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, 2006
	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 001-07260

Nortel Networks Corporation

(Exact name of registrant as specified in its charter)

Canada	Not Applicable
(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
Common Shares without nominal or par value 4.25% Convertible Senior Notes Due 2008	New York Stock Exchange New York Stock Exchange

The common shares are also listed on the Toronto Stock Exchange in Canada

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, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

       Large accelerated filer þ Accelerated filer o Non-Accelerated filer o       

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 28, 2007, 433,878,107 common shares of Nortel Networks Corporation were issued and outstanding. Non-affiliates of the registrant held 433,689,339 common shares having an aggregate market value of $13,002,006,383 based upon the last sale price on the New York Stock Exchange on February 28, 2007, of $29.98 per share; for purposes of this calculation, shares held by directors and executive officers have been excluded.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Circular and Proxy Statement relating to the registrant’s 2007 Annual and Special Meeting of Shareholders, to be held on May 2, 2007, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2006

EXPLANATORY NOTE

Nortel Networks Corporation previously announced the need to restate its consolidated financial statements for the years ended December 31, 2004, 2005 and the first nine months of 2006.

The consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for the years ended December 31, 2005 and 2004, and the consolidated balance sheet as of December 31, 2005, including the applicable notes, contained in this Annual Report on Form 10-K have been restated. Nortel has also included in this report restated unaudited consolidated financial information for each of the first three quarters of 2006 and each of the quarters of 2005.

In addition, this report includes the restatement of Nortel’s consolidated financial statements for periods prior to 2004. Amendments to Nortel’s prior filings with the United States Securities and Exchange Commission would be required in order for Nortel to be in full compliance with its reporting obligations under the U.S. Securities Exchange Act of 1934, as amended. However, any amendments to Nortel’s Annual Reports on Form 10-K for the years ended December 31, 2005 and 2004, and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, June 30, and September 30, 2006 and 2005 respectively, would in large part repeat the disclosure contained in this report. Accordingly, Nortel does not plan to amend these or any other prior filings. Nortel believes that it has included in this report all information needed for current investor understanding.

For a description of the current restatement, see note 4, “Restatement of previously issued financial statements” in the accompanying audited consolidated financial statements and “— Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K.

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TABLE OF CONTENTS

PART I
ITEM 1.	Business	1
	Overview	1
	Developments in 2006 and 2007	1
	Business Segments	5
	Sales and Distribution	11
	Backlog	11
	Product Standards, Certifications and Regulations	11
	Sources and Availability of Materials	11
	Seasonality	12
	Strategic Alliances, Acquisitions, Minority Equity Investments and Divestitures	12
	Research and Development	12
	Intellectual Property	13
	Employee Relations	14
	Environmental Matters	14
	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	30
ITEM 2.	Properties	31
ITEM 3.	Legal Proceedings	31
ITEM 4.	Submission of Matters to a Vote of Security Holders	34
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
	Dividends	35
	Securities Authorized for Issuance Under Equity Compensation Plans	35
	Shareholder Return Performance Graph	36
	Canadian Tax Matters	36
	Sales or Other Dispositions of Shares	36
	Sales of Unregistered Securities	37
ITEM 6.	Selected Financial Data	38
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
	Executive Overview	40
	Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters	45
	Results of Operations	51
	Segment Information	57
	Liquidity and Capital Resources	61
	Off-Balance Sheet Arrangements	68
	Application of Critical Accounting Policies and Estimates	69
	Accounting Changes and Recent Accounting Pronouncements	82
	Outstanding Share Data	84
	Market Risk	84
	Environmental Matters	84
	Legal Proceedings	85
	Cautionary Notice Regarding Forward-Looking Information	85
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	86
	Equity Price Risk	87
ITEM 8.	Financial Statements and Supplementary Data	88
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	190
ITEM 9A.	Controls and Procedures	190
ITEM 9B.	Other Information	199

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PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	199
ITEM 11.	Executive Compensation	199
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	200
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	200
ITEM 14.	Principal Accountant Fees and Services	200
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	201
SIGNATURES		210

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, and from federal, state and local government agencies and the military to cable operators, wired and wireless telecommunications service providers, and Internet service providers. New technology and higher expectations for productivity, performance, ease of use, security, reduced operating costs, profitability and return on investment are creating far more complexity. At the same time, customers are demanding more simplicity as they find it increasingly challenging to design, operate, maintain and evolve their communications networks. Organizations need communications that contribute peak efficiency without negative impact on other critical activities.

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. Our strengths include a reputation for innovation 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 and innovative technology.

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 on March 7, 2000. Its common shares are publicly traded on the New York Stock Exchange, or NYSE, and the Toronto Stock Exchange, or TSX, under the symbol “NT”. Nortel Networks Limited, or NNL, a Canadian company incorporated in 1914, is the Company’s principal operating subsidiary. The Company holds all of NNL’s outstanding common shares but none of its outstanding preferred shares. NNL’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. 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 as soon as reasonably practicable after providing them to the United States Securities and Exchange Commission, or SEC. 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 NNL, 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. All dollar amounts in this report are in millions of United States dollars unless otherwise stated.

Where we say “we”, “us” or “Nortel”, we mean Nortel Networks Corporation or Nortel Networks Corporation and its subsidiaries, as applicable.

Many of the technical terms used in this report are defined in the Glossary of Certain Technical Terms beginning at page 15.

Developments in 2006 and 2007

Business Environment

We operate in a highly competitive business environment. Consolidation of communications vendors and customers continued through 2006. 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 in the Asia region, driven by local, low-cost vendors who are also expanding their market beyond Asia.

Industry growth in 2006 was driven primarily by third-generation, or 3G, wireless network deployments, 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). In the enterprise communications market, VoIP, mobility and collaboration applications continue to drive growth in converged IP networks and network security solutions. Enterprises are also looking to align IT investments with business processes, resulting in software and service opportunities in both

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service-oriented architectures, or SOA, and unified communications 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. The industry is increasingly more focused on software, services and solutions, the market for which is growing faster than the market for products alone.

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 3G wireless licenses in China, now expected to occur in 2007.

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 today stands at the threshold of a new era, fueled by increasing demand for pervasive personal broadband capabilities that provide extremely fast access to any application from any device and any location. We believe that this new era will be innovation-rich, driven by three trends — hyperconnectivity, true broadband and the emergence of communications-enabled applications.

Hyperconnectivity refers to the expected dramatic increase in demand for network connections. Simple connectivity — a single network connection for everyone — will no longer be enough. Many people already use multiple networked devices, and soon there will be more devices than users. Portable gaming and entertainment devices, digital cameras, appliances, motor vehicles and other devices not widely networked today will be networked in the future. The potential number of mobile network endpoints alone could reach more than five billion by the end of the decade. Machine-to-machine network traffic from sensors, video cameras and other devices for applications like retail inventory, utility management, transportation, healthcare, public safety and surveillance are expected to outpace person-to-person communications in the next three-to-five years — a milestone potentially as industry altering as when data surpassed voice in 2001. Social and government interaction, multimedia entertainment, e-commerce, healthcare, financial services, and many other ways to communicate are ultimately expected to create a need for hundreds of online identities per individual. This hyperconnectivity is expected to create a significantly more complex environment requiring rethinking and reinvention of network architectures, business models and back-office frameworks.

True broadband means making the Internet so seamless and technology-transparent that users never have to think about where or how they communicate. It will be ‘always on’ and available anywhere from the most convenient device. This is not possible today because existing broadband wireless access networks based on 3G technologies were built on the assumption that the Internet is used primarily for e-mail and Web browsing. Now demand for video, high-definition television, peer-to-peer connectivity, video-on-demand and other bandwidth-hungry applications is increasing substantially. Our analysis indicates that, to address this demand, wireless networks will need to move to fourth generation, or 4G, technology, and network core capacity for information transport will need to jump from today’s T1 standard (1.544 megabits) to an estimated 10 gigabits and ultimately to 100 gigabits. We believe that delivering a true broadband experience will require other changes as well. The network technology will need to be truly transparent, allowing users to move from work to home to play without losing quality, connectivity, content or clarity. Convergence of fixed and mobile communications will need to continue. Handoffs from one network to the next will need to be seamless. Common applications will need to be available and function in the same manner across all networks and access devices.

Communications-enabled applications are applications designed, built and deployed in a fundamentally different way. Today’s architecture of applications based on servers and mainframes and delivered largely over separate networks is becoming obsolete. It is no longer cost efficient, nor does it adequately support converged voice, data, video and multimedia services. In its place will be Web-based, network-aware applications and services like ‘click-to-talk,’ which allow users to make a VoIP call simply by clicking a button on a Web page. This requires connection to both the Web page and the network signaling system, and is made possible by middleware based on emerging technologies like SOA and IMS. Based on current estimates, we expect that networks will need to deliver thousands of common applications that can be tailored to user identity, location, presence, proximity and other unique attributes. We expect that the networks themselves will no longer be built simply to support an estimated number of users, but rather an estimated number of real-time client and customer interactions. Enterprises will need considerably larger scale applications to handle customers and partners. Service providers will have an opportunity to address this need by building more extensible applications architectures.

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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.

Remedial Measures and Elimination of Material Weaknesses; Current Restatement of Previously Issued Financial Statements

During 2006 and into 2007, we continued to improve our internal controls over financial reporting to compensate for our previously identified and reported five material weaknesses, and to implement the recommendations for remedial measures made following the independent review of the facts and circumstances that led to the first restatement of our financial statements, effected in December 2003, as further described in the Controls and Procedures section of this report. We believe that the remedial measures and other actions taken to significantly improve internal control over financial reporting described in the Controls and Procedures section of this report, in the aggregate, addressed most of the internal control issues in the five material weaknesses. As at December 31, 2006, we concluded that these measures resulted in the elimination of the five material weaknesses, with the exception of certain deficiencies that comprise the revenue-related material weakness as further described in the Controls and Procedures section of this report.

In the course of the preparation of our 2006 financial statements and as a result of our previously announced pension plan changes, we identified certain errors primarily through discussions with our North American pension and post-retirement actuaries and through our on-going remediation efforts described above. These matters have been discussed with the Staff of the SEC, including as part of our responses to Staff comments on our periodic filings with the SEC. As a result, we have restated our consolidated balance sheet as of December 31, 2005 and consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for each of the years ended December 31, 2005 and 2004, and the unaudited consolidated financial information for the quarters ended March 31, June 30 and September 30, 2006 and for each quarter of 2005. The adjustments mainly relate to:

•  Pension and post-retirement benefits errors;

•  Revenue recognition errors;

•  A prior year tax error; and

•  Other errors.

For a discussion of the impact of this restatement, see “Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters” in the MD&A section of this report, and note 4, “Restatement of previously issued financial statements” to the accompanying audited consolidated financial statements.

In connection with this restatement, defaults and events of default occurred under our $750 support facility with Export Development Canada, or EDC, which default was waived by EDC on March 9, 2007. The delay in filing this report does not affect the previously announced timing of the Company’s annual and special shareholders’ meeting scheduled for May 2, 2007.

Strategy

With our capability and experience in enterprise and service provider networking, we are well positioned to capitalize on this new era of pervasive personal broadband. Our strategy is focused on transforming the enterprise to support a hyper-connected world, delivering next-generation mobility and convergence to enable a true broadband experience, and providing networking solutions that integrate networks and applications into a seamless framework.

We are seeking to generate profitable growth by using this focus to identify markets and technologies where we can attain a market leadership position or achieve at least 20% market share. Some areas in which we are increasing investment include 4G broadband wireless technologies, Carrier Ethernet, optical, next-generation enterprise unified communications, Web-based applications and services, and secure networking.

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 execution and operational excellence through transformation of our businesses and processes. In February 2005, the Board of Directors approved a plan to transform the structure, processes and systems of our finance organization. This will create a more effective organization with segregated functions and clear accountabilities built around global standard processes based on SAP. SAP is a software package that will allow us to consolidate various financial computer systems into one integrated finance system. Phased global SAP implementation will speed the financial

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consolidation process and increase transparency to senior management. Our Business Transformation Plan also addresses our most significant operational challenges, simplifies organizational structure, and maintains a strong focus on revenue generation and improved operating margins including quality improvements and cost reduction through Six Sigma. The plan contemplates transformation of our business in six key areas: services, procurement effectiveness, revenue stimulation (including sales and pricing), R&D effectiveness, general and administrative effectiveness, and organizational and workforce effectiveness. Effective and timely execution of our Business Transformation Plan is crucial to our strategy. On June 27, 2006, we announced next steps for our plan, including 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 further steps for our plan with the announcement of a planned net reduction of approximately 2,900 additional positions, movement of approximately 1,000 positions to lower cost locations, and further reductions in our real estate portfolio. For further information, see “Executive Overview — Significant Business Developments in 2006 and 2007 — Business Transformation Initiatives” in the MD&A section of this report.

We remain focused on integrity through effective corporate governance practices, remediation of our material weakness in 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 be committed to increasing employee awareness of ethical issues through on-line training and the issuance of a new code of business conduct.

We are positioned to respond to evolving technology and industry trends by providing end-to-end solutions to our customers, developed internally and enhanced through strategic alliances, acquisitions and minority investments. We have partnered with industry leaders — like Microsoft and IBM — whose technology and vision are complementary, and will continue to seek and develop similar relationships with other companies. 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. We also expect to continue playing an active role in influencing emerging broadband and wireless standards.

Significant Developments

Operations

•  Entered into a five-year, estimated $2,000 agreement to supply Verizon Communications Inc.’s, or Verizon’s Wireless segment with CDMA equipment and services supporting network expansion and rollout of new music, video and other broadband data and multimedia services.

•  Launched Innovative Communications Alliance, combining our communications technology and services expertise with Microsoft’s desktop leadership to deliver a shared vision for unified communications.

•  Continued transformation of finance organization focused on deploying SAP processes in order management, materials handling, repair and return, inventory and shipping.

•  Established a new senior executive leadership team under CEO Mike Zafirovski with key external hires and internal promotions.

•  Launched more than 70 Six Sigma projects, addressing a range of issues including cash management, time-to-market, cost of poor quality, and customer satisfaction.

•  Created new Operations Centers of Excellence in Mexico and Turkey, continuing consolidation of more than 100 operations sites worldwide.

•  Initiated two-year, 70% reduction of more than 700 IT business applications.

Channels to Market

•  Signed three-year agreement with BT to deliver VoIP, multimedia, instant messaging and mobile communications to UK enterprises of all sizes.

•  Enhanced channels to market for small- and medium-sized businesses by expanding distributor agreements in North America and accelerating recruitment and development of new resellers in Europe.

Acquisitions and Divestitures

•  Sold substantially all of the assets and liabilities related to our UMTS access business to Alcatel-Lucent.

•  Acquired Tasman Networks, strengthening our portfolio of enterprise routers.

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•  Completed divestiture of substantially all remaining major optical, wireless and enterprise manufacturing operations and related supply chain activities to Flextronics Telecom Systems, Ltd., or Flextronics.

Finance

•  Implemented 1-for-10 consolidation of our common shares.

•  Nortel Networks Inc., or NNI, the Company’s U.S. operating subsidiary, entered into $1,300 credit facility in February 2006 guaranteed by the Company, NNL and NNI primarily to finance NNL’s outstanding $1,275 6.125% notes due February 15, 2006.

•  NNL issued, and the Company and NNI guaranteed, $2,000 of senior notes in July 2006, with $1,300 of net proceeds used to prepay the $1,300 credit facility.

•  Selected KPMG LLP to stand for appointment as our independent auditor, subject to shareholder approval at the Company’s 2007 annual and special meeting of shareholders.

Other

•  Entered into and received court orders in respect of agreements to settle significant class action lawsuits, pursuant to which we will pay $575 in cash and issue approximately 62,866,775 common shares (representing approximately 14.5% of our common shares as at February 7, 2006, the date an agreement in principle was reached with the plaintiffs) reflecting our 1 for 10 common share consolidation, to the plaintiffs, or the Global Class Action Settlement.

•  Significant improvement in our internal controls over financial reporting resulting in the elimination, as at December 31, 2006, of our previously reported five material weaknesses with the exception of the deficiencies that comprise the revenue related material weakness (see the Controls and Procedures section of this report).

•  Third restatement of financial statements completed, and return to timely reporting of periodic reports with the filing of the Second Quarter Quarterly Report on Form 10-Q (for more information on the third restatement, see our 2005 Annual Report on Form 10-K).

•  Regulatory and criminal investigations in relation to prior restatements ongoing.

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

Business Segments

Our reportable segments are Mobility and Converged Core Networks, or MCCN, Enterprise Solutions, or ES, Metro Ethernet Networks, or MEN, and Global Services, or GS. On December 31, 2006, we completed the sale of certain assets and liabilities relating to our UMTS access business — which had been part of MCCN — to Alcatel-Lucent.

Sales of approximately $1,416 to Verizon constituted approximately 12.4% of our 2006 consolidated revenue, of which approximately $1,022 was in the MCCN segment.

     Mobility and Converged Core Networks

We offer Mobility and Converged Core 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, 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.

Our MCCN 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 featuring 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 and UMB. We own numerous OFDM and MIMO patents and are a leader in the development of these standards, which provide a common foundation for WiMAX, LTE and UMB. Our WiMAX solution delivers high performance and low cost per megabit. With our leadership in MIMO antenna technology,

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a standard component of all WiMAX devices, we believe that our WiMAX solution delivers more bandwidth for significantly less installed cost.

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 MCCN 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 as a precursor to fully-converged networks based on SIP and IMS. Successful deployment and performance of VoIP systems will be critical to winning market share in IMS. To support this shift, we have already installed more than 1,000 SIP-enabled networks around the world. Over the last eight years, we have also made progressive investments in 4G technologies. Near the end of 2006, our WiMAX product program entered the early trial phase with multiple service providers across four continents. In December, we announced our first mobile WiMAX contract with Chunghwa Telecom as part of the Taiwan government’s M-Taiwan initiative. We are also focused on developing a viable, self-sustaining WiMAX device ecosystem to drive early service adoption.

MCCN competitors include Ericsson, Alcatel-Lucent, Motorola, Samsung, Nokia, Siemens, 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 become a bigger part of the service provider business case.

In 2006, we took a series of steps to narrow our focus to communications technologies undergoing transition, in part to address the significant competitor consolidation in maturing product segments. With the divestiture of our UMTS access business, resources were made available to more effectively address growing opportunities in carrier VoIP, IMS and 4G. We are focused on supporting customers as they move through transitions from circuit voice to converged IP networks and from 2G to 4G wireless networks, and on developing a more tightly-defined migration strategy for dominant CDMA service providers.

Our plan is to establish segment leadership with products and expertise spanning the gap between these legacy and future-focused network environments. As part of this strategic shift, we have identified strategic alliances as a key element of a successful offer, and we are taking steps to create these alliances in both the WiMAX and IMS markets.

We are #2 globally in CDMA revenues, according to the Dell’Oro Group, and we have benefited from recent customer network upgrades to 3G technology — like CDMA 1xEV-DO Rev. A — for faster broadband wireless access. The GSM market, which though declining is expected to remain the largest in telecommunications equipment for several years, is dominated by Ericsson, Nokia and Siemens. Some GSM service providers have expressed uncertainty about our commitment to the GSM access business in light of our UMTS access divestiture. Despite this, we have GSM customers across the North American, CALA (Caribbean and Latin America), EMEA (Europe, Middle East and Africa) and Asia regions, with economies of scale to support ongoing development for those seeking to delay the move to UMTS or 4G. We also expect to benefit from economic conditions that we believe are more favorable for WiMAX than UMTS. UMTS has suffered from lack of innovation and investment caused by very high spectrum license fees for service providers, and the downturn early in this decade in availability of capital for dot-com companies.

Two customers make up approximately 29% of MCCN 2006 revenue. The loss of either of these customers could have a material adverse effect on the MCCN segment.

Significant MCCN Developments

•  Signed five-year, estimated $2,000 agreement to supply Verizon Wireless with CDMA equipment and services supporting network expansion and rollout of new music, video, and other broadband data and multimedia services.

•  Selected by Chunghwa Telecom to provide first mobile WiMAX network in Taiwan.

•  Introduced new mobile WiMAX product portfolio, including demonstration of real-time, multimedia IPTV and IMS services, deployments in Canada for Netago Wireless and in Greece for Craig Wireless, and trials with Golden Telecom in Moscow, National Taiwan University and Japan’s Ministry of Internal Affairs and Communications.

•  Selected by Golden Telecom to build Moscow’s first wireless mesh network, expected to provide universal indoor and outdoor wireless access for approximately 3.9 million households.

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•  Selected to provide GSM-R solutions for China’s Ministry of Railways, Indian Railways, SNTF Algeria, and Spain’s first international high-speed railway line.

•  Selected by Denver-based Cebridge, one of the 10 largest cable operators in the United States, to provide VoIP solutions for two new cable franchise acquisitions.

•  Signed global purchase agreement with Denver-based Liberty Global, the world’s leading international cable operator, for cable VoIP and optical solutions and services through 2007.

•  Provided ‘triple-play’ voice, video and broadband cable network solution for Amsterdam-based UPC Broadband, a division of Liberty Global.

•  Selected by Vidéotron, Quebec’s leading cable operator and integrated communications supplier, to provide an end-to-end cable VoIP solution using PacketCable and SIP protocols.

     Enterprise Solutions

We provide Enterprise Solutions addressing the main, 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.

These enterprises are deploying data, voice, video, chat, conferencing, Web collaboration and other communications and networking solutions over IP-based converged networks to improve cost efficiency, capacity, speed, quality, performance, resiliency and security. They are also beginning to focus on integration of communications-enabled applications into business processes, using emerging technologies like SOA and unified communications.

Our extensive ES portfolio addresses businesses of all sizes with reliable, secure and scalable products spanning Ethernet layers 2-7, secure routing and end-to-end network security, 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.

The global enterprise equipment market segments in which we compete can generally be categorized as converged data and voice networks and voice and unified communications applications. Cisco is our largest competitor in providing data network products and solutions for enterprises, while Avaya is the largest in providing voice equipment. Other principal competitors include Siemens, Alcatel-Lucent and NEC. We also compete with smaller niche companies like Juniper Networks, 3Com, Extreme Networks and Enterasys Networks.

Competitive factors include, in order of priority, 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 data and voice networking, combined with voice and unified communications applications, provides a competitive position in the converging enterprise environment. Our products and services attract customers ranging in size from smaller SMBs (small- to medium-sized businesses) to the largest enterprises. Partnerships such as the Innovative Communications Alliance with Microsoft are expected to provide seamless technology integration for customers looking to coordinate desktop software suites with business communications solutions. We are seeking to improve our competitive position in the enterprise market through such alliances, and by expanding partnerships to improve coverage and efficiency of channels to market.

We leverage an extensive array of channel partners for global market reach, and to provide our customers with a range of deployment choices. We continue our focus on the top 150 channel partners, doubling the number of people supporting the service provider channel and significantly increasing our independent value-added reseller and system integrator resources. We have also created a two-tier value-added distribution model to better serve mid-market businesses and SMBs. We have established agreements 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. In the United States, we leverage our IP call center assets in a newly created inside sales center to systematically reach mid-market and SMB customer segments with increased scale and velocity. This inside sales team coordinates with regionally aligned field representatives and partner teams on an ‘inside/outside’ approach targeting migration of our large installed base and new convergence opportunities.

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Significant ES Developments

•  Achieved significant win with Royal Dutch Shell as part of Innovative Communications Alliance with Microsoft.

•  Signed three-year partnership agreement with BT to deliver VoIP, multimedia, instant messaging and mobile communications to U.K. enterprises of all sizes.

•  Provided VoIP networks for a number of enterprises around the world, including the InterContinental Jeddah Hotel in Jeddah, Saudi Arabia; Jazeera Airways in Kuwait; INDEVCO (Industry Development Company) in Lebanon; the Agriculture Bank of China; the Langham Hotel in Hong Kong; and Kroger grocery stores, Kohl’s department stores, and Station Casinos in the United States.

•  Supplied converged voice and data network providing hospitality solutions and services for the Louisiana Superdome in New Orleans.

•  Provided or received orders for solutions supporting communications, video streaming and multimedia for The Telegraph Group and The Economist Group, both major British media organizations, and for the new headquarters building of The New York Times Company scheduled to open in 2007.

•  Provided fixed business telephony solutions for the XX Winter Olympic Games in Turin, Italy for 2,500 athletes, 10,000 media representatives, and Olympic staff.

•  Implemented secure wireless network for the Bell Centre, home of the Montreal Canadiens hockey team, and a network security solution for Macquarie University in Australia.

•  Improved communications and online access to advanced learning resources for more than 40,000 students, faculty and staff at China’s University of Petroleum.

Metro Ethernet Networks

As applications converge over IP, Ethernet technology is evolving from a service for business-to-business communications to an infrastructure capable of supporting delivery of next-generation, IP-based voice, video and data applications. IP-based video traffic, in particular, is facilitating this shift to an Ethernet infrastructure. Internet video, residential broadcast TV, video on demand, and new wireless broadband multimedia applications are expected to drive significantly increased bandwidth requirements. 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 corporate customers. We believe that Ethernet technology has the potential to become an 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 per megabit for emerging video-intensive applications. The MEN portfolio includes Carrier Ethernet switching, optical networking, and multiservice switching products.

Enabling 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 PBT, or provider backbone transport, technology developed by Nortel that can enable service providers and large enterprises to simplify network management, redefine service quality and deliver substantial cost savings using Ethernet technology. We are a leading contributor in the drive to establish an IEEE, or Institute of Electrical and Electronics Engineers, standard based on PBT, for extending the simplicity and ease-of-use of Ethernet beyond connectivity services to include network transport. We captured a significant PBT win with BT in January 2007 and hope to capitalize on it to build market momentum and drive additional sales.

Within our Optical portfolio, our Multiservice SONET/SDH products merge the speed, cost and simplicity of Ethernet with the reach and robustness of optical technologies in order to switch new IP-based applications, deliver Ethernet connectivity services, and maintain efficient transport of legacy traffic. With network engineering and planning built into our WDM equipment, our eDCO and eROADM enable service providers to dynamically re-route wavelengths over different fiber types. In mid-2006, we expanded our optical portfolio to include an advanced business continuity system that increases intelligence at the WAN edge to enhance performance and security. This system also offers wide area file services that simplify branch office computing, and makes data center connectivity more straightforward with real-time hardware compression, time-of-day bandwidth management, and storage extension technologies.

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.

Cisco and Alcatel-Lucent have leading market shares in the existing Carrier Ethernet market. Other competitors include Atrica, Siemens, Huawei, Extreme and Foundry. We believe the Carrier Ethernet market will bisect into Ethernet over

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MPLS solutions and native Carrier Ethernet switching solutions such as ours. With PBT for determinism and QoS, PBB for service scalability, and our Metro Ethernet Service Operations System for simplified operations and management, we have chosen a different direction than 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, Cisco, Fujitsu and Ciena. In addition, we compete with smaller companies that address specific niches within this market, such as ADVA and Infinera. Certain competitors are also strong on a regional basis, such as Huawei and NEC in the Asia region.

Principal competitive factors include advanced features that enable network flexibility, adaptability and faster turn-up, maximize Quality of Service and smooth migration to Ethernet-based networks, and reduce total cost of implementation and ongoing operation. Another important factor is standards-based product implementation for inter-vendor operability.

Significant MEN Developments

•  Selected by BT in January 2007 to supply carrier-grade Ethernet solutions — based on PBT technology pioneered by Nortel — for high-bandwidth services transport over BT’s 21st Century Network.

•  Selected to provide optical solutions for Liberty Global, the world’s leading international cable operator, and Charter Communications, the fourth largest U.S. cable operator.

•  Provided optical backbone for London-based ntl Incorporated, the U.K.’s largest cable operator.

•  Won Carrier Ethernet award from Shanghai Telecom for high-bandwidth, business-critical voice, data and video services in China’s largest city.

•  Provided a Carrier Ethernet-based ‘triple-play’ voice, video and multimedia services solution for Pride, a telecommunications service provider in Russia.

•  Provided wireless backhaul solution for Sonofon A/S, Denmark’s second largest mobile telephone service provider, to help deliver services like interactive gaming, music downloads, video streaming and Web browsing.

•  Selected by service providers COLT in the U.K., Golden Telecom in Russia, and Southern Cross Cables in the U.S. to provide optical solutions supporting high-bandwidth data and video services.

•  Selected by Mobile Telecommunications Company, a leading mobile service provider in the Middle East and Africa, to deliver high-speed mobile services such as mobile video, multimedia messaging and Web browsing.

•  Awarded contract by Iraq Telecommunications & Post to build nationwide optical backbone for high-quality, high-bandwidth data, video and multimedia services.

•  Optical Metro 3500 next-generation SONET platform was the first stand-alone optical network element to be JITC-certified as interoperable with the U.S. Defense Switched Network for voice and data transport and included on the U.S. Department of Defense Voice Network Approved Products List.

•  Provided enhanced business continuity services with optical solutions for enterprise customers including automaker BMW; St. George, Australia’s fifth largest bank; and Banco Real ABN Amro, a leading financial institution in Brazil.

•  Enabled collaborative research globally by supplying optical networks to research and education institutions including SurfNet in the Netherlands, RISQ in Canada, the Chinese Academy of Sciences, and the Joint Universities Computer Centre of Hong Kong.

Global Services

We have increased our emphasis on services and now provide services and solutions supporting the entire lifecycle of multi-vendor, multi-technology networks for enterprises and service providers 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 small- and medium-sized businesses and large global enterprises; municipal, regional and federal government agencies; wireline and wireless service providers; cable operators; and MVNOs.

Managed Services and Application Services are expected to grow the fastest, with significant opportunities in transforming networks to IP and next-generation wireless technologies; multimedia communications including Web conferencing and Web services; and vertical solutions for municipal wireless, security and enterprise mobility.

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Our GS 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 at a more competitive total cost of ownership.

•  Network Managed Services including support for individual solutions throughout networks and hosted multimedia services 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.

•  Network Application Services including applications development, integration and Web services that help enhance business processes and consumer services by optimizing business infrastructures.

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 partners like Microsoft and IBM.

We sell services on a direct basis in the service provider market and employ both direct and indirect sales models for the enterprise market. The majority of services we offer for the enterprise market are provided to and through channel partners, many of whom also deliver other services on a direct basis to customers of Nortel products.

Our key competitors in GS include Ericsson, Nokia, Siemens, Alcatel-Lucent and Motorola in the service provider market, and Cisco, Avaya and Motorola in the enterprise market. 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, installed base, solutions focus and multi-vendor expertise.

As the impact of convergence grows, we expect that our experience in serving enterprises and service providers (wireline, wireless and cable) will become an increasingly important differentiator for our GS offerings. We have significant market presence and incumbent service relationships in both of these markets, although we need to increase our Nortel brand recognition in services. Market consolidation and recent mergers of major competitors are expected to increase the competition for services, as is 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 hope to meet this challenge in part by expanding our service capabilities through strategic partnerships and acquisition of resources with critical skills.

We have affirmed our commitment to services and solutions by making this segment a key growth initiative. With a large installed base, multi-vendor expertise and brand recognition, we have significant opportunity to expand services sales.

Significant GS Developments

•  Won seven-year network managed services award from Rolls-Royce, a leading global provider of power systems and services, including management of existing telephone network and transition to a single, advanced VoIP network including unified messaging and mobility services.

•  Received agreement to continue managing Kodak’s U.S. voice network, which we have done since 1995.

•  Introduced industry’s first Managed VoIP Service with Proactive Voice Quality Management, and announced Hong Kong brokerage firm CLSA as one of our first customers for this service.

•  Deployed municipal wireless networks for the town of Carlsbad, NM, Occoquan Wireless in Occoquan, VA, Ronco Communications in Niagara County, NY, and Annapolis Wireless in Annapolis, MD.

•  Awarded up to five-year network managed services deal by India’s Bharti Airtel, including hosted contact center services using advanced, multi-language interactive voice response technology to provide a 24/7 ‘virtual storefront’ voice portal for more than 20 million subscribers to Bharti Airtel’s GSM mobile, broadband and fixed-line services.

•  Won maintenance agreement for state-of-the-art Nortel IP network to serve new headquarters building of The New York Times Company scheduled to open in 2007.

•  Provided network design, integration, management and maintenance services enabling Suddenlink Communications, one of the 10 largest cable operators in the U.S., to provide IP telephony services.

In 2006 and prior periods, revenues from network services consisting of network planning and installation have been generally bundled with our product sales and not included in Global Services revenues. Beginning in the first half of 2007, we expect to include these services in our GS revenues.

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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 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 $5,200 and $5,400 as of each of December 31, 2006 and 2005, respectively. The backlog consists of confirmed orders as well as $3,398 of deferred revenues as reported in our consolidated balance sheets. A portion of our deferred revenues and advanced billings are non-current and we do not expect to fill them in 2007. 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 some 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

Starting in 1999, our manufacturing and supply chain strategy has evolved 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 the end of 2003, we had divested most of our manufacturing activities to leading EMS suppliers. In the second quarter of 2006, we completed divestitures of substantially all of our remaining manufacturing and related activities to Flextronics, including optical design activities in Ottawa, Canada and Monkstown, Northern Ireland, and manufacturing activities in Montreal and Calgary in Canada and Chateaudun, France. We retained our Monkstown manufacturing operations and established an EMEA supply chain center there. For more information on our supply chain strategy, see “Executive Overview — Significant Developments in 2006 and 2007 — Supply Chain Strategy” in the MD&A section of this report.

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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, or OEM, 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 14, “Commitments”, to the accompanying audited consolidated financial statements and “Liquidity and Capital Resources — Future Uses and Sources of Liquidity — Future Uses of Liquidity — Contractual cash obligations” 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 Inventory” in the MD&A section of this report.

Seasonality

We experienced a seasonal decline in revenues in the first quarter of 2006 compared to the fourth quarter of 2005, followed by sequential growth in each quarter thereafter across all reportable segments. The quarterly profile of our business results in 2007 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.

Strategic Alliances, Acquisitions, Minority Equity Investments and Divestitures

Our industry is characterized by rapid change and a wide variety of complex technologies. To deliver optimal solutions to customers, we supplement our own development activities by continually evaluating and from time to time engaging in strategic alliances, joint ventures, acquisitions, minority equity investments and divestitures as necessary to support our business strategy.

In 2006, we formed a strategic alliance with Microsoft to accelerate availability of unified communications, and we acquired Tasman Networks, Inc., a company with a portfolio of enterprise routers. In 2005, we formed a joint venture with LG Electronics, Inc. that offers advanced telecommunications and networking solutions for Korean and global customers; and acquired PEC Solutions, Inc. (now known as Nortel Government Solutions Incorporated, or NGS) to grow our business with U.S. government clients.

We continue to make and hold minority investments in businesses with technology, products or services that support a current strategic commercial relationship or provide us with insight into options for future relationships.

In May of 2006, we completed the transfer of substantially all of our remaining manufacturing and related activities and assets to Flextronics. On December 31, 2006, we closed the sale to Alcatel-Lucent of assets and liabilities relating to our UMTS access business, helping us to simplify our business and strategically focus investments for leadership in key markets.

For additional information regarding these topics, see “Executive Overview — Significant Business Developments in 2006 and 2007” in the MD&A section, and the Risk Factors section, of this report and note 10, “Acquisitions, divestitures and closures” to the accompanying audited consolidated financial statements.

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 change the way people live, work and play.

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

Achieving this vision requires extensive knowledge of different products, technologies and capabilities. The challenges that must be overcome (such as fixed-mobile convergence, real-time communications handoff, true presence, extension of enterprise applications to mobile devices, 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, UMB, OFDM, MIMO), Carrier Ethernet (PBT, PBB), optical (eDCO, eROADM, DOC), next-generation enterprise unified communications, Web-based applications and services (IMS, SOA), and secure networking.

As at December 31, 2006, we employed approximately 12,270 regular full-time R&D employees (excluding employees on notice of termination). We conduct R&D through ten 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 formed strategic relationships with Microsoft, LG Electronics and IBM.

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

As part of our Business Transformation Plan, we have launched an initiative to help increase quality, predictability and effectiveness in our R&D processes, platforms and tools. This includes increased re-use at the component and platform level, which we believe will enable us to make products more cost-effectively and improve time-to-market for future product development. Though R&D investment will continue to be a priority, our goal is to decrease R&D run rate to an industry-competitive 15% of revenue by mid-2007.

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

	2006		2005		2004
R&D expense	$	1,939	$	1,874	$	1,975
R&D costs incurred on behalf of others*		16		28		40
Total	$	1,955	$	1,902	$	2,015

*  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.

For additional information regarding R&D expenses, see “Results of Operations — Operating Expenses — Research and Development Expense” in the MD&A section of this report.

Intellectual Property

Intellectual property is fundamental to Nortel 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.

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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, 2006, we employed approximately 33,760 regular full-time employees (excluding employees on notice of termination and including employees of our joint ventures) including approximately:

•  12,950 regular full-time employees in the United States;

•  7,080 regular full-time employees in Canada;

•  5,950 regular full-time employees in EMEA; and

•  7,780 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 basis, and engage the services of contractors as required. During 2006, approximately 2,760 regular full-time employees were hired.

Between 2004 and 2006, approximately 2,100 of our employees were transferred to Flextronics in connection with divestitures of manufacturing activities to Flextronics. In the fourth quarter of 2006, we sold substantially all of our assets and liabilities related to our UMTS access products and services to Alcatel-Lucent, resulting in the transfer of approximately 1,700 employees, primarily in France, Ottawa and Beijing. Additionally, in the second quarter of 2006, we announced plans to reduce our workforce by approximately 1,900 employees. Approximately 60% of those reductions were completed by year end. On February 7, 2007, we announced next steps in our Business Transformation Plan including a net reduction in our global workforce of approximately 2,900 positions, or the 2007 Restructuring Plan. We expect that approximately 70% of these reductions will take place in 2007. We also plan to shift approximately 1,000 positions to lower cost locations, with approximately 40% of this activity taking place in 2007. For more information on the 2007 Restructuring Plan, see “Executive Overview — Significant Business Developments in 2006 and 2007” in the MD&A section of this report.

For additional information, see “Sources and Availability of Materials” above in this section of this report, note 7, “Special charges”, to the accompanying audited consolidated financial statements and “Results of Operations — Operating Expenses — Special Charges” in the MD&A section of this report.

At December 31, 2006, labor contracts covered approximately 2% of our employees, including four contracts covering approximately 3% of Canadian employees, three contracts covering approximately 4% of EMEA employees, one contract covering all employees in Brazil, and one contract covering less than 1% of employees in the United States (employed by NGS).

Employee morale, satisfaction and career development continue to be important areas of focus. Although recruitment of skilled employees in recent years has been highly challenging in our industry, we saw an increase in recruitment success in some areas in 2006, especially with regard to new graduates. Our employee attrition rate has been relatively stable in 2006 and 2005, though slightly increased from 2004. We believe it will become increasingly important to our future success to attract, integrate and retain employees with very high levels of technical expertise, management skills, sales experience, financial expertise and other skill sets critical in this 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.

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Financial Information about Segments and Product Categories

For financial information about segments and product categories, see note 6, “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 6, “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 11, “Long-term debt, credit and support facilities”, 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

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.

CDMA (code division multiple access) is a 2G digital mobile technology.

Determinism refers to the capability to identify the paths a service is taking over the network in order to simplify troubleshooting and to establish back-up paths ensuring 50-millisecond switch times.

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.

eROADM (Enhanced Reconfigurable Optical Add/Drop Multiplexer) is a component of Nortel’s Common Photonic Layer (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.

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.

JITC (Joint Interoperability Test Command) is the organization within the U.S. Defense Information Systems Agency (DISA) responsible for confirming that network elements meet all critical Defense Switched Network (DSN) requirements.

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 standard expected to enable wireless networks to support data transfer rates up to 100 megabits per second.

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.

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 local area networks (LANs) to transmit large amounts of digital data over a large number of carriers spaced at precise radio frequencies.

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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.

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 (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.

UMB (Ultra Mobile Broadband) is an evolving standard expected to enable wireless networks to support data transfer rates up to 280 megabits per second.

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

WAN (Wide Area Network) is a wired 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 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 Nortel believes 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 is the potential that regulatory decisions 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, 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, such as the merger of Lucent and Alcatel, 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 or a change in technology focus by our customers, particularly certain key customers.

Continued cautiousness in capital spending by service providers and other customers 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, 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 orders are not indicative of 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. Any such change in demand may reduce purchases of our networking solutions by our customers, require increased 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, 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, 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, reduced 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. 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.

As part of our review of restructured businesses, we look at the recoverability of their tangible and intangible assets. Future market conditions may trigger further write-downs of these assets due to uncertainties in the estimates and

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assumptions used in asset valuations, which are based on our forecasts of future business performance, and accounting estimates related to the useful life and recoverability of the net book value of these assets, including inventory, goodwill, net deferred taxes and other intangible 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, 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, financial difficulties and consolidation in their industry, both of which may result in fewer sources of components or products, increased prices and greater exposure 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 used in our solutions 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 the divestiture of associated assets, to contract manufacturers, including an agreement with Flextronics. See “Developments in 2006 and 2007 — Supply Chain Strategy” in the MD&A section of this report. As a result, a significant portion of our supply chain is concentrated with Flextronics. 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 quality 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. 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 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.

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.

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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. 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 in the future may be impacted by our current credit condition. Significant foreign exchange rate fluctuations could have a material adverse effect on our business, results of operations and financial condition.

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 such markets; 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 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.

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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 we are reducing and refocusing the 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.

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 affect 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. Furthermore, these occurrences could adversely affect our reputation and result in the loss of or delay in market acceptance of our products and loss of sales, which would adversely affect our business, results of operations and financial condition.

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, or other industry regulation in any country in which we 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.

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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 have made, and may continue to 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 acquire companies 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 LG Electronics and our alliance with Microsoft. 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).

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

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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, levels 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, 2006, our primary source of liquidity was cash and we expect this to continue throughout 2007. Although we generated significant cash flow in the fourth quarter of 2006, we cannot be assured that our operations will generate significant cash flow in 2007. 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 regulatory and 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, 2006, we 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 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.

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Covenants in the indenture 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 indenture governing the senior notes we issued on July 5, 2006 contains various restrictive covenants. See “Liquidity and Capital Resources — Senior Notes” in the MD&A section of this report.

These and other restrictions in the indenture governing the 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 NNL 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.

NNL’s long-term corporate credit rating from Moody’s is currently “B3” and its 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 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, 2006, there was approximately $166 of outstanding support utilized under the EDC Support Facility, approximately $140 of which was outstanding under the small bond sub-facility. Bid and performance related bonds with terms that extend beyond December 31, 2008 are currently not eligible for the support provided by the EDC Support Facility. EDC may also suspend its obligation to issue NNL any additional support if events occur that have a material adverse effect on NNL’s 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 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

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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. 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.

Our stock price has historically been volatile and any declines in the market price of our publicly traded securities may negatively impact our ability to make future acquisitions, raise capital, issue debt and retain employees.

Our publicly traded securities have experienced, and may continue to experience, substantial price volatility, including considerable decreases, particularly as a result of variations between our actual or anticipated financial results and the published expectations of analysts and as a result of announcements by our competitors and us, including our announcements related to our multiple restatements and related matters, our management changes, the regulatory and criminal investigations, the Global Class Action Settlement, the other civil litigation proceedings and related matters. Our credit quality, any equity or equity related offerings, our operating results and prospects, restatements of previously issued financial statements and any exclusion of our publicly traded securities from any widely followed stock market indices, among other factors, will also affect the market price of our publicly traded securities.

The stock markets have experienced extreme price fluctuations that have affected the market price and trading volumes of many technology and telecommunications companies in particular. These fluctuations may negatively impact our ability to raise capital, issue debt, secure customer business, retain employees or make future acquisitions. Such difficulties, as well as general economic and geopolitical conditions, may in turn have a material adverse effect on the market price of our publicly traded securities. The issuance of approximately 62,866,775 Nortel Networks Corporation common shares under the Global Class Action Settlement will result in dilution of existing equity positions and may increase volatility in the market price of Nortel Networks Corporation common shares or our other publicly traded securities. We expect that the Global Class Action Settlement could be deemed effective as early as March 20, 2007 for the finalization of the settlement. On or about this date, it is anticipated that approximately 4 percent of the total settlement shares could be issued to plaintiffs’ counsel in accordance with the terms of the settlement, and be freely tradeable, with the balance of settlement shares expected to be issued, and upon issuance freely tradeable, in the second half of 2007. The calculations of basic or diluted earnings (loss) per share and the number of our outstanding common shares do not reflect the common shares issuable pursuant to the Global Class Action Settlement, common shares reserved for issuance under our incentive plans or upon exercise of stock options and common shares reserved for issuance upon conversion of our 4.25% Convertible Senior Notes due 2008.

Risks Relating to Our Restatements and Related Matters

Our current restatement of our consolidated financial statements and related events, and possible future
restatements, may have a material adverse effect on us.

As described in the MD&A and Controls and Procedures sections of this report, we have effected successive restatements of prior period financial results. As a result of previously announced changes to our pension plans, third party actuarial firms which we retained re-measured our U.S. and Canadian pension and post-retirement plans in the third quarter of 2006, at which time one of these firms discovered potential errors (generally originating in the late 1990s) in the historical actuarial calculations they had originally performed on the U.S. pension plan assets. Throughout the fourth quarter of

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2006 and into 2007, we investigated these potential errors, including a review by us and our third party actuaries of each of our significant pension and post-retirement benefit plans. As a result of this review, we determined that we had understated our historical pension expense with respect to the U.S. and Canadian plans.

In addition, as a result of the significant ongoing remedial efforts to address our internal control material weaknesses and other deficiencies, we corrected for additional, individually immaterial errors identified throughout 2006. These errors related mainly to revenue recognition errors with revenue having generally been recognized prematurely in prior years when it should have been deferred and recognized in later periods. These matters have been discussed with the Staff of the SEC including as part of our responses to Staff comments on Nortel’s periodic filings with the SEC.

This restatement could have a negative effect on our business and results of operations in the near future. In part as a result of the compensating procedures and processes that we are applying to our financial reporting process, during the preparation of our financial statements for recent periods (including 2004, 2005 and 2006), we identified a number of adjustments to correct accounting errors related to prior periods, including the errors corrected in the most recent restatement, as more fully discussed in note 4, “Restatement of previously issued financial statements” to the accompanying audited consolidated financial statements. In the past, we also recorded adjustments that were immaterial to the then-current period and to the prior periods in the financial statements for the then-current period. As long as we continue to have a material weakness in our internal control over financial reporting, we may in the future identify similar adjustments to prior period financial information. Adjustments that may be identified in the future could require further restatement of our financial statements. Furthermore, the threshold for our being required to restate financial information in the future is potentially very low in the current regulatory environment due in part to the fact that we currently, and in the near future expect to, operate at close to break-even levels of earnings (loss). We have received comments on our periodic filings from the Staff of the SEC’s Division of Corporation Finance. As part of this comment process, we may receive further comments from the Staff of the SEC relating to this Annual Report on Form 10-K. If, as a result of any of the matters described above, we are required to amend this report or restate certain of our financial information, it may have a material adverse effect on our business and results of operations. For example, a future restatement may result in delays in filing our periodic reports which in turn may result in breaches of our public debt indentures and obligations under the EDC Support Facility which may affect our liquidity. The current restatement resulted in a breach of certain provisions of the EDC Support Facility, for which NNL obtained a waiver on March 9, 2007.

We are subject to ongoing regulatory and 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, in addition to the restatement effected in this report, our Annual Reports on Form 10-K for the fiscal years ended 2005, 2004 and 2003). We have been under investigation by the SEC and the Ontario Securities Commission, or OSC, since April 2004 in connection with our previous restatements. We 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 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 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 regulatory and criminal investigations may adversely affect the course of the remaining civil litigation against us.

As part of the resolution of the regulatory and criminal investigations, we may be subject to injunctions on future conduct; required to implement further remedial measures, report on, or have an independent adviser review, assess, monitor and report on our accounting practices, financial reporting and disclosure processes and internal control systems; or subject to other penalties, which individually or collectively could have a material adverse effect on our business, results of operations, financial condition and liquidity.

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

We have 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. The Global Class Action Settlement remains conditioned on, among other things, receipt of securities regulatory and stock exchange approvals and finalizing the court approval orders which could significantly delay the administration and distribution of the settlement amount. See the Legal Proceedings section of this report.

Under the terms of the Global Class Action Settlement, we will pay $575, plus applicable accrued interest, in cash, which has been placed into escrow, and issue approximately 62,866,775 common shares of Nortel (representing approximately 14.5% of Nortel’s common shares outstanding as of February 7, 2006), reflecting our 1 for 10 share consolidation on December 1, 2006, to the plaintiffs, and will contribute to the plaintiffs one-half of any recovery from our ongoing litigation against certain of our former senior officers who were terminated for cause in 2004, which seeks the return of payments made to them in 2003 under Nortel’s bonus plan. The total settlement amount will include all plaintiffs’ court-approved attorneys’ fees and will continue to be adjusted in future quarters. We expect that the Global Class Action Settlement could be deemed effective as early as March 20, 2007 for the finalization of the settlement. On or about this date, it is anticipated that approximately 4 percent of the total settlement shares could be issued to plaintiffs’ counsel in accordance with the terms of the settlement, and be freely tradeable, with the balance of settlement shares expected to be issued, and upon issuance freely tradeable, in the second half of 2007. Our insurers agreed to pay $228.5 towards the settlement and we agreed with the insurers to certain indemnification obligations. While we believe that these indemnification obligations would be unlikely to materially increase our total payment obligations under the Global Class Action Settlement, any such indemnification payments could be material and would not reduce the amounts payable by us as noted above. 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 our 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, including a purported class action lawsuit brought pursuant to the United States Employee Retirement Income Security Act. 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.

We and our independent registered chartered accountants have identified a material weakness related to our internal control over financial reporting and concluded that our internal control over financial reporting was ineffective as at December 31, 2006. This material weakness could impact our ability to report our results of operations and financial condition accurately and in a timely manner.

We and our independent registered chartered accountants for 2006, Deloitte & Touche LLP, or Deloitte, have identified a material weakness in our internal control over financial reporting as at December 31, 2006. In addition, management and Deloitte concluded that our internal control over financial reporting was not effective as at December 31, 2006. As well, our chief executive officer and chief financial officer have also concluded, as at December 31, 2006, that our disclosure controls and procedures were not effective. See the Controls and Procedures section of this report. We continue to identify, develop and implement remedial measures and compensating procedures to address this material weakness, which is time consuming and may further disrupt our business. This material weakness, unless addressed, could result in accounting errors such as those underlying our prior restatements, as more fully discussed in the Controls and Procedures sections of this report and our 2005, 2004 and 2003 Annual Reports.

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While we are implementing steps to restore the effectiveness of our internal control over financial reporting and our disclosure controls and procedures and to address the material weaknesses identified above, failure to restore the effectiveness of our internal control over financial reporting and our disclosure controls and procedures could adversely impact the accuracy and timeliness of future reports and filings we make with the SEC and OSC and could have a material adverse effect on our business, results of operations, financial condition and liquidity.

We are currently unable to access our shelf registration statement filed with the SEC, which may adversely affect our financial flexibility.

As a result of the delayed filing of our periodic reports in 2006, we and NNL continue to be unable to use, in its current form as a short-form shelf registration statement, the remaining approximately $800 of capacity for various types of securities under our SEC shelf registration statement. We will again become eligible for short-form shelf registration of our securities with the SEC after we have completed timely filings of our financial reports for 12 consecutive months, which we expect to achieve by June 1, 2007. Our current inability to make use of the short-form registration process results in less flexibility and increased time to access the capital markets which in turn could adversely impact our business objectives.

If in the future we are unable to report our results of operations and financial condition accurately and in a timely manner, the holders of our debt could accelerate the maturity of that debt, which could leave us unable to meet our payment obligations, and the NYSE and TSX could commence suspension or delisting procedures in respect of NNC common shares or other of our or NNL’s listed securities.

If we are unable to report our financial condition and results of operations accurately and in a timely manner, it could have a material adverse effect on our business, results of operations, financial condition and liquidity. For example, delays in filing our periodic reports could cause us to breach our obligations under our public debt indentures and our credit and support facilities. 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 NNL might be unable to meet our respective payment obligations. In addition, delays in filing our periodic reports could result in our not being in compliance with the continued listing requirements of the NYSE and the TSX, which could cause the NYSE and the TSX to commence suspension or delisting procedures in respect of NNC common shares or other of our or NNL’s listed securities. If a suspension or delisting were to occur, there would be significantly less liquidity in the suspended or delisted securities, and we would expect demand for such securities to decrease, which could result in a decline in the market price of such securities. Our ability to raise additional capital through equity, and attract and retain personnel by means of equity compensation, would also be greatly impaired.

ITEM 1B.   Unresolved Staff Comments

None.

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ITEM 2.   Properties

During 2006, we moved our principal executive offices to a 160,812 square foot leased facility in Toronto, Ontario, Canada and vacated our Brampton, Ontario, Canada facility, which was sold for $84 in cash. In 2006, we continued to reduce the number and size of our facilities in connection with a square footage reduction plan. In 2007, we plan to vacate an additional 500,000 square feet of facility space in accordance with our Business Transformation Plan. For more information on the Business Transformation Plan, see “Executive Overview — Significant Business Developments in 2006 and 2007 — Business Transformation Initiatives” 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, 2006, estimated facilities use by segment was 15% MCCN, 12% ES, 20% MEN, 31% GS, and 22% one or more segments and/or corporate facilities. We operated 205 sites occupying approximately 11.9 million square feet.

	Number of Sites
Type of Site*	Owned		Leased		Geographic Locations
Manufacturing and repair**		4		—	EMEA, CALA and the Asia region
Distribution centers		—		8	U.S., EMEA, CALA and the Asia region
Offices (administration, sales and field service)		3		178	All geographic regions
Research and development		3		9	U.S., Canada, EMEA and the Asia region
TOTAL***		10		195

*	Indicates primary use. A number of sites are mixed-use facilities.
**	Manufacturing sites in Turkey, China and Thailand are operated by Nortel joint ventures. Small amounts of integration and test activity are conducted by Nortel in Northern Ireland and Brazil.
***	Excludes approximately 5.2 million square feet, designated as part of planned square footage reduction plans, of which approximately 3.5 million square feet was sub-leased.

ITEM 3.   Legal Proceedings

Subsequent to our announcement on February 15, 2001, in which we provided revised guidance for our financial performance for the 2001 fiscal year and the first quarter of 2001, we and certain of our 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 our securities during certain periods between October 24, 2000 and February 15, 2001. The lawsuits allege, 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 our announcement on March 10, 2004, in which we indicated it was likely that we would need to revise our previously announced unaudited results for the year ended December 31, 2003, and the results reported in certain of our quarterly reports in 2003, and to restate our previously filed financial results for one or more earlier periods, we and certain of our 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 our securities during certain periods between February 16, 2001 and July 28, 2004. The lawsuits allege, 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 our financial results. These matters are also the subject of investigations by Canadian and U.S. securities regulatory and criminal investigative authorities.

We have entered into agreements to settle all of the Nortel I Class Actions and Nortel II Class Actions, or the Global Class Action Settlement, 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 remains conditioned on, among other things, securities regulatory and stock exchange approvals and finalizing the court approval orders.

Under the terms of the Global Class Action Settlement, we will pay $575 in cash and issue approximately 62,866,775 common shares (representing approximately 14.5% of our common shares outstanding as of February 7, 2006, the date an

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agreement in principle was reached with the plaintiffs in the U.S. class action lawsuits), reflecting our 1 for 10 common share consolidation effected on December 1, 2006, to the plaintiffs, and we will contribute to the plaintiffs one-half of any recovery from our ongoing litigation against certain of our former senior officers who were terminated for cause in 2004, which seeks the return of payments made to them in 2003 under our bonus plan. On June 1, 2006, we placed $575 plus accrued interest of $5 into escrow and has classified this amount as restricted cash. The total settlement amount will include all plaintiffs’ court-approved attorneys’ fees. As a result of the Global Class Action Settlement, we have established a litigation reserve and recorded a charge to our full-year 2005 financial results of $2,474, $575 of which related to the cash portion of the Global Class Action Settlement, while $1,899 related to the equity component. A recovery of $219 was recorded as at December 31, 2006, to reflect the fair value mark-to-market adjustment of the common shares and the equity component of the litigation reserve will be adjusted in future quarters, based on the fair value of the common shares issuable, until the settlement is finalized. The administration of the settlement will be a complex and lengthy process. Once the securities regulatory and stock exchange approvals have been obtained and the court approval orders are finalized following the exhaustion of any appeals and appeal periods, the claims administrator will submit a list of approved claims to the appropriate courts for approval. Once all the courts have approved the claims, the process of distributing cash and share certificates to claimants can begin. It is not possible to predict how long the process will take, although it likely will be many months.

Our insurers have agreed to pay $228.5 in cash toward the settlement and we have agreed to certain indemnification obligations with our insurers. We believe that it is unlikely that these indemnification obligations will materially increase our total cash payment obligations under the Global Class Action Settlement.

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

In August 2006, we 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 settlement. The proposed settlement did not have a material impact on our financial condition and an accrued liability was recorded in the third quarter of 2006.

In April 2004, we announced that we were under investigation by each of the SEC and the OSC in connection with the restatements of our financial statements in 2003 and 2004. These investigations are ongoing.

In connection with these investigations, on March 12, 2007, the SEC filed a complaint against certain of our former executives 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.

In addition, on March 12, 2007, the OSC, issued a notice of hearing with respect to certain of our former executives 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 executives 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.

In May 2004, we 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, we received

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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 our financial accounting situation by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is also ongoing.

Beginning in December 2001, we, together with certain of our 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 period from March 7, 2000, through November 28, 2006. The lawsuit alleges, among other things, material misrepresentations and omissions to induce participants and beneficiaries to continue to invest in and maintain investments in our common shares through the investment plan. A class of plaintiffs in this action has not yet been certified.

In December 2005, an application was filed in the Ontario Superior Court of Justice for leave to commence a shareholders’ derivative action on our behalf against certain of our then-current and former 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 our 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 our Board of Directors to reform and improve our corporate governance and internal control procedures as the court may deem necessary or desirable and an order that we 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.

On February 8, 2007, a Statement of Claim was filed in the Ontario Superior Court of Justice in the name of Nortel against Deloitte. 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 claims seeks damages and other relief on Nortel’s behalf, including recovery of payments that Nortel will make to class members as part of the Global Class Action Settlement. To date, the three shareholders have not brought any application for leave to commence a derivative action in the name of Nortel against Deloitte. The Litigation Committee of our Board of Directors is currently reviewing the matter and will respond to the claim in due course.

In January 2005, we and NNL 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 our 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 us and NNL 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-judgement 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 NNL asserting claims for, among other things, wrongful dismissal and seeking compensatory, aggravated and punitive damages, and pre- and post-judgment interest and costs.

Except as otherwise described herein, in each of the matters described above, the plaintiffs are seeking an unspecified amount of monetary damages. We are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact to us 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 we have recorded in our 2005 and 2006 financial results as a result of the Global Class Action Settlement and the accrued liability for the Ontario Settlement, we have not 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, we cannot determine whether these actions, suits, claims and proceedings will, individually or collectively, have a material adverse effect on our business, results of operations, financial condition or liquidity. Except for matters encompassed by the Global Class Action Settlement and the Ontario Settlement, we intend to

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defend these actions, suits, claims and proceedings, litigating or settling cases where in management’s judgement it would be in the best interest of shareholders to do so. We will continue to cooperate fully with all authorities in connection with the regulatory and criminal investigations.

We are also a defendant in various other suits, claims, proceedings and investigations which arise in the normal course of business.

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 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. We continue to evolve compliance plans and risk mitigation strategies relating to the new laws and requirements. We intend to design and manufacture products that are compliant with all applicable legislation and meet our quality and reliability requirements.

We have a corporate environmental management system standard and an environmental program to promote such compliance. Moreover, we have a periodic, risk-based, integrated environment, health and safety audit program. Our environmental program focuses its activities on design for the environment, supply chain and packaging reduction issues. We work with our suppliers and other external groups to encourage the sharing of non-proprietary information on environmental research.

We are exposed to liabilities and compliance costs arising from our past and current generation, management and disposal of hazardous substances and wastes. As of December 31, 2006, the accruals on our consolidated balance sheet for environmental matters were $27. Based on information available as of December 31, 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 our business, results of operations, financial condition and liquidity.

We have remedial activities under way at 14 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 $27.

We are 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 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 10% or more, depending on the circumstances). A de minimis potentially responsible party is generally considered to have contributed less than 10% (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 $27 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.

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PART II

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

Our common shares are listed and posted for trading on the New York Stock Exchange, or NYSE, in the U.S. and on the Toronto Stock Exchange, or TSX, in Canada. The following table sets forth the high and low sale prices of our common shares as reported on the NYSE composite tape and on the TSX.

		New York				Toronto
		Stock Exchange				Stock Exchange
		Composite Tape				(Canadian $)
		High		Low		High		Low
2006	Fourth Quarter	$	27.18	$	19.30	$	31.59	$	21.80
	Third Quarter		23.90		19.00		26.80		21.40
	Second Quarter		31.00		20.20		36.30		22.40
	First Quarter		34.30		27.30		40.20		31.30
2005	Fourth Quarter		35.70		27.50		42.20		32.10
	Third Quarter		33.80		25.10		40.60		30.70
	Second Quarter		29.10		22.60		36.30		28.50
	First Quarter		36.20		26.20		44.00		32.30

On February 28, 2007, the last sale price on the NYSE was $29.98 and on the TSX was Canadian $35.06.

On February 28, 2007, approximately 138,500 registered shareholders held 100% of our outstanding common shares. These included the Canadian Depository for Securities and the Depository Trust Company, two clearing corporations, which held a total of approximately 97.89% of our common shares on behalf of other shareholders.

Dividends

On June 15, 2001, we announced that our Board of Directors had decided to discontinue the declaration and payment of common share dividends. As a result, dividends have not been declared and paid on our common shares since June 29, 2001, and future dividends will not be declared unless and until our Board of Directors decides otherwise. On July 26, 2001, our Board of Directors suspended the operation of the Nortel Networks Corporation Dividend Reinvestment and Stock Purchase Plan.

Securities Authorized for Issuance Under Equity Compensation Plans

For a discussion of our equity compensation plans, please see the Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters section of this report.

The following graph compares the yearly percentage change in the cumulative total shareholder return on our common shares to the cumulative total return of the S&P 500 Composite Stock Index (or S&P 500 Index) and the S&P 500 Communications Equipment Index for the period which commenced on December 31, 2001 and ended on December 31, 2006.(1)

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Shareholder return performance graph

Indexed Returns Years Ending

	Base Period
Company Index	Dec. 2001		Dec. 2002		Dec. 2003		Dec. 2004		Dec. 2005		Dec. 2006
Nortel Networks Corporation		100		21.58		56.70		46.51		41.02		35.83
S&P 500 Index		100		77.90		100.25		111.15		116.51		135.03
S&P 500 Communications Equipment Index		100		45.83		76.12		78.42		80.08		92.49

(1) Assumes that $100.00 was invested in our common shares on the NYSE and in each of the indices on December 31, 2001, and that all dividends were reinvested.

Canadian Tax Matters

Dividends

Under the U.S.-Canada Income Tax Convention (1980), or the Convention, Canadian withholding tax of 15% generally applies to the gross amount of dividends (including stock dividends) paid or credited to beneficial owners of our common shares:

•  who are resident in the U.S. for the purposes of the Convention; and

•  who do not hold the shares in connection with a business carried on through a permanent establishment or a fixed base in Canada.

The Convention provides an exemption from withholding tax on dividends paid or credited to certain tax-exempt organizations that are resident in the U.S. for purposes of the Convention. Persons who are subject to the U.S. federal income tax on dividends may be entitled, subject to certain limitations, to either a credit or deduction with respect to Canadian income taxes withheld with respect to dividends paid or credited on our common shares.

Sales or Other Dispositions of Shares

Gains on sales or other dispositions of our common shares by a non-resident of Canada are generally not subject to Canadian income tax, unless the holder realizes the gains in connection with a business carried on in Canada. A gain

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realized upon the disposition of our common shares by a resident of the U.S. that is otherwise subject to Canadian tax may be exempt from Canadian tax under the Convention. Where our common shares are disposed of by way of our acquisition of such common shares, other than a purchase in the open market in the manner in which common shares would normally be purchased by any member of the public in the open market, the amount paid by us in excess of the paid-up capital of such common shares will be treated as a dividend, and will be subject to non-resident withholding tax.

Sales of Unregistered Securities

During the fourth quarter of 2006, we issued an aggregate of 2,195 shares upon the exercise of options granted under the Nortel Networks/BCE 1985 Stock Option Plan and the Nortel Networks/BCE 1999 Stock Option Plan. The common shares issued on the exercise of these options were issued outside of the U.S. to BCE Inc., or BCE, employees who were not U.S. persons at the time of option exercise, or to BCE in connection with options that expired unexercised or were forfeited. The common shares issued are deemed to be exempt from registration pursuant to Regulation S under the Securities Act. All funds received by us in connection with the exercise of stock options granted under the two Nortel Networks/BCE stock option plans are transferred in full to BCE pursuant to the terms of the May 1, 2000 plan of arrangement pursuant to which we were spun off from BCE, except for nominal amounts paid to us to round up fractional entitlements into whole shares. We keep these nominal amounts and use them for general corporate purposes.

	Number of Common Shares Issued
	Without U.S. Registration Upon		Range of
	Exercise of Stock Options		Exercise Prices
Date of Exercise	Under Nortel/BCE Plans		Canadian $
October 19, 2006(1)		13,663	$	21.30-$25.27
November 16, 2006(1)		2,121	$	25.27
December 14, 2006		617	$	252.74-$464.85

(1) The number of common shares issued and the range of exercise prices for options exercised in October and November 2006 do not reflect the 1 for 10 share consolidation of our common shares completed on December 1, 2006.

The following table sets forth the total number of share units of Nortel credited to accounts of our directors, in lieu of cash fees, under the Nortel Networks Corporation Directors’ Deferred Share Compensation Plan and Nortel Networks Limited Directors’ Deferred Share Compensation Plan during the fourth quarter of 2006. These transactions are exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof.

	Total Number of
	Common Share
	Units Acquired under
	Directors’ Deferred Share			Price per
Date of Grant	Compensation Plans			Common Share (or Unit)
December 29, 2006		12,748.9452	(1)	$	26.96	(2)

(1)

Share units issued under the Nortel Networks Corporation Directors’ Deferred Share Compensation Plan/Nortel Networks Limited Directors’ Deferred Share Compensation Plan (the “NNCDDSCP/NNLDDSCP”). Pursuant to the NNCDDSCP/NNLDDSCP, upon election of the director, certain fees payable to NNC and NNL directors are paid in the form of NNC/NNL share units, based upon the market price of NNC common shares at the time such NNC/NNL share units are credited to the director’s account under the NNCDDSCP/NNLDDSCP. On the earliest date when a director ceases to be both (i) a member of the boards of directors of NNC and NNL and (ii) employed by NNC and/or NNL or its subsidiaries, NNC and/or NNL will cause to be purchased on the open market, for delivery to the director, a number of our common shares equal to the number of NNC/NNL share units credited to the director’s account under the NNCDDSCP/NNLDDSCP.

(2)

Represents our common share price of $31.42 Cdn. as converted into U.S. dollars using the noon rate of exchange of the Bank of Canada on the grant date.

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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, 2004, 2003 and 2002 and summarized results of operations data for the years ended December 31, 2003 and 2002. Readers should note the following information regarding the selected financial data presented below.

As more fully described in note 4 of the audited consolidated financial statements, we have restated our previously reported consolidated financial statements for our fiscal years 2005 and 2004 and the quarters ended March 31, June 30 and September 30, 2006 and 2005. The selected data below includes all such restatement adjustments. The audited restated consolidated balance sheet as of December 31, 2005 and audited restated consolidated statements of operations, statements of changes in equity and comprehensive income (loss) and statements of cash flows for our 2005 and 2004 fiscal years ended December 31, are included elsewhere in this Annual Report on Form 10-K. We have not issued restated financial statements for our 2003 and 2002 fiscal years or a restated consolidated balance sheet as of December 31, 2004, 2003 or 2002, but selected unaudited information about the restatement adjustments for those periods is presented below. We have also recorded entries relating to periods prior to 2002 which resulted in a cumulative reduction in accumulated deficit as of January 1, 2002 of $18. This adjustment is comprised mainly of a $28 reduction in cumulative pension and post-retirement benefit expense which is discussed in more detail in note 4.

	2006			2005			2004			2003			2002
				As restated*			As restated*			As restated			As restated
	(Millions of U.S. dollars, except per share amounts)
Results of Operations
Total revenues	$	11,418		$	10,509		$	9,478		$	9,907		$	10,736
Research and development expense		1,939			1,874			1,975			1,972			2,085
Special charges
Goodwill impairment		—			—			—			—			595
Other special charges		105			169			181			289			1,502
Shareholder litigation settlement expense (recovery)		(219	)		2,474			—			—			—
Operating earnings (loss)		269			(2,732	)		(298	)		(163	)		(3,145	)
Other income (expense) — net		212			295			217			485			(6	)
Income tax benefit (expense)		(60	)		81			20			73			469
Net earnings (loss) from continuing operations		19			(2,611	)		(296	)		105			(2,961	)
Net earnings (loss) from discontinued operations — net of tax		—			1			49			183			(103	)
Cumulative effect of accounting changes — net of tax		9			—			—			(12	)		—
Net earnings (loss)		28			(2,610	)		(247	)		276			(3,064	)
Basic earnings (loss) per common share
— from continuing operations	$	0.06		$	(6.02	)	$	(0.68	)	$	0.22		$	(7.73	)
— from discontinued operations		0.00			0.00			0.11			0.42			(0.27	)
Basic earnings (loss) per common share	$	0.06		$	(6.02	)	$	(0.57	)	$	0.64		$	(8.00	)
Diluted earnings (loss) per common share
— from continuing operations	$	0.06		$	(6.02	)	$	(0.68	)	$	0.22		$	(7.73	)
— from discontinued operations		0.00			0.00			0.11			0.42			(0.27	)
Diluted earnings (loss) per common share	$	0.06		$	(6.02	)	$	(0.57	)	$	0.64		$	(8.00	)
Financial Position as of December 31
Total assets	$	18,979		$	18,135		$	17,716		$	17,189		$	17,395
Total debt(a)		4,500			3,896			3,891			4,017			4,225
Minority interests in subsidiary companies		779			783			624			613			631
Total shareholders’ equity		1,121			763			3,612			3,651			2,948

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

See notes 3, 7, 10, 16 and 21 to the accompanying audited consolidated financial statements for the impact of accounting changes, special charges, acquisitions, divestitures and closures, capital stock and the shareholder litigation settlement expense related to the proposed class action litigation settlement, respectively, that affect the comparability of the above selected financial data.

* See note 4 to the accompanying consolidated financial statements.

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The following information presents the financial impact of the restatement adjustments on our previously reported consolidated statement of operations data for the years ended December 31, 2003 and 2002:

Consolidated Statement of Operations data for the year ended December 31, 2003

	As previously
	reported		Adjustments			As restated
	(Millions of U.S. dollars,
	except per share amounts)
Revenues	$	9,932	$	(25	)	$	9,907
Cost of revenues		5,723		2			5,725
Gross profit	$	4,209	$	(27	)	$	4,182
Net earnings (loss) from continuing operations	$	122	$	(17	)	$	105
Net earnings (loss)	$	293	$	(17	)	$	276
Basic and diluted earnings (loss) per common share
— from continuing operations	$	0.26	$	(0.04	)	$	0.22
— from discontinued operations		0.42		0.00			0.42
Basic and diluted earnings (loss) per common share	$	0.68	$	(0.04	)	$	0.64

Consolidated Statement of Operations data for the year ended December 31, 2002

	As previously
	reported			Adjustments			As restated
	(Millions of U.S. dollars,
	except per share amounts)
Revenues	$	10,738		$	(2	)	$	10,736
Cost of revenues		6,886			2			6,888
Gross profit	$	3,852		$	(4	)	$	3,848
Net earnings (loss) from continuing operations	$	(2,958	)	$	(3	)	$	(2,961	)
Net earnings (loss)	$	(3,061	)	$	(3	)	$	(3,064	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(7.72	)	$	(0.01	)	$	(7.73	)
— from discontinued operations		(0.27	)		0.00			(0.27	)
Basic and diluted earnings (loss) per common share	$	(7.99	)	$	(0.01	)	$	(8.00	)

Restatement adjustments

The following table summarizes the restatement adjustments (refer to note 4 of the accompanying consolidated financial statements for a description of the nature of the adjustments):

	Revenues						Cost of revenues						Net earnings (loss)
	2003			2002			2003			2002			2003			2002
As previously reported	$	9,932		$	10,738		$	5,723		$	6,886		$	293		$	(3,061	)
Adjustments:
Pension and post-retirement errors		—			—			6			3			(16	)		(10	)
Revenue recognition errors		(25	)		(2	)		(4	)		(1	)		(20	)		(1	)
Other errors		—			—			—			—			19			8
As restated	$	9,907		$	10,736		$	5,725		$	6,888		$	276		$	(3,064	)

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

Executive Overview	40
Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters	45
Results of Operations	51
Segment Information	57
Liquidity and Capital Resources	61
Off-Balance Sheet Arrangements	68
Application of Critical Accounting Policies and Estimates	69
Accounting Changes and Recent Accounting Pronouncements	82
Outstanding Share Data	84
Market Risk	84
Environmental Matters	84
Legal Proceedings	85
Cautionary Notice Regarding Forward-Looking Information	85

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. The MD&A should be read in combination with our audited consolidated financial statements and 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.

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. Our business activities include the design, development, engineering, marketing, sale, supply, licensing, installation, servicing and support of these networking solutions.

The telecommunications industry has evolved over the past two decades by developing new technologies and using those technologies to build smarter and faster networks. We believe that the telecommunications industry today stands at the threshold of a new era to be fueled by increasing demand for pervasive personal broadband capabilities that provide high-bandwidth access to any application from any device and any location. We believe that innovation in this era will be driven by three emerging trends: hyperconnectivity, true broadband, and the emergence of communications-enabled applications. Hyperconnectivity refers to the expected dramatic increase in demand for network connections as more devices such as portable gaming and entertainment devices, digital cameras, appliances, motor vehicles, and other devices are added to the network. True broadband refers to the ability of an internet user to access the network from any location using any access device without losing quality, connectivity, content or clarity. We believe that the increasing use of video,

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high definition television, video on demand, peer-to-peer connectivity, and other applications requiring the use of significant bandwidth will result in increased demand for true broadband. To deliver a true broadband experience to users, wired and wireless access bandwidth will need to be substantially increased and fixed and mobile communications will need to continue to converge. Communications-enabled applications refers to the trend towards Web-based, network-aware applications and services which will be made possible by middleware based on emerging technologies like Service-Oriented Architecture and IP Multimedia Subsystem, or IMS. Our strategy is to capitalize on these trends by transforming enterprises to support a hyperconnected world, delivering next-generation mobility and convergence to enable a true broadband experience, and providing networking solutions that integrate networks and applications into a seamless framework.

Our short-term focus has been on: (i) the transformation of our businesses and processes, (ii) integrity renewal and (iii) growth imperatives. We believe we are well positioned to deliver wireless and wireline infrastructure, applications and services to carrier and enterprise customers.

Our plan for business transformation is expected to address our most significant operational challenges and is focused on simplifying our organizational structure and maintaining a strong focus on revenue generation and improved operating margins as well as quality improvements and cost reductions through a program known as Six Sigma. This plan contemplates the transformation of our business in six key areas: services, procurement effectiveness, revenue stimulation (including sales and pricing), research and development, or R&D, effectiveness, general and administrative effectiveness, and organizational and workforce effectiveness. Employees throughout our organization are engaged in supporting various objectives in each of these areas. Other initiatives include the continued progress of our finance transformation project, which will implement, among other things, a new information technology platform to provide an integrated global financial system.

We remain focused on integrity renewal through a commitment to effective corporate governance practices, remediation of material weaknesses in our internal controls and ethical conduct. We have an enhanced compliance function that places greater emphasis on compliance with applicable laws and company policies, and we have increased employee awareness of ethics issues through an online ethics training program and a new code of business conduct.

Our long-term growth imperatives are motivated by a desire to generate profitable growth and focus on areas where we can attain a leadership position and a minimum market share of twenty percent in key technologies, with a specific focus on mobility and convergence, enterprise transformation, and services and solutions. We anticipate that industry demand for wireless networking solutions will be increased due to continued subscriber and network traffic growth to support applications such as mobile video. We anticipate growth opportunities in this area and plan to increase our investment in metro ethernet, particularly to support video delivery over wired as well as wireless access, and in products compliant with the Worldwide Interoperability for Microwave Access, or WiMAX, standard, and the IMS service creation and control architecture.

We believe we are well-positioned in many enterprise voice networks today, but continue to face competitive challenges in integrating our voice and data portfolios to capitalize on the trend towards internet protocol, or IP, converged networks. We have taken steps to strengthen our end-to-end convergence solutions and focus on the enterprise market, including through the acquisition of Tasman Networks Inc., which has strengthened our data portfolio. In the third quarter of 2006 we entered into a strategic alliance with Microsoft Corporation to facilitate the ongoing transition of a key component of our business from traditional voice technology to software.

Commencing in the third quarter of 2006, in an effort to align our resources and reporting to our strategy, we changed our organization and began reporting our operating results in four segments: Mobility and Converged Core Networks, or MCCN, Enterprise Solutions, or ES, Metro Ethernet Networks, or MEN, and Global Services, or GS. The MCCN 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. The ES segment provides communication solutions for our enterprise customers that are used to build new networks and to transform existing communications networks into more cost effective, packet-based networks supporting data, voice and multimedia communications. 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 multi-media communications services. 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. We have recast our fiscal 2005 and 2004 results to reflect these changes in our reportable segments.

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In the first half of 2007, we expect to further refine our segments by including installation, engineering, and project management services in our GS segment. These services are currently bundled with our product revenue and are included in each of ES, MEN, and MCCN.

How We Measure Business Performance

Our president and chief executive officer has been identified as our chief operating decision maker in assessing the performance and allocating resources to our operating segments. The primary financial measure used by the CEO is management earnings (loss) before income taxes, or Management EBT. This measure includes the cost of revenues, selling, general and administrative, or SG&A, expense, R&D expense, interest expense, other income (expense) — 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”. Commencing in 2007, the CEO will use both Management EBT and operating margin as the primary financial measures in assessing performance and allocating resources. Operating margin is defined as gross profit, less SG&A and R&D expenses divided by Revenue.

2006 Financial Highlights

The following is a summary of our 2006 financial highlights:

	2006			2005			$ Change			% Change
Revenues	$	11,418		$	10,509		$	909			9
Gross Margin		38.9	%		40.7	%					(1.8 pts	)
Operating expenses(a)		4,547			4,472			75			2
Management EBT(b)		(193	)		15			(208	)
Net Earnings (Loss)		28			(2,610	)		2,638			—
Cash and Cash Equivalents		3,492			2,951			541			18

(a)	Operating expenses includes SG&A, R&D, and special charges.
(b)	See note 6, “Segment information” to the accompanying audited consolidated financial statements for a reconciliation of Management EBT to net earnings (loss) from continuing operations.

As discussed below under “Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters”, we have restated our consolidated financial statements for 2005, 2004, 2003, 2002 and the first, second, and third quarters of 2006 and 2005. For additional information please see note 4, “Restatement of previously issued financial statements” to the accompanying audited consolidated financial statements.

•  Revenues increased 9% to $11,418:  Revenues increased across all of our business segments and from a geographic perspective the increase was driven by the Europe, Middle East and Africa, or EMEA, and Asia regions. The majority of our revenue growth is attributable to the addition of a full year of results from Nortel Government Solutions, or NGS, and the LG-Nortel joint venture, or LG-Nortel, and favorable foreign exchange impacts.

•  Gross margin decreased 1.8 percentage points to 38.9%:  The impact of increased competition, our revenue growth in lower margin markets in Asia from LG-Nortel and in Europe, and the shift in product mix from mature technologies with higher margins to next-generation technologies with lower margins resulted in gross margin declines in 2006 as compared to 2005. The impacts of these trends were most significant in the ES and MEN segments.

•  Operating expenses increased by $75 and were at 39.8% of revenue:  While spending increased modestly in 2006 compared to 2005, our operating expenses as a percentage of revenue have trended downwards over the last two years.

•  Management EBT decreased $208 to a loss of $193:  The decrease in Management EBT was driven primarily by decreases in the ES segment and increases in corporate costs related to increased interest expenses. The MCCN and GS segments continued to be significantly more profitable than ES and MEN.

•  Net earnings (loss) increased to net earnings of $28 from a net loss of $2,610:  The increase in net earnings was driven primarily by changes in the fair value of our shareholder class action lawsuit settlement and a gain related to the divestiture of certain assets and liabilities related to our UMTS access business. The net loss in 2005 included a charge of $2,474 related to the Global Class Action Settlement.

•  Cash and cash equivalents increased $541 to $3,492:  The increase in cash was primarily driven by net cash from operating activities of $237, net cash from financing activities of $483, and net positive impacts from foreign exchange of $94, partially offset by net cash used in investing activities of $273.

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Significant Business Developments in 2006 and 2007

Divestiture of UMTS Access Assets

On December 31, 2006, we completed the sale of substantially all our assets and liabilities, related to our 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, we provided Alcatel-Lucent with a $23 promissory note in lieu of transferring working capital, which was paid in the first quarter of 2007.

As a result of the sale, we 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 our UMTS access products. Additionally, we wrote off net assets of $18 related primarily to unbilled receivables, goodwill, prepaid assets and deferred revenue and costs, and recorded additional liabilities of $26, relating to transaction costs. We have retained our existing UMTS access customer contracts related to LG-Nortel and will source the UMTS access products and services from Alcatel-Lucent.

We and Alcatel-Lucent have also agreed to provide certain transitional services to each other in order to facilitate the various aspects of the divesture. We have 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 our 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 December 31, 2008 and December 31, 2010, respectively.

We have recorded a net gain of $166 and deferred income of $5 primarily due to contingent liabilities related to a loss-sharing arrangement based on 2007 operating results.

In 2006, the access portion of our UMTS business generated estimated revenues and incurred estimated R&D costs of approximately $750 and $260, respectively. The expected R&D costs savings from this divestiture will be partially offset by additional R&D investments in technologies where we believe we can attain a leadership position. In 2007, we will continue to generate revenue from our UMTS access contracts in LG-Nortel. However, as a result of the divestiture, our total revenue from UMTS access will be significantly lower than in 2006.

Credit Facility and Senior Notes

On February 14, 2006, our indirect subsidiary, Nortel Networks Inc., or NNI, entered into a new one-year credit facility in the aggregate principal amount of $1,300, or the 2006 Credit Facility. The 2006 Credit Facility was drawn down in the full amount on February 14, 2006, and we used the net proceeds primarily to repay at maturity the outstanding $1,275 aggregate principal amount of the 6.125% notes due February 15, 2006 issued by our principal operating subsidiary, Nortel Networks Limited, or NNL.

On July 5, 2006, NNL completed an offering of $2,000 aggregate principal amount of senior notes, or the Notes. NNL used $1,300 of the net proceeds to repay the 2006 Credit Facility and 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 of Nortel Networks Capital Corporation due June 15, 2006, or the 7.40% Notes, and $575, plus accrued interest, deposited into escrow on June 1, 2006, pursuant to the Global Class Action Settlement.

Business Transformation Initiatives

On June 27, 2006, in connection with our previously announced Business Transformation plan to increase competitiveness by improving operating margins and overall business performance, we announced a series of new initiatives to create a world-class operations organization and planned actions to achieve organizational simplification. These initiatives include a work plan which is expected to result in a reduction of approximately 1,900 positions globally and the creation of approximately 800 new positions in Operations Centers of Excellence, or the 2006 Restructuring Plan.

We also announced significant changes to our North American employee benefit plans. As a result of the employee benefit plan changes, we recorded a gain of $43 in the third quarter of 2006. This benefit was realized evenly across gross profit, SG&A expense, and R&D expense.

On February 7, 2007, we outlined the next steps of our Business Transformation plan with the announcement of a work plan to implement a net reduction in our global workforce of approximately 2,900 positions, or the 2007 Restructuring

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Plan. We expect that approximately 70% of these reductions will take place in 2007. As part of this plan we will also shift approximately 1,000 positions from higher-cost to lower-cost locations, with approximately 40% of this activity taking place in 2007. 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. Upon completion, the 2007 Restructuring Plan is expected to result in annual savings of approximately $400. We currently expect to incur charges related to the 2007 Restructuring Plan of approximately $390, with approximately $300 related to the workforce reductions and approximately $90 related to the real estate actions. Approximately 75% of the aggregate charges are expected to be incurred in 2007, with the remainder expected to be incurred in 2008. Cash expenditures related to the 2007 Restructuring Plan are currently estimated to be approximately $370, and are expected to be incurred generally in the same timeframe.

Global Class Action Settlement

In February 2006, we 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. 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 remains conditioned on, among other things, receipt of securities regulatory and stock exchange approvals, and finalizing the court approved orders. Under the terms of the Global Class Action Settlement, we will pay $575 in cash and issue approximately 62,866,775 common shares of Nortel (which represents approximately 14.5% of our common shares outstanding as of February 7, 2006, the date the agreement in principle was reached with the plaintiffs in the U.S. class action lawsuits), reflecting our 1 for 10 share consolidation on December 1, 2006, to the plaintiffs, and will contribute to the plaintiffs one-half of any recovery resulting from our ongoing litigation against certain former officers of Nortel.

As a result of the Global Class Action Settlement, we established a litigation provision and recorded a charge to our full-year 2005 financial results of $2,474 (net of insurance proceeds of $228.5 which were placed in escrow in April 2006). Of this amount, $575 related to the cash portion, which was placed in escrow on June 1, 2006, along with $5 in accrued interest, and $1,899 related to the equity component. We have adjusted the equity component in each quarter of 2006 and will further adjust it in future quarters based on the fair value of the Nortel Networks Corporation common shares issuable until the finalization of the settlement. As of December 31, 2006, the fair value of the equity component had decreased to $1,680, resulting in a recovery of $219 for 2006.

Acquisitions

On February 24, 2006, we acquired Tasman Networks, an established networking company that provides a portfolio of secure enterprise routers, for approximately $99 in cash and related liabilities. The purchase price allocation of $99 included approximately $43 of goodwill acquired, $58 of intangible assets acquired and $2 in net liabilities assumed. We recorded an expense of $16 for in-process research and development in the second quarter of 2006. The allocation of the purchase price is based on management’s best estimate of the relative values of the assets acquired and liabilities assumed.

Supply Chain Strategy

In recent years we have entered into agreements to outsource substantially all of our manufacturing operations, culminating in a 2004 agreement with Flextronics International Ltd. and Flextronics Telecom Systems Ltd., or Flextronics, for the divestiture of substantially all of our remaining manufacturing operations and related activities. We and Flextronics also entered into a four year supply agreement for manufacturing services (whereby Flextronics now manages in excess of $2,000 of our annual cost of revenues) and a three year supply agreement for design services. Commencing in the fourth quarter of 2004, and throughout 2005, we completed the transfer to Flextronics of our optical design activities in Ottawa, Canada and Monkstown, Northern Ireland, and our manufacturing activities in Montreal, Canada and Chateaudun, France.

In 2006 we completed the transfer to Flextronics of our manufacturing operations and related assets in Calgary, Canada including product integration, testing, repair, and logistics operations. The transfer of our Calgary operations represented the final transfer to Flextronics.

The completion of the agreement for the divestiture of substantially all of our remaining manufacturing operations and related activities resulted in the transfer of approximately 2,100 employees to Flextronics and gross cash proceeds of $599. On October 18, 2006, we signed an amendment to various agreements with Flextronics to restructure our purchase commitments and increase our obligation to reimburse Flextronics for certain costs associated with the transaction. These

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amendments allow for increased flexibility to drive cost reductions through our business transformation initiatives. We do not expect to recognize a material net gain as a result of this divestiture.

Microsoft Alliance

On July 18, 2006, we announced a strategic alliance with Microsoft to jointly develop, market and sell communications solutions. We and Microsoft agreed to form joint teams to collaborate on product development spanning enterprise, mobile and wireline carrier solutions. The initial focus will be on unified communications products in enterprises providing seamless voice, e-mail, and multimedia capabilities with both Microsoft and Nortel clients. 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. In addition, we entered into a patent cross licensing agreement whereby we and Microsoft have agreed to exchange patent rights to certain products, services and technology. In consideration for access to our developed technology, Microsoft paid us $40 in the third quarter of 2006. This amount will be amortized ratably into income over the four year term of the agreement.

Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters

Previous Restatements

We have effected successive restatements of prior period financial results. In December 2003, we restated our consolidated financial statements for the years ended December 31, 2002, 2001 and 2000, and for the quarters ended March 31, 2003 and June 30, 2003, or the First Restatement. Following an independent review of the facts and circumstances leading to the First Restatement, or the Independent Review, we restated our financial statements for the years ended December 31, 2002 and 2001, and the quarters ended March 31, 2003 and 2002, June 30, 2003 and 2002, and September 30, 2003 and 2002, or the Second Restatement.

Over the course of the Second Restatement process, we identified a number of reportable conditions, each constituting a material weakness, in our internal control over financial reporting as of December 31, 2003. As of December 31, 2005, and as recently as September 30, 2006, we reported the following five material weaknesses in internal control over financial reporting:

•  lack of compliance with written Nortel procedures for monitoring and adjusting balances related to certain accruals and provisions, including restructuring charges and contract and customer accruals;

•  lack of compliance with Nortel procedures for appropriately applying applicable GAAP to the initial recording of certain liabilities including those described in Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies”, or SFAS No. 5, and to foreign currency translation as described in SFAS No. 52, “Foreign Currency Translation”, or SFAS No. 52;

•  lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S. GAAP to transactions, including but not limited to revenue transactions;

•  lack of a clear organization and accountability structure within the accounting function, including insufficient review and supervision, combined with financial reporting systems that are not integrated and which require extensive manual interventions; and

•  lack of sufficient awareness of, and timely and appropriate remediation of, internal control issues by Nortel personnel.

For additional information relating to the control deficiencies that resulted in these material weaknesses, please see the Controls and Procedures section of our 2003, 2004 and 2005 Annual Reports on Form 10-K.

At the recommendation of the Audit Committee, in January 2005 the Board of Directors adopted all of the recommendations for remedial measures of the Independent Review summarized in the “Summary of Findings and of Recommended Remedial Measures of the Independent Review”, submitted to the Audit Committee in January 2005 by Wilmer Cutler Pickering Hale & Dorr LLP and Huron Consulting Services LLC, or the Independent Review Summary. Those governing remedial principles were designed to prevent recurrence of the inappropriate accounting conduct found in the Independent Review, 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;

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•  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.

Please see the Independent Review Summary in the Controls and Procedures section of our 2003 Annual Report on Form 10-K for further information concerning these governing principles as they relate to three identified categories — people, processes and technology.

As part of the remedial measures and to compensate for the unremedied material weaknesses in our internal control over financial reporting, we undertook intensive efforts in 2005 to enhance our controls and procedures relating to the recognition of revenue. These efforts included, among other measures, extensive documentation and review of customer contracts for revenue recognized in 2005 and earlier periods. As a result of the contract review, it became apparent that certain of the contracts had not been accounted for properly under U.S. GAAP. Management’s determination that these errors required correction led to the Audit Committee’s decision on March 9, 2006 to effect a further restatement of our consolidated financial statements, or the Third Restatement, which was effected with the filing of our 2005 10-K/A and NNL’s Annual Report on Form 10-K for the year ended December 31, 2005, or NNL’s 2005 10-K, with the SEC and Canadian securities regulators on May 1, 2006.

During 2006, we continued to build on the remedial actions in 2004 and 2005 and implemented significant changes to our internal control over financial reporting and continued to develop and implement remedial measures to address the material weaknesses that existed as of December 31, 2005 and each of the quarters within 2006, as well as to implement the recommendations for remedial measures in the Independent Review Summary. We believe that the remedial measures and other actions to significantly improve internal control over financial reporting, described in the Controls and Procedures section of this report, individually and in the aggregate addressed most of the internal control issues in the five material weaknesses. As at December 31, 2006, we concluded that these measures resulted in the elimination of the five material weaknesses, with the exception of the deficiencies that comprise the following revenue related material weakness as at December 31, 2006, which is further described in the Controls and Procedures section of this report:

•  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 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.

Current Restatement of Previously Issued Financial Statements

In the course of the preparation of our 2006 financial statements, we identified certain errors primarily through discussions with our North American pension and post-retirement actuaries and through our ongoing remediation efforts with respect to our material weakness related to revenue recognition and our previously reported material weaknesses and other internal control deficiencies. As a result, we have restated our consolidated balance sheet as of December 31, 2005 and consolidated statement of operations, changes in equity and comprehensive income (loss) and statement of cash flows for the years ended December 31, 2005 and 2004. The adjustments relate to: (i) pension and post-retirement benefits errors, (ii) revenue recognition errors, (iii) a prior year tax error, and (iv) other errors.

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The impact of the restatement to periods prior to 2004 was a net increase of $2 to opening accumulated deficit as of January 1, 2004. The following tables present the impact of the restatement on our previously reported consolidated statement of operations data for the years ended December 31, 2005 and 2004.

Consolidated Statement of Operations data for the year ended December 31, 2005

	As Previously
	Reported			Adjustments			As Restated
Revenues	$	10,523		$	(14	)	$	10,509
Gross profit		4,306			(28	)		4,278
Operating earnings (loss)		(2,671	)		(61	)		(2,732	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		(2,586	)		(70	)		(2,656	)
Net earnings (loss) from continuing operations		(2,576	)		(35	)		(2,611	)
Net earnings (loss) from discontinued operations — net of tax		1			—			1
Net earnings (loss)		(2,575	)		(35	)		(2,610	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(5.94	)	$	(0.08	)	$	(6.02	)
— from discontinued operations		0.00			—			0.00
Basic and diluted earnings (loss) per common share	$	(5.94	)	$	(0.08	)	$	(6.02	)

Consolidated Statement of Operations data for the year ended December 31, 2004

	As Previously
	Reported			Adjustments			As Restated
Revenues	$	9,516		$	(38	)	$	9,478
Gross profit		3,942			(20	)		3,922
Operating earnings (loss)		(250	)		(48	)		(298	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		(240	)		(43	)		(283	)
Net earnings (loss) from continuing operations		(256	)		(40	)		(296	)
Net earnings (loss) from discontinued operations — net of tax		49			—			49
Net earnings (loss)		(207	)		(40	)		(247	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.59	)	$	(0.09	)	$	(0.68	)
— from discontinued operations		0.11			—			0.11
Basic and diluted earnings (loss) per common share	$	(0.48	)	$	(0.09	)	$	(0.57	)

The following table summarizes the impact of the restatement adjustments to revenues, cost of revenues, and net earnings (loss) for the years ended December 31, 2005 and 2004.

	Revenues						Cost of Revenues						Net earnings (loss)
	2005			2004			2005			2004			2005			2004
As previously reported	$	10,523		$	9,516		$	6,217		$	5,574		$	(2,575	)	$	(207	)
Adjustments:
Pension and post-retirement errors		—			—			15			12			(48	)		(40	)
Revenue recognition errors		(14	)		(38	)		(2	)		(26	)		(9	)		(9	)
Prior period tax error		—			—			—			—			36			—
Other errors		—			—			1			(4	)		(14	)		9
As restated	$	10,509		$	9,478		$	6,231		$	5,556		$	(2,610	)	$	(247	)

The pension and post-retirement benefit errors related primarily to actuarial errors in the calculation of the market-related value of assets in both our U.S. and Canadian pension and post-retirement benefit plans, resulting in an increase in net loss of $48 and $40 for 2005 and 2004, respectively. The revenue recognition errors related primarily to complex arrangements with multiple deliverables in which the timing of revenue recognition was determined to be incorrect and errors related to the calculation of liquidated damages. The revenue recognition errors resulted in an increase in net loss

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of $9 for 2005 and 2004, respectively. We also corrected for a prior year tax error related to an internal review of comparisons of tax returns to provisions for prior years resulting in a $36 decrease in the 2005 net loss. Other errors related to foreign exchange, certain expenses and misclassifications in the statement of operations resulted in an increase of $14 and a decrease of $9 to net loss for 2005 and 2004, respectively.

For a more detailed description of these adjustments, please see note 4, “Restatement of previously issued financial statements” to the accompanying audited consolidated financial statements.

Quarterly information

The following statement of operations data presents the impact of the restatement on our previously issued consolidated statements of operations for each of the quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and March 31, 2005, June 30, 2005, September 30, 2005, and December 31, 2005. The quarter ended December 31, 2006 had not previously been reported.

	Three Months Ended						Three Months Ended
	March 31, 2006						March 31, 2005
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
Revenues	$	2,382		$	2,390		$	2,389		$	2,382
Gross profit		908			925			1,012			997
Operating earnings (loss)		(159	)		(154	)		(78	)		(103	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		(160	)		(159	)		(77	)		(103	)
Net earnings (loss) from continuing operations		(176	)		(180	)		(106	)		(131	)
Net earnings (loss) from discontinued operations — net of tax		—			—			2			2
Net earnings (loss)		(167	)		(171	)		(104	)		(129	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.39	)	$	(0.39	)	$	(0.25	)	$	(0.30	)
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.39	)	$	(0.39	)	$	(0.25	)	$	(0.30	)

	Three Months Ended				Three Months Ended
	June 30, 2006				June 30, 2005
	As				As
	Previously		As		Previously			As
	Reported		Restated		Reported			Restated
Revenues	$	2,744	$	2,780	$	2,619		$	2,609
Gross profit		1,066		1,068		1,134			1,136
Operating earnings (loss)		414		383		(47	)		(51	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		395		370		(25	)		(30	)
Net earnings (loss) from continuing operations		366		342		(32	)		(37	)
Net earnings (loss) from discontinued operations — net of tax		—		—		(1	)		(1	)
Net earnings (loss)		366		342		(33	)		(38	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	0.84	$	0.79	$	(0.07	)	$	(0.08	)
— from discontinued operations		0.00		0.00		(0.00	)		(0.00	)
Basic and diluted earnings (loss) per common share	$	0.84	$	0.79	$	(0.07	)	$	(0.08	)

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	Three Months Ended						Three Months Ended
	September 30, 2006						September 30, 2005
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
Revenues	$	2,955		$	2,926		$	2,518		$	2,490
Gross profit		1,125			1,123			978			962
Operating earnings (loss)		(15	)		11			(81	)		(106	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		(69	)		(36	)		(85	)		(107	)
Net earnings (loss) from continuing operations		(99	)		(63	)		(138	)		(159	)
Net earnings (loss) from discontinued operations — net of tax		—			—			2			2
Net earnings (loss)		(99	)		(63	)		(136	)		(157	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.23	)	$	(0.14	)	$	(0.32	)	$	(0.37	)
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.23	)	$	(0.14	)	$	(0.32	)	$	(0.37	)

	Three Months Ended
	December 31, 2005
	As
	Previously			As
	Reported			Restated
Revenues	$	2,997		$	3,028
Gross profit		1,182			1,183
Operating earnings (loss)		(2,465	)		(2,472	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies		(2,399	)		(2,416	)
Net earnings (loss) from continuing operations		(2,300	)		(2,284	)
Net earnings (loss) from discontinued operations — net of tax		(2	)		(2	)
Net earnings (loss)		(2,302	)		(2,286	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(5.30	)	$	(5.26	)
— from discontinued operations		0.00			0.00
Basic and diluted earnings (loss) per common share	$	(5.30	)	$	(5.26	)

Adjustments

The following tables summarize the impact of the restatement adjustments to revenues, cost of revenue, and net earnings (loss) for the years ended December 31, 2006 and 2005 on a quarterly basis.

	2006
	Revenues							Cost of Revenues
	Three		Three		Three			Three			Three		Three
	Months		Months		Months			Months			Months		Months
	Ended		Ended		Ended			Ended			Ended		Ended
	March 31		June 30		September 30			March 31			June 30		September 30
As previously reported	$	2,382	$	2,744	$	2,955		$	1,474		$	1,678	$	1,830
Adjustments:
Pension and post-retirement errors		—		—		—			3			3		1
Revenue recognition errors		8		36		(29	)		(15	)		13		(4	)
Other errors		—		—		—			3			18		(24	)
As restated	$	2,390	$	2,780	$	2,926		$	1,465		$	1,712	$	1,803

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	2006
	Net earnings (loss)
	Three			Three			Three
	Months			Months			Months
	Ended			Ended			Ended
	March 31			June 30			September 30
As previously reported	$	(167	)	$	366		$	(99	)
Adjustments:
Pension and post-retirement errors		(8	)		(8	)		(2	)
Revenue recognition errors		19			20			(22	)
Other errors		(15	)		(36	)		60
As restated	$	(171	)	$	342		$	(63	)

	2005
	Revenues											Cost of Revenues
	Three			Three			Three			Three		Three			Three			Three			Three
	Months			Months			Months			Months		Months			Months			Months			Months
	Ended			Ended			Ended			Ended		Ended			Ended			Ended			Ended
	March 31			June 30			September 30			December 31		March 31			June 30			September 30			December 31
As previously reported	$	2,389		$	2,619		$	2,518		$	2,997	$	1,377		$	1,485		$	1,540			1,815
Adjustments:
Pension and post-retirement errors		—			—			—			—		4			3			4			4
Revenue recognition errors		(7	)		(10	)		(28	)		31		5			(16	)		(19	)		28
Other errors		—			—			—			—		(1	)		1			3			(2	)
As restated	$	2,382		$	2,609		$	2,490		$	3,028	$	1,385		$	1,473		$	1,528		$	1,845

	2005
	Net earnings (loss)
	Three			Three			Three			Three
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	March 31			June 30			September 30			December 31
As previously reported	$	(104	)	$	(33	)	$	(136	)	$	(2,302	)
Adjustments:
Pension and post-retirement errors		(12	)		(12	)		(12	)		(12	)
Revenue recognition errors		(11	)		6			(8	)		4
Prior period tax error		—			—			—			36
Other errors		(2	)		1			(1	)		(12	)
As restated	$	(129	)	$	(38	)	$	(157	)	$	(2,286	)

As a result of NNL’s restatement of their financial results, it breached certain provisions of the EDC Support Facility. Absent a waiver, EDC would have the right to refuse to issue additional support and to terminate its commitments under the Support Facility, subject to a 30 day cure period with respect to certain provisions. On March 9, 2007 NNL received a waiver from EDC in respect of its breaches.

Regulatory Actions

We are under investigation by the SEC and the OSC Enforcement Staff. In addition, we 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 situation by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is ongoing. Regulatory sanctions may potentially require us to agree to remedial undertakings that may involve our or an independent adviser to report on the review, assessment and monitoring of our accounting practices, financial reporting and disclosure processes and internal control systems. We will continue to cooperate fully with all authorities in connection with these investigations and reviews.

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Results of Operations

Revenues

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

	For the Years Ended
	December 31,						2006 vs 2005						2005 vs 2004
	2006		2005		2004		$ Change			% Change			$ Change		% Change
United States	$	5,092	$	5,203	$	4,645	$	(111	)		(2	)	$	558		12
EMEA		3,239		2,704		2,483		535			20			221		9
Canada		720		571		552		149			26			19		3
Asia		1,736		1,422		1,238		314			22			184		15
CALA(a)		631		609		560		22			4			49		9
Consolidated	$	11,418	$	10,509	$	9,478	$	909			9		$	1,031		11

(a)  Caribbean and Latin America, or CALA, region.

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 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 $99 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 $134 in 2006, driven primarily by the recognition of previously deferred revenues resulting from the delivery of a software upgrade. GS revenues increased by $37 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 MCCN, ES, and MEN segments. GSM and UMTS solutions revenue in EMEA increased by $185 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 $110, primarily driven by the recognition of previously deferred revenue triggered by the delivery of a software upgrade. Enterprise circuit and packet solutions increased by $107 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, primarily in Europe. MEN data networking and security solutions in EMEA increased by $74 and were positively impacted by the recognition of previously deferred revenue.

North American (Canada and the U.S. only) revenues increased by $38 in 2006, with an increase in Canada of $149 partially offset by a decline in the U.S. of $111. The decline in the U.S. was driven primarily by a $348 decrease in our GSM and UMTS solutions 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 $175 increase in CDMA solutions revenue in the U.S. The growth in CDMA solutions in the U.S. was primarily driven by two of our major carrier customers. CDMA solutions increased in Canada by $67, with the increase primarily driven by increased volumes with a key carrier customer. MCCN circuit and packet voice solutions increased by $76 in North America, primarily driven by increased volume in our voice over internet protocol, or VoIP business. The ES segment experienced a slight decline in North America of $21, 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.

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2005 vs. 2004

Revenues increased to $10,509 in 2005 from $9,478 in 2004, an increase of $1,031, or 11%. The overall growth in revenues was primarily driven by increases in the U.S., EMEA, and Asia.

U.S. revenues increased by $558 and drove more than 50% of our overall revenue increase in 2005. The increase in U.S. revenues was primarily driven by increases in our ES, MEN and MCCN segments. The acquisition of NGS in 2005 contributed $142 to the revenue increase in the U.S. Enterprise circuit and packet voice solutions increased by $101 and were primarily driven by the recognition of deferred revenue, while enterprise data networking and security solutions increased by $57 as a result of higher volumes in 2005. Optical networking solutions in the MEN segment increased by $148 and were primarily driven by increased demand for multimedia and communications at broadband network speeds as well as delivery of triple play services (data, voice and multimedia) to consumers by a range of service providers. In the MCCN segment, CDMA solutions increased by $182 in the U.S. primarily due to an overall increase in volumes. The growth in the CDMA business was partially offset by a decline in GSM and UMTS solutions of $53.

Revenues in EMEA increased by $221 and were primarily driven by an increase in the MEN segment and an increase in GSM and UMTS solutions in EMEA of $207. The increase was driven primarily by projects to upgrade GSM networks to allow for enhanced data transmission rates, and the continued rollout of a UMTS network for a key customer. The increase in GSM and UMTS solutions was partially offset by a decline in CDMA solutions of $35 which was primarily driven by network completions in 2004 which were not repeated in 2005. As a result of increased demand, optical networking solutions increased by $29 and data networking and security solutions increased by $33.

Revenues in Asia increased by $184 and were primarily driven by an increase in the MCCN segment. GSM and UMTS solutions increased by $258 and were primarily driven by revenues from the deployment of a GSM network for a customer in India. The increase in GSM and UMTS solutions was partially offset by a decline in CDMA solutions of $85 which was primarily driven by the impact of network completions in 2004 not repeated in 2005.

Gross Margin

	For the Years Ended
	December 31,									2006 vs 2005					2005 vs 2004
	2006			2005			2004			$ Change		% Change			$ Change		% Change
Gross Profit	$	4,439		$	4,278		$	3,922		$	161		4		$	356		9
Gross Margin		38.9	%		40.7	%		41.4	%				(1.8 pts	)				(0.7 pts	)

2006 vs. 2005

Gross margin decreased to 38.9% in 2006 from 40.7% in 2005, a decrease of 1.8 percentage points. Historically our gross margins have been lower in Asia and EMEA than in North America, 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 percentage points on our gross margin. Gross margin declined by approximately 1.5 percentage points 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 percentage points due to negative margin impacts associated with a contract in India in 2005 and not repeated in 2006 to the same levels.

2005 vs. 2004

Gross margin decreased to 40.7% in 2005 from 41.4% in 2004, a decrease of 0.7 percentage points. Gross margins were negatively impacted by approximately 0.5 percentage points as a result of the impact of a contract in India. Gross margin was positively impacted by our ES and CDMA solutions, offset by declines due to overall product mix and pricing pressures.

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Operating Expenses

Selling, General and Administrative Expense

	For the Years Ended
	December 31,									2006 vs 2005					2005 vs 2004
	2006			2005			2004			$ Change		% Change			$ Change		% Change
SG&A Expense	$	2,503		$	2,429		$	2,146		$	74		3		$	283		13
As a % of Revenue		21.9	%		23.1	%		22.6	%				(1.2 pts	)				(0.5 pts	)

2006 vs. 2005

SG&A expense increased to $2,503 in 2006 from $2,429 in 2005, an increase of $74, or 3%. SG&A expense as a percentage of revenue decreased by 1.2 percentage points in 2006 compared to 2005. Incremental SG&A costs related to the inclusion of a full year of operating results from NGS and LG-Nortel increased SG&A expense by $100 in 2006. Higher costs associated with our employee bonus plans resulted in an increase in SG&A expense of $23. The strengthening of the Canadian dollar, Euro, and British pound against the U.S. dollar resulted in an estimated increase in SG&A expense of $40. These increases in SG&A expense were partially offset by cost savings of approximately $55 resulting from reduced spending on our restatement related activities. In addition, SG&A expense in 2005 was negatively impacted by costs associated with changes to our senior executive team, which were not repeated to the same extent in 2006, resulting in a decrease in SG&A expense in 2006 of approximately $54.

2005 vs. 2004

SG&A expense increased to $2,429 in 2005 from $2,146 in 2004, an increase of $283, or 13%. Increased costs related to our internal control remedial measures, investments in our finance processes, and restatement related activities resulted in an increase in SG&A expense of approximately $61 in 2005. The additions of NGS and LG-Nortel in the second half of 2005 increased SG&A expense by approximately $52. Increased costs related to employee bonus plans and the departure and hiring of senior executives resulted in an increase in SG&A expense of approximately $65 in 2005. In addition, SG&A expense in 2004 was reduced by customer financing receivable recoveries of $118, compared with recoveries of $10 in 2005. The increases in SG&A expense were partially offset by a decrease of approximately $25 in our stock based compensation in 2005 and costs savings associated with the restructuring plan announced in 2004.

Research and Development Expense

	For the Years Ended
	December 31,									2006 vs 2005					2005 vs 2004
	2006			2005			2004			$ Change		% Change			$ Change			% Change
R&D Expense	$	1,939		$	1,874		$	1,975		$	65		3		$	(101	)		(5	)
As a % of Revenue		17.0	%		17.8	%		20.8	%				(0.8 pts	)					(3.0 pts	)

2006 vs. 2005

R&D expense increased to $1,939 in 2006 from $1,874 in 2005, an increase of $65, or 3%. The increase was primarily due to incremental costs of approximately $69 related to the inclusion of a full year of operating results from LG-Nortel, and estimated unfavorable foreign exchange impacts of approximately $60 associated with the strengthening of the Canadian dollar, Euro and British pound against the U.S. dollar. These increases were partially offset by cost savings associated with the changes made to our employee benefit plans.

2005 vs. 2004

R&D expense decreased to $1,874 in 2005 from $1,975 in 2004, a decrease of $101, or 5%. The decrease was primarily due to cost savings associated with our 2004 Restructuring Plan, partially offset by increased investment in targeted product areas, primarily in ES, increased expense of approximately $24 related to our employee bonus plans, and unfavorable foreign exchange impacts associated with the strengthening of the Canadian dollar against the U.S. dollar.

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Special Charges

The following table sets forth special charges by restructuring plan.

	For the Years Ended December 31,							2006 vs 2005						2005 vs 2004
	2006		2005			2004		$ Change			% Change			$ Change			% Change
2006 Restructuring Plan	$	68	$	—		$	—	$	68			—		$	—			—
2004 Restructuring Plan		20		180			165		(160	)		(89	)		15			9
2001 Restructuring Plan		17		(11	)		16		28			—			(27	)		(169	)
Total Special Charges	$	105	$	169		$	181	$	(64	)		(38	)	$	(12	)		(7	)

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 a work plan involving workforce reductions of approximately 1,900 employees, as well as the creation of approximately 800 new positions in our Operations Centers of Excellence. The workforce reductions span all of our segments and are 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. We estimate total charges to earnings and cash associated with the 2006 Restructuring Plan will be approximately $100, of which $68 in charges were incurred in 2006, with the remainder expected to be incurred in fiscal 2007.

In 2006, we incurred total cash costs related to the 2006 restructuring plan of approximately $28 with the remaining cash costs expected to be incurred primarily in 2007.

2004 Restructuring Plan

In the third quarter of 2004, we announced a strategic plan that includes a work plan involving focused workforce reductions, including a voluntary retirement program, of approximately 3,250 employees, real estate optimization and other cost containment actions such as reductions in information services costs, outsourced services and other discretionary spending across all segments or, the 2004 Restructuring Plan. We estimate total charges to earnings associated with the 2004 Restructuring Plan in the aggregate of approximately $410 comprised of approximately $240 with respect to the workforce reductions and approximately $170 with respect to the real estate actions, of which $365 have been incurred. Substantially all of the charges with respect to the workforce reductions have been incurred with the remainder of the charges related to ongoing lease costs for impacted real estate facilities to be substantially incurred by the end of 2018.

We expect to incur total cash costs related to the 2004 Restructuring Plan of approximately $360, which are split approximately $230 for workforce reductions and $130 for real estate actions. Approximately 12%, 50%, and 11% of these cash costs were incurred in 2006, 2005, and 2004, respectively, and the remaining cash costs are expected to be substantially incurred by the end of 2018.

2001 Restructuring Plan

During 2001, we implemented a work plan to streamline operations and activities around core markets and leadership strategies in light of the significant downturn in both the telecommunications industry and the economic environment, and capital market trends impacting operations and expected future growth rates, or the 2001 Restructuring Plan. Under the 2001 Restructuring Plan activities were initiated in 2003 to exit certain leased facilities and leases for assets no longer used across all segments. The liabilities associated with these activities were measured at fair value and recognized under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). Under the 2001 Restructuring Plan, we recorded special charges of $17, $(11) and $16 relating primarily to the revision of prior accruals due to contract settlement and lease costs for the years ended December 31, 2006, 2005 and 2004, respectively.

We have incurred cash costs related to the 2001 Restructuring Plan of $54, $113, and $216 in 2006, 2005, and 2004, respectively. Remaining cash costs relating to the 2001 Restructuring Plan of approximately $195 are expected to be incurred into 2024 for ongoing lease costs related to impacted real estate facilities.

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The following table sets forth special charges by segment.

	2006
	Restructuring
	Plan		2004 Restructuring Plan						2001 Restructuring Plan							Total Special Charges
	2006		2006		2005		2004		2006		2005			2004		2006		2005		2004
Special charges by segment:
Mobility and Converged Core Networks	$	38	$	9	$	124	$	110	$	12	$	(1	)	$	11	$	59	$	123	$	121
Enterprise Solutions		14		3		27		14		3		(2	)		3		20		25		17
Metro Ethernet Networks		7		8		24		29		2		(8	)		1		17		16		30
Global Services		3		—		5		—		—		—			1		3		5		1
Other		6		—		—		12		—		—			—		6		—		12
Total special charges	$	68	$	20	$	180	$	165	$	17	$	(11	)	$	16	$	105	$	169	$	181

Gain/Loss on Sale of Businesses and 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 fixed 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.

In 2004, gain on sale of businesses and assets of $91 was primarily due to a gain of $78 related to the sale of certain assets in CALA and a gain of approximately $30 related to the sale of our directory operator service business to VoltDelta Resources LLC, or VoltDelta. These gains were partially offset by charges related to the divestiture of our manufacturing operations to Flextronics of approximately $6 and write-offs of certain fixed assets of approximately $10.

Shareholder Litigation Settlement Expense/Recovery

We recorded a shareholder litigation settlement recovery of $219 during the year ended December 31, 2006 as a result of a fair value mark-to-market adjustment of the equity component of the Global Class Action Settlement at year end. For additional information, see “Significant Business Developments in 2006 — Global Class Action Settlement”.

We recorded a shareholder litigation settlement expense of $2,474 during the year ended December 31, 2005 as a result of the Global Class Action Settlement.

Other Income — Net

The components of other income — net were as follows:

	For the Years Ended December 31,
	2006			2005		2004
Interest and dividend income(a)	$	140		$	115	$	92
Gain (loss) on sale or write down of investments		(6	)		67		19
Currency exchange gains (losses)(b)		(12	)		59		65
Other — net		90			54		41
Other income — net	$	212		$	295	$	217

(a)	Interest and dividend income on our short-term investments.
(b)	Currency exchange gains and losses were primarily related to day-to-day transactional activities.

In 2006, other income — net was $212, which included interest and dividend income of $140, a net loss on the sale or write down of investments of $6, and net currency exchange losses of $12. Other net income of $90 was primarily driven by a gain of $26 related to the sale of a note receivable from Bookham, Inc., net income of $22 on royalties from patented technology, 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

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expenses of $7 from the securitization of certain receivables and expenses of $6 related to various litigation and settlement costs.

In 2005, other income — net was $295 which included interest and dividend income on our short-term investments of $115 and a net currency exchange gain of $59. 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 VoltDelta. Other net income of $54 was primarily driven by gains of $35 related to customer settlements and customer financing arrangements, income of $22 from the sub-lease of certain facilities, and net income of $13 on royalties from patented technology. These gains were partially offset by a loss of $20 on the sale of certain accounts receivables.

In 2004, other income — net was $217, which included interest and dividend income of $92 and net currency exchange gains of $65. We generated a net gain of $19 on the sale or write downs of investments, which was primarily driven by a gain of $18 on the sale of shares in Entrust, Inc. and a gain of $13 on the sale of shares of Arris Group, partially offset by a loss of $14 related to the write down of our investment in Bookham, Inc. Other net income of $41 was primarily driven by a gain of $52 resulting from a restructured customer financing arrangement, income of $12 from the sublease of certain of our facilities, and a gain of $7 related to a bankruptcy settlement. These gains were partially offset by a loss of $24 related to changes in fair value of derivative financial instruments that did not meet the criteria for hedge accounting and a loss of $7 related to prepaid equity forward purchase contracts that were entered into in connection with the issuance of restricted stock units.

Interest Expense

Interest expense increased by $121 in 2006 compared to 2005 and by $17 in 2005 compared to 2004. The increase in 2006 was primarily due to higher debt levels, interest rates and borrowing costs on NNL’s debt as a result of the 2006 Credit Facility and the 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 Benefit (Expense)

The 2006 income tax expense of $60 was primarily related to the net reduction of our deferred tax assets as well as current tax provisions in certain taxable jurisdictions, including tax adjustments of $13 related to prior tax positions taken in the United Kingdom, or U.K., and $15 related to tax on the payment of preferred share dividends in Canada, partially offset by the recognition of R&D related incentives and releases of valuation allowance in certain smaller jurisdictions.

The 2005 income tax benefit of $81 was primarily related to the release of a liability of $140 tax benefit related to the retroactive application of our advance pricing arrangements, or APA, $11 tax expense related to tax on the payment of preferred share dividends in Canada, and various R&D related incentives, partially offset by a reduction of our deferred tax assets and current tax provisions in certain taxable jurisdictions, and various corporate minimum and other taxes. In addition, we recorded additional valuation allowances against the tax benefit of losses realized in some jurisdictions.

As of December 31, 2006, we have substantial loss carryforwards and valuation allowances in our significant tax jurisdictions. These loss carryforwards will serve to minimize our future cash income related taxes. We continue to assess the valuation allowance recorded against our deferred tax assets on a quarterly basis. The valuation allowance is in accordance with SFAS No. 109, “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.”

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Segment Information

Mobility and Converged Core Networks

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

	For the Years Ended December 31,						2006 vs 2005						2005 vs 2004
	2006		2005		2004		$ Change			% Change			$ Change			% Change
Revenue
CDMA solutions	$	2,512	$	2,181	$	2,103	$	331			15		$	78			4
GSM and UMTS solutions		2,413		2,615		2,203		(202	)		(8	)		412			19
Circuit and packet voice solutions		997		884		931		113			13			(47	)		(5	)
Total Revenue	$	5,922	$	5,680	$	5,237	$	242			4		$	443			8
Management EBT	$	517	$	504	$	269	$	13			3		$	235			87

2006 vs. 2005

MCCN revenues increased to $5,922 in 2006 from $5,680 in 2005, an increase of $242, or 4%. 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 $175, as certain of our significant customers increased investments in their infrastructure in order to enhance their service offerings. CDMA solutions increased in Canada by $67 primarily due to increased volumes with a key carrier customer and by $110 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 $348 and a decline in Asia of $86. 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 $86 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 $185. The increase in EMEA was driven by higher UMTS solutions, primarily due to the recognition of previously deferred revenues resulting from the completion of certain contract deliverables, partially offset by a decline in GSM solutions.

The increase in MCCN 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 $76 and $55, respectively.

Management EBT for the MCCN segment increased to $517 in 2006 from $504 in 2005, an increase of $13 or 3%. The $13 increase was the result of an increase in gross profit of $102, partially offset by increases in SG&A and R&D expense of $28 and $23, respectively.

MCCN gross margin remained essentially flat and gross profit increased by $102 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. The increase in SG&A of $28 was primarily due to increased sales and marketing expenses related to LG-Nortel and headcount spending in North America. R&D expense increased by $23 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 MCCN segment was focused on driving additional investment in new product opportunities such as WiMAX and IMS while decreasing investment in legacy products.

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2005 vs. 2004

MCCN revenues increased to $5,680 in 2005 from $5,237 in 2004, an increase of $443, or 8%. The increase in MCCN was primarily driven by significant increases in GSM and UMTS solutions.

In 2005, GSM and UMTS solutions in EMEA increased by $207 and were driven primarily by projects to upgrade GSM networks to allow for enhanced data transmission rates, and the continued rollout of a UMTS network for a key customer. GSM and UMTS solutions increased by $258 in Asia and were primarily driven by revenues from a significant contract in India. Reduced demand for our GSM and UMTS solutions in North America resulted in decreased revenues of $114. The reduced demand was primarily due to industry consolidation and a reduction of spending levels by two of our key customers.

CDMA solutions revenue in North America increased by $235 in 2005 primarily due to increased demand for network expansions and upgrades to next generation CDMA technologies. The increase in North America was partially offset by declines in Asia, EMEA, and CALA of $157. These declines can be attributed to network completions in 2004 and reduced demand resulting from industry consolidation.

MCCN Management EBT increased to $504 in 2005 from $269 in 2004, an increase of $235 or 87%. Gross margin declined by 1.7 percentage points, however, gross profit increased by $88 as the impact of the decline in gross margin was offset by increased volumes. Declines in R&D and SG&A expense of $112 and $11, respectively, also contributed to the increase in Management EBT.

Enterprise Solutions

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

	For the Years Ended
	December 31,							2006 vs 2005						2005 vs 2004
	2006			2005		2004		$ Change			% Change			$ Change			% Change
Revenue
Circuit and packet voice solutions	$	1,628		$	1,477	$	1,309	$	151			10		$	168			13
Data networking and security solutions		712			628		634		84			13			(6	)		(1	)
Total Revenue	$	2,340		$	2,105	$	1,943	$	235			11		$	162			8
Management EBT	$	(75	)	$	93	$	59	$	(168	)		(181	)	$	34			58

2006 vs. 2005

ES revenues increased to $2,340 in 2006 from $2,105 in 2005, an increase of $235 or 11%. The increase in 2006 was driven primarily by the addition of a full year of results from LG-Nortel.

The enterprise market is in the process of transitioning from traditional communications systems to next-generation IP networks. The change in the product mix of our ES revenues in 2006 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. 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 $107 in EMEA and $99 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 $62 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 $37 and $34 in the U.S. and Asia, respectively.

Management EBT for the ES segment decreased to a loss of $75 in 2006 from earnings of $93 in 2005, a decrease of $168. This decrease in Management EBT was primarily driven by a decrease in gross profit of $29, and an increase in SG&A and R&D expenses of $70 and $77, respectively. ES gross margin decreased by 6.1 percentage points while gross profit decreased by $29 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 $70 was due to increased selling and marketing costs associated with the addition of LG-Nortel, increased

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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 $77.

2005 vs. 2004

ES revenues increased to $2,105 in 2005 from $1,943 in 2004, an increase of $162 or 8%. The increase in 2005 was primarily driven by increases in circuit and packet voice solutions in the U.S. and EMEA.

ES circuit and packet voice solutions increased by $101 and $52 in the U.S. and EMEA, respectively. The increases were primarily driven by the recognition of deferred revenue related to our packet voice solutions.

Management EBT increased to $93 in 2005 from $59 in 2004, an increase of $34, or 58%. The increase was primarily the result of an increase in gross profit of $61 driven by higher volumes, partially offset by increased R&D expense of $26 resulting from increased investment in our circuit and packet core voice solutions, and an increase in SG&A expense of $10.

Metro Ethernet Networks

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

	For the Years Ended
	December 31,								2006 vs 2005				2005 vs 2004
	2006		2005			2004			$ Change		% Change		$ Change		% Change
Revenue
Optical Networking Solutions	$	1,186	$	1,008		$	805		$	178		18	$	203		25
Data Networking and Security Solutions		484		400			353			84		21		47		13
Total Revenue	$	1,670	$	1,408		$	1,158		$	262		19	$	250		22
Management EBT	$	34	$	(102	)	$	(336	)	$	136		—	$	234		—

2006 vs. 2005

MEN revenues increased to $1,670 in 2006 from $1,408 in 2005, an increase of $262 or 19%. 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 $134 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 $74 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 $34 in 2006 from a loss of $102 in 2005, an increase of $136. The increase in 2006 was mainly the result of an increase in gross profit of $86 and a decrease in R&D expense of $47. MEN gross margin decreased by 0.4 percentage points while gross profit increased by $86 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 decreased by $47 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.

2005 vs. 2004

MEN revenues increased to $1,408 in 2005 from $1,158 in 2004, an increase of $250, or 22%. The increase in 2005 was primarily driven by increased demand for optical networking solutions in the U.S. and EMEA and increased demand for data networking and security solutions in EMEA.

Optical networking solutions in the MEN segment increased by $148 in the U.S. and $29 in EMEA, and were primarily driven by increased demand for multimedia and communications at broadband network speeds. Delivery of triple play services (data, voice, and multimedia) to consumers by a range of service providers resulted in a positive impact on revenues from our optical networking solutions. MEN data networking and security solutions increased by $33 in EMEA, primarily due to increased demand.

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Management EBT for the MEN segment was a loss of $102 in 2005, an improvement of $234 from 2004. The improvement in Management EBT was primarily the result of an increase in gross profit of $165, due to increased sales volumes, lower costs resulting from the transition of our manufacturing operations to Flextronics, and recovery in inventory provisions due to the sale of optical inventory that was fully provided for. Management EBT was also positively impacted by a decrease in R&D expense of $53, driven primarily by workforce reductions that targeted a level of R&D expense that was more representative of the volume of our business.

Global Services

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

	For the Years Ended
	December 31,						2006 vs 2005						2005 vs 2004
	2006		2005		2004		$ Change			% Change			$ Change		% Change
Revenue	$	1,242	$	1,170	$	1,129	$	72			6		$	41		4
Management EBT	$	333	$	354	$	329	$	(21	)		(6	)	$	25		8

2006 vs. 2005

GS revenues increased to $1,242 in 2006 from $1,170 in 2005, an increase of $72, or 6%. Substantially all of our GS revenues are generated from network support and managed 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 an increase of $31 in network managed services and growth of $22 in network support services. In 2006 the majority of GS revenue continued to be generated by network support services. Increases in GS revenues in EMEA and Asia of $37 and $37, respectively, were partially offset by a decline in the U.S. of $18.

Management EBT in the GS segment decreased to $333 in 2006 from $354 in 2005, a decrease of $21. Gross margin decreased by 2.6 percentage points while gross profit remained essentially flat. An increase in SG&A of $18 and an increase in R&D of $5 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.

2005 vs. 2004

GS revenues increased to $1,170 in 2005 from $1,129 in 2004, an increase of $41, or 4%. The growth in GS revenues was primarily driven by an increase in network support services primarily in North America and CALA.

Management EBT for the GS segment increased to $354 in 2005 from $329 in 2004, an increase of $25 or 8%. The increase was primarily driven by higher gross profit of $19 resulting from increased sales volumes and a slight decline in SG&A of $4. GS did not incur any material R&D expenditures in 2005 or 2004.

Other

	For the Years Ended December 31,									2006 vs 2005					2005 vs 2004
	2006			2005			2004			$ Change			% Change		$ Change			% Change
Revenue	$	244		$	146		$	11		$	98			67	$	135			1,227
Management EBT	$	(1,002	)	$	(834	)	$	(538	)	$	(168	)		—	$	(296	)		—

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2006 vs. 2005

Other revenues are comprised primarily of revenues from NGS. Other revenues increased to $244 in 2006 from $146 in 2005, an increase of $98. 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 $168 in 2006 and was primarily the result of increases in other items expense of $204, partially offset by a decline in SG&A of $40. The increase in other items expense was primarily due to an increase in interest expense of $121 due to higher debt levels and borrowing costs, lower net foreign transactional gains of $71, and lower net investment gains of $73. These impacts were partially offset by increased dividend and interest income of $25 and increased gains on changes in the fair value of derivative financial instruments that did not meet the criteria for hedge accounting of $31. These increases were partially offset by a decrease in SG&A expense of $40, 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.

2005 vs. 2004

Other revenues increased to $146 in 2005 from $11 in 2004, an increase of $135. The increase was driven by the acquisition of NGS on June 3, 2005.

Other Management EBT decreased by $296 in 2005 and was primarily driven by increases in SG&A and R&D expenses of $290 and $38, respectively. The increase in SG&A was primarily due to costs associated with our internal control remedial measures, investment in our finance processes and restatement related activities and increased costs related to employee bonus plans and the departure and hiring of senior executives resulted in an increase in SG&A expense in 2005. In addition, 2004 SG&A expense was reduced by customer financing receivable recoveries of $118, compared with recoveries of $10 in 2005. The increases in SG&A expense were partially offset by a decrease in our stock based compensation expense in 2005 and cost savings associated with our 2004 Restructuring Plan. The increase in R&D expense of $38 was primarily due to increases in employee related expenses and unfavorable foreign exchange impacts associated with the strengthening of the Canadian dollar against the U.S. dollar, partially offset by savings associated with our 2004 Restructuring Plan. The increases in SG&A and R&D were partially offset by lower other items expense.

Liquidity and Capital Resources

Cash Flow

Our total cash and cash equivalents excluding restricted cash increased by $541 in 2006 to $3,492 as at December 31, 2006.

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,
	2006			2005			2004
Net Earnings (Loss)	$	28		$	(2,610	)	$	(247	)
Non-Cash Items		438			2,525			471
Changes in Working Capital		(70	)		194			(163	)
Other Changes		(159	)		(288	)		(246	)
Net cash from (used in) operating activities of continuing operations		237			(179	)		(185	)
Net cash from (used in) investing activities of continuing operations		(273	)		(426	)		(132	)
Net cash from (used in) financing activities of continuing operations		483			(60	)		(110	)
Effect of foreign exchange rate changes on cash and cash equivalents		94			(102	)		88
Net cash from (used in) continuing operations		541			(767	)		(339	)
Net cash from (used in) operating activities of discontinued operations		—			33			22
Net increase (decrease) in cash and cash equivalents		541			(734	)		(317	)
Cash and cash equivalents at beginning of period		2,951			3,685			4,002
Cash and cash equivalents at end of period	$	3,492		$	2,951		$	3,685

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Operating Activities

In 2006, our net cash flows from operating activities of continuing operations of $237 were driven by net income of $28 plus adjustments for non-cash items of $438, a net use of cash of $70 due to changes in working capital, and a net use of cash of $159 due to changes in other assets and liabilities. The primary additions to our net income for non-cash items of $438 were pension and other accruals of $346, amortization and depreciation of $290, stock based compensation expense of $112, minority interest of $59, and net other additions of $50. These additions were partially offset by the non-cash portion of the shareholder litigation recovery of $219 and net gain on sale of businesses and assets of $200. The use of cash of $70 relating to changes in our working capital was due to outflows from changes in inventory of $42 and accounts payable of $79, partially offset by an inflow from changes in accounts receivable of $51.

In 2005, our net cash flows used in operating activities of continuing operations were $179 due to a net loss from continuing operations of $2,610 plus adjustments for non-cash items of $2,525, net cash from changes in working capital of $194, and a net use of cash of $288 due to changes in other assets and liabilities. The primary additions to our net loss for non-cash items of $2,525 were $1,899 for shareholder litigation expense settlement, amortization and depreciation of $302, pension and other accruals of $299, stock based compensation expense of $88, and net other additions of $53. These additions were partially offset by deferred income taxes of $116. Net cash from changes in our working capital was due to inflows from changes in inventory of $285 and accounts payable of $189, partially offset by outflows from changes in accounts receivable of $280.

Accounts Receivable

	As at December 31,						2006 vs. 2005						2005 vs. 2004
	2006		2005		2004		$ Change			% Change			$ Change		% Change
Accounts Receivable	$	2,785	$	2,826	$	2,444	$	(41	)		(1	)	$	382		16
Days sales outstanding in accounts receivable (DSO)(a)		75		84		89

(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 $2,785 as at December 31, 2006 from $2,826 as at December 31, 2005, a decrease of $41. This decrease was driven by significant cash collections primarily in North America and EMEA in the fourth quarter of 2006. This decrease in accounts receivable had a positive impact on our cash flow from operations. Our increase in revenue coupled with a decrease in accounts receivable led to a nine day improvement in our DSO as of December 31, 2006, compared to the prior year.

Inventory

	As at December 31,						2006 vs. 2005						2005 vs. 2004
	2006		2005		2004		$ Change			% Change			$ Change			% Change
Inventory (excluding deferred costs)	$	456	$	605	$	994	$	(149	)		(25	)	$	(389	)		(39	)
Net inventory days (NID)(a)		22		31		64

(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 declined in 2006 by $149, and this decline had a positive impact on our cash flow. The divestiture of our Calgary and Chateaudun facilities to Flextronics reduced inventory by $170, and the divestiture of certain assets and liabilities related to our UMTS access business reduced inventory by $21. The positive impact of these divestitures on our 2006 cash flow is reflected in cash flow from investing activities of continuing operations. Removing the impact of the divestitures, inventory increased in 2006 by $42, which had a negative impact on our cash flow from operating activities.

Net inventory days decreased by nine days as of December 31, 2006 compared to December 31, 2005. This improvement was primarily due to the impact of the divestitures described above.

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Accounts Payable

	As at December 31,						2006 vs. 2005						2005 vs. 2004
	2006		2005		2004		$ Change			% Change			$ Change		% Change
Trade Accounts Payable	$	1,086	$	1,167	$	966	$	(81	)		(7	)	$	201		21
Days of purchases outstanding in accounts payable (DPO)(a)		49		57		64

(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 trade and other 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.

Trade accounts payable decreased to $1,086 in 2006 from $1,167 in 2005, a decrease of $81. The decrease was primarily the result of our improvement in inventory management and the impact on cost of sales due to deferred cost releases.

Investing Activities

In 2006, net cash flows used in investing activities were $273 and were primarily due to an increase in restricted cash and cash equivalents of $557, primarily related to the Global Class Action Settlement, $146 for investments and acquisitions of businesses, net of cash acquired, including $98 related to our acquisition of Tasman Networks, $316 for the purchase of plant and equipment, which were partially offset by proceeds from disposals of plant and equipment of $143, and $603 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 related to our UMTS access business and $219 related to the transfer of certain manufacturing assets to Flextronics.

In 2005, cash flows used in investing activities were $426 and were primarily due to payments of $651 for acquisitions of investments and businesses, net of cash acquired, including $423 relating to the acquisition of NGS and $155 relating to our contribution to LG-Nortel, and $258 for the purchase of plant and equipment, which were partially offset by proceeds of $470 on the sale of assets including net proceeds of $334 related to the transfer of certain manufacturing assets to Flextronics and $136 from the sale of certain investments and businesses which we no longer considered strategic including $27 related to the sale of our remaining common shares of Arris Group, $45 related to the sale of our investment in Axtel, $25 related to the sale of our interest in VoltDelta and $20 related to the sale of short-term investments. We also received proceeds of $10 from the sale of plant and equipment.

Financing Activities

In 2006, net cash flows from financing activities were $483 and were primarily from (i) cash proceeds of $2,000 from the issuance of the 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 the NNL 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 paid by NNL related to its outstanding preferred shares and (iv) other payments of $58, including $42 in transaction costs associated with the issuance of the Notes.

In 2005, cash flows used in financing activities were $60 and were primarily from dividends of $43 primarily paid by NNL on its outstanding preferred shares, a repayment of capital leases payable of $10 and a net reduction of our notes payable by $13. These amounts were partially offset by $6 of proceeds from the issuance of Nortel Networks Corporation common shares from the exercise of stock options.

Other Items

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.

In 2005, our cash decreased $102 due to unfavorable effects of changes in foreign exchange rates primarily of the Euro and the British pound against the U.S. dollar.

In 2005, cash flows from our discontinued operations were $33 and were primarily related to the collection of customer financing receivables in 2005. During 2006 and 2005 we did not enter into any material customer financing arrangements.

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Senior Notes

On February 14, 2006, NNI entered into the 2006 Credit Facility which was drawn down in the full amount on February 14, 2006 and we used the net proceeds primarily to repay the outstanding $1,275 aggregate principal amount of the NNL 6.125% Notes on February 15, 2006. For more details of the 2006 Credit Facility, see note 11, “Long-term debt, credit and support facilities” to the accompanying audited consolidated financial statements.

On July 5, 2006, NNL completed an offering of the Notes which consist of $450 of fixed rate senior notes due 2016, or the 2016 Fixed Rate Notes, $550 of fixed rate senior notes due 2013, or the 2013 Fixed Rate Notes, and $1,000 of floating rate senior notes due 2011, or the 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 annum of 10.125% payable semi-annually. The Floating Rate Notes bear interest at a rate per annum, reset quarterly, equal to the reserve-adjusted London Interbank Offered Rate, or LIBOR, plus 4.25%, payable quarterly. As of December 31, 2006, the Floating Rate Notes had an interest rate of 9.62% per annum. Following the issuance of the Notes, we entered into interest rate swaps to convert our fixed interest rate exposure under the Notes to a floating rate equal to LIBOR plus 4.4% for the 2013 Fixed Rate Notes and LIBOR plus 4.9% for the 2016 Fixed Rate Notes. We have entered into these interest rate swaps in order to match floating rate assets and floating rate liabilities and minimize income statement volatility related to interest rate movements. The Notes are fully and unconditionally guaranteed by Nortel and initially guaranteed by NNI.

NNL 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, NNL 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. Prior to July 15, 2009, NNL may also redeem up to 35% of the original aggregate principal amount of any series of 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 Floating Rate Notes, 100% of the principal amount so redeemed plus a premium equal to the interest rate per annum of such Floating Rate Notes applicable on the date of redemption, in each case plus accrued and unpaid interest, if any. In addition, in the event of certain changes in applicable withholding taxes, NNL may redeem the Notes of each series of Notes in whole, but not in part.

The indenture governing the Notes and related guarantees contain various covenants that limit our ability to incur liens (other than certain permitted liens) on assets of NNC and its restricted subsidiaries to secure funded debt in excess of certain permitted amounts without equally and ratably securing the Notes to merge, consolidate, sell or otherwise dispose of substantially all of the assets of any of NNC, NNL and, so long as NNI is a guarantor of the Notes, NNI, unless the surviving entity or purchaser of such assets assumes the obligations of NNC, NNL or NNI, as the case may be, under the Notes and related guarantees and no default exists under the indenture governing the Notes after giving effect to such merger, consolidation or sale.

In addition, the indenture governing the Notes and related guarantees contain covenants that, at any time that the Notes do not have an investment grade rating, limit our 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 stock or NNL preferred stock, in excess of certain permitted amounts or incur debt that is subordinated to any other debt of NNC, NNL or NNI, unless that new debt is expressly subordinated to the Notes and the guarantees. At any time that the Notes do not have an investment grade rating, our ability to incur, assume, issue or guarantee additional indebtedness and certain types of preferred stock and pay dividends is tied to an Adjusted EBITDA to fixed charges ratio. Adjusted EBITDA is generally defined in the indenture governing the Notes 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 indenture governing the Notes as consolidated interest expense plus dividends paid on certain preferred stock. Our December 31, 2006 Adjusted EBITDA to fixed charges ratio does not permit us to incur debt under the covenant. However, pursuant to certain significant exceptions and “carve-outs” contained in the covenants in the indenture governing the Notes, we may incur certain debt and make certain restricted payments without regard to the Adjusted EBITDA to fixed charges ratio up to certain permitted amounts. We believe that these exceptions and carve-outs currently provide us with sufficient flexibility to incur additional indebtedness, if we chose to do so, in order to operate our business.

Upon a change of control, NNL is required within 30 days to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. “Change of control” is defined in the indenture governing the Notes as, among other things, the filing of a Schedule 13D or Schedule TO under the Securities Exchange Act of

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1934, as amended, or the Exchange Act, 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 Nortel Networks Corporation or has the power to elect a majority of the members of the Board of Directors of Nortel or our ceasing to be the beneficial owner of 100% of the voting power of the common stock of NNL.

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 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 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, 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;

•  We are under continuing regulatory and criminal investigations and subject to litigation proceedings and, as a result, any fines or other penalties or judgments or settlements in connection with our pending civil litigation not encompassed by the Global Class Action Settlement, or regulatory 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 and expenses; and

•  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 restriction in our indentures and by our and NNL’s credit ratings and 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.

Future Uses of Liquidity

Our cash requirements for the 12 months commencing January 1, 2007, are primarily expected to consist of funding for operations, including our investments in R&D, and the following items:

•  costs related to our regulatory and other legal proceedings, including $575, plus accrued interest, in cash related to the Global Class Action Settlement. This payment will be made from our restricted cash and will not impact our cash and cash equivalents balance of $3,492 as of December 31, 2006. The cash amount bears interest at a prescribed rate, was placed in escrow on June 1, 2006 and has been classified as restricted cash and cash equivalents. As part of the Global Class Action Settlement, we agreed with our insurers to certain indemnification obligations. We believe that these indemnification obligations are unlikely to materially increase our total cash payment obligations under the Global Class Action Settlement;

•  cash contributions for pension, post retirement and post employment funding of approximately $440;

•  capital expenditures of approximately $300;

•  costs related to workforce reductions and real estate actions in connection with the 2007 Restructuring Plan of approximately $275;

•  costs related to workforce reduction and other restructuring activities for all other restructuring plans of approximately $115;

•  costs associated with the completion of the divestiture of our manufacturing operations to Flextronics and the divestiture of certain assets and liabilities related to our UMTS access business to Alcatel-Lucent of approximately $40 and $110, respectively; and

•  costs related to our finance transformation project which will include, among other things, implementing SAP to provide an integrated global financial system, of approximately $30.

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

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Contractual cash obligations

	Payments Due												Total
Contractual Cash Obligations(a)	2007		2008		2009		2010		2011		Thereafter		Obligations
Long-term debt(b)	$	18	$	1,821	$	18	$	20	$	1,022	$	1,565	$	4,464
Interest on long-term debt(c)		298		273		222		222		177		623		1,815
Operating leases(d)		123		105		90		95		84		406		903
Purchase obligations		69		12		2		—		—		—		83
Outsourcing contracts		10		10		11		—		—		—		31
Obligations under special charges		60		41		29		38		33		167		368
Pension, post-retirement and post-employment obligations(e)		440												440
Other long-term liabilities reflected on the balance sheet		10		10		9		9		10		25		73
Total contractual cash obligations	$	1,028	$	2,272	$	381	$	384	$	1,326	$	2,786	$	8,177

(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, 2006.
(b)	Includes principal payments due on long-term debt and $310 of capital lease obligations. For additional information, see note 11, “Long-term debt, credit and support facilities”, to the accompanying audited consolidated financial statements.
(c)	Amounts represent interest obligations on our long-term debt excluding capital leases as at December 31, 2006. As described in note 12, “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, 2006.
(d)	For additional information, see note 14, “Commitments”, to the accompanying audited consolidated financial statements.
(e)	Represents our estimate of our 2007 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.

During 2006, we fulfilled a $232 purchase commitment which existed at December 31, 2005. On February 14, 2006, NNI entered into the 2006 Credit Facility which was drawn down in full to repay at maturity the outstanding $1,275 aggregate principal amount of NNL’s 6.125% Notes on February 15, 2006. On July 5, 2006, NNL completed the Notes offering and repaid the 2006 Credit Facility.

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, 2006 and the end date of the agreement. In those cases, we have estimated the timing of the payments based on forecasted usage rates.

As part of our agreement with Flextronics regarding the divestiture of substantially all of our remaining manufacturing operations, Flextronics has the ability in certain cases to exercise rights to sell back to us certain inventory and equipment after the expiration of a specified period (of up to fifteen months) following the respective closing date of each facility transfer. We do not expect such rights to be exercised with respect to any material amount of inventory and/or equipment.

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 our outsourcing contracts is variable to the extent that our hardware volumes and workforce fluctuates from the baseline levels contained in the contracts and our 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 2024. Balance sheet provisions of $43 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.

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Pension and post-retirement obligations

During 2006, we made cash contributions to our defined benefit pension plans of $354 and to our post-retirement benefit plans of $37. In 2007, we expect to make cash contributions of approximately $365 to our defined benefit pension plans and approximately $36 to our post-retirement 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 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 continued negative impact on gross margin due to competitive pressures, product mix and other factors discussed above under “Results of Operations — Continuing 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, 2006, our primary source of liquidity was cash. We believe our cash will be sufficient to fund the changes to our business model in accordance with our strategic plan (see “Executive Overview — Our Business and Strategy”), fund our investments and meet our customer commitments for at least the 12 month period commencing January 1, 2007, including the cash expenditures outlined under “Future Uses of Liquidity” above.

Available support facility

On February 14, 2003, NNL entered into the EDC Support Facility. As of December 31, 2006, the 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 $10, of which $140 was outstanding; and

•  $450 of uncommitted support for performance bonds or similar instruments and/or receivables sales and/or securitizations, of which $26 was outstanding.

The EDC Support Facility does not materially restrict NNL’s ability to sell any of its assets (subject to certain maximum amounts) or to purchase or pre-pay any of its currently outstanding debt. The EDC Support Facility provides that EDC may suspend its obligation to issue NNL any additional support if events occur that would have a material adverse effect on NNL’s business, financial position or results of operation. In addition, the EDC Support Facility can be suspended or terminated if NNL’s senior long-term 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 NNL’s subsidiaries provided that should NNL or its subsidiaries incur liens on its assets securing certain indebtedness, or should any subsidiary of NNL incur or guarantee certain indebtedness in the future above agreed thresholds of $25 in North America and $100 outside of North America, equal and ratable security and/or guarantees of NNL’s obligations under the EDC Support Facility would be required at that time.

During the first half of 2006, NNL’s 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 NNL’s U.S. and Canadian personal property and the U.S. personal property of NNI. NNL’s 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 $2,000 Notes offering discussed above, NNL, NNI and EDC entered into a new guarantee agreement dated July 4, 2006 by which NNI agreed to guarantee NNL’s obligations under the EDC Support Facility during such time that the $2,000 Notes are guaranteed by NNI.

Effective December 14, 2006, NNL and EDC amended and restated the EDC Support Facility to maintain the total EDC Support Facility at up to $750, including the existing $300 of committed support for performance bonds and similar

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instruments, with individual amounts up to $10, and to extend the maturity date of the EDC Support Facility for an additional year to December 31, 2008.

As a result of the breach of certain provisions of NNL’s EDC Support Facility related to the required restatement by NNL of certain of its prior period results, absent a waiver, EDC will have the right to refuse to issue additional support and to terminate its commitments under the Support Facility, subject to a 30 day cure period with respect to certain provisions. On March 9, 2007, NNL obtained a waiver from EDC.

Shelf registration statement and base shelf prospectus

In 2002, we and NNL filed a shelf registration statement with the SEC and a base shelf prospectus with the applicable securities regulatory authorities in Canada, to qualify the potential sale of up to $2,500 of various types of securities in the U.S. and/or Canada. The qualifying securities include common shares, preferred shares, debt securities, warrants to purchase equity or debt securities, share purchase contracts and share purchase or equity units (subject to certain approvals). As of December 31, 2006, approximately $1,700 under the shelf registration statement and base shelf prospectus had been utilized. As of June 6, 2004, the Canadian base shelf prospectus expired. As a result of the delayed filing of our 2005 Form 10-K/A, NNL’s 2005 Form 10-K and the 2006 First Quarter Reports with the SEC due to the Third Restatement, we and NNL continue to be unable to use, in its current form as a short-form shelf registration statement, the remaining approximately $800 of capacity for various types of securities under our SEC shelf registration statement. We will again become eligible for short-form shelf registration with the SEC after we have completed timely filings of our financial reports for twelve consecutive months.

Credit Ratings

	Rating on Long-Term Debt		Rating on
	Issued or Guaranteed by		Preferred Shares
	Nortel Networks		Issued by
	Limited/Nortel Networks		Nortel Networks
Rating Agency	Corporation		Limited		Last Update
Standard & Poor’s Ratings Service		B−		CCC−	June 16, 2006
Moody’s Investors Service, Inc.		B3		Caa3	September 26, 2006

On June 16, 2006, S&P revised its rating on NNL from credit watch with negative implications to stable outlook. At the same time, S&P affirmed its B− long-term credit rating and assigned its B− senior unsecured debt rating to the Notes with an outlook of stable. On September 26, 2006, Moody’s affirmed the B3 Corporate Family Rating on Nortel, B3 rating on the Notes and NNL’s 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 NNL, 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

We have entered into bid, performance related and other bonds in connection 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. 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 two to five years. Any potential payments which might become due under these bonds would be related to our non-performance under the applicable contract. Historically, we have not had to make material payments and we do not anticipate that we will be required to make material payments under these types of bonds.

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

	December 31,		December 31,
	2006		2005
Bid and performance related bonds(a)	$	231	$	222
Other bonds(b)		30		44
Total bid, performance related and other bonds	$	261	$	266

(a)	Net of restricted cash and cash equivalents amounts of $7 and $36 as of December 31, 2006 and 2005, respectively.
(b)	Net of restricted cash and cash equivalents amounts of $628 and $31 as of December 31, 2006 and 2005, 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, 2008 are currently not eligible for the support provided by this facility. If the facility is not further extended beyond December 31, 2008, we would likely need to increase our use of cash collateral to support these obligations beginning on January 1, 2008, absent a further extension of the facility.

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 policies, 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.

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 on undelivered obligations and/or whether delivered elements have stand-alone value to the customer. Changes to our

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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 related to delivered elements is deferred until the earlier of when sufficient 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 is recognized based on the revenue recognition guidance applicable to the last delivered element. For instance, where post-contract support is the last delivered element within the unit of accounting, the deferred revenue is recognized ratably over the remaining post-contract support term once post-contract 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 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.

For elements related to customized network solutions and certain network build-outs, revenues are recognized under 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 a measure of the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. Generally, the terms of long-term contracts provide for progress billing based on completion of certain phases of work. Contract revenues recognized, based on costs incurred towards the completion of the project, that are unbilled are accumulated in the contracts in progress account included in accounts receivable — net. Billings in excess of revenues recognized to date on long-term contracts are recorded as advance billings in excess of revenues recognized to date on contracts within other accrued liabilities. Significant judgment is often required when estimating total contract costs and progress to completion on these 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 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 title in certain jurisdictions, have 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 of each element or the residual method, as applicable, and using vendor specific objective evidence of fair values, 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 reasonably assured. Revenue related to post-contract customer support, or PCS, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term.

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Under SOP 97-2 or under Emerging Issues Task Force, or EITF, Abstract 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 (i) the undelivered element is delivered or (ii) fair value of the undelivered element exists, 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 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 collection 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 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 for approximately 55% 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 20% of our deferred revenue balance relates to contractual arrangements where billing milestones preceded revenue recognition.

The following table summarizes our deferred revenue balances:

	As at December 31,				2006 vs. 2005
	2006		2005		$ Change			% Change
Deferred Revenue	$	2,046	$	2,356	$	(310	)		(13	)
Advance Billings		1,352		1,229		123			10
Total Deferred Revenue	$	3,398	$	3,585	$	(187	)		(5	)

Deferred revenues decreased by $187 in 2006 as a result of reductions related to the net release to revenue of approximately $125, and other adjustments of $204 (including the impact of $95 related to divestitures in 2006), partially offset by an increase due to foreign exchange of $142. The release of deferred revenue to revenue is net of the additional deferrals recorded during 2006.

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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, a regional (except Asia, excluding LG-Nortel) 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 of our continuing operations as of:

	December 31,			December 31,
	2006			2005
Gross accounts receivable	$	2,873		$	2,966
Provision for doubtful accounts		(88	)		(140	)
Accounts receivable — net	$	2,785		$	2,826
Accounts receivable provision as a percentage of gross accounts receivables		3	%		5	%
Gross long-term receivables	$	39		$	57
Provision for doubtful accounts		(34	)		(33	)
Net long-term receivables	$	5		$	24
Long-term receivable provision as a percentage of gross long-term receivables		87	%		58	%

Provisions for Inventory

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 provisions against this type of inventory.

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

	December 31,			December 31,
	2006			2005
Gross inventory	$	3,415		$	3,696
Inventory provisions		(1,007	)		(1,043	)
Inventories — net(a)	$	2,408		$	2,653
Inventory provisions as a percentage of gross inventory		29	%		28	%
Inventory provisions as a percentage of gross inventory excluding deferred costs(b)		69	%		63	%

(a)	Includes the long-term portion of inventory related to deferred costs, which is included in other assets.
(b)	Calculated excluding deferred costs of $1,952 and $2,048 in 2006 and 2005, respectively.

Inventory provisions decreased by $36 as a result of $122 of additional inventory provisions and $53 of reclassifications and other adjustments, partially offset by $149 of scrapped inventory and $62 of reductions due to sale of inventory. 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, which take into consideration the historical material replacement 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. 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 technical support 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. Technical support labor cost is estimated based primarily upon historical trends in the rate of customer warranty claims and projected claims within the warranty period.

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:

	2006			2005
Balance at the beginning of the year	$	206		$	271
Payments		(267	)		(179	)
Warranties issued		281			190
Revisions		(3	)		(76	)
Balance at the end of the year	$	217		$	206

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 replacement costs and the associated labor 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, 2006, our deferred tax asset balance, excluding discontinued operations, was $8,473 against which we have recorded a valuation allowance of $4,431 resulting in a net deferred tax asset of $4,042. As of December 31,

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2005, our net deferred tax asset was $3,937. The $105 increase in 2006 was primarily due to the effects of foreign exchange translation, partially offset by a reduction of deferred tax assets and valuation allowance in profitable jurisdictions. 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 quarter of 2006, the Canadian government enacted a reduction in the federal tax rate. The overall rate reduction of approximately 3% will be phased in through 2010, at which time the federal rate will be 19%. As a result of this change in rates, our gross deferred tax asset was reduced with a corresponding decrease in the amount of valuation allowance established against the gross deferred tax asset.

We assess the 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 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;

•  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 assets.

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 our valuation allowance in the third quarter of 2002 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, 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 other comprehensive income items, foreign currency translation, and the additions of certain refundable tax credits in France. Thus, we have provided valuation allowances against the deferred tax assets related to our losses in these jurisdictions for the applicable periods since establishing the valuation allowance.

At each reporting period since 2002, we have considered the factors listed above to determine if any further adjustments should be made to the net deferred tax asset on a jurisdictional basis. Relative to 2002, the factors we consider have generally trended favorably year over year as our jurisdictional cumulative losses have decreased substantially since 2002. As discussed below, we evaluate cumulative earnings (loss) within each jurisdiction and at NNL. NNL has operated at near break-even since 2002, and the results in Canada and the U.S. have improved substantially over the same period relative to 2001 and 2002. As a result, we have concluded that there have not been sufficient changes to our profitability to warrant additional significant changes to our net deferred tax asset.

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

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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 certain significant jurisdictions (namely Canada and the U.S.).

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 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.

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 2007 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 taking actions through our Business Transformation initiatives, such as exiting products where we cannot achieve market share as well as adjusting our cost base in order to achieve our objective of becoming profitable in the future.

Using the detailed forecast as the base, we project our range of future profitability and ability to realize our deferred tax assets assuming both improving revenues based on market growth analysis and no change in revenues and by making certain assumptions about the cost savings we expect to achieve. The cost savings assumptions are based on management’s overall plan to improve profitability including the Business Transformation initiative designed to improve operating margins by $1,500 by the end of 2008. Recent Business Transformation initiatives include: i) the divestiture of the loss-making assets and liabilities of our UMTS access business in the fourth quarter of 2006, ii) the 2006 Restructuring Plan and changes to reduce our North American employee benefit plans, and iii) the recently announced 2007 and 2008 planned workforce reductions and the shift of a portion of our employee base to lower cost locations. These initiatives are discussed in more detail throughout this report.

Though we believe our assumptions about future revenues are conservative, our projections assume that revenue will not decrease below 2007 forecasted levels. Similarly, we expect to achieve the cost savings reflected in the projection. However, if our revenue were to decline by greater than 10% of our 2007 forecast, and such decline in revenue is not offset by additional cost reductions, or if we are not able to achieve 80% of our projected cost reductions by the end of 2008, the weight we ascribe to our strong earnings history and our ability to achieve forecasted results will decrease and an increase to the valuation allowance will likely be necessary in Canada, particularly with respect to short-lived investment tax credits, and possibly the U.S. We do not expect an increase or decrease to our valuation allowance in 2007 if we are able to meet our 2007 forecast. If we significantly exceed our 2007 forecast, we may no longer have 12 quarters of cumulative losses in the U.S., and perhaps Canada, requiring an assessment of whether a portion of the valuation allowance should be released.

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 our 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 less than our previous forecasts and projections. Looking ahead in 2007, we have stabilized a number of these factors and assembled a rigorous forecast based on a thorough understanding of the revenue recognition models with which the Company now operates.

The significant majority of our net deferred tax asset is recorded in the U.S. and Canada. As noted above, we are currently in a cumulative loss position in both the U.S. and Canada and, as a result, we consider the potential impairment of our net

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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, 2006:

			Net		Other		Gross
	Tax Benefit		Investment		Temporary		Deferred Tax		Valuation			Net Deferred
	of Losses		Tax Credits		Differences		Asset		Allowance			Tax Asset
Canada(a)	$	1,062	$	936	$	1,288	$	3,286	$	(1,373	)	$	1,913
United States(a)		1,196		381		767		2,344		(782	)		1,562
United Kingdom		1,595		—		361		1,956		(1,494	)		462
France		500		41		14		555		(483	)		72
Other		256		—		76		332		(299	)		33
Total	$	4,609	$	1,358	$	2,506	$	8,473	$	(4,431	)	$	4,042

(a)  Includes $867 of gross deferred tax asset and corresponding valuation allowance in Canada at NNC primarily related to a shareholder litigation settlement, and $151 of gross deferred tax asset and corresponding valuation allowance in the U.S. relative to wholly-owned U.S. subsidiaries of NNC primarily related to operating losses.

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 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.

Canada

Our net deferred tax assets in Canada are recorded at NNL, the principal operating subsidiary of NNC. We have concluded that because NNC does not have any substantive revenue generating activity, a full valuation allowance against the deferred tax assets is appropriate at NNC. Our analysis of cumulative profits in Canada is focused specifically on NNL.

As of December 31, 2006, we have operated at a cumulative loss of $309 over the most recent 12 quarters. Prior to the incurrence of significant losses incurred 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 periods of earnings and several periods 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. Additionally, our cumulative loss has decreased quarter over quarter in six of the last eight quarters.

The significant majority of our $1,913 net deferred tax asset at NNL relates to loss and investment tax credit carryforwards which have 10 year carryforward periods. Approximately 72% of our loss carryforwards are set to expire by the end of 2011, and 68% of our investment tax credits will expire by the end of 2011. However, there are tax-planning strategies that permit the conversion of these loss and investment tax credit carryforwards into discretionary deductible expenses with an unlimited carryforward period. As a result, we do not expect that a significant portion of our carryforwards will expire in the near future. Tax credit carryforward amounts of approximately $300 with respect to the years from 1994 to 1996 have expired and are not included in the balance of gross deferred tax assets. Nortel can restore a significant amount of the deferred tax asset by executing a certain tax planning strategy that involves filing amended tax returns. We 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. Currently these planning strategies can be implemented at minimal risk and cost. These tax planning strategies are permissible based on existing Canadian tax law. We place significant weight on our ability to execute these planning strategies.

There is proposed legislation in Canada which may significantly increase the cost of implementing our planning strategies, and may result in a significant amount of our investment tax credits expiring unused. However, we have reviewed the proposed legislation and we believe we have provided adequate valuation allowance for the potential negative impact of the proposed legislation.

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U.S.

As of December 31, 2006, we have operated at a $217 cumulative loss 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 U.S. was near break-even for the most recent 12 quarters as of December 31, 2005; however, the restatement of earnings completed in April 2006 deferred a significant amount of the earnings from 2005 and prior years into 2006 and beyond. As a result, the U.S. remained in a cumulative loss position for the year ended December 31, 2005. However, the U.S. operations had earnings of $67 during 2006.

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 80% of our research tax credits and over 98% of our operating loss carryforwards do not begin to expire until 2019. As a result, we do not expect that a significant portion of our carryforwards will expire in the near future 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 U.K. operations have a strong history of earnings exclusive of the losses from 2001 and 2002 which created the current carryforwards in the U.K. However, unlike operations in those jurisdictions, 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 France operations 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 exclusive of the losses which created the current carryforwards. 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 in France, with the exception of certain credits and losses that may be redeemed in 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 apply to the 2001 through 2005 taxation years and we are in discussions with the taxing authorities about including the 2006 taxation year. The APA is currently being negotiated by the pertinent taxing authorities (U.S., Canada, and U.K.).

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 our deferred tax assets. However, it is possible that the result of the APA negotiations could cause a material shift in historical earnings between various Nortel entities. Such a shift in historical earnings could materially adjust the cumulative earnings (loss) calculation used as part of the analysis of positive/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 jurisdiction (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.

During the year ended December 31, 2006, our gross income tax valuation allowance increased to $4,431 compared to $3,429 as of December 31, 2005. Of the $1,002 increase, $749 was primarily due to a valuation allowance being established relative to the realizability of the deferred tax asset established at NNC associated with future deduction of the shareholder settlement. The remaining increase to the valuation allowance relates to the impacts of foreign exchange rates

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and other adjustments offset by additional valuation allowances recorded against the tax benefit of current period losses in certain jurisdictions. We assessed positive evidence including forecasts of future taxable income to support realization of the net deferred tax assets, and negative evidence including our cumulative loss position, and concluded that the valuation allowances as of December 31, 2006 were appropriate.

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 probable as a result of any ongoing or future examination.

Specifically, the tax authorities in Brazil have completed an examination of a prior taxation years and have issued assessments in the amount of $71. We are currently in the process of appealing these assessments and believe that we have adequately provided for tax adjustments that are probable as a result of the outcome of the ongoing appeals process.

In addition, tax authorities in France have issued three preliminary notices of proposed assessment in respect of the 2001, 2002 and 2003 taxation years. These assessments collectively propose adjustments to taxable income of approximately $1,099, additional income tax liabilities of $43 inclusive of interest, as well as certain adjustments to withholding and other taxes of approximately $72 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 made an offer of settlement to the French tax authorities, which was significantly less than the assessed amount, for the purpose of accelerating the settlement process to either the courts or competent authority proceedings under the Canada-France tax treaty. We believe we have adequately provided for tax adjustments that are probable 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 to the taxation years beginning in 2001. The APA requests are currently under consideration and we are in the process of negotiating the terms of the arrangement with the tax authorities. We continue to monitor the progress of these negotiations; however we are not a party to them. We have applied the transfer pricing methodology proposed in the APA requests in preparing our tax returns and accounts beginning in 2001.

We had previously concluded that it was probable that the retroactive application of the proposed methodology to year 2000 would be accepted by the tax authorities and prepared our income tax estimates (both current and deferred taxes) on the basis that the 2000 taxation year would be governed by the APA submission. As a result, we had previously provided approximately $140 for taxes and interest in various tax jurisdictions that would be due as a result of retroactive application of the APA. In the fourth quarter of 2005, we obtained new information and as a result can no longer conclude that it is probable that the APA will be retroactively applied. We have recalculated our current and deferred tax balances assuming the 2000 tax year would not be subject to the retroactive application of the APA. As a result, the gross deferred income tax balances in our significant jurisdictions were recalculated on an as filed basis, and the liability of $140 for taxes and interest that was previously accrued was released in the fourth quarter of 2005.

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

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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/or

•  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 the 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 $2,529 of December 31, 2006 and $2,586 as of December 31, 2005. The decrease of $57 was primarily driven by (i) an adjustment of $56 related to the reduction of goodwill originally recorded as part of our investment in LG-Nortel and (ii) disposals of $42 related to the transfer of our Calgary manufacturing operations to Flextronics and $8 related to the sale of certain net assets related to our UMTS access business. These decreases were partially offset by an addition of $43 related to the goodwill acquired as a result of our acquisition of Tasman Networks and other adjustments of $6, which included an increase of $15 resulting from the impact of foreign exchange fluctuations on our goodwill balances denominated in currencies other than U.S. dollars.

Due to the change in our operating segments and reporting units as described in “Business Overview — Our Segments”, a triggering event occurred requiring a goodwill impairment test in the first and third quarters of 2006 in accordance with SFAS No. 142, “Goodwill and other Intangible Assets”, or SFAS 142. We performed this test and concluded that there was no impairment.

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 5% for NGS to in excess of 400% for MCCN. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test for NGS, we determined that a hypothetical 7% reduction in the forecasted revenues for 2007 would result in a reduction in the excess of the fair value over the carrying value from 5% to nil and if the reduction of forecasted revenues is greater, a partial impairment charge may be required.

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The excess of fair value over the carrying value of our four reportable segments (which accounts for 93% of our consolidated goodwill), is in excess of $11,500. As such, a significant decrease in the fair value of these reporting units would be required to trigger goodwill impairment.

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 2006, the expected long-term rate of return on plan assets used to estimate pension expenses was 7.2% on a weighted average basis, which was the rate determined at September 30, 2005. This rate is down slightly from the rate of 7.4% used in 2005. The discount rates used to estimate the net pension obligations and expenses for 2006 were 5.1% and 5.1%, respectively, on a weighted average basis, compared to 5.1% and 5.7%, respectively, in 2005.

The key assumption used to estimate the post-retirement benefit costs for 2006 was an expected discount rate of 5.4% and 5.4% for the obligations and costs, respectively, both on a weighted average basis. The weighted average discount rate for the obligations remained the same as in 2005 and for the costs was down slightly from a 2005 rate of 5.9%.

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, duration of the liabilities, and current high-quality bond rates.

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 2006 Pre-Tax
	Effect on 2006 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	$	(63	)		N/A
1 percentage point decrease in the expected return on assets		63			N/A
1 percentage point increase in the discount rate		(109	)		(1	)
1 percentage point decrease in the discount rate		91			3

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 $4 (0.1% of total plan assets) as of December 31, 2006 and $5 (0.1% of total plan assets) as of December 31, 2005.

Actuarial gains and losses included in accumulated other comprehensive loss are being recognized over approximately an 11 year period, which represents the weighted-average expected remaining service life of the 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. At the end of 2006, we had net actuarial losses included in Accumulated Other Comprehensive Income/Loss related to the defined benefit plans of $1,475, which could result in an increase to pension expenses in future years depending on several factors, including whether such losses exceed the corridor in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”. The post-retirement benefit plans had an actuarial gain of $2 included in accumulated other comprehensive loss at the end of 2006.

In the second quarter of 2006, we announced changes to our North American pension and post-retirement plans effective January 1, 2008. We will move employees currently enrolled in our defined benefit pension plans to defined contribution plans. In addition, we will eliminate post-retirement healthcare benefits for employees who are not age 50 with five years of service as of July 1, 2006. As a result of these changes we re-measured our pension and post-retirement benefit obligations related to our North American plans as of the date our Board of Directors approved these changes and recorded the impacts of this re-measurement in the third quarter of 2006 in accordance with SFAS 88 and SFAS 106. Plan changes approved by our Board of Directors and changes to key assumptions as a result of the re-measurement resulted in

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a curtailment gain of approximately $34 for both the pension and post-retirement benefit plans. In addition, we were required to adjust the minimum pension liability for certain plans, representing the amount by which the accumulated benefit obligation less the fair value of the plan assets was greater than the recorded liability. The effect of this adjustment and the related foreign currency translation adjustment was to decrease accumulated other comprehensive loss (before tax) by $198, decrease intangible assets by $14, and decrease pension liabilities by $212.

For the year-end measurement, the impact of changes in discount rates and other accounting assumptions more than offset the favourable impacts of strong pension asset returns and our contributions made to the plans. As a result, we were required to adjust the minimum pension liability for certain plans, representing the amount by which the accumulated benefit obligation less the fair value of the plan assets was greater than the recorded liability. The effect of this adjustment and the related foreign currency translation adjustment was to increase accumulated other comprehensive loss (before tax) by $68, decrease intangible assets by $4 and increase pension liabilities by $64.

The unfunded status of our defined benefit pension plans and post-retirement plans was $2,741 as of the measurement date of September 30, 2006, as compared to $3,379 as of September 30, 2005. The decrease of $638 is the result of the events described above which include the announced changes to our North American pension and post-retirement plans announced in the second quarter of 2006, changes in assumptions for the year end measurement, strong asset returns, and our contributions to the plans. The full unfunded status is recorded as a liability on our balance sheet in accordance with 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)”, or SFAS 158, issued by the FASB in September 2006.

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 of						After Application of
	SFAS 158			Adjustment			SFAS 158
Intangible assets — net	$	262		$	(21	)	$	241
Other assets — long term		686			3			689
Deferred tax asset — long term		3,803			60			3,863
Payroll and benefit liabilities — current		(868	)		228			(640	)
Other liabilities — long term		(5,398	)		(412	)		(5,810	)
Accumulated other comprehensive loss		479			142			621

During 2006, we made cash contributions to our defined benefit pension plans of $354 and to our post-retirement benefit plans of $37. In 2007, we expect to make cash contributions of approximately $365 to our defined benefit pension plans and approximately $36 to our post-retirement benefit plans.

For 2007, we are lowering our expected rate of return on plan assets from 7.2% to 7.1% for defined benefit pension plans. Also for 2007, our discount rate on a weighted-average basis for pension expenses will remain at 5.1% for the defined benefit pension plans and at 5.4% 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. If the actual results of the plans differ from the assumptions, additional contributions by us may be required. 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”.

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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, 2006, we had $43 in accruals related to workforce reduction charges and $231 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.

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 regulatory and criminal investigations and significant 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.

On February 8, 2006, we announced that we had reached a settlement in principle with the lead plaintiffs in two significant class action lawsuits. As a result of the Global Class Action Settlement, we established a litigation reserve and recorded a charge to our full-year 2005 financial results of $2,474, $1,899 of which related to the equity component of the Global Class Action Settlement. In 2006, we recorded a shareholder litigation settlement recovery of $219 as a result of a fair value mark-to-market adjustment of the equity component of the Global Class Action Settlement.

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 since January 1, 2006. The following summarizes the accounting changes and pronouncements we have adopted in 2006 that have had a material impact on our results of operations and financial condition:

•  Share-Based Payment — In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment”, or SFAS 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the audited consolidated financial statements based on their fair values. SFAS 123R also modifies certain measurement and expense recognition provisions of SFAS 123 that will impact us, including the requirement to estimate employee forfeitures each period when recognizing compensation expense and requiring that the initial and subsequent measurement of the cost of liability-based awards each period be based on the fair value (instead of the intrinsic value) of the award. This statement is effective for Nortel as of January 1, 2006. We previously elected to expense employee stock-based compensation using the fair value method prospectively for all awards granted or modified on or after January 1, 2003 in

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accordance with SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure”, or SFAS 148. SEC Staff Accounting Bulletin (“SAB”) 107, “Share-Based Payment”, or 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. This resulted in an increase in the basic and diluted earnings (loss) per common share of $0.02. 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 19 “Stock-based compensation plans” to the accompanying audited consolidated financial statements.

•  Accounting for Defined Benefit Pension and Other Postretirement Plans — 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)”, or 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 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 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 us for our fiscal year ending December 31, 2008. 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. For a summary of the impact on our audited consolidated financial statements resulting from the adoption of SFAS 158, see Application of Critical Accounting Policies and Estimates — Pension and Post-Retirement Benefits. For additional information on our pension and post-retirement plans see note 9 “Employee Benefit Plans” to the accompanying audited consolidated financial statements.

•  Quantification of Financial Statement Misstatements — In September 2006, the SEC staff issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements” (“SAB 108”). There are two recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” and “iron curtain” methods. The roll-over method, the method previously used by us, focuses primarily on the material impact of a misstatement on the statement of operations, which can lead to the accumulation of misstatements on the balance sheet that may become material to the balance sheet. The iron curtain method focuses primarily on the effect of correcting for the accumulated misstatements as at the balance sheet date, essentially correcting the balance sheet with less emphasis on the reversing effects of prior year errors on the statement of operations. SAB 108 requires quantification of financial statement misstatements under both the roll-over and iron curtain approaches, referred to as the “dual-approach”. SAB 108 permits companies to initially adopt its provisions by adjusting for the cumulative effect of misstatements related to prior years, previously deemed to be immaterial, in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of accumulated deficit. During the year of adoption SAB 108 also provides the option of prospective correction of immaterial errors in previously reported quarterly financial statements that would be reported as comparative information in future filings with the SEC. SAB 108 does not require financial statement reports previously filed with the SEC to be amended. SAB 108 became effective for our fiscal year ended December 31, 2006. The provisions of SAB 108 did not have a material impact on our results of operation and financial condition for the year ended December 31, 2006.

Recent Accounting Pronouncements

Please see note 2(w) “Significant accounting policies — Recent Accounting Pronouncements” to the accompanying audited consolidated financial statements for a summary of recent accounting pronouncements.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 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 will be a two-step process, whereby (1) we determine whether it

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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, we would recognize the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt the provisions of FIN 48 on January 1, 2007. We are currently in the process of assessing the impact of FIN 48. Based on our preliminary analysis, we do not expect a significant adjustment to opening accumulated deficit as a result of the adoption of FIN 48. For additional information see note 8 “Income Taxes” to the accompanying audited consolidated financial statements.

Outstanding Share Data

As of February 28, 2007, Nortel Networks Corporation had 433,878,107 outstanding common shares.

As of February 28, 2007, 28,299,588 issued and 602,841 assumed stock options were outstanding and 19,624,872 and 602,841, respectively, are exercisable for common shares of Nortel Networks Corporation on a one-for-one basis.

As of February 28, 2007, 1,231,503 restricted stock units and 446,500 performance stock units were outstanding. Once vested, each restricted stock unit and performance stock unit entitles the holder to receive one common share of Nortel Networks Corporation or, in our discretion, cash in lieu of common shares in certain circumstances from treasury or through open market purchases at our option.

In addition, Nortel Networks Corporation previously issued $1,800 of 4.25% Convertible Senior Notes, or Convertible Senior Notes, due on September 1, 2008. The Convertible Senior Notes are convertible, at any time, by holders into common shares of Nortel Networks Corporation, at a conversion price of $100 per common share, reflecting the 1 for 10 share consolidation discussed below.

We expect that the Global Class Action Settlement could be deemed effective as early as March 20, 2007 for the finalization of the settlement. On or about this date, it is anticipated that approximately 4 percent of the total settlement shares could be issued to plaintiffs’ counsel in accordance with the terms of the settlement, and be freely tradeable, with the balance of settlement shares expected to be issued, and upon issuance freely tradeable, in the second half of 2007.

On November 6, 2006, our Board of Directors approved a 1 for 10 consolidation of Nortel Networks Corporation outstanding common shares effective December 1, 2006. Nortel Networks Corporation common shares began trading on a consolidated basis on December 1, 2006.

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 Disclosure about Market Risk section of this report.

Environmental Matters

We are exposed to liabilities and compliance costs arising from our past management and disposal of hazardous substances and wastes. As of December 31, 2006, the accruals on the consolidated balance sheet for environmental matters were $27. Based on information available as of December 31, 2006, we believe 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 14 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 $27.

We are 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. (two Potentially Responsible Party and two de minimis Potentially Responsible Party). An estimate of our share of the anticipated remediation costs associated with such Superfund sites is included in the environmental accruals of $27 referred to above.

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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 its current estimate.

For a discussion of environmental matters, see note 21, “Contingencies” to the accompanying audited consolidated financial statements.

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, 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 current restatement and related matters including: the negative impact on Nortel or NNL of the current restatement; legal judgments, fines, penalties or settlements, or any substantial regulatory fines or other penalties or sanctions, related to the ongoing regulatory and 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; any unsuccessful remediation of Nortel’s material weakness in internal control over financial reporting resulting in an inability to report Nortel’s results of operations and financial condition accurately and in a timely manner; Nortel’s inability to access, in its current form, its shelf registration filed with the United States Securities and Exchange Commission (SEC); or any breach by Nortel of the continued listing requirements of the NYSE or TSX causing the NYSE and/or the TSX to commence suspension or delisting procedures. For additional information with respect to certain of these and other factors, see Nortel’s Annual Report on Form 10-K and other securities filings with the SEC. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or

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obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 that we have authorized under 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.

Additional disclosure of our financial instruments is included in note 12, “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”, we recognize the gains and losses on the effective portion of these contracts in earnings when the hedged transaction occurs. Any ineffective portion of 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, 2006 were in U.S. dollars, Canadian dollars, British pounds and Euros. The net impact of foreign exchange fluctuations resulted in a loss of $3 in 2006, a gain of $68 in 2005 and a gain of $57 in 2004. 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, 2006 and 2005. 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 in loss) of $120 as of December 31, 2006 and a potential decrease in after-tax earnings (increase in loss) of $127 as of December 31, 2005. 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. The change in fair value of the 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. 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

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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 earnings (increase in loss) of $55 as of December 31, 2006 and a potential decrease in earnings (increase in loss) of $40 as of December 31, 2005.

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 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, 2006, 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 $12.

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ITEM 8.   Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Chartered Accountants		89
Consolidated Statements of Operations		90
Consolidated Balance Sheets		91
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)		92
Consolidated Statements of Cash Flows		93
Notes to Consolidated Financial Statements		94
************
Quarterly Financial Data (Unaudited)		170
Condensed Consolidated Statements of Operations		171
Condensed Consolidated Balance Sheets		178
Condensed Consolidated Statements of Cash Flows		179
Supplemental Information		181

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders and Board of Directors of Nortel Networks Corporation

We have audited the accompanying consolidated balance sheets of Nortel Networks Corporation and subsidiaries (“Nortel”) as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for each of the three 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 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As described in Note 4 to the consolidated financial statements, the accompanying consolidated financial statements of Nortel as of December 31, 2005 and for the years ended December 31, 2005 and 2004 have been restated. We therefore withdraw our previous report dated April 28, 2006 on those financial statements, as originally filed.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nortel’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of Nortel’s internal control over financial reporting and an adverse opinion on the effectiveness of Nortel’s internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Toronto, Canada

March 15, 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 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

Toronto, Canada

March 15, 2007

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NORTEL NETWORKS CORPORATION

Consolidated Statements of Operations for the years ended December 31

	2006			2005			2004
				As restated*			As restated*
	(Millions of U.S. dollars,
	except per share amounts)
Revenues:
Products	$	10,158		$	9,338		$	8,511
Services		1,260			1,171			967
Total Revenues		11,418			10,509			9,478
Cost of revenues:
Products		6,267			5,590			5,037
Services		712			641			519
Total cost of revenues		6,979			6,231			5,556
Gross profit		4,439			4,278			3,922
Selling, general and administrative expense		2,503			2,429			2,146
Research and development expense		1,939			1,874			1,975
Amortization of intangibles		26			17			9
In-process research and development expense		22			—			—
Special charges		105			169			181
(Gain) loss on sale of businesses and assets(a)		(206	)		47			(91	)
Shareholder litigation settlement expense (recovery)		(219	)		2,474			—
Operating earnings (loss)		269			(2,732	)		(298	)
Other income — net		212			295			217
Interest expense
Long-term debt		(272	)		(209	)		(192	)
Other		(68	)		(10	)		(10	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		141			(2,656	)		(283	)
Income tax benefit (expense)		(60	)		81			20
		81			(2,575	)		(263	)
Minority interests — net of tax		(59	)		(39	)		(33	)
Equity in net earnings (loss) of associated companies — net of tax		(3	)		3			—
Net earnings (loss) from continuing operations		19			(2,611	)		(296	)
Net earnings from discontinued operations — net of tax		—			1			49
Net earnings (loss) before cumulative effect of accounting change		19			(2,610	)		(247	)
Cumulative effect of accounting change — net of tax (note 3)		9			—			—
Net earnings (loss)	$	28		$	(2,610	)	$	(247	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	0.06		$	(6.02	)	$	(0.68	)
— from discontinued operations		0.00			0.00			0.11
Basic and diluted earnings (loss) per common share	$	0.06		$	(6.02	)	$	(0.57	)

(a) Includes related costs.

* See note 4

The accompanying notes are an integral part of these consolidated financial statements

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NORTEL NETWORKS CORPORATION

Consolidated Balance Sheets as of December 31

	2006			2005
				As restated*
	(Millions of U.S. dollars, except for share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	3,492		$	2,951
Restricted cash and cash equivalents		639			77
Accounts receivable — net		2,785			2,826
Inventories — net		1,989			2,080
Deferred income taxes — net		276			377
Other current assets		742			798
Total current assets		9,923			9,109
Investments		204			244
Plant and equipment — net		1,530			1,560
Goodwill		2,529			2,586
Intangible assets — net		241			172
Deferred income taxes — net		3,863			3,664
Other assets		689			800
Total assets	$	18,979		$	18,135
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	1,125		$	1,181
Payroll and benefit-related liabilities		640			803
Contractual liabilities		243			348
Restructuring liabilities		97			99
Other accrued liabilities		4,603			4,232
Long-term debt due within one year		18			1,446
Total current liabilities		6,726			8,109
Long-term debt		4,446			2,439
Deferred income taxes — net		97			104
Other liabilities		5,810			5,937
Total liabilities		17,079			16,589
Minority interests in subsidiary companies		779			783
Guarantees, commitments and contingencies (notes 13, 14 and 21)
SHAREHOLDERS’ EQUITY
Common shares, without par value — Authorized shares: unlimited; Issued and outstanding shares: 433,934,747 and 433,916,293 for 2006 and 2005, respectively		33,938			33,932
Additional paid-in capital		3,378			3,281
Accumulated deficit		(35,574	)		(35,602	)
Accumulated other comprehensive loss		(621	)		(848	)
Total shareholders’ equity		1,121			763
Total liabilities and shareholders’ equity	$	18,979		$	18,135

* See note 4

The accompanying notes are an integral part of these consolidated financial statements

91

NORTEL NETWORKS CORPORATION

Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)

	2006			2005			2004
				As restated*			As restated*
	(Millions of U.S. dollars)
Common shares
Balance at the beginning of the year	$	33,932		$	33,840		$	33,674
Common shares issued (cancelled) — net		1			6			31
Conversion of prepaid forward purchase contracts		—			82			127
Common shares issued (cancelled) related to acquisitions — net		(5	)		(4	)		—
Fair value and costs associated with stock option plans and stock purchase plans		10			8			8
Balance at the end of the year		33,938			33,932			33,840
Additional paid-in capital
Balance at the beginning of the year		3,281			3,283			3,341
Prepaid forward purchase contracts settled		—			(82	)		(127	)
Fair value and costs associated with stock option plans and stock purchase plans		(6	)		(8	)		(8	)
Stock option compensation		93			87			77
Restricted stock unit expense		8			1			—
Performance stock unit expense		2			—			—
Balance at the end of the year		3,378			3,281			3,283
Accumulated deficit
Balance at the beginning of the year		(35,602	)		(32,992	)		(32,743	)
Adjustment as of January 1, 2004 due to restatement*		—			—			(2	)
Net earnings (loss)		28			(2,610	)		(247	)
Balance at the end of the year		(35,574	)		(35,602	)		(32,992	)
Accumulated other comprehensive loss
Balance at the beginning of the year		(848	)		(519	)		(553	)
Adjustment as of January 1, 2004 due to restatement*		—			—			(66	)
Foreign currency translation adjustment		284			(147	)		190
Unrealized gain (loss) on investments — net		8			(2	)		(63	)
Unrealized derivative gain (loss) on cash flow hedges — net		(17	)		(11	)		6
Minimum pension liability adjustment — net		94			(169	)		(33	)
Other comprehensive income (loss)		369			(329	)		100
Adoption of FASB Statement No. 158 — net (see note 3)		(142	)		—			—
Balance at the end of the year		(621	)		(848	)		(519	)
Total shareholders’ equity	$	1,121		$	763		$	3,612
Total comprehensive income (loss) for the year
Net earnings (loss)	$	28		$	(2,610	)	$	(247	)
Other comprehensive income (loss)		369			(329	)		100
Total comprehensive income (loss) for the year	$	397		$	(2,939	)	$	(147	)

* See note 4

The accompanying notes are an integral part of these consolidated financial statements

92

NORTEL NETWORKS CORPORATION

Consolidated Statements of Cash Flows for the years ended December 31

	2006			2005			2004
				As restated*			As restated*
	(Millions of U.S. dollars)
Cash flows from (used in) operating activities
Net earnings (loss)	$	28		$	(2,610	)	$	(247	)
Adjustments to reconcile net earnings (loss) from continuing operations to net cash from (used in) operating activities, net of effects from acquisitions and divestitures of businesses:
Amortization and depreciation		290			302			341
Non-cash portion of shareholder litigation settlement expense (recovery)		(219	)		1,899			—
Non-cash portion of special charges and related asset write downs		3			38			6
Non-cash portion of in-process research and development expense		22			—			—
Equity in net (earnings) loss of associated companies		3			(3	)		—
Stock based compensation expense		112			88			77
Deferred income taxes		31			(116	)		(47	)
Net (earnings) from discontinued operations		—			(1	)		(49	)
Cumulative effect of accounting change		(9	)		—			—
Pension and other accruals		346			299			220
(Gain) loss on sale or write down of investments, businesses and assets		(200	)		(20	)		(110	)
Minority interests		59			39			33
Other — net		220			123			274
Change in operating assets and liabilities		(449	)		(217	)		(683	)
Net cash from (used in) operating activities of continuing operations		237			(179	)		(185	)
Cash flows from (used in) investing activities
Expenditures for plant and equipment		(316	)		(258	)		(276	)
Proceeds on disposals of plant and equipment		143			10			10
Change in restricted cash and cash equivalents		(557	)		3			(11	)
Acquisitions of investments and businesses — net of cash acquired		(146	)		(651	)		(5	)
Proceeds from the sale of investments and businesses		603			470			150
Net cash from (used in) investing activities of continuing operations		(273	)		(426	)		(132	)
Cash flows from (used in) financing activities
Dividends paid by subsidiaries to minority interests		(60	)		(43	)		(33	)
Increase in notes payable		105			70			92
Decrease in notes payable		(79	)		(83	)		(84	)
Proceeds from issuance of long-term debt		3,300			—			—
Repayments of long-term debt		(2,725	)		—			(107	)
Debt issuance cost		(42	)		—			—
Increase in capital leases payable		1			—			—
Decrease in capital leases payable		(17	)		(10	)		(9	)
Issuance of common shares		1			6			31
Common share consolidation cost		(1	)		—			—
Net cash from (used in) financing activities of continuing operations		483			(60	)		(110	)
Effect of foreign exchange rate changes on cash and cash equivalents		94			(102	)		88
Net cash from (used in) continuing operations		541			(767	)		(339	)
Net cash from (used in) operating activities of discontinued operations		—			33			22
Net increase (decrease) in cash and cash equivalents		541			(734	)		(317	)
Cash and cash equivalents at beginning of year		2,951			3,685			4,002
Cash and cash equivalents at end of year	$	3,492		$	2,951		$	3,685

* See note 4

The accompanying notes are an integral part of these consolidated financial statements

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NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements

(Millions of U.S. dollars, except per share amounts, unless otherwise stated)

1.   Nortel Networks Corporation

Nortel Networks Corporation (“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, support multimedia and business-critical applications. Nortel’s networking solutions consist of hardware, software and services. Nortel’s business activities include the design, development, assembly, marketing, sale, licensing, installation, servicing and support of these networking solutions.

The common shares of Nortel Networks Corporation are publicly traded on the New York Stock Exchange (“NYSE”) and Toronto Stock Exchange (“TSX”) under the symbol “NT”. Nortel Networks Limited (“NNL”) is Nortel’s principal direct operating subsidiary and its results are consolidated into Nortel’s results. Nortel holds all of NNL’s outstanding common shares but none of its outstanding preferred shares. NNL’s preferred shares are reported in minority interests in subsidiary companies in the consolidated balance sheets, and dividends on preferred shares are reported in minority interests — net of tax in the consolidated statements of operations.

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.

In conjunction with the establishment of Nortel’s Global Services operating segment in the third quarter of 2006, Nortel has disclosed the revenues and related cost of revenues from both its products and services in its audited consolidated statements of operations.

On November 6, 2006, Nortel’s Board of Directors approved a consolidation of Nortel’s outstanding common shares at a ratio of 1 consolidated share for 10 pre-consolidated shares in accordance with the authority given to the Board by the Nortel shareholders at the annual and special meeting of shareholders held June 29, 2006. Nortel’s shares began trading on the TSX and NYSE on a consolidated basis on December 1, 2006. All references to share and per share data for all periods presented in the consolidated financial statements have been adjusted to give effect to the 1 for 10 common share consolidation.

(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 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.

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Notes to Consolidated Financial Statements — (Continued)

(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 obsolescence, product warranty, amortization, asset valuations, asset retirement obligations, impairment assessments, employee benefits including pensions, taxes and related valuation allowances and provisions, research and development provisions, restructuring and other provisions, stock-based compensation and contingencies.

(c)  Translation of foreign currencies

The consolidated financial statements of Nortel 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 long-term intercompany advances considered to form part of the net investment, are accumulated as a component of other comprehensive income (loss) (“OCI”).

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).

When appropriate, Nortel may hedge a designated portion of the exposure to foreign exchange gains and losses incurred on the translation of specific foreign operations. Derivative instruments used by Nortel can include foreign currency-denominated debt, foreign currency swaps and foreign currency forward and option contracts that are denominated in the same currency as the hedged foreign operations. The translation gains and losses on the effective portion of the cash flow hedging instruments that qualify for hedge accounting are recorded in OCI; other translation gains and losses not related to cash flow hedges are recorded 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. Services revenue reported in the audited consolidated statements of operations is comprised of revenue from Nortel’s Global Services segment (excluding services bundled with product sales).

Depending upon 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”), and SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition” (“SAB 104”), which was preceded by SAB 101, “Revenue Recognition in Financial Statements” (“SAB 101”), prior to December 2003. Revenue is recognized net of cash discounts and allowances.

Effective July 1, 2003, for contracts involving multiple deliverables, where the deliverables are governed by more than one authoritative accounting standard, Nortel generally applies the FASB Emerging Issues Task Force (“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

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NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

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.

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.

Prior to July 1, 2003, for contracts involving multiple elements, Nortel allocated revenue to each element based on the relative fair value or the residual method, as applicable. Provided none of the undelivered elements were essential to the functionality of the delivered elements, revenue related to the software element was recognized under SOP 97-2 and revenue related to the hardware element was recognized under SOP 81-1 or SAB 101.

For elements related to customized network solutions and certain network build-outs, revenues are recognized under SOP 81-1, generally using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on a measure of the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. Generally, the terms of long-term contracts provide for progress billing based on completion of certain phases of work. Contract revenues recognized, based on costs incurred toward the completion of the project, that are unbilled are accumulated in the contracts in progress account included in accounts receivable — net. Billings in excess of revenues recognized to date on long-term contracts are recorded as advance billings in excess of revenues recognized to date on contracts within other accrued liabilities. In circumstances where reasonably dependable cost estimates cannot be made for a customized network solution or build-out element and there is no assurance that a loss will not be incurred on the element, all revenues and certain costs are deferred until completion of the element (“completed contract accounting”).

Revenue for hardware that does not require significant customization, and where any software is considered incidental, is recognized under SAB 104, provided, however, that revenue is recognized 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 legal title in certain jurisdictions, have 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

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NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

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, and using vendor specific objective evidence of fair values, 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 reasonably assured. Revenue related to post-contract 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) the undelivered element is delivered or (ii) fair value of the undelivered element exists, 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.

(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 global 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.

(g)  Earnings (loss) per common share

Basic earnings (loss) per common share, is calculated by dividing the net earnings (loss) by the weighted-average number of Nortel Networks Corporation’s common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by dividing the applicable net earnings (loss) by the sum of the weighted-average number of Nortel common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. The treasury stock method is used to compute the dilutive effect of warrants, options and similar instruments. The if-converted method is used to compute the dilutive effect of convertible debt. A comparison of the conditions required for issuance of shares compared to those existing at the end of the period is used to compute the dilutive effect of contingently issuable shares.

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NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

(h)  Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments. All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents. The amounts presented in the consolidated financial statements approximate the fair value of cash and cash equivalents.

(i)  Restricted cash and cash equivalents

Cash and cash equivalents are considered restricted when they are subject to contingent rights of a third party customer under bid, performance related, and other bonds associated with contracts that Nortel is not able to unilaterally revoke. Cash and cash equivalents collateral may be provided, often in addition to the payment of fees to the other party, as a result of the general economic and industry environment, and of Nortel’s and NNL’s credit ratings.

(j)  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 include 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 realizable value of the collateral if recovery of the receivables is dependent upon a liquidation of the assets. Interest income on impaired customer finance receivables is recognized as the cash payments are collected.

(k)  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. In addition, full provisions are generally recorded for surplus inventory in excess of one year’s forecast demand or inventory deemed obsolete.

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.

(l)  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 and 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. Retained interests are classified as available-for-sale securities.

Nortel, when acting as the servicing agent, generally does not record an asset or liability related to servicing as the annual servicing fees are equivalent to those that would be paid to a third party servicing agent.

Nortel reviews the fair value assigned to retained interests at each reporting date subsequent to the date of the transfer to determine if there is an other-than-temporary impairment. Fair value is reviewed using similar valuation techniques as

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NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

those used to initially measure the retained interest and, if a change in events or circumstances warrants, the fair value is adjusted and any other-than-temporary impairments are recorded in other income (expense) — net.

(m)  Investments

Investments in publicly traded equity securities of companies over which Nortel does not exert significant influence are accounted for at fair value and are classified as available for sale. 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.

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.

(n)  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 lives of buildings are twenty to forty years, and of machinery and equipment are three to ten years. Capitalized software is amortized over three years.

(o)  Software development and business reengineering 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 reengineering costs

Internal and external costs of business process reengineering 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 reengineer 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.

(p)  Impairment or disposal of long-lived assets (plant and equipment and acquired technology)

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; 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.

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Notes to Consolidated Financial Statements — (Continued)

Recoverability is assessed based on the carrying amount of the asset 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 to be disposed of by 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 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 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.

(q)  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 the 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 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).

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Notes to Consolidated Financial Statements — (Continued)

(r)  Intangible assets

Intangible assets consist of acquired technology and other intangible assets. Acquired technology represents the value of the proprietary know-how which was technologically feasible as of the acquisition date and is charged to net earnings (loss) on a straight-line basis over its estimated useful life. Other intangible assets are amortized into net earnings (loss) based on their expected pattern of benefit to future periods using estimates of undiscounted cash flows.

(s)  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.

(t)  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 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 balance sheet.

(u)  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). Ineffective portions 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 an accounting hedge relationship 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, terminated 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 continues to be recognized 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 all material relationships between derivative instruments and hedged items, as well as its 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

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sheet or to specific firm commitments or forecasted transactions. Nortel also formally assesses, both at the hedge’s inception and on an ongoing basis, as applicable, whether the derivatives that are used in designated hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Nortel generally classifies cash flows resulting from its derivative financial instruments in the same manner as the cash flows from the item that the derivative is hedging. Typically, this is within cash flows from (used in) operating activities in the consolidated statements of cash flows, or, for derivatives designated as hedges relating to the cash flows associated with settlement of the principal component of long-term debt, within cash flows from (used in) financing activities.

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 as there is no corresponding underlying exposure. In addition, Nortel may enter into certain commercial contracts containing embedded derivative financial instruments. Generally, for these embedded derivatives, for which the economic characteristics and risks are not clearly and closely related to the economic characteristics and risks of the host contract, the changes in fair value are recorded in net earnings (loss).

(v)  Stock-based compensation

Nortel employees participate in a number of stock-based compensation plans that are described in note 19. Nortel directors participate in director stock unit plans.

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 method and, accordingly, the results of prior periods have not been restated. This method requires that 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, Nortel measured the cost of share-based awards granted or modified on or after January 1, 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 cost of these awards over the remaining service period following the provisions of SFAS 123R. For those share-based awards granted prior to January 1, 2003 and not subsequently modified, that were nonvested and outstanding as of January 1, 2006, Nortel will recognize the remaining cost of these awards over the remaining service period as required by SFAS 123R.

The accounting for Nortel’s stock-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 based on the estimated number of stock options that are expected to vest.

Restricted Stock Units (“RSUs”), Performance Stock Units (“PSUs”), Deferred Stock Units (“DSUs”) and Stock Appreciation Rights (“SARs”)

RSUs that are settled with common shares are valued 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. Compensation expense is recognized on a straight-line basis over the vesting period based on the estimated number of RSU awards that are expected to vest. All RSUs granted have been classified as equity instruments based on the settlement provisions of the stock-based compensation plans.

PSUs that are settled with common shares are valued using the grant date market price of the underlying shares. 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 performance criteria based on the relative total shareholder return on the common shares of Nortel

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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 common shares to be issued for the vested PSUs are determined based on Nortel’s ranking within the Technology Index and can range from 0% to 200%. The estimate of the number of common shares to be issued upon the settlement of vested PSUs is determined using a Monte Carlo simulation model. Compensation expense is recognized on a straight-line basis over the vesting period based on the estimated number of PSU awards that are expected to vest. All PSUs granted have been classified as equity instruments based on the settlement provisions of the stock-based compensation plans.

Grants of SARs that are settled in cash at the option of employees are accounted for as liability awards. Grants of SARs that are settled in stock are accounted for as equity awards.

Grants of DSUs that are settled with stock purchased on the open market are accounted for as liabilities. The value of the liability is remeasured each period based on the cumulative compensation expense recognized for the awards at each period end. This is determined based on the current market price of the underlying stock at period end, the estimated number of DSU awards that are expected to vest calculated in the same manner as equity settled RSUs and the portion of the vesting period that has elapsed. Subsequent to vesting and prior to settlement of the award, changes in Nortel’s payment obligations are based on changes in the stock price and are recorded as compensation expense each period. The payment obligation is established for DSUs on the later of the date of termination of employment and/or directorship.

Stock-based awards, which are substantively discretionary in nature, are measured and recorded fully as compensation expense in the period that the issuance and settlement of the award is approved.

Employee Stock Purchase Plans (“ESPPs”)

Nortel has stock purchase plans for eligible employees in eligible countries, and a stock purchase plan for eligible unionized employees in Canada (collectively, the “ESPPs”), to facilitate the acquisition of common shares of Nortel Networks Corporation at a discount. The discount is such that the plans are considered compensatory under the fair value based method. Nortel’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 stock-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 years ended December 31:

	2005			2004
Net earnings (loss) — reported	$	(2,610	)	$	(247	)
Stock-based compensation — reported		89			117
Stock-based compensation — pro forma(a)		(96	)		(224	)
Net earnings (loss) — pro forma	$	(2,617	)	$	(354	)
Basic earnings (loss) per common share:
Reported	$	(6.02	)	$	(0.57	)
Pro forma	$	(6.03	)	$	(0.82	)
Diluted earnings (loss) per common share:
Reported	$	(6.02	)	$	(0.57	)
Pro forma	$	(6.03	)	$	(0.82	)

(a) Stock-based compensation — pro forma expense for both years ended December 31, 2005 and 2004 was net of tax of nil.

(w)  Recent accounting pronouncements

(i)  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 for any

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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” (“SFAS 140”), 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. Nortel will adopt the provisions of SFAS 155 on January 1, 2007. The implementation of SFAS 155 is not expected to have a material impact on Nortel’s results of operations and financial condition.

(ii)	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. SFAS 156 is effective for fiscal years beginning after September 15, 2006. Nortel will adopt the provisions of SFAS 156 on January 1, 2007. The implementation of SFAS 156 is not expected to have a material impact on Nortel’s results of operations and financial condition.
(iii)	In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 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 will be 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 is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority. FIN 48 is effective for fiscal years beginning after December 15, 2006. Nortel will adopt the provisions of FIN 48 on January 1, 2007. Nortel is currently in the process of assessing the impact of FIN 48. Based on Nortel’s preliminary analysis, it does not expect a significant adjustment to opening accumulated deficit as a result of the adoption of FIN 48. For additional information, see note 8.
(iv)	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 after December 15, 2006. Nortel will adopt the provisions of EITF 06-2 on January 1, 2007. Nortel does not expect the adoption of EITF 06-2 to have a material impact on its results of operations and financial condition.
(v)	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). EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. Nortel will adopt the provisions of EITF 06-3 on January 1, 2007. Nortel does not expect the adoption of EITF 06-3 to have a material impact on the presentation of its results of operations and financial condition.

(vi)  In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides accounting guidance on the definition of fair value and establishes 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 adopt the provisions of

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SFAS 157 on January 1, 2008. Nortel is currently assessing the impact of the adoption of SFAS 157 on its results of operations and financial condition.

(vii)  In September 2006, the EITF reached a consensus on EITF Issue No. 06-1 “Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider” (“EITF 06-1”). EITF 06-1 provides accounting guidance on the consideration given by a service provider to a manufacturer or reseller of specialized equipment for the reduction of the price of such equipment to an end-customer which is necessary for an end-customer to receive service from the service provider. EITF 06-1 is effective for fiscal years beginning after June 15, 2007. Nortel will adopt the provisions of EITF 06-1 on January 1, 2008. Nortel does not expect the adoption of EITF 06-1 to have a material impact on its results of operations and financial condition.

3.   Accounting changes

(a)  The Effect of Contingently Convertible Debt on Diluted Earnings per Share

On September 30, 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“EITF 04-8”), which addresses when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings (loss) per share. EITF 04-8 requires that contingently convertible debt instruments be included in the computation of diluted earnings (loss) per share regardless of whether the market price trigger has been met. EITF 04-8 also requires that prior period diluted earnings (loss) per share amounts presented for comparative purposes be restated. EITF 04-8 became effective for reporting periods ending after December 15, 2004. The adoption of EITF 04-8 did not have a material impact on Nortel’s diluted earnings (loss) per share.

(b)  Implicit Variable Interests

In March 2005, the FASB issued FASB Staff Position (“FSP”), FIN No. 46(R)-5, “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities” (“FSP FIN 46R-5”). FSP FIN 46R-5 provides guidance for a reporting enterprise on determining whether it holds an implicit variable interest in VIEs or potential VIEs when specific conditions exist. This FSP became effective in the first period beginning after March 3, 2005 in accordance with the transition provisions of FIN 46. The adoption of FSP FIN 46R-5 had no material impact on Nortel’s results of operations and financial condition.

(c)  Accounting for Electronic Equipment Waste Obligations

In June 2005, the FASB issued FSP FAS No. 143-1, “Accounting for Electronic Equipment Waste Obligations” (“FSP FAS 143-1”). FSP 143-1 provides guidance on how commercial users and producers of electronic equipment should recognize and measure asset retirement obligations associated with the European Union (“EU”) Directive 2002/96/EC on Waste Electrical and Electronic Equipment. FSP FAS 143-1, along with the EU Directive, effectively obligates a commercial user to accrue costs associated with the retirement of a specified asset that qualifies as historical waste equipment. FSP FAS 143-1 directs the commercial user to apply the provisions of FASB SFAS No. 143, “Accounting for Asset Retirement Obligations”, and the related FASB FIN No. 47, “Accounting for Conditional Asset Retirement Obligations”, to an obligation associated with historical waste. FSP FAS 143-1 applies to the later of Nortel’s fiscal quarter ended June 30, 2005, or the date of the adoption of the law by the applicable EU-member country. In the second, third and fourth quarters of 2005, Nortel adopted FSP FAS 143-1 with respect to those EU-member countries that enacted the directive into country specific laws. The adoption of FSP FAS 143-1 did not have a material impact on Nortel’s results of operations and financial condition for the fiscal years ended December 31, 2006 and 2005. Due to the fact that certain EU-member countries have not yet enacted country-specific laws, Nortel cannot estimate the impact of applying this guidance in future periods.

(d)  The Meaning of Other-than-Temporary Impairment and its Application to Certain Investments

As of January 1, 2006, Nortel adopted EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”), re-titled FSP FAS 115-1 and FAS 124-1, “The Meaning of

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Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1 and FAS 124-1”). The adoption of FSP FAS 115-1 and FAS 124-1 did not have a material impact on Nortel’s results of operations and financial condition.

(e)  Inventory Costs

As of January 1, 2006, Nortel adopted SFAS No. 151, “Inventory Costs” (“SFAS 151”). The adoption of SFAS 151 did not have a material impact on Nortel’s results of operations and financial condition.

(f)  Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. SFAS 123R also modifies certain measurement and expense recognition provisions of SFAS 123 that have an impact Nortel, including the requirement to estimate employee forfeitures each period when recognizing compensation expense and requiring that the initial and subsequent measurement of the cost of liability-based awards each period be based on the fair value (instead of the intrinsic value) of the award. This statement is effective for Nortel as of January 1, 2006. Nortel previously elected to expense employee stock-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 Stock Based Compensation — Transition and Disclosure” (“SFAS 148”). SAB 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 or $0.02 per basic and diluted earnings (loss) per common share 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 19.

(g)  Accounting Changes and Error Corrections

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — an Amendment of APB Opinion No. 28”. SFAS 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS 154 requires retrospective application to prior period financial statements of voluntary changes in accounting principles and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 also requires certain disclosures for restatements due to correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Nortel has adopted SFAS 154 as of January 1, 2006. The impact that the adoption of SFAS 154 will have on Nortel’s consolidated results of operations and financial condition will depend on the nature of future accounting changes adopted by Nortel and the nature of transitional guidance provided in future accounting pronouncements. As of December 31, 2006, Nortel adopted the provisions of SFAS 154 on Nortel’s results of operations and financial condition.

(h)  Accounting for Purchases and Sales of Inventory with the same Counterparty

As of April 1, 2006, Nortel adopted EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (“EITF 04-13”). The adoption of EITF 04-13 did not have a material impact on Nortel’s results of operations and financial condition.

(i)  Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)

As of July 1, 2006, Nortel adopted FSP FIN No. 46(R)-6, “Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”). The adoption of FSP FIN 46(R)-6 did not have a material impact on Nortel’s results of operations and financial condition.

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             (j)   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 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. 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. Based on the funded status of Nortel’s pension and post-retirement benefit plans as of the measurement date, 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. For additional information on Nortel’s pension and post-retirement plans, see note 9.

             (k)   SAB 108 An Interpretation by the SEC Regarding the Process of Quantifying Financial Statement Misstatements

In September 2006, the SEC staff issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements” (“SAB 108”). There are two recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” and “iron curtain” methods. The roll-over method, the method previously used by Nortel, focuses primarily on the material impact of a misstatement on the statement of operations, which can lead to the accumulation of misstatements on the balance sheet that may become material to the balance sheet. The iron curtain method focuses primarily on the effect of correcting for the accumulated misstatements as at the balance sheet date, essentially correcting the balance sheet with less emphasis on the reversing effects of prior year errors on the statement of operations. SAB 108 requires quantification of financial statement misstatements under both the roll-over and iron curtain approaches, referred to as the “dual-approach”. SAB 108 permits companies to initially adopt its provisions by adjusting for the cumulative effect of misstatements related to prior years, previously deemed to be immaterial, in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of accumulated deficit. During the year of adoption, SAB 108 also provides the option of prospective correction of immaterial errors in previously reported quarterly financial statements, that would be reported as comparative information in future filings with the SEC. SAB 108 does not require financial statement reports previously filed with the SEC to be amended. SAB 108 became effective for Nortel’s fiscal year ended December 31, 2006. The provisions of SAB 108 had no material impact to Nortel’s results of operations and financial condition for the year ended December 31, 2006.

4.   Restatement of previously issued financial statements

In the course of the preparation of Nortel’s 2006 financial statements, management identified certain errors primarily through discussions with the Company’s North American pension and post-retirement actuaries and through its ongoing remediation efforts with respect to its material weakness related to revenue recognition and its other previously reported material weaknesses and other internal control deficiencies. As a result, Nortel has restated its consolidated balance sheet as of December 31, 2005 and consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for each of the years ended December 31, 2005 and 2004. The adjustments relate to:

•  Pension and post-retirement benefits errors;

•  Revenue recognition errors;

•  A prior year tax error; and

•  Other errors.

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Notes to Consolidated Financial Statements — (Continued)

The impact of the restatement to periods prior to 2004 was a net increase of $2 to opening accumulated deficit as of January 1, 2004, which was comprised of a decrease of $2, an increase of $22 and a decrease of $18 related to pension and post-retirement errors, revenue recognition errors and other errors, respectively; and a cumulative increase of $59 to accumulated other comprehensive loss related to the pension and post-retirement benefit errors discussed below. The following tables present the impact of the restatement on Nortel’s previously issued consolidated statements of operations for the years ended December 31, 2005 and 2004. The effects of the restatement on the consolidated balance sheet as of December 31, 2005 are shown following the discussion below.

Consolidated Statement of Operations for the year ended December 31, 2005

	As Previously
	Reported(a)			Adjustments			As Restated
Revenues:
Products	$	9,349		$	(11	)	$	9,338
Services		1,174			(3	)		1,171
Total Revenues		10,523			(14	)		10,509
Cost of revenues:
Products		5,576			14			5,590
Services		641			—			641
Total cost of revenues		6,217			14			6,231
Gross profit		4,306			(28	)		4,278
Selling, general and administrative expense		2,413			16			2,429
Research and development expense		1,856			18			1,874
Amortization of intangibles		17			—			17
Special charges		170			(1	)		169
(Gain) loss on sale of businesses and assets		47			—			47
Shareholder litigation settlement expense (recovery)		2,474			—			2,474
Operating earnings (loss)		(2,671	)		(61	)		(2,732	)
Other income — net		303			(8	)		295
Interest expense
Long-term debt		(207	)		(2	)		(209	)
Other		(11	)		1			(10	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(2,586	)		(70	)		(2,656	)
Income tax benefit (expense)		56			25			81
		(2,530	)		(45	)		(2,575	)
Minority interests — net of tax		(50	)		11			(39	)
Equity in net earnings (loss) of associated companies — net of tax		4			(1	)		3
Net earnings (loss) from continuing operations		(2,576	)		(35	)		(2,611	)
Net earnings from discontinued operations — net of tax		1			—			1
Net earnings (loss)	$	(2,575	)	$	(35	)	$	(2,610	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(5.94	)	$	(0.08	)	$	(6.02	)
— from discontinued operations		0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(5.94	)	$	(0.08	)	$	(6.02	)

(a) Commencing in the third quarter of 2006, Nortel disclosed revenues and cost of revenues from both its products and services. Previous years have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation that was effective December 1, 2006.

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Notes to Consolidated Financial Statements — (Continued)

Consolidated Statement of Operations for the year ended December 31, 2004

	As Previously
	Reported(a)			Adjustments			As Restated
Revenues:
Products	$	8,548		$	(37	)	$	8,511
Services		968			(1	)		967
Total Revenues		9,516			(38	)		9,478
Cost of revenues:
Products		5,055			(18	)		5,037
Services		519			—			519
Total cost of revenues		5,574			(18	)		5,556
Gross profit		3,942			(20	)		3,922
Selling, general and administrative expense		2,133			13			2,146
Research and development expense		1,960			15			1,975
Amortization of intangibles		9			—			9
Special charges		181			—			181
(Gain) loss on sale of businesses and assets		(91	)		—			(91	)
Operating earnings (loss)		(250	)		(48	)		(298	)
Other income — net		212			5			217
Interest expense
Long-term debt		(192	)		—			(192	)
Other		(10	)		—			(10	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(240	)		(43	)		(283	)
Income tax benefit (expense)		30			(10	)		20
		(210	)		(53	)		(263	)
Minority interests — net of tax		(46	)		13			(33	)
Net earnings (loss) from continuing operations		(256	)		(40	)		(296	)
Net earnings from discontinued operations — net of tax		49			—			49
Net earnings (loss)	$	(207	)	$	(40	)	$	(247	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.59	)	$	(0.09	)	$	(0.68	)
— from discontinued operations		0.11			—			0.11
Basic and diluted earnings (loss) per common share	$	(0.48	)	$	(0.09	)	$	(0.57	)

(a) Commencing in the third quarter of 2006, Nortel disclosed revenues and cost of revenues from both its products and services. Previous years have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation that was effective December 1, 2006.

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The following table summarizes the restatement adjustments to revenues, cost of revenues, and net earnings (loss).

	Revenues						Cost of revenues						Net earnings (loss)
	2005			2004			2005			2004			2005			2004
As previously reported	$	10,523		$	9,516		$	6,217		$	5,574		$	(2,575	)	$	(207	)
Adjustments:
Pension and post-retirement benefits errors		—			—			15			12			(48	)		(40	)
Revenue recognition errors		(14	)		(38	)		(2	)		(26	)		(9	)		(9	)
Prior period tax error		—			—			—			—			36			—
Other errors		—			—			1			(4	)		(14	)		9
As restated	$	10,509		$	9,478		$	6,231		$	5,556		$	(2,610	)	$	(247	)

Pension and post- retirement benefit errors:

As a result of the previously announced pension plan changes (see note 9 for additional details), third party actuarial firms retained by Nortel performed re-measurements of the U.S. and Canadian pension and post-retirement benefit plans in the third quarter of 2006, at which time one of the firms discovered potential errors (generally originating in the late 1990s) in the historical actuarial calculations they had originally performed for the U.S. pension plan assets. Throughout the fourth quarter of 2006 and into 2007, Nortel investigated these potential errors, including initiating a comprehensive review by Nortel and its third party actuaries of each of its significant pension and post-retirement benefit plans.

As a result, Nortel determined that the accounting for the U.S. pension plan contained a historical adjustment that overstated the actuarial calculation of the market-related value of assets, resulting in a cumulative understatement of pension expense which increased pension and post-retirement benefit expense by $24 for each of 2005 and 2004. In addition, Nortel discovered an error in the Canadian pension plan accounting related to the amortization of unrealized gains within the actuarial calculation of the market-related value of assets over a longer period than permitted under SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”). This error resulted in a cumulative overstatement of pension expense resulting in a $16 and $19 increase in pension and post-retirement benefit expense for 2004 and 2005, respectively. Additionally, as a result of the comprehensive review, errors were identified in the U.S. post-retirement plan. The actuarial valuation omitted certain U.S. retirees in the calculation of post-retirement benefit obligations resulting in a $5 understatement of 2005 pension and post-retirement benefit expense.

The correction of the pension and post-retirement benefit errors, in aggregate, resulted in a net increase in pension and post-retirement benefit expense of $48 and $40 for the years ended December 31, 2005 and 2004, respectively. The $48 increase in pension and post-retirement benefit expense increased cost of revenues, SG&A, and R&D by $15, $16, and $17, respectively for the year ended December 31, 2005. The $40 increase in pension and post-retirement benefit expense increased cost of revenues, SG&A, and R&D by $12, $13, and $15, respectively for the year ended December 31, 2004. The net impact for periods prior to 2004 resulted in a cumulative $2 decrease in pension expense. As a result of the pension and post-retirement errors, Nortel recorded a cumulative $59 increase to other comprehensive loss as of January 1, 2004. The impact of the increase in 2004 and 2005 pension and post-retirement benefit expense, resulted in reductions to the minimum pension liability — net and other comprehensive income of $84 and $41 for 2004 and 2005, respectively.

Revenue recognition errors:

As a result of the significant ongoing remedial efforts to address Nortel’s internal control material weaknesses and other deficiencies, throughout 2006, Nortel identified a number of individually immaterial revenue recognition errors it has now corrected as a result of this restatement.

These errors related principally to complex arrangements with multiple deliverables in which the timing of revenue recognition was determined to be incorrect. For certain of Nortel’s multiple element arrangements where certain elements such as PCS, specified upgrade rights and/or non-essential hardware or software products or services remained undelivered, Nortel determined that the undelivered element could not be treated as a separate unit of accounting because fair value could not be established. Accordingly, Nortel should have deferred revenue, and related costs, until the earlier of the point in time that fair value of the undelivered element could be established or all the remaining elements have

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Notes to Consolidated Financial Statements — (Continued)

been delivered. These corrections resulted in a reduction of revenue of $37 and $27 for 2005 and 2004, respectively, and a decrease to cost of revenues of $4 and $32 for 2005 and 2004, respectively.

Additionally, as part of this restatement, Nortel corrected other revenue recognition errors the most significant of which are described below.

Previous misapplication of SOP 81-1 resulted in errors in revenues recognized in an arrangement between 2003 and 2005. The misapplication related to the calculation of liquidated damages estimated to be incurred as a result of contractual commitments for network outages. Prior to the second quarter of 2006, Nortel estimated its liquidated damages based on a quarterly network outage estimate. In the second quarter of 2006, Nortel determined that it should have been recognizing product credits based on an estimate of the total expected outages for the arrangement. Nortel had previously corrected the resulting revenue errors in the second quarter of 2006 and, as a result of this restatement, has now recorded the correction in the appropriate periods, resulting in an increase in both revenue and gross profit of $16 for 2005 and decreases of $8 and $10 for 2004 and 2003, respectively.

During the fourth quarter of 2005, and throughout 2006, Nortel deferred revenue related to Enterprise products sold by LG-Nortel due to the fact that it believed that LG-Nortel had a practice of providing implicit PCS for which they did not have fair value. A subsequent detailed review of the Enterprise products sold by LG-Nortel led to a conclusion in the second half of 2006 that LG-Nortel did not have a practice of providing implicit PCS for certain Enterprise products. As a result, revenue should have been recognized upon delivery. Nortel has corrected these errors, resulting in an increase in 2005 revenues and cost of revenues of $10, and $6, respectively.

In 2004, Nortel entered into a software arrangement where the customer had the right to suspend payments until delivery of certain future products; therefore, the arrangement fee was not fixed or determinable. Pursuant to SOP 97-2, if at the outset of the arrangement the fee is not fixed or determinable, once all other revenue recognition criteria have been satisfied, revenue should be recognized as payments become due. Previously, the fee was recognized ratably over the term. Due to the lack of a fixed or determinable fee, the amount recognized ratably should have been capped at the amount that was due and payable from the customer. The correction of this error resulted in a decrease in each of 2004 revenues and gross profit of $5, and an increase in 2005 revenues and gross profit of $7.

An error related to the classification between inventories — net and other assets was identified in the fourth quarter of 2006. Nortel identified certain deferred costs that were classified as long-term and included in other assets but that related to arrangements where the associated deferred revenue was recorded as a current liability. Nortel has corrected this error and reclassified these deferred costs as a component of inventory — net, included in current assets. This correction resulted in an increase in inventory — net of $253, and a corresponding decrease of $253 in other assets as at December 31, 2005.

Prior year tax error:

Nortel incorrectly recorded a $36 tax expense in the fourth quarter of 2005 as a consequence of the comparison of tax returns to provisions for prior years. The error was discovered during an internal review of prior period tax returns, and as a result, Nortel’s fourth quarter 2005 tax expense has been restated to reflect the correction of this error, resulting in a $36 increase in the 2005 income tax benefit and a corresponding increase in the 2005 deferred tax asset.

Other errors:

Other errors relate primarily to foreign exchange, certain expenses and misclassifications in the statement of operations and resulted in an increase of $14 and a decrease of $9 to net loss for 2005 and 2004, respectively. The most significant items are discussed in detail below.

In the first quarter of 2006, Nortel identified a foreign exchange translation error in which incorrect foreign exchange rates had been used to record a specific revenue arrangement, resulting in an overstatement of other income — net in 2005 and an understatement in 2004. The correction was made initially in the first quarter of 2006, and, as a result of this restatement, has been recorded in the appropriate periods, resulting in a decrease to other income-net in 2005 of $6, and increases to other income — net in 2004 and 2003 of $3 and $10, respectively.

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Notes to Consolidated Financial Statements — (Continued)

Nortel previously recorded the impact of a property tax assessment reduction of $6 to special charges in 2006 which related to 2005. As a result of this restatement, this error is being corrected and reported as a decrease to 2005 special charges with a corresponding decrease to the real estate restructuring provision. Additionally, Nortel corrected changes in real estate restructuring provisions related to properties in EMEA and severance provisions which related to 2005 but had previously been recorded in the first quarter of 2006. As a result of this restatement, these changes have been recorded in 2005 resulting in a $5 increase in 2005 special charges.

Prior to the fourth quarter of 2006, the preferred share dividends paid by NNL, including the related Canadian taxes, were included as a component of Nortel’s minority interest. Nortel has determined that these taxes should have been recorded as a component of income tax expense. As a result, Nortel has reclassified $11 from minority interest to income tax expense for each of 2005 and 2004.

In 2006, classification errors related to lease expenses were corrected and are now being reversed in the correct reporting periods. These errors involved lease costs that were originally recorded in other income — net and should have been charged to SG&A. The correction of the classification error resulted in an increase of $7 to SG&A for the first quarter of 2006, a reduction of $2 and $2 in 2005 and 2004, respectively, and the remaining correction of $3 to 2003 with offsetting adjustments to other income - net in each period.

Statements of cash flows

Nortel corrected an error related to the classification of cash attributable to an employee trust that should have been classified as restricted cash and cash equivalents. This balance sheet correction resulted in an increase in 2004 cash used in operating activities of $6 for 2004 and a $1 decrease in 2005 cash used in operating activities, with offsetting adjustments to cash flows used in investing activities.

Other than this error, there were no other errors in the cash flow statements for the years ended December 31, 2005 and 2004 other than conforming changes to the components of the reconciliation to net cash used in operating activities related to other restatement adjustments.

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Balance sheet

The following table presents the impact of the restatement adjustments on Nortel’s previously reported consolidated balance sheet as of December 31, 2005.

Consolidated Balance Sheet as of December 31, 2005

	As Previously
	Reported			Adjustments			As Restated
ASSETS
Current assets
Cash and cash equivalents	$	2,951		$	—		$	2,951
Restricted cash and cash equivalents		77			—			77
Accounts receivable — net		2,862			(36	)		2,826
Inventories — net		1,804			276			2,080
Deferred income taxes — net		377			—			377
Other current assets		796			2			798
Total current assets		8,867			242			9,109
Investments		244			—			244
Plant and equipment — net		1,564			(4	)		1,560
Goodwill		2,592			(6	)		2,586
Intangible assets — net		172			—			172
Deferred income taxes — net		3,629			35			3,664
Other assets		1,044			(244	)		800
Total assets	$	18,112		$	23		$	18,135
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	1,180		$	1		$	1,181
Payroll and benefit-related liabilities		801			2			803
Contractual liabilities		346			2			348
Restructuring liabilities		95			4			99
Other accrued liabilities		4,200			32			4,232
Long-term debt due within one year		1,446			—			1,446
Total current liabilities		8,068			41			8,109
Long-term debt		2,439			—			2,439
Deferred income taxes — net		104			—			104
Other liabilities		5,935			2			5,937
Total liabilities		16,546			43			16,589
Minority interests in subsidiary companies		780			3			783
SHAREHOLDERS’ EQUITY
Common shares, without par value		33,932			—			33,932
Additional paid-in capital		3,281			—			3,281
Accumulated deficit		(35,525	)		(77	)		(35,602	)
Accumulated other comprehensive loss		(902	)		54			(848	)
Total shareholders’ equity		786			(23	)		763
Total liabilities and shareholders’ equity	$	18,112		$	23		$	18,135

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Notes to Consolidated Financial Statements — (Continued)

5.   Consolidated financial statement details

The following consolidated financial statement details are presented as of December 31, 2006 and 2005 for the consolidated balance sheets and for each of the three years ended December 31, 2006 for the consolidated statements of operations and consolidated statements of cash flows.

Consolidated statements of operations

Cost of revenues:

In August 2004, Nortel entered into a contract with Bharat Sanchar Nigam Limited (“BSNL”) to establish a wireless network in India. Nortel’s commitments for orders received as of December 31, 2006, 2005 and 2004 under this contract have resulted in estimated project losses in each of these years of approximately $7, $148 and $160, respectively, which were recorded as a charge to cost of revenues and accrued within contractual liabilities in the years ended December 31, 2006, 2005 and 2004.

Selling, general and administrative expense:

SG&A expense included bad debt (expense) recoveries of $(5), $10 and $118 in the years ended December 31, 2006, 2005 and 2004, respectively.

Research and development expense:

	2006		2005		2004
R&D expense	$	1,939	$	1,874	$	1,975
R&D costs incurred on behalf of others(a)		16		28		40
Total	$	1,955	$	1,902	$	2,015

(a) These costs included R&D costs charged to customers of Nortel 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.

Shareholder litigation settlement

Nortel recorded a recovery of $219 and an expense of $2,474 for the years ended December 31, 2006 and 2005, respectively, related to an agreement to settle certain shareholder class action litigation. For additional information see note 21.

Other income — net:

	2006			2005		2004
Interest and dividend income	$	140		$	115	$	92
Gain (loss) on sale or write down of investments		(6	)		67		19
Currency exchange gains (losses)		(12	)		59		65
Other — net		90			54		41
Other income — net	$	212		$	295	$	217

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Notes to Consolidated Financial Statements — (Continued)

Consolidated balance sheets

Accounts receivable — net:

	2006			2005
Trade receivables	$	2,464		$	2,276
Notes receivable		7			87
Contracts in process		402			603
		2,873			2,966
Less: provision for doubtful accounts		(88	)		(140	)
Accounts receivable — net	$	2,785		$	2,826

Inventories — net:

	2006			2005
Raw materials	$	725		$	781
Work in process		11			50
Finished goods		727			817
Deferred costs		1,952			2,048
		3,415			3,696
Less: provision for inventory		(1,007	)		(1,043	)
Inventories — net		2,408			2,653
Less: long-term deferred costs(a)		(419	)		(573	)
Current inventories — net	$	1,989		$	2,080

(a) Long-term portion of deferred costs is included in other assets.

Other current assets:

	2006		2005
Prepaid expenses	$	175	$	203
Income taxes recoverable		64		68
Other		503		527
Other current assets	$	742	$	798

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Notes to Consolidated Financial Statements — (Continued)

Plant and equipment — net:

	2006			2005
Cost:
Land	$	35		$	45
Buildings		1,185			1,261
Machinery and equipment		2,048			2,191
Capital lease assets		215			213
Sale lease-back assets		92			80
		3,575			3,790
Less accumulated depreciation:
Buildings		(444	)		(454	)
Machinery and equipment		(1,488	)		(1,681	)
Capital lease assets		(96	)		(78	)
Sale lease-back assets		(17	)		(17	)
		(2,045	)		(2,230	)
Plant and equipment — net(a)	$	1,530		$	1,560

(a) Includes assets held for sale with a carrying value of $52 and $136 as of December 31, 2006 and 2005, respectively, related to owned facilities that were being actively marketed for sale. These assets were written down in the current and previous periods to their estimated fair values less estimated costs to sell. The write downs were included in special charges. Nortel expects to dispose of all of these assets held for sale during 2007.

Goodwill:

The following table outlines goodwill by reportable segment:

				Mobility and
				Converged			Metro
	Enterprise			Core			Ethernet			Global
	Solutions			Networks			Networks			Services			Other			Total
Balance — as of December 31, 2004	$	413		$	174		$	782		$	934		$	—		$	2,303
Change:
Additions		110			20			14			23			175			342
Disposals		(8	)		—			(14	)		(16	)		—			(38	)
Foreign exchange		(3	)		(4	)		(4	)		(6	)		(4	)		(21	)
Balance — as of December 31, 2005	$	512		$	190		$	778		$	935		$	171		$	2,586
Change:
Additions(a)		9			—			16			18			—			43
Disposals(b)		(9	)		(11	)		(17	)		(19	)		—			(56	)
Foreign exchange		3			4			4			4			—			15
Other		(7	)		(18	)		(13	)		(21	)		—			(59	)(c)
Balance — as of December 31, 2006	$	508		$	165		$	768		$	917		$	171		$	2,529

(a)	The addition of $43 relates to the goodwill acquired as a result of the acquisition of Tasman Networks, Inc. (“Tasman Networks”) in the first quarter of 2006. See note 10 for additional information.
(b)	Includes a disposal of $42 related to the transfer of Nortel’s Calgary manufacturing plant assets to Flextronics International Ltd. (“Flextronics”) in the second quarter of 2006. See note 10 for additional information.
(c)	Primarily relates to reclassifications in goodwill previously recorded as a result of the finalization of the purchase price allocation for Nortel Government Solutions Incorporated (formerly PEC Solutions Inc.) (“NGS”), and LG-Nortel Co. Ltd. (“LG-Nortel”). See note 10 for additional information.

Due to the changes in operating segments and reporting segments in the first and third quarters of 2006 as described in note 6, a triggering event occurred requiring a goodwill impairment test in each of the first and third quarters of 2006 in

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accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Nortel performed these tests and concluded that there was no impairment.

Intangible assets:

	2006			2005
Cost:
Other intangible assets(a)	$	307		$	164
Less accumulated amortization:
Other intangible assets		(66	)		(29	)
Other intangible assets — net		241			135
Pension intangible assets — net		—			37
Intangible assets — net(b)	$	241		$	172

(a)	Other intangible assets are being amortized over a weighted-average period of approximately eight years ending in 2014. Amortization expense for the next five years commencing in 2007 is expected to be $55, $46, $41, $35 and $21, respectively. The majority of amortization expense is denominated in a foreign currency and may fluctuate due to changes in foreign exchange rates.
(b)	The increase related primarily to intangible assets acquired through various business acquisitions. See note 10.

The amortization expense recorded for intangible assets was $26, $17 and $9 for the years ended December 31, 2006, 2005 and 2004, respectively.

Other accrued liabilities:

	2006		2005
Outsourcing and selling, general and administrative related provisions	$	400	$	298
Customer deposits		78		38
Product related provisions		93		51
Warranty provisions (note 13)		217		206
Deferred revenue		1,127		1,275
Miscellaneous taxes		75		61
Income taxes payable		72		77
Interest payable		114		67
Advance billings in excess of revenues recognized to date on contracts(a)		1,352		1,229
Shareholder litigation settlement provision (note 21)		814		804
Other		261		126
Other accrued liabilities	$	4,603	$	4,232

(a) Includes amounts which may be recognized beyond one year due to the duration of certain contracts.

Other liabilities:

	2006		2005
Pension benefit liabilities	$	1,965	$	1,533
Post-employment and post-retirement benefit liabilities		794		936
Restructuring liabilities (note 7)		177		198
Deferred revenue		919		1,081
Shareholder litigation settlement provision (note 21)		1,680		1,899
Other long-term provisions		275		290
Other liabilities	$	5,810	$	5,937

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Notes to Consolidated Financial Statements — (Continued)

Minority interests in subsidiary companies:

	2006		2005
Preferred shares of NNL (Authorized: unlimited number of Class A and Class B)
Series 5, issued November 26, 1996 for consideration of Canadian $400(a)	$	294	$	294
Series 7, issued November 28, 1997 for consideration of Canadian $350(b)		242		242
Other(c)		243		247
Minority interests in subsidiary companies	$	779	$	783

(a)	As of December 31, 2006 and 2005, 16 million Class A Series 5 preferred shares were outstanding. Since December 1, 2001, holders of Series 5 preferred shares are entitled to, if declared, a monthly floating cumulative preferential cash dividend based on Canadian prime rates.
(b)	As of December 31, 2006 and 2005, 14 million Class A Series 7 preferred shares were outstanding. Since December 1, 2002, holders of the Series 7 preferred shares are entitled to, if declared, a monthly floating non-cumulative preferential cash dividend based on Canadian prime rates.
(c)	Other includes minority interests in joint ventures primarily in Europe and Asia.

Consolidated statements of cash flows

Change in operating assets and liabilities:

	2006			2005			2004
Accounts receivable — net	$	51		$	(280	)	$	(16	)
Inventories — net		(42	)		285			(241	)
Deferred costs		97			(538	)		(536	)
Income taxes		(20	)		(58	)		(63	)
Accounts payable		(79	)		189			94
Payroll, accrued and contractual liabilities		(257	)		213			(664	)
Deferred revenue		(229	)		161			573
Advance billings		120			102			331
Restructuring liabilities		(21	)		(149	)		(57	)
Other		(69	)		(142	)		(104	)
Change in operating assets and liabilities	$	(449	)	$	(217	)	$	(683	)

Cash and cash equivalents:

	2006		2005		2004
Cash on hand and balances with banks	$	748	$	767	$	773
Short-term investments		2,744		2,184		2,912
Cash and cash equivalents at end of year	$	3,492	$	2,951	$	3,685

Acquisitions of investments and businesses — net of cash acquired:

	2006			2005			2004
Cash acquired	$	(1	)	$	(26	)	$	(6	)
Total net assets acquired other than cash		(146	)		(651	)		(5	)
Total purchase price		(147	)		(677	)		(11	)
Less:
Cash acquired		1			26			6
Acquisitions of investments and businesses — net of cash acquired	$	(146	)	$	(651	)	$	(5	)

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Notes to Consolidated Financial Statements — (Continued)

Interest and taxes paid (recovered):

	2006		2005		2004
Cash interest paid	$	241	$	203	$	189
Cash taxes paid	$	43	$	48	$	40

6.   Segment information

General description

Commencing in the first quarter of 2006, Nortel’s operations were modified into two product groups: (i) Enterprise Solutions and Packet Networks (“ESPN”), which combined Nortel’s optical networking solutions, data networking and security solutions, and enterprise circuit and packet voice solutions into a unified product group; and (ii) Mobility and Converged Core Networks (“MCCN”), which combined Nortel’s Code Division Multiple Access (“CDMA”) solutions and Global Systems for Mobile communications (“GSM”) and Universal Mobile Telecommunications Systems (“UMTS”) solutions and its carrier circuit and packet voice solutions into a unified product group. In the third quarter of 2006, Nortel further changed the way its operations were organized, with the creation of a new product group, Metro Ethernet Networks (“MEN”), which combines optical networking solutions and the carrier portion of data networking solutions previously included in the ESPN segment. In addition, Nortel established Global Services (“GS”), an operating segment focused on providing a broad range of services and solutions to Nortel’s carrier and enterprise customers.

These organizational changes resulted in changes to Nortel’s reportable segments. Commencing in the third quarter of 2006, MCCN, Enterprise Solutions (“ES”), MEN and GS form Nortel’s reportable segments and are described below. Prior year results have been recast to conform to current segment presentation.

•  MCCN provides mobility networking solutions using (i) CDMA solutions and GSM and UMTS solutions 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 solutions to its service provider customers for business and residential subscribers, including local, toll, long-distance and international gateway capabilities 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. On December 4, 2006, Nortel entered into an agreement for the sale of certain assets and the transfer of certain liabilities related to its UMTS access business to Alcatel-Lucent. The sale was completed on December 31, 2006. See note 10 for additional information.

•  ES provides solutions to enterprise customers using (i) enterprise circuit and packet voice solutions, (ii) data networking and security solutions, which supply data, voice and multi-media communications solutions to Nortel’s enterprise customers, and (iii) software solutions for multi-media messaging, conferencing and call centers. Nortel’s solutions for enterprises are used to build new networks and transform their existing communications networks, into packet-based networks supporting data, voice and multi-media communications. 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 their branch offices, small businesses and home offices, as well as government agencies, educational and other institutions and utility organizations.

•  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 solutions that help service providers and enterprises better manage increasing bandwidth demands. Nortel believes that ethernet technology is particularly suited to these solutions and is integrating ethernet with Nortel’s optical technology. In addition to increased capacity and lower cost per bit, Nortel differentiates its MEN products on the basis of being able to deliver carrier-grade reliability. The metropolitan, or metro, network is a key focus area as bandwidth demands are increasing as a result of the growth of network based broadcast and on-

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demand video delivery, wireless “backhaul” for a variety of data services including video as well as traditional business, internet, private line and voice services. MEN serves the long haul optical market using common products and technologies from the metro optical market. MEN also serves high performance, mission critical enterprise networks.

•  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 web 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 small and medium-sized businesses, to large global enterprises and all levels of government. Revenues from network implementation services including network planning, engineering and installation are generally bundled with product sales and are not currently included in the revenues of GS.

Other miscellaneous business activities and corporate functions including the operating results from the acquisition 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 and other corporate costs are allocated to Nortel’s reportable segments based on usage determined generally by headcount. Costs not allocated to the segments are primarily related to Nortel’s corporate compliance, 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 the performance of the segments and the allocation of resources to the segments. The primary financial measure used by the CEO in assessing performance and allocating resources to the segments is management earnings (loss) before income taxes (“Management EBT”), a measure that includes the cost of revenues, SG&A expense, R&D expense, interest expense, other income (expense) — 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”. The CEO does not review asset information on a segmented basis in order to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those applied to the consolidated financial statements.

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Notes to Consolidated Financial Statements — (Continued)

Segments

The following tables set forth information by segment for the years ended December 31:

	2006			2005			2004
Revenues
Mobility and Converged Core Networks	$	5,922		$	5,680		$	5,237
Enterprise Solutions		2,340			2,105			1,943
Metro Ethernet Networks		1,670			1,408			1,158
Global Services		1,242			1,170			1,129
Total reportable segments		11,174			10,363			9,467
Other		244			146			11
Total revenues	$	11,418		$	10,509		$	9,478
Management EBT
Mobility and Converged Core Networks	$	517		$	504		$	269
Enterprise Solutions		(75	)		93			59
Metro Ethernet Networks		34			(102	)		(336	)
Global Services		333			354			329
Total reportable segments		809			849			321
Other		(1,002	)		(834	)		(538	)
Total Management EBT		(193	)		15			(217	)
Amortization of intangibles		(26	)		(17	)		(9	)
In-process research and development expense		(22	)		—			—
Special charges		(105	)		(169	)		(181	)
Gain (loss) on sale of businesses and assets		206			(47	)		91
Shareholder litigation settlement (expense) recovery		219			(2,474	)		—
Income tax benefit (expense)		(60	)		81			20
Net earnings (loss) from continuing operations	$	19		$	(2,611	)	$	(296	)

Product and service revenues

The following table sets forth external revenues by product and service for the years ended December 31:

	2006		2005		2004
CDMA solutions	$	2,512	$	2,181	$	2,103
GSM and UMTS solutions		2,413		2,615		2,203
Circuit and packet voice solutions		2,625		2,361		2,240
Optical networking solutions		1,186		1,008		805
Data networking and security solutions		1,196		1,028		987
Global services		1,242		1,170		1,129
Other		244		146		11
Total	$	11,418	$	10,509	$	9,478

During the year ended December 31, 2006, Nortel had one customer, Verizon Communications Inc., which generated revenues of approximately $1,416 or 12.4% of total consolidated revenues. The revenues did not relate specifically to one of Nortel’s reportable segments, but rather were generated throughout all of Nortel’s reportable segments. For the years ended December 31, 2005 and 2004, no customer generated revenues greater than 10 percent of consolidated revenues.

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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:

	2006		2005		2004
U.S.	$	5,092	$	5,203	$	4,645
Europe, Middle East and Africa (“EMEA”)		3,239		2,704		2,483
Canada		720		571		552
Asia		1,736		1,422		1,238
CALA		631		609		560
Total	$	11,418	$	10,509	$	9,478

Long-lived assets

The following table sets forth long-lived assets representing plant and equipment — net, goodwill and other intangible assets — net by geographic region as of December 31:

	2006		2005
U.S.	$	2,940	$	2,917
EMEA		428		474
Canada		627		700
Other regions(a)		305		227
Total	$	4,300	$	4,318

(a) The Asia and CALA regions.

7.   Special charges

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 includes workforce reductions of approximately 1,900 employees (the “2006 Restructuring Plan”). The workforce reductions are expected to include approximately 350 middle management positions throughout the company, with the balance of the workforce reductions to primarily occur in the U.S. and Canada and span all of Nortel’s segments. Nortel estimates the total charges to earnings and cash associated with the 2006 Restructuring Plan will be approximately $100, to be expensed over fiscal 2006 and 2007, of which $68 were incurred in 2006.

In the third quarter of 2004, Nortel announced a strategic work plan that involves focused workforce reductions, including a voluntary retirement program, of approximately 3,250 employees, real estate optimization and other cost containment actions such as reductions in information services costs, outsourced services and other discretionary spending across all segments (the “2004 Restructuring Plan”). Nortel estimates that aggregate charges to earnings associated with the 2004 Restructuring Plan will be approximately $410, comprised of approximately $240 with respect to the workforce reductions and approximately $170 with respect to the real estate actions. Approximately $365 of the aggregate charges relating to the 2004 Restructuring Plan has been incurred as of December 31, 2006. Substantially all of the charges with respect to the workforce reductions have been incurred, with the remainder of the charges relating to ongoing lease costs related to impacted real estate facilities related to the 2004 Restructuring Plan are to be substantially incurred by the end of 2018.

During 2001, Nortel implemented a work plan to streamline operations and activities around core markets and leadership strategies (the “2001 Restructuring Plan”). Under the 2001 Restructuring Plan, as described below, activities were initiated in 2003 to exit certain leased facilities and leases for assets no longer used across all segments. The liabilities associated with these activities were measured at fair value and recognized under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).

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Notes to Consolidated Financial Statements — (Continued)

During the years ended December 31, 2006, 2005 and 2004, Nortel continued to implement these restructuring work plans. Special charges recorded from January 1, 2004 to December 31, 2006 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
2004 Restructuring Plan
Provision balance as of January 1, 2004	$	—		$	—		$	—		$	—
Other special charges		163			—			2			165
Cash drawdowns		(38	)		—			—			(38	)
Non-cash drawdowns		—			—			(2	)		(2	)
Foreign exchange and other adjustments		(1	)		—			—			(1	)
Provision balance as of December 31, 2004	$	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
2001 Restructuring Plan
Provision balance as of January 1, 2004	$	66		$	460		$	—		$	526
Other special charges		7			—			—			7
Revisions to prior accruals		(4	)		13			—			9
Cash drawdowns		(49	)		(167	)		—			(216	)
Non-cash drawdowns		(4	)		—			—			(4	)
Foreign exchange and other adjustments		(1	)		18			—			17
Provision balance as of December 31, 2004	$	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
Other special charges		—			—			—			—
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
Total provision balance as of December 31, 2006(a)	$	43		$	231		$	—		$	274

(a) As of December 31, 2006 and 2005, the short-term provision balances were $97 and $99, respectively, and the long-term provision balances were $177 and $198, respectively.

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Notes to Consolidated Financial Statements — (Continued)

The following table summarizes the total special charges incurred for each of Nortel’s restructuring plans:

	2006		2005			2004		Total
Special Charges by Restructuring Plan:
2006 Restructuring Plan	$	68	$	—		$	—	$	68
2004 Restructuring Plan		20		180			165		365
2001 Restructuring Plan		17		(11	)		16		22
Total	$	105	$	169		$	181	$	455

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 2004		200		1,700		1,900
During 2005		61		893		954
During 2006		22		520		542
RFT employee notifications for the three years ended December 31, 2006		283		3,113		3,396

(a)	Direct employees included employees performing manufacturing, assembly, test and inspection activities associated with the production of Nortel’s products.
(b)	Indirect employees included employees performing manufacturing, management, sales, marketing, research and development and administrative activities.

2006 Restructuring Plan

Year ended December 31, 2006

For the year ended December 31, 2006, Nortel recorded special charges of $68 related to severance and benefit costs associated with a workforce reduction of approximately 910 employees, of which 542 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 MCCN and ES business segments. The remaining provision is expected to be substantially drawn down by the end of 2007.

2006 Restructuring Plan — by Segment

The following table outlines special charges incurred by segment related to the 2006 Restructuring Plan for the year ended December 31, 2006:

			Plant and
	Workforce		Equipment
	Reduction		Write Downs		Total
2006 Restructuring Plan
Mobility and Converged Core Networks	$	37	$	1	$	38
Enterprise Solutions		14		—		14
Metro Ethernet Networks		7		—		7
Global Services		3		—		3
Other		6		—		6
Total special charges for the year ended December 31, 2006	$	67	$	1	$	68

2004 Restructuring Plan

Year ended December 31, 2006

During the year ended December 31, 2006, Nortel recorded revisions of $20 related to prior accruals.

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Notes to Consolidated Financial Statements — (Continued)

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 MCCN 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. The remaining provision, net of approximately $34 in estimated sublease income, is expected to be substantially drawn down by the end of 2018.

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 MCCN 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.

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.

Year ended December 31, 2004

Workforce reduction charges of $163 were related to severance and benefit costs associated with approximately 1,850 employees, of which 1,800 had been notified of termination during 2004. The remaining charge related to termination benefits attributable to ongoing employee benefit arrangements. The workforce reduction was primarily in the U.S., Canada and EMEA and extended across all segments.

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Notes to Consolidated Financial Statements — (Continued)

2004 Restructuring Plan — by Segment

The following table outlines special charges incurred by segment for each of the three years ended December 31:

				Contract
				Settlement		Plant and
	Workforce			and Lease		Equipment
	Reduction			Costs		Write Downs		Total
2004 Restructuring Plan
Mobility and Converged Core Networks	$	(1	)	$	4	$	6	$	9
Enterprise Solutions		—			1		2		3
Metro Ethernet Networks		—			3		5		8
Global Services		—			—		—		—
Other		—			—		—		—
Total special charges for the year ended December 31, 2006	$	(1	)	$	8	$	13	$	20
Mobility and Converged Core Networks	$	49		$	53	$	22	$	124
Enterprise Solutions		9			12		6		27
Metro Ethernet Networks		10			12		2		24
Global Services		2			2		1		5
Other		—			—		—		—
Total special charges for the year ended December 31, 2005	$	70		$	79	$	31	$	180
Mobility and Converged Core Networks	$	108		$	—	$	2	$	110
Enterprise Solutions		14			—		—		14
Metro Ethernet Networks		29			—		—		29
Global Services		—			—		—		—
Other		12			—		—		12
Total special charges for the year ended December 31, 2004	$	163		$	—	$	2	$	165

2001 Restructuring Plan

Year ended December 31, 2006

During the year ended December 31, 2006, Nortel recorded revisions of $16 for contract settlements and lease costs. The remaining provision, net of approximately $144 in estimated sublease income, is expected to be substantially drawn down by the end of 2013.

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. The remaining provision, net of approximately $183 in estimated sublease income, is expected to be substantially drawn down by the end of 2013.

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.

Year ended December 31, 2004

Workforce reduction charges of $7 were related to severance and benefit costs associated with approximately 80 employees notified of termination. The workforce reduction occurred in Canada and related entirely to the MCCN segment.

No new contract settlement and lease costs were incurred during 2004. Revisions to prior accruals of $13 resulted primarily from changes in estimates for sublease income and costs to vacate certain properties, across all segments.

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Notes to Consolidated Financial Statements — (Continued)

2001 Restructuring Plan — by Segment

The following table outlines special charges incurred by segment for each of the three years ended December 31:

				Contract
				Settlement			Plant and
	Workforce			and Lease			Equipment
	Reduction			Costs			Write Downs			Total
2001 Restructuring Plan
Mobility and Converged Core Networks	$	1		$	11		$	—		$	12
Enterprise Solutions		—			3			—			3
Metro Ethernet Networks		—			2			—			2
Global Services		—			—			—			—
Total special charges for the year ended December 31, 2006	$	1		$	16		$	—		$	17
Mobility and Converged Core Networks	$	(3	)	$	(2	)	$	4		$	(1	)
Enterprise Solutions		(2	)		(1	)		1			(2	)
Metro Ethernet Networks		—			—			(8	)		(8	)
Global Services		—			—			—			—
Total special charges for the year ended December 31, 2005	$	(5	)	$	(3	)	$	(3	)	$	(11	)
Mobility and Converged Core Networks	$	2		$	9		$	—		$	11
Enterprise Solutions		1			2			—			3
Metro Ethernet Networks		—			1			—			1
Global Services		—			1			—			1
Total special charges for the year ended December 31, 2004	$	3		$	13		$	—		$	16

As described in note 6, 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 table above based generally on headcount.

8.   Income taxes

As of December 31, 2006, Nortel’s net deferred tax assets were $4,042, 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 and capital loss carry forwards and tax credit carry forwards.

In accordance with SFAS 109, Nortel reviews all available positive and negative evidence to evaluate the recoverability of the 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 is subject to ongoing examinations by certain tax authorities of the jurisdictions in which it operates. Nortel regularly assesses the status of these 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 $71 for the taxation years of 1999 and 2000. In addition, the tax authorities in France commenced negotiations to settle the proposed assessments in respect of the 2001, 2002 and 2003 taxation years. These assessments collectively propose adjustments to taxable income of approximately $1,099, additional income tax liabilities of $43 inclusive of interest as well as certain adjustments to withholding and other taxes of approximately $72 plus applicable interest and penalties. Nortel made an offer of settlement to the French tax authorities, which was significantly less than the assessed amount, for the purpose of accelerating the settlement process to either the courts or competent authority proceedings under the Canada-France tax treaty. Nortel believes that it has adequately provided for tax adjustments that are probable as a result of any ongoing or future examinations.

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Notes to Consolidated Financial Statements — (Continued)

Nortel had previously entered into Advance Pricing Arrangements (each an “APA”) 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. Nortel continues to monitor the progress of these negotiations, however Nortel 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 currently in discussions with the tax authorities regarding the application of the APAs to the 2006 taxation year. Nortel continues to apply the transfer pricing methodology proposed in the APAs to its current year financial statements and intends to file its 2006 corporate income tax returns consistent with the methodology described in its APA requests.

The outcome of the APA applications is uncertain and possible additional losses, as they relate to the APA negotiations, cannot be determined at this time. However, Nortel does not believe it is probable that the ultimate resolution of these negotiations will have a material adverse effect on its consolidated financial position, results of operations or 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.

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Notes to Consolidated Financial Statements — (Continued)

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:

	2006			2005			2004
Income taxes at Canadian rates (2006 — 34%, 2005 — 34.5%, 2004 — 33.3%)	$	(48	)	$	916		$	94
Difference between Canadian rates and rates applicable to subsidiaries in the U.S. and other jurisdictions		2			34			(2	)
Valuation allowances on tax benefits		(883	)		(163	)		(204	)
Utilization of losses		36			18			2
Tax benefit of investment tax credits, net of valuation allowance		47			39			43
Shareholder litigation settlement		749			(854	)		—
Adjustments to provisions and reserves		(2	)		141			25
Foreign withholding and other taxes		(28	)		(23	)		(24	)
Corporate minimum taxes		(3	)		(14	)		(8	)
Impact of non-taxable/(non-deductible) items and other differences		70			(13	)		94
Income tax benefit (expense)	$	(60	)	$	81		$	20
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 sale of businesses and assets	$	(434	)	$	(2,652	)	$	(318	)
U.S. and other, excluding gain (loss) on sale of businesses and assets		369			43			(56	)
Gain (loss) on sale of businesses and assets		206			(47	)		91
	$	141		$	(2,656	)	$	(283	)
Income tax benefit (expense):
Canadian, excluding gain (loss) on sale of businesses and assets	$	16		$	10		$	5
U.S. and other, excluding gain (loss) on sale of businesses and assets		(73	)		71			15
Gain (loss) on sale of businesses and assets		(3	)		—			—
	$	(60	)	$	81		$	20
Income tax benefit (expense):
Current	$	(29	)	$	(35	)	$	(27	)
Deferred		(31	)		116			47
Income tax benefit (expense)	$	(60	)	$	81		$	20
Details of movement in valuation allowance
Opening Valuation Allowance	$	(3,429	)	$	(3,718	)	$	(3,441	)
Amounts charged to income tax benefit (expense)		(847	)		(148	)		(202	)
Amounts charged to other comprehensive loss		66			(58	)		(32	)
Other (additions)/ deductions(a)		(221	)		495			(43	)
Closing Valuation Allowance	$	(4,431	)	$	(3,429	)	$	(3,718	)

(a) Other additions and deductions represent the net impacts of foreign exchange, deferred tax assets that expired during the period, tax rate changes, and tax return and other adjustments.

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The following table shows the significant components included in deferred income taxes as of December 31:

	2006			2005
Assets:
Tax benefit of loss carryforwards	$	4,609		$	4,486
Investment tax credits, net of deferred tax liability		1,358			1,174
Provisions and reserves		750			786
Post-retirement benefits other than pensions		288			306
Plant and equipment		216			96
Pension plan liabilities		622			610
Deferred compensation		153			256
Shareholder lawsuit settlement		749			—
		8,745			7,714
Valuation allowance		(4,431	)		(3,429	)
		4,314			4,285
Liabilities:
Provisions and reserves		104			108
Plant and equipment		35			34
Unrealized foreign exchange and other		133			206
		272			348
Net deferred income tax assets	$	4,042		$	3,937

Nortel recorded no tax benefit in 2005 relating to the shareholder litigation settlement (see note 21) since at that time, the determination of the amount of the settlement that was deductible for income tax purposes could not be reasonably determined as the definitive agreements in respect of the settlement were not concluded. Such agreements were concluded in 2006, and although there continues to be some uncertainty as to the full extent of deductibility of the settlement amount, Nortel has included the full shareholder settlement expense in its components of deferred tax assets at December 31, 2006. Nortel has, however, provided a full valuation allowance against this asset since there is some uncertainty as to whether Nortel can generate sufficient profits in future years to sustain this benefit.

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 these earnings. 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 $300 in respect of the 1994 through to 1996 taxation years have expired, and are not included in the deferred tax assets as of December 31, 2006. Nortel can restore a significant amount of the deferred tax assets by executing a certain tax planning strategy that involves filing amended tax returns.

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As of December 31, 2006, 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)		Total
2006 - 2008	$	65	$	8	$	236	$	309
2009 - 2011		2,133		—		674		2,807
2012 - 2018		640		7		393		1,040
2019 - 2026		3,154		—		393		3,547
Indefinitely		2,547		4,970		—		7,517
	$	8,539	$	4,985	$	1,696	$	15,220

(a)	The capital losses related primarily to the United Kingdom (“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 $47, $39 and $43 have been applied against the income tax provision in 2006, 2005 and 2004, respectively. Unused tax credits can be utilized to offset deferred taxes payable primarily in Canada.

9.   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 four kinds of capital accumulation and retirement programs: balanced capital accumulation and retirement programs (the “Balanced Program”) and investor capital accumulation and retirement programs (the “Investor Program”) available to substantially all of its North American employees; 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 capital accumulation and retirement programs that include defined benefit pension plans (the “Traditional Program”) which are closed to new entrants in the U.K. and portions of which are closed to new entrants in the U.S. and Canada. Although these four kinds of 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 in the Traditional Program are eligible for their existing company sponsored post-retirement benefits or a modified version of these benefits, depending on age or years of service. Employees in the Balanced Program are eligible for post-retirement benefits at reduced company contribution levels, while employees in the Investor Program 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 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 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 will reallocate employees currently enrolled in its defined benefit pension plans to defined contribution plans. In addition, Nortel will eliminate post-retirement healthcare benefits for employees who are not age 50 with five years of service as of July 1, 2006. As a result of these changes Nortel re-measured its pension and post-retirement benefit obligations related to its North American plans as of the date its Board of Directors approved such changes and recorded the impacts of this re-measurement in the third quarter of 2006 in accordance with SFAS 88 and SFAS 106. Plan changes approved by Nortel’s Board of Directors and changes to key assumptions as a result of the re-measurement resulted in a curtailment gain of approximately $34 for both the pension and post-retirement benefit plans. In addition, Nortel was required to adjust the minimum pension liability for certain plans, representing the amount by which the accumulated benefit obligation less the fair value of the plan assets was greater than the recorded liability. The

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effect of this adjustment and the related foreign currency translation adjustment was to decrease accumulated other comprehensive loss (before tax) by $198, decrease intangible assets by $14 and decrease pension liabilities by $212.

For the year end measurement, the impact of changes in discount rates and other accounting assumptions more than offset the favorable impacts of strong pension asset returns and the contributions made by Nortel. As a result, Nortel was required to adjust the minimum pension liability for certain plans, representing the amount by which the accumulated benefit obligation less the fair value of the plan assets was greater than the recorded liability. The effect of this adjustment and the related foreign currency translation adjustment was to increase accumulated other comprehensive loss (before tax) by $68, decrease intangible assets by $4 and increase pension liabilities by $64.

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 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	$	686		$	3		$	689
Deferred tax assets — long term	$	3,803		$	60		$	3,863
Payroll and benefit liabilities — current	$	(868	)	$	228		$	(640	)
Other liabilities — long term	$	(5,398	)	$	(412	)	$	(5,810	)
Accumulated other comprehensive loss	$	479		$	142		$	621

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	$	(7	)	$	(3	)
Net actuarial loss (gain)	$	102	$	(1	)	$	101

The following table illustrates the amounts in accumulated other comprehensive income (loss) - before tax, that have not yet been recognized as components of pension expense:

	Defined Benefit		Post-Retirement
	Pension Plan		Benefits			Total
Amounts recognized in accumulated other comprehensive income (loss) — before tax — consists of:
Prior service cost (credit)	$	13	$	(71	)	$	(58	)
Net actuarial loss (gain)		1,475		(2	)		1,473
Total amount recognized	$	1,488	$	(73	)	$	1,415

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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
	2006			2005			2006			2005
Change in benefit obligation:
Benefit obligation — beginning	$	8,952		$	8,311		$	883		$	761
Service cost		130			123			6			8
Interest cost		462			458			42			44
Plan participants’ contributions		6			6			10			8
Plan amendments		—			3			(63	)		—
Actuarial loss (gain)		40			835			(170	)		87
Acquisitions/divestitures/settlements		—			9			—			—
Special and contractual termination benefits		13			21			—			—
Curtailments		(337	)		9			—			(1	)
Benefits paid		(599	)		(541	)		(42	)		(43	)
Foreign exchange		543			(282	)		4			19
Benefit obligation — ending	$	9,210		$	8,952		$	670		$	883
Change in plan assets:
Fair value of plan assets — beginning	$	6,456		$	6,105		$	—		$	—
Actual return on plan assets		551			919			—			—
Employer contributions		323			174			32			35
Plan participants’ contributions		6			6			10			8
Acquisitions/divestitures/settlements		—			(4	)		—			—
Benefits paid		(599	)		(541	)		(42	)		(43	)
Foreign exchange		402			(203	)		—			—
Fair value of plan assets — ending	$	7,139		$	6,456		$	—		$	—
Funded status of the plans	$	(2,071	)	$	(2,496	)	$	(670	)	$	(883	)
Unrecognized prior service cost (credit)		—			16			—			(44	)
Unrecognized net actuarial losses (gains)		—			2,076			—			168
Contributions after measurement date		71			40			9			4
Net amount recognized	$	(2,000	)	$	(364	)	$	(661	)	$	(755	)
Amounts recognized in the accompanying consolidated balance sheets consist of:
Other liabilities — long-term	$	(1,965	)	$	(1,533	)	$	(625	)	$	(735	)
Other liabilities — current		(40	)		(332	)		(36	)		(20	)
Intangible assets — net		—			37			—			—
Other assets		5			2			—			—
Foreign currency translation adjustment		—			180			—			—
Accumulated other comprehensive loss		—			1,282			—			—
Net amount recognized	$	(2,000	)	$	(364	)	$	(661	)	$	(755	)

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:

	2006		2005
Projected benefit obligation	$	9,194	$	8,938
Accumulated benefit obligation	$	8,914	$	8,312
Fair value of plan assets	$	7,117	$	6,438

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The following details the net pension expense, all related to continuing operations, and the underlying assumptions for the defined benefit plans for the years ended December 31:

	2006			2005			2004
Pension expense:
Service cost	$	130		$	123		$	122
Interest cost		462			458			422
Expected return on plan assets		(457	)		(405	)		(388	)
Amortization of prior service cost		2			2			4
Amortization of net losses		130			118			94
Curtailment losses (gains)		(6	)		12			—
Special and Contractual termination benefits		13	(a)		21			7
Net pension expense	$	274		$	329		$	261
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate		5.1	%		5.1	%		5.7	%
Rate of compensation increase		4.5	%		4.4	%		4.5	%
Weighted-average assumptions used to determine net pension expense for years ended December 31:
Discount rate		5.1	%		5.7	%		5.8	%
Expected rate of return on plan assets		7.2	%		7.4	%		7.4	%
Rate of compensation increase		4.4	%		4.5	%		4.2	%

(a) For 2006, special and contractual termination benefits are the result of certain business divestitures and restructuring plan workforce reduction initiatives.

The following details the amounts included within accumulated other comprehensive income (loss), including foreign currency translation adjustments, for the years ended December 31:

	Defined Benefit Plans
	2006			2005
Increase (decrease) in minimum pension liability adjustment included in other comprehensive income (loss)	$	(130	)	$	172

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:

	2006			2005			2004
Post-retirement benefit cost:
Service cost	$	6		$	8		$	9
Interest cost		42			44			43
Amortization of prior service cost		(5	)		(4	)		(3	)
Amortization of net losses (gains)		1			3			2
Curtailment losses (gains)		(29	)		—			—
Net post-retirement benefit cost	$	15		$	51		$	51
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate		5.4	%		5.4	%		5.9	%
Weighted-average assumptions used to determine net post-retirement benefit cost for years ended December 31:
Discount rate		5.4	%		5.9	%		6.0	%
Weighted-average health care cost trend rate		8.0	%		7.8	%		8.3	%
Weighted-average ultimate health care cost trend rate		4.8	%		4.8	%		4.8	%

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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:

	2006			2005			2004
Effect on aggregate of service and interest costs
1% increase	$	4		$	5		$	5
1% decrease	$	(3	)	$	(4	)	$	(4	)
Effect on accumulated post-retirement benefit obligations
1% increase	$	43		$	86		$	67
1% decrease	$	(36	)	$	(70	)	$	(55	)

As of December 31, 2006, 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)
2007	$	496	$	46	$	2
2008	$	495	$	46	$	2
2009	$	505	$	47	$	2
2010	$	518	$	47	$	3
2011	$	532	$	48	$	3
2012-2016	$	2,894	$	229	$	20

The target allocation percentages and the year-end percentages based on actual asset balances of the defined benefit plans as of December 31 are as follows:

	2006						2005
	Target			Actual			Target			Actual
Debt instruments		43	%		43	%		43	%		41	%
Equity securities		56	%		54	%		56	%		57	%
Other		1	%		3	%		1	%		2	%

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 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 common shares of Nortel Networks Corporation, held directly or through pooled funds, with an aggregate market value of $4 (0.1 percent of total plan assets) and $5 (0.1 percent of total plan assets) as of December 31, 2006 and 2005, 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,

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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 $365 in 2007 to the defined benefit plans and approximately $36 in 2007 to the post-retirement benefit plans.

Under the terms of the Balanced Program, Investor Program and Traditional Program, eligible employees may contribute a portion of their compensation to an investment plan. Based on the specific program that the employee is enrolled in, Nortel matches a percentage of the employee’s contributions up to a certain limit. The cost of these investment plans was $76, $67 and $75 for the years ended December 31, 2006, 2005 and 2004, respectively.

Under the terms of the Balanced Program and Flexible Benefits Plan, Nortel contributes a fixed percentage of employees’ eligible earnings to a defined contribution plan arrangement. The cost of these plan arrangements was $23, $20 and $20 for the years ended December 31, 2006, 2005 and 2004, respectively.

10.   Acquisitions, divestitures and closures

Acquisitions

Tasman Networks Inc.

On February 24, 2006, Nortel completed the acquisition of Tasman Networks for approximately $99 in cash and assumed liabilities. Tasman Networks is an established communication equipment provider that sells secure, high performance, wide area network IP routers and converged service routers. 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. 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.

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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. (“LG”), the business venture named “LG-Nortel”. Certain assets of Nortel’s South Korean distribution and services business were combined with the service business and certain assets of LG’s telecommunications infrastructure business. In exchange for a cash contribution of $155 paid to LG, Nortel received 50% plus one share of the equity in LG-Nortel. LG also received 50% less one share of the equity in the business venture. The purpose of the business venture was to create a world-class telecommunications systems and related solutions supplier that leverages the product portfolio, quality, reputation, and global brands of Nortel and LG. The business venture will focus primarily on providing solutions to the Korean carrier and enterprise market as well as leveraging LG’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.

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 use of the ‘Nortel’ trademark and the other from LG which allows the use of the ‘LG’ trademark. Both agreements grant the worldwide non-exclusive use of each respective company’s 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, LG will be 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.

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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. In previous quarters 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 LG 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 (formerly PEC Solutions, Inc.)

On June 3, 2005, Nortel Networks Inc. (“NNI”), an indirect subsidiary of Nortel, indirectly acquired approximately 26,693,725 shares of NGS (formerly PEC Solutions, Inc.), representing approximately 95.6 percent 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 percent 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 15).

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.

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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.

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, 2004, with pro forma adjustments to give effect to amortization of intangible assets and certain other adjustments:

	2005			2004
Revenues	$	10,618		$	9,685
Net earnings (loss)	$	(2,619	)	$	(236	)
Basic earnings (loss) per common share	$	(6.03	)	$	(0.54	)
Diluted earnings (loss) per common share	$	(6.03	)	$	(0.54	)

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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 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 has recorded additional liabilities of $26, 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 December 31, 2008 and December 31, 2010, respectively.

Nortel has recorded a net gain of $166 and deferred income of $5 primarily due to contingent liabilities related to a loss-sharing arrangement based on 2007 operating results.

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 will manage in excess $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, Canada and Chateaudun, France. In the second quarter of 2006, Nortel completed the transfer of the manufacturing operations and related assets including product integration, testing, and repair and logistics operations of its Calgary, Canada manufacturing operations to Flextronics, representing the final transfer of substantially all of Nortel’s manufacturing and related operations to Flextronics.

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, 2006. 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, 2006, Nortel had transferred approximately $404 of inventory and equipment to Flextronics relating to the transfer of the optical design activities in Ottawa and Monkstown and the manufacturing activities in Montreal, Chateaudun and Calgary. As Flextronics has the ability to exercise rights to sell back to Nortel certain inventory and equipment after the expiration of a specified period (up to fifteen months) following each respective transfer date, Nortel has retained these assets on its balance sheet to the extent they have not been consumed as part of ongoing operations as

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at December 31, 2006. Nortel does not expect that rights will be exercised with respect to any material amount of inventory and/or equipment. Nortel does not expect to record any material gain on this transaction.

Directory and operator services business

On August 2, 2004, Nortel completed the contribution of certain fixed assets, intangible assets including customer contracts, software and other licenses, and liabilities of its directory and operator services (“DOS”) business to VoltDelta Resources LLC (“VoltDelta”), a wholly owned subsidiary of Volt Information Sciences, Inc. (“VIS”), in return for a 24 percent interest in VoltDelta which was valued at $57. After a period of two years, Nortel and VIS each have an option to cause Nortel to sell its VoltDelta shares to VIS for proceeds ranging from $25 to $70. As a result of this transaction, approximately 160 Nortel DOS employees in North America and Mexico joined VoltDelta. This non-monetary exchange was recorded at fair value, and Nortel recorded a gain of $30 within sale of businesses and assets during 2004.

On December 28, 2005, VoltDelta entered into a Letter of Agreement to repurchase a 24% minority interest in it held by Nortel for an aggregate purchase price of approximately $62. The terms of the Letter of Agreement included VoltDelta paying Nortel $25 on December 29, 2005, and issuing a promissory note in the amount of $37 which was paid in full on February 15, 2006. The sale resulted in a net gain of approximately $7 for the year ended December 31, 2005. As of December 31, 2006, Nortel did not hold any ownership interest in VoltDelta. Nortel continues to provide transitional services to VoltDelta over the initial agreement period of ten years with no additional material financial impact to Nortel.

Optical components operations

In 2002, Nortel sold certain plant and equipment, inventory, patents and other intellectual property and trademarks relating to its optical components business to Bookham, Inc. (“Bookham”). Included in the sale was the transfer of Nortel’s transmitter and receiver, pump laser and amplifier businesses located in Paignton, U.K., Harlow, U.K., Ottawa, Canada, Zurich, Switzerland and Poughkeepsie, New York. Nortel also transferred approximately 1,200 employees to Bookham in the transaction. The transaction included a minimum purchase commitment with Bookham requiring Nortel to purchase approximately $120 of product from Bookham between November 8, 2002 and March 31, 2004.

On December 2, 2004, Nortel and Bookham entered into a restructuring agreement which, among other changes, extended the maturity date of a $25.9 principal amount senior secured note of Bookham (the “Series B Note”) by one year from November 8, 2005 to November 8, 2006, and eliminated the conversion feature of a $20 principal amount senior unsecured note of Bookham due November 2007 (the “Series A Note”). Bookham also agreed to secure the Series A Note, provide additional collateral for the Series A Note and the Series B Note, and provide Nortel with other debt protection covenants. On January 13, 2006, Nortel received $20 in cash plus accrued interest from Bookham to retire the Series A Note. In addition, Nortel sold the Series B Note for approximately $26 to a group of unrelated investors.

On January 13, 2006, Nortel announced that it had entered into an agreement with Bookham to amend the current supply agreement and extend certain purchase commitments, which were scheduled to expire on April 29, 2006. Under the terms of the amended supply agreement, Nortel agreed to purchase a minimum of $72 of product from Bookham during the calendar year of 2006. Nortel’s purchase commitment was substantially complete in 2006.

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11.   Long-term debt, credit and support facilities

Long-term debt

The following table shows the components of long-term debt as of December 31:

	2006			2005
6.125% Notes due February 15, 2006	$	—		$	1,275
7.40% Notes due June 15, 2006(a)		—			150
4.25% Convertible Senior Notes due September 1, 2008		1,800			1,800
LIBOR + 4.25% floating rate notes due July 15, 2011		1,000			—
10.125% Fixed rate Notes due July 15, 2013		550			—
10.75% Fixed rate Notes due July 15, 2016		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 4.77% for 2006 and 5.65% for 2005		5			7
Fair value adjustment attributable to hedged debt obligations		(1	)		1
Obligation associated with a consolidated VIE with interest rate of 3.7% for 2006 and 3.1% for 2005		87			83
Obligations under capital leases and sale leasebacks with a weighted-average interest rate of 8.48% for 2006 and 8.98% for 2005		223			219
		4,464			3,885
Less: Long-term debt due within one year		18			1,446
Long-term debt	$	4,446		$	2,439

(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, 2006, the amounts of long-term debt payable for each of the years ending December 31 consisted of:

2007	$	18
2008		1,821
2009		18
2010		20
2011		1,022
Thereafter		1,565
Total long-term debt payable	$	4,464

Credit facility

On February 14, 2006, Nortel’s indirect subsidiary, Nortel Networks Inc. (“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 (the “Tranche A Term Loans”), and (ii) a senior unsecured one-year term loan facility in the amount of $450 (the “Tranche B Term Loans”). The Tranche A Term Loans were secured equally and ratably with NNL’s obligations under the EDC Support Facility (as defined below) and NNL’s 6.875% Bonds due September 2023 by a lien on substantially all of the U.S. and Canadian assets of Nortel and NNL and the U.S. assets of NNI. The Tranche A Term Loans and Tranche B Term Loans were guaranteed by Nortel and by NNL, and NNL’s obligations under the EDC Support Facility were also guaranteed by Nortel and by NNI, in each case until the maturity or prepayment of the 2006 Credit Facility. The 2006 Credit Facility was drawn down in the full amount on February 14, 2006, and Nortel used the net proceeds primarily to repay the outstanding $1,275 aggregate principal amount of NNL’s 6.125% notes that matured on February 15, 2006. The 2006 Credit Facility was amended in the second quarter of 2006 and waivers were obtained in connection with defaults arising from the delayed filing of Nortel’s and NNL’s 2005 Annual Reports on Form 10-K/A and 10-K, respectively (the “2005 Annual Reports”), and their respective Quarterly Reports on

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Form 10-Q for the first quarter of 2006 (the “2006 First Quarter Reports”). On July 5, 2006, the total amount owing under the 2006 Credit Facility was repaid using the net proceeds from the issuance of the Notes (as defined below) and the facility, the guarantee agreement and all of the collateral arrangements securing it and Nortel’s and NNL’s public debt were terminated.

Senior notes offering

On July 5, 2006, NNL completed an offering of $2,000 aggregate principal amount of senior notes (the “Notes”) to qualified institutional buyers pursuant to Rule 144A and to persons outside the United States pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). The 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 “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 annum of 10.125% payable semi-annually and the 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, 2006, the Floating Rate Notes had an interest rate of 9.62% per annum.

NNL 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, NNL 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. Prior to July 15, 2009, NNL may also redeem up to 35% of the original aggregate principal amount of any series of 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 Floating Rate Notes, 100% of the principal amount so redeemed plus a premium equal to the interest rate per annum of such 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, NNL may redeem each series of Notes in whole, but not in part.

Upon a change of control, NNL is required within 30 days to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest. A “change of control” is defined in the indenture governing the 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 Nortel or has the power to elect a majority of the members of the Board of Directors of Nortel, or Nortel ceasing to be the beneficial owner of 100% of the voting power of the common stock of NNL.

In connection with the issuance of the Notes, Nortel, NNL and NNI entered into a registration rights agreement with the initial purchasers of the 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 or resale of the Notes within certain time periods, failing which holders of the Notes will be entitled to payment of certain additional interest.

The Note Indenture and related guarantees contain various covenants that limit Nortel’s and NNL’s ability to create liens (other than certain permitted liens) against assets of Nortel, NNL and its restricted subsidiaries to secure funded debt in excess of certain permitted amounts without equally and ratably securing the Notes and to merge, consolidate and sell or otherwise dispose of substantially all of the assets of any of Nortel, NNL and, so long as NNI is a guarantor of the Notes, NNI unless the surviving entity or purchaser of such assets assumes the obligations of Nortel, NNL or NNI, as the case may be, under the 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 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 stock or NNL preferred stock, in excess of certain permitted amounts or incur debt that is subordinated to any other debt of Nortel, NNL or NNI, without having that new debt be expressly subordinated to the Notes and the guarantees. At any

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time that the 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 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 12 for further details).

NNL used $1,300 of the net proceeds from the issuance of the 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 the Global Class Action Settlement (as defined in note 21).

On August 15, 2001, Nortel completed an offering of $1,800 of 4.25% Convertible Senior Notes (the “Senior Notes”), due on September 1, 2008. The Senior Notes pay interest on a semi-annual basis on March 1 and September 1, which began March 1, 2002. The Senior Notes are convertible at any time by holders into common shares of Nortel Networks Corporation, at an initial conversion price of $10 per common share, subject to adjustment upon the occurrence of certain events. Nortel’s 1 for 10 common share consolidation on December 1, 2006 increased the initial conversion price to $100 from $10 and decreased the number of Nortel shares that could be issued upon the exercise of conversion rights under the Senior Notes from 180 million common shares to 18 million common shares. Nortel may redeem some or all of the Senior Notes in cash at any time at a redemption price of 100.708% until August 31, 2007, and 100% thereafter and 100% of the principal amount of the Senior Notes, depending on the redemption date, plus accrued and unpaid interest and additional interest, if any, to the date of the redemption. In addition, Nortel may be required to redeem the Senior Notes in cash and/or common shares of Nortel Networks Corporation under certain circumstances such as a change in control, or Nortel may redeem the Senior Notes at its option under certain circumstances such as a change in the applicable Canadian withholding tax legislation. NNL is the full and unconditional guarantor of the Senior Notes in the event Nortel does not make payments for the principal, interest, premium, if any, or other amounts, if any, as they are due. The guarantee is a direct, unconditional and unsubordinated obligation of NNL.

As a result of the delay in the filing of Nortel’s and NNL’s 2004 Quarterly Reports on Form 10-Q for the first, second and third quarters of 2004 (the “2004 Quarterly Reports”), 2004 Annual Reports on Form 10-K (the “2004 Annual Reports”), 2005 Quarterly Reports on Form 10-Q for the first quarter of 2005 (the “2005 First Quarter Reports”), the 2005 Annual Reports and the 2006 First Quarter Reports (together with the 2004 Quarterly Reports, 2004 Annual Reports, 2005 First Quarter Reports and the 2005 Annual Reports, the “Reports”), Nortel and NNL were not in compliance with their obligations to deliver their respective SEC filings to the trustees under their then-existing public debt indentures. With the filing of the 2006 First Quarter Reports with the SEC and the delivery of the 2006 First Quarter Reports to the trustees under the relevant public debt indentures, Nortel and NNL became compliant with their delivery obligations thereunder. There were $2,350 of notes of NNL (or its subsidiaries) and $1,800 of convertible debt securities of Nortel outstanding under such indentures as of December 31, 2006.

Support facility

On February 14, 2003, NNL entered into an agreement with Export Development Canada (“EDC”) regarding arrangements to provide for support of certain performance related obligations arising out of normal course business activities for the benefit of Nortel (the “EDC Support Facility”). On December 10, 2004, NNL and EDC amended the terms of the EDC Support Facility by extending the termination date of the EDC Support Facility to December 31, 2006 from December 31, 2005.

Effective October 24, 2005, NNL and EDC amended and restated the EDC Support Facility to maintain the total EDC Support Facility at up to $750, including the existing $300 of committed support for performance bonds and similar instruments with individual amounts up to $10, and to extend the maturity date of the EDC Support Facility for an additional year to December 31, 2007. In connection with this amendment, all guarantee and security agreements previously guaranteeing or securing the obligations of Nortel and its subsidiaries under the EDC Support Facility and the

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public debt securities of Nortel and its subsidiaries at such time were terminated and the assets of Nortel and its subsidiaries pledged under the security agreements were released in full. EDC also agreed to provide future support under the EDC Support Facility on an unsecured basis and without the guarantees of NNL’s subsidiaries provided that, should NNL or its subsidiaries incur liens on its assets securing certain indebtedness, or should any subsidiary of NNL incur or guarantee certain indebtedness in the future above agreed thresholds of $25 in North America and $100 outside of North America, equal and ratable security and/or guarantees of NNL’s obligations under the EDC Support Facility will be required at that time.

Between February 14, 2006, when Nortel entered into the 2006 Credit Facility, and July 5, 2006, when Nortel issued the Notes and repaid the 2006 Credit Facility in full NNL’s obligations under the EDC Support Facility were equally and ratably secured with the 2006 Credit Facility. In connection with the issuance of the Notes, NNL, NNI and EDC entered into a new guarantee agreement dated July 4, 2006, by which NNI agreed to guarantee NNL’s obligations under the EDC Support Facility during such time that the Notes are guaranteed by NNI.

Effective December 14, 2006, NNL and EDC amended and restated the EDC Support Facility to maintain the total EDC Support Facility at up to $750, including the existing $300 of committed support for performance bonds and similar instruments with individual amounts up to $10 and to extend the maturity date of the EDC Support Facility for an additional year to December 31, 2008.

The delayed filing of the 2005 Annual Reports and 2006 First Quarter Reports with the SEC, and the delayed delivery of such reports to the trustees under Nortel’s and NNL’s public debt indentures, and to EDC under the EDC Support Facility, gave EDC the right to (i) terminate its commitments under the EDC Support Facility relating to certain of Nortel’s performance related obligations arising out of normal course business activities, and (ii) exercise certain rights against the collateral pledged under related security agreements or require NNL to cash collateralize all existing support.

In the second quarter of 2006, NNL obtained waivers from EDC with respect to these matters to permit Nortel’s continued access to the EDC Support Facility in accordance with its terms while Nortel and NNL worked to complete their filing obligations. With the filing and delivery to EDC and to the trustees under Nortel’s and NNL’s public debt indentures of the 2005 Annual Reports and the 2006 First Quarter Reports, NNL became compliant with its obligations under the EDC Support Facility under the terms of the waiver from EDC.

As a result of the delayed filing and restatement of Nortel’s and NNL’s 2006 Annual Reports on Form 10-K, an event of default occurred under the EDC Support Facility. See note 22 for additional information.

As of December 31, 2006, there was approximately $166 of outstanding support utilized thereunder, approximately $140 of which was outstanding under the revolving small bond sub-facility.

12.   Financial instruments and hedging activities

Risk management

Nortel’s net earnings (loss) and cash flows may be negatively impacted by fluctuating interest rates, foreign exchange rates and equity prices. To effectively manage these market risks, Nortel may enter 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. Some option and forward contracts used to hedge future revenue or expenditure streams are designated as cash flow hedges and hedge specific exposures. The ineffective portions of the change in fair value of derivatives in designated cash flow hedges recognized immediately in earnings for the years ended December 31, 2006 and 2005 has not been significant. Nortel expects all of the hedged items in the 2006 designated cash flow hedges to affect earnings within the next 12 months. Option and forward contracts that do not meet the criteria for

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hedge accounting are also used to manage the risk of fluctuations in exchange rates on existing assets and liabilities and on future revenue and expenditure streams.

The following table provides the total notional amounts of the purchase and sale of currency options and forward contracts as of December 31:

	2006(a)									2005(b)
							Net									Net
	Buy			Sell			Buy / (Sell)			Buy			Sell			Buy / (Sell)
Currency
Options(c):
Canadian dollar		$0			$0			$0			$22			$22			$0
Forwards(c):
Canadian dollar		$395			$427			$(32	)		$302			$799			$(497	)
British pound		£626			£24			£602			£597			£27			£570
Euro		22	€		44	€		(22	€)		37	€		96	€		(59	€)
Other (U.S. dollar)		$0			$33			$(33	)		$49			$95			$(46	)

(a)	All notional amounts of option and forward contracts will mature no later than the end of 2007.
(b)	All notional amounts of option and forward contracts matured no later than the end of 2006.
(c)	All amounts are stated in source currency.

Nortel did not execute any foreign currency swaps in 2006 and had no such agreements in place as of December 31, 2006.

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 10 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 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 rates on the income statement. The hedging strategy for the 7 year interest rate swaps was designated as of October 1, 2006 and passed the effectiveness testing in accordance with SFAS 133. The 10 year interest rate swap was also designated October 1, 2006, but did not pass the effectiveness testing in accordance with SFAS 133. Prior to October 1, 2006, the non-designated portions resulted in a gain of $23 on net earnings (loss) for the year ended December 31, 2006.

The following table provides a summary of interest rate swap contracts and their aggregated weighted-average rates as of December 31:

	2006			2005
Interest rate swap contracts:
Received-fixed swaps — notional amount	$	1,000		$	875
Average fixed rate received		10.4	%		6.3	%
Average floating rate paid		10.0	%		3.9	%

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Equity price risk

From time to time, Nortel enters into equity forward contracts to hedge the variability in future cash flows associated with certain compensation obligations that vary based on future Nortel Networks Corporation common share prices. These contracts fix the price of Nortel Networks Corporation common shares and are cash settled on maturity to offset changes in the compensation liability based on changes in the share price from the inception of the forward contract. These equity forward contracts are not designated in a hedging relationship, and are considered economic hedges of the compensation obligation. They are carried at fair value with changes in fair value recorded in other income (expense) — net. As of December 31, 2006, Nortel 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, 2006 and 2005; the fair value of option contracts reflected the cash flows due to or by Nortel if settlement had taken place on December 31, 2006 and 2005; and the fair value of long-term debt instruments reflected a current yield valuation based on observed market prices as of December 31, 2006 and 2005. 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:

	2006				2005
	Carrying		Fair		Carrying			Fair
	Amount		Value		Amount			Value
Financial liabilities:
Long-term debt due within one year	$	18	$	17	$	1,446		$	1,442
Long-term debt	$	4,446	$	4,486	$	2,439		$	2,308
Derivative financial instruments net asset (liability) position:
Interest rate swap contracts(a)	$	23	$	23	$	3		$	3
Forward and option contracts(b)	$	26	$	26	$	(12	)	$	(12	)

(a)	Recorded in other assets.
(b)	Comprised of other assets of $41 and other liabilities of $15 as of December 31, 2006, and other assets of $14 and other liabilities of $26 as of December 31, 2005.

Credit risk

Credit risk on 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 high credit quality. The maximum potential loss on all financial instruments may exceed amounts recognized in the consolidated financial statements. However, Nortel’s maximum exposure to credit loss in the event of non-performance by the other party to the derivative contracts is limited to those derivatives that had a positive fair value of $71 as of December 31, 2006. Nortel is also exposed to credit risk from customers although Nortel’s global orientation has resulted in a large number of diverse customers which minimizes concentrations of credit risk.

Other derivatives

Nortel may 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 derivative financial instruments under SFAS 133. Such warrants are generally not eligible to be designated as hedging

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instruments as there is no corresponding underlying exposure. In addition, Nortel may enter into certain commercial contracts containing embedded derivative financial instruments.

Transfers of receivables

In 2006, 2005 and 2004, Nortel entered into various agreements to transfer certain of its receivables. These receivables were transferred at discounts of $12, $19 and $37 from book value for the years ended December 31, 2006, 2005 and 2004, respectively, at annualized discount rates of approximately 0 percent to 8 percent, 2 percent to 8 percent and 2 percent to 6 percent for the years ended December 31, 2006, 2005 and 2004, respectively. Certain receivables have been sold with limited recourse for each of the years ended December 31, 2006, 2005 and 2004.

Under certain agreements, Nortel has continued as servicing agent and/or has provided limited recourse. The fair value of these retained interests 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. Nortel, when acting as the servicing agent, generally does not record an asset or liability related to servicing as the annual servicing fees are equivalent to those that would be paid to a third party servicing agent. 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, 2006 and 2005, total accounts receivable transferred and under Nortel’s management were $204 and $247, 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 percent 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:

	2006		2005		2004
Proceeds from new transfers of financial assets	$	202	$	298	$	137
Proceeds from collections reinvested in revolving period transfers	$	163	$	260	$	373

13.   Guarantees

Nortel has entered into agreements that contain features which meet the definition of a guarantee under FIN 45. FIN 45 defines a guarantee as applicable to Nortel as a contract that contingently requires Nortel to make payments (either in cash, financial instruments, other assets, common shares of Nortel or through the provision of services) to a third party based on 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. A description of the major types of Nortel’s outstanding guarantees as of December 31, 2006 is provided below:

(a)  Business sale and business combination agreements

In connection with agreements for the sale of portions of its business, including certain discontinued operations, Nortel has typically retained the liabilities of a business which relate to events occurring prior to its 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 June 2008.

Nortel also entered into guarantees related to the escrow of shares in business combinations in prior periods. These types of agreements generally include indemnities 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.

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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.

Historically, Nortel has not made any significant indemnification payments under such agreements and no significant liability has been accrued in the consolidated financial statements with respect to the obligations associated with these guarantees.

In conjunction with the sale of a subsidiary to a third party, Nortel guaranteed to the purchaser that specified annual 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, 2006 is $10. A liability of $8 has been accrued in the consolidated financial statements with respect to the obligation associated with this guarantee as of December 31, 2006.

(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 and 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. Historically, Nortel has not made any significant indemnification payments under such agreements. As of December 31, 2006, Nortel had no intellectual property indemnification obligations for which compensation would be required.

(c)  Lease agreements

Nortel has entered into agreements with its lessors that guarantee the lease payments of certain assignees of its facilities to lessors. 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 $38 as of December 31, 2006. 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 and no significant liability has been accrued in the consolidated financial statements with respect to the obligations associated with these guarantees.

(d)  Third party debt agreements

From time to time, Nortel guarantees the debt of certain customers. These third party debt agreements require Nortel to make debt payments throughout the term of the related debt instrument if the customer fails to make scheduled debt payments. Under most such arrangements, Nortel’s guarantee is secured, usually by the assets being purchased or financed. As of December 31, 2006, Nortel had no third party debt agreements that would require it to make any debt payments for its customers.

(e)  Indemnification of lenders and agents under credit facilities and EDC Support Facility

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. 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. For additional information related to the recent amendment of the EDC Support Facility, see note 11.

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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.

Historically, Nortel has not made any significant indemnification payments under such agreements and no significant liability has been accrued in the consolidated financial statements with respect to the obligations associated with these indemnification guarantees.

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, if the particular transaction becomes invalid. As of December 31, 2006, Nortel had approximately $204 of securitized receivables which were subject to repurchase under this provision, in which case Nortel would assume all rights to collect such receivables. The indemnification provisions generally expire upon expiration of the securitization agreements, which extend through 2007, or collection of the receivable amounts by the counterparty.

Nortel is generally unable to estimate the maximum potential liability for these types of indemnification guarantees as certain agreements 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.

Historically, Nortel has not made any significant indemnification payments under such agreements and no significant liability has been accrued in the consolidated financial statements with respect to the obligations associated with these guarantees.

(f)  Other indemnification agreements

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 (other than 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.

Historically, Nortel has not made any significant indemnification payments under such agreements and no significant liability has been accrued in the consolidated financial statements with respect to the obligations associated with these guarantees.

On March 17, 2006, in connection with the Global Class Action Settlement (as defined in note 21), Nortel announced that it had reached an agreement with the lead plaintiffs on the related insurance and corporate governance matters including Nortel’s insurers agreeing to pay $228.5 in cash towards the settlement and Nortel agreeing with their insurers to certain indemnification obligations. Nortel believes that these indemnification obligations would be unlikely to materially increase its total cash payment obligations under the Global Class Action Settlement. The insurance payments would not reduce the amounts payable by Nortel or NNL as disclosed in this report.

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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:

	2006			2005
Balance at the beginning of the year	$	206		$	271
Payments		(267	)		(179	)
Warranties issued		281			190
Revisions		(3	)		(76	)
Balance at the end of the year	$	217		$	206

14.   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 two 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:

	2006		2005
Bid and performance related bonds(a)	$	231	$	222
Other bonds(b)		30		44
Total bid, performance related and other bonds	$	261	$	266

(a)	Net of restricted cash and cash equivalent amounts of $7 and $36 as of December 31, 2006 and 2005, respectively.
(b)	Net of restricted cash and cash equivalent amounts of $628 and $31 as of December 31, 2006 and 2005, 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-ups 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 the venture capital firm. Nortel had remaining commitments, if requested, of $30 as of December 31, 2006. These commitments expire at various dates through to 2016.

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 up to the prescribed minimum or forecasted purchases. As of December 31, 2006, Nortel had aggregate purchase commitments of $83. Significant purchase commitments are described below.

During the third quarter of 2003, Nortel renegotiated a supply arrangement with a key supplier. The renegotiated agreement requires that $2,800 in aggregate purchases with the supplier be made between June 2003 and June 2009. As of December 31, 2005, the remaining purchase commitment under the agreement was $232. During the year ended December 31, 2006, Nortel fulfilled this commitment.

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The following table sets forth the expected purchase commitments to be made over the next several years:

									Total
	2007		2008		2009		Thereafter		Obligations
Purchase commitments	$	69	$	12	$	2	$	—	$	83

Amounts paid by Nortel under the above purchase commitments during the years ended December 31, 2006, 2005 and 2004 were $470, $1,134 and $1,088, respectively.

Operating leases and other commitments

As of December 31, 2006, the future minimum payments under operating leases, 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		Outsourcing		Special		Sublease
	Leases		Contracts		Charges		Income
2007	$	123	$	10	$	60	$	(17	)
2008		105		10		41		(14	)
2009		90		11		29		(13	)
2010		95		—		38		(12	)
2011		84		—		33		(9	)
Thereafter		406		—		167		(21	)
Total future minimum payments	$	903	$	31	$	368	$	(86	)

Rental expense on operating leases for the years ended December 31, 2006, 2005 and 2004, net of applicable sublease income, amounted to $196, $175 and $179, respectively.

Expenses related to outsourcing contracts for the years ended December 31, 2006, 2005 and 2004 amounted to $93, $96 and $253, 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 $40 in research and development funds over the initial four year term of the agreement. Substantially all of the payments are scheduled to be received by Nortel beginning in fiscal year 2007 and are subject to Nortel achieving certain mutually agreed upon performance metrics. Microsoft will recoup its payment of research and development funds by receiving payments from Nortel of five percent 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, 2006, 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.

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In addition, Nortel entered into a patent cross license agreement that establishes an alliance relationship between Nortel and Microsoft. Nortel and Microsoft have agreed to exchange patent rights to certain products, services and technology. In consideration for access to Nortel’s developed technology, in the third quarter of 2006 Microsoft paid Nortel $40 that is to be recognized over a 4 year period.

15.   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.

Total customer financing as of December 31, 2006 and 2005 was $10 and $66, respectively, which included undrawn commitments of $1 and $50, respectively. During the years ended December 31, 2006 and 2005, Nortel reduced undrawn customer financing commitments by $49 and $19 ($8 relates to a VIE which Nortel began consolidating effective April 1, 2005), respectively, as a result of the expiration or cancellation of commitments and changing customer business plans. As of December 31, 2006, all undrawn commitments were available for funding under the terms of the financing agreements.

During the years ended December 31, 2006, 2005 and 2004, Nortel recorded net customer financing bad debt expense (recovery) of $4, $4 and $(45), 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 year ended December 31, 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, 2006, Nortel’s consolidated balance sheet included $87 of long-term debt (see note 11) and $86 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 was 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 10).

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, 2006, none of these other interests or arrangements were considered significant variable interests and, therefore, were not disclosed in Nortel’s financial statements.

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16.   Capital stock

Common Share Consolidation

On November 6, 2006, Nortel’s Board of Directors approved a 1 for 10 consolidation of its outstanding common shares effective December 1, 2006. Nortel’s shares began trading on a consolidated basis on December 1, 2006. In connection with the common share consolidation, the number of shares of Nortel common stock outstanding as of December 31, 2006 was reduced from 4,339,347,470 to 433,934,747, without any change in par value per common share.

All references to share and per-share data for all periods presented in the consolidated financial statements have been adjusted to give effect to the 1 for 10 common share consolidation.

Common shares

Nortel Networks Corporation is authorized to issue an unlimited number of common shares without nominal or par value. The outstanding number of common shares and prepaid forward purchase contracts included in shareholders’ equity consisted of the following as of December 31:

	2006						2005						2004
	Number			$			Number			$			Number			$
	(Number of common shares in thousands)
Common shares:
Balance at the beginning of the year		433,916		$	33,932			427,267		$	33,840			416,671		$	33,674
Shares issued pursuant to:
Stock option plans		263			12			262			14			713			39
Acquisition and acquisition related(a)		—			—			—			(1	)		—			—
Common share cancellations(b)		(244	)		(6	)		(97	)		(3	)		—			—
Prepaid forward purchase contracts(c)		—			—			6,484			82			9,883			127
Balance at the end of the year		433,935		$	33,938			433,916		$	33,932			427,267		$	33,840
(Number of prepaid forward purchase contracts)
Prepaid forward purchase contracts:(c)
Balance at beginning of the year		—		$	—			384		$	82			969		$	209
Prepaid forward purchase contracts settled		—			—			(384	)		(82	)		(585	)		(127	)
Balance at the end of the year		—		$	—			—		$	—			384		$	82

(a)	Common shares issued as part of the purchase price consideration. During the years ended December 31, 2006, 2005 and 2004, common shares were cancelled as earn out provisions were forfeited pursuant to their applicable agreements.
(b)	Relates to common shares of Nortel surrendered by members and former members of Nortel’s core executive team for cancellation in connection with the voluntary undertaking by each such individual to pay over a three year period an amount equal to the return to profitability bonus paid in 2003.
(c)	Included in additional paid in capital in the consolidated balance sheets. During the years ended December 31, 2006, 2005 and 2004, nil, 6,484 and 9,883 common shares were issued as a result of the early settlement of nil, 384 and 585 prepaid forward purchase contracts, respectively. The net proceeds from the settled contracts of nil, $82 and $127, respectively, were transferred from additional paid-in capital to common shares.

Preferred shares

Nortel Networks Corporation is authorized to issue an unlimited number of Class A preferred shares, which rank senior to the Class B preferred shares and the 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 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 Networks Corporation at the time of issue. None of the Class A or Class B preferred shares of Nortel Networks Corporation has been issued.

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Shareholder rights plan

At the Nortel annual and special shareholders’ meeting on June 29, 2006, shareholders approved the reconfirmation and amendment of Nortel’s shareholder rights plan, which will expire at the annual meeting of shareholders to be held in 2009 unless it is reconfirmed at that time. Under the rights plan, Nortel issues one right for each Nortel Networks Corporation common share outstanding. These rights would become exercisable upon the occurrence of certain events associated with an unsolicited takeover bid and would, if exercised, permit shareholders that are not making an unsolicited takeover bid to purchase Nortel common shares at a significant discount.

17.   Earnings (loss) per common share

The following table details the weighted-average number of Nortel Networks Corporation common shares outstanding for the purposes of computing basic and diluted earnings (loss) per common share for the following periods:

	2006		2005(a)		2004(a)
	(Number of common shares in millions)
Basic weighted-average shares outstanding:
Issued and outstanding		434		430		426
Prepaid forward purchase contracts(b)		—		4		8
Basic weighted-average shares outstanding		434		434		434
Weighted-average shares dilution adjustments:
Dilutive stock options		—		—		—
Diluted weighted-average shares outstanding		434		434		434
Weighted-average shares dilution adjustments — exclusions:
Stock options		30		30		30
4.25% Convertible Senior Notes		18		18		18

(a)	As a result of the net loss from continuing operations for the years ended December 31, 2005 and 2004, all potential dilutive securities were considered anti-dilutive.
(b)	The impact of the minimum number of common shares to be issued upon settlement of the prepaid forward purchase contracts on a weighted-average basis was nil and 4 for the years ended December 31, 2006 and 2005, respectively. As of December 31, 2006, all common shares to be issued pursuant to the prepaid forward purchase contracts had been settled.

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18.   Accumulated other comprehensive loss

The components of accumulated other comprehensive loss, net of tax, were as follows:

	2006			2005			2004
Accumulated foreign currency translation adjustment
Balance at the beginning of the year	$	198		$	345		$	155
Change in foreign currency translation adjustment(a)		284			(147	)		190
Balance at the end of the year		482			198			345
Unrealized gain (loss) on investments — net
Balance at the beginning of the year		31			33			96
Change in unrealized gain (loss) on investments		8			(2	)		(63	)
Balance at the end of the year(b)		39			31			33
Unrealized derivative gain (loss) on cash flow hedges — net
Balance at the beginning of the year		7			18			12
Change in unrealized derivative gain (loss) on cash flow hedges(c)		(17	)		(11	)		6
Balance at the end of the year		(10	)		7			18
Minimum pension liability — net
Balance at the beginning of the year		(1,084	)		(915	)		(882	)
Change in minimum pension liability adjustment(d)		94			(169	)		(33	)
Adoption of FASB statement No. 158(e)		990			—			—
Balance at the end of the year		—			(1,084	)		(915	)
Unamortized Pension and Post-Retirement Plan actuarial losses and prior service cost — net
Balance at the beginning of the year		—			—			—
Adoption of FASB statement No. 158(e)		(1,132	)		—			—
Balance at the end of the year		(1,132	)		—			—
Accumulated other comprehensive loss	$	(621	)	$	(848	)	$	(519	)

(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 loss until realized. Unrealized gain (loss) on investments was net of tax of nil, for each of the years ended December 31, 2006, 2005 and 2004. During the years ended December 31, 2006, 2005 and 2004, realized (gains) losses on investments of $5, $(9) and $(14), respectively, were reclassified to other income (expense) — net in the consolidated statements of operations.
(c)	During the years ended December 31, 2006, 2005 and 2004, net derivative gains of $14, $18 and $14 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, 2006, 2005 and 2004, respectively. Nortel estimates that $10 of net derivative gains (losses) included in accumulated other comprehensive loss will be reclassified into net earnings (loss) within the next 12 months.
(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 9). The change in minimum pension liability adjustment is presented net of tax of $24, $6 and nil for the years ended December 31, 2006, 2005 and 2004, respectively.
(e)	Represents non-cash charges to shareholders’ equity related to the adoption of SFAS 158 (see note 9). The charge is presented net of tax of $60 for the year ended December 31, 2006.

19.   Stock-based compensation plans

Stock options

Prior to 2006, Nortel granted options to purchase Nortel common shares under two existing stock option plans, the Nortel Networks Corporation 2000 Stock Option Plan (the “2000 Plan”) and the Nortel Networks Corporation 1986 Stock Option Plan As Amended and Restated (the “1986 Plan”). Under these two plans, options to purchase Nortel common shares could be granted to employees and, under the 2000 Plan, options could be also granted to directors of Nortel. The options

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under both plans entitle the holders to purchase one common share at a subscription price of not less than 100% of 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% on the anniversary date of the grant for three years. Commencing in 2003, options granted generally vest 25% each year over a four-year period on the anniversary of the date of grant. The Compensation and Human Resources Committee of the Board of Directors of Nortel and NNL (the “CHRC”) that administers both plans generally has the discretion to vary the period during which the holder has the right to exercise options and, in certain circumstances, may accelerate the right of the holder to exercise options, but in no case shall the term of an option exceed ten years. Nortel meets its obligations under both plans by issuing Nortel common shares. 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 Nortel 2005 Stock Incentive Plan (the “SIP”) effective January 1, 2006.

During 2005, the shareholders of Nortel approved the SIP, a stock-based compensation plan, which permits grants of stock options, including incentive stock options, SARs, PSUs and RSUs to employees of Nortel and its subsidiaries. On November 6, 2006, the SIP was amended and restated effective as of December 1, 2006, to adjust the number of common shares available for grant thereunder to reflect the 1 for 10 consolidation of Nortel’s issued and outstanding common shares. The subscription price for each share subject to an option shall not be less than 100% of the market value of common shares of Nortel 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, which administers the SIP, generally has the discretion to accelerate or waive any condition to the vesting of options, but in no case shall options granted become exercisable within the first year (except in the event of death), and in no case shall the exercise period exceed ten years. Nortel meets its obligations under the SIP by issuing Nortel common shares. All stock options granted have been classified as equity instruments based on the settlement provisions of the stock-based compensation plans.

Stand-alone SARs or SARs in tandem with options may be granted under the SIP. Upon the exercise of a vested SAR, a holder will be entitled to receive payment of an amount equal to the excess of the market value of a common share of Nortel on the date of exercise over the subscription or base price under the SAR. On the exercise of a tandem SAR, the related option shall be cancelled. As of December 31, 2006 and 2005, there were no SARs outstanding.

As of December 31, 2006, the maximum number of common shares authorized by the shareholders and reserved for issuance by the Board of Directors of Nortel under each of the 1986 Plan, 2000 Plan and SIP is as follows:

	Maximum
	(Number of common
	shares in thousands)
1986 Plan
Issuable to employees		46,972
2000 Plan
Issuable to non-employee directors		50
Issuable to employees		9,400
SIP
Issuable to employees		12,200

In January 1995, a key contributor stock option program (the “Key Contributor Program”) was established and options were granted under the 1986 Plan and the 2000 Plan in connection with this program. Under that 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 common share of Nortel on the date of grant and the replacement options have an exercise price equal to the market value of a common share of Nortel 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 common shares of Nortel at least equal to the number of common shares subject to the initial options less any common shares sold to pay for options costs, applicable taxes and brokerage costs associated with

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the exercise of the initial options. No Key Contributor Program options were granted for the years ended December 31, 2006 and 2005.

During the year ended December 31, 2006, approximately 48,360 Nortel common shares were issued pursuant to the exercise of stock options granted under the 1986 Plan and 25,724 Nortel common shares were issued pursuant to the exercise of stock options granted under the 2000 Plan. During the year ended December 31, 2006, approximately 4,040,201 stock options, 812,350 RSUs and 464,000 PSUs were granted under the SIP. During the year ended December 31, 2006, there were 182,865 Nortel common shares issued pursuant to the vesting of RSUs granted under the SIP. During the year ended December 31, 2006, there were no stock options exercised or PSUs that vested under the SIP.

Nortel also assumed stock option plans in connection with the acquisition of various companies. Common shares of Nortel 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 stock option plans may differ from the SIP, 2000 Plan and 1986 Plan, but are not considered significant to Nortel’s overall use of stock-based compensation.

The following is a summary of the total number of outstanding stock options and the maximum number of stock options available for grant:

				Weighted-
				Average		Aggregate
	Outstanding			Exercise		Intrinsic		Available
	Options			Price		Value		for Grant
	(Thousands)					(Thousands)		(Thousands)
Balance at December 31, 2003		28,840		$	122.70	$	143,917		8,800
Granted options under all stock option plans		3,786		$	77.40	$	—		(3,786	)
Options exercised		(713	)	$	42.40	$	24,885		—
Options forfeited		(791	)	$	52.20				786
Options expired		(1,667	)	$	266.40				1,506
Balance at December 31, 2004		29,455		$	117.70	$	70,486		7,306
SIP 2005 maximum share issuance limit		—		$	—				12,200
Granted options under all stock option plans		6,422		$	29.20	$	10,767		(7,119	)(a)
Options exercised		(262	)	$	22.70	$	1,876		—
Options forfeited		(783	)	$	59.20				779	(a)
Options expired		(4,540	)	$	171.60				3,798	(a)
Balance at December 31, 2005		30,292		$	94.30	$	44,553		16,964
Granted options under all stock option plans		4,040		$	21.09	$	22,787		(5,317	)(a)
Options exercised		(80	)	$	22.10	$	577		—
Options forfeited		(1,257	)	$	39.30				1,362	(a)
Options expired		(3,202	)	$	143.61				2,684	(a)
Fractional share adjustment(b)		(11	)	$	—				10
Balance at December 31, 2006		29,782		$	81.72	$	36,952		15,703

(a)	Amount is inclusive of RSUs and PSUs granted or cancelled. RSUs and PSUs reduce shares available for grant under the SIP.
(b)	Relates to an adjustment required as a result of the 1 for 10 common share consolidation effective December 1, 2006.

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The following tables summarize information about stock options outstanding and exercisable as of December 31, 2006:

	Options Outstanding
			Weighted-
			Average		Weighted-
			Remaining		Average		Aggregate
	Number		Contractual		Exercise		Intrinsic
Range of Exercise Prices	Outstanding		Life		Price		Value
	(Thousands)		(In years)				(Thousands)
$0.0000 -    $23.9000		8,130		7.5	$	22.19	$	36,921
$23.9001 -    $35.8515		7,057		7.7	$	29.74	$	31
$35.8516 -    $53.7788		531		4.4	$	50.74	$	—
$53.7789 -    $80.6696		6,661		4.7	$	69.56	$	—
$80.6697 -   $121.0059		3,518		3.7	$	93.54	$	—
$121.0060 -   $181.5104		828		1.7	$	149.92	$	—
$181.5105 -   $272.2671		1,418		2.5	$	226.78	$	—
$272.2672 -   $408.4022		804		2.7	$	328.84	$	—
$408.4023 -   $612.6047		433		2.8	$	522.98	$	—
$612.6048 - $1,026.6235		402		2.7	$	714.91	$	—
		29,782		5.7	$	81.72	$	36,952
Options expected to vest as of December 31, 2006		28,352		5.6	$	84.13	$	33,582

	Options Exercisable
				Weighted-
				Average		Weighted-
				Remaining		Average		Aggregate
	Number			Contractual		Exercise		Intrinsic
Range of Exercise Prices	Exercisable			Life		Price		Value
	(Thousands)			(In years)				(Thousands)
$0.0000 -    $23.9000		3,261			5.5	$	23.23	$	11,426
$23.9001 -    $35.8515		2,686			6.5	$	30.18	$	26
$35.8516 -    $53.7788		531			4.4	$	50.75	$	—
$53.7789 -    $80.6696		5,629			4.3	$	68.27	$	—
$80.6697 -   $121.0059		3,039			3.2	$	94.41	$	—
$121.0060 -   $181.5104		780			1.7	$	150.05	$	—
$181.5105 -   $272.2671		1,393			2.5	$	227.17	$	—
$272.2672 -   $408.4022		804			2.7	$	328.82	$	—
$408.4023 -   $612.6047		433			2.8	$	522.98	$	—
$612.6048 - $1,026.6235		402			2.7	$	714.91	$	—
		18,958	(a)		4.3	$	109.02	$	11,452

(a) Total number of exercisable options for the years ended December 31, 2006 and 2005 were 18,958 and 18,547, respectively. During the periods of March 10, 2004 to June 1, 2005, and March 10, 2006 to June 6, 2006, the exercise of otherwise exercisable stock options was suspended due to Nortel and NNL not being in compliance with certain reporting requirements of U.S. and Canadian securities regulators.

The aggregate intrinsic value of outstanding and exercisable stock options provided in the preceding table represents the total pre-tax intrinsic value of outstanding and exercisable stock options based on Nortel’s closing stock price of $26.73 as of December 29, 2006, the last trading day for Nortel common shares in 2006, which is assumed to be the price that would have been received by the stock option holders had all stock option holders exercised and sold their options on that date. The total number of in-the-money options exercisable as of December 31, 2006 was 3,282,686.

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Nonvested shares

Nortel’s nonvested share awards consist of (i) options granted under all of Nortel’s stock option plans and (ii) RSU and PSU awards granted under the SIP. The fair value of each nonvested share award is calculated using the stock price on the date of grant. A summary of the status of nonvested share awards as of December 31, 2006, and changes throughout the year ended December 31, 2006, is presented below.

	Options					RSU Awards					PSU Awards
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Grant Date					Grant Date
	Shares			Price		Shares			Fair Value(a)		Shares			Fair Value(b)
	(Thousands)					(Thousands)					(Thousands)
Nonvested shares at December 31, 2005		11,745		$	40.92		697		$	31.48		—		$	—
Granted		4,040		$	21.09		813		$	21.01		464		$	22.54
Vested		(3,707	)	$	40.61		(183	)	$	31.80		—		$	—
Forfeited		(1,257	)	$	39.30		(87	)	$	28.50		(17	)	$	22.68
Fractional share adjustment(c)		3		$	—		—		$	—		—		$	—
Nonvested shares at December 31, 2006		10,824		$	33.91		1,240		$	24.74		447		$	22.44

(a)	RSU awards do not have an exercise price, therefore grant date weighted-average fair value has been calculated. The grant date fair value for the RSU awards is the stock price on the date of grant.
(b)	PSU awards do not have an exercise price, therefore grant date weighted-average fair value has been calculated using a Monte Carlo simulation model.
(c)	Relates to an adjustment required as a result of the 1 for 10 common share consolidation effective December 1, 2006.

As of December 31, 2006, there was $109 of total unrecognized compensation cost related to Nortel’s nonvested stock options that is expected to be recognized over a weighted-average period of 2.4 years. As of December 31, 2006, there were $27 and $8 of total unrecognized compensation cost related to Nortel’s nonvested RSUs and PSUs, respectively, that are expected to be recognized over a weighted-average period of 2.5 and 2.5 years, respectively.

Restricted stock units and Performance stock units

RSUs and PSUs can be issued under the SIP. RSUs generally become vested based on continued employment and PSUs generally become vested subject to the attainment of performance criteria. Each RSU or PSU granted under the SIP generally represents one common share of Nortel. Vested units will generally be settled upon vesting by delivery of a common share of Nortel for each vested unit or payment of a cash amount equal to the market value of a common share of Nortel at the time of settlement, or a combination thereof, as determined in the discretion of the CHRC.

The number of RSUs granted during the year ended December 31, 2006 was 812,350. All of the RSUs awarded to executive officers in 2005 and going forward vest in equal installments on the first three anniversary dates of the date of the award. The RSUs awarded in 2005 and 2006 under the SIP will be settled in shares at the time of vesting. All RSUs granted have been classified as equity instruments based on the settlement provisions of the stock-based compensation plans.

The number of PSUs granted during the year ended December 31, 2006 was 464,000. Vesting and settlement of PSUs at the end of the three year performance period will depend upon the level of achievement of certain performance criteria based on the relative total shareholder return on the common shares of Nortel compared to the total shareholder return on the common shares of a comparative group of companies included in the Dow Jones Technology Titans 30 Index (the “Technology Index”). The number of common shares to be issued for the vested PSUs are determined based on Nortel’s ranking within the Technology Index and can range from 0% to 200%. All PSUs granted have been classified as equity instruments based on the settlement provisions of the stock-based compensation plans.

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The following is a summary of the total number of outstanding RSU awards granted:

						Weighted
				Weighted-		Average
	Outstanding			Average		Remaining
	RSU Awards			Grant Date		Contractual
	Granted			Fair Value(a)		Life
	(Thousands)					(In years)
Balance at December 31, 2004(b)		—		$	—		—
Granted RSU awards		697		$	31.28
Awards exercised		—		$	—
Awards forfeited		—		$	—
Awards expired		—		$	—
Balance at December 31, 2005		697		$	31.48		9.7
Granted RSU awards		813		$	21.01
Awards exercised		(183	)	$	31.80
Awards forfeited		(87	)	$	28.50
Awards expired		—		$	—
Balance at December 31, 2006		1,240		$	24.74		9.2
RSUs expected to vest as of December 31, 2006		1,150		$	24.74		9.2

(a)	RSU awards do not have an exercise price, therefore grant date weighted-average fair value has been calculated. The grant date fair value for the RSU awards is the stock price on the date of grant.
(b)	There were no RSUs issued prior to January 1, 2005 as a part of the SIP.

The weighted-average grant-date fair value of the RSUs awarded for the year ended December 31, 2005 was $31.28.

The following is a summary of the total number of outstanding PSU awards granted:

						Weighted
				Weighted-		Average
	Outstanding			Average		Remaining
	PSU Awards			Grant Date		Contractual
	Granted			Fair Value(a)		Life
	(Thousands)					(In years)
Balance at December 31, 2005(b)		—		$	—		—
Granted PSU awards		464		$	22.54
Awards exercised		—		$	—
Awards forfeited		(17	)	$	22.68
Awards expired		—		$	—
Balance at December 31, 2006		447		$	22.44		9.5
PSUs expected to vest as of December 31, 2006		414		$	22.44		9.5

(a)	PSU awards do not have an exercise price therefore grant date weighted-average fair value has been calculated. The grant date fair value for the PSU awards was determined using a Monte Carlo simulation model.
(b)	There were no PSUs issued prior to January 1, 2006.

Directors’ deferred share compensation plans

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 Nortel or NNL, any committees thereof, and as board or committee chairperson, in share units with the remainder of such fees to be paid in cash. Generally, the share units are settled four trading days following the release of Nortel’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 of Nortel purchased on the open market. As of December 31, 2006 and 2005, the number of share units outstanding and the DSU expense were not material to Nortel’s results of operations and financial condition.

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Employee stock purchase plans

Nortel has ESPPs to facilitate the acquisition of common shares of Nortel Networks Corporation by eligible employees. On June 29, 2005, the shareholders of Nortel approved three new stock purchase plans, the Nortel Global Stock Purchase Plan, the Nortel U.S. Stock Purchase Plan and the Nortel Stock Purchase Plan for Members of the Savings and Retirement Program 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 percent 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 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 Nortel contributing the remaining 15% of the price.

The purchases under the ESPPs for the years ended December 31 are shown below:

	2006(b)		2005(b)		2004
	(Number of shares in thousands)
Nortel Networks Corporation common shares purchased(a)		294		78		—
Weighted-average price of shares purchased	$	25.43	$	30.68	$	—

(a)	Compensation expense was recognized for Nortel’s portion of the contributions. Nortel contributed an amount equal to the difference between the market price and the purchase price.
(b)	During the periods of March 10, 2004 to June 1, 2005, and March 10, 2006 to June 6, 2006, the ESPPs were suspended due to Nortel and NNL not being in compliance with certain reporting requirements of U.S. and Canadian securities regulators.

Stock-based compensation

Effective January 1, 2006, Nortel adopted SFAS 123R, which revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Nortel adopted SFAS 123R using the modified prospective transition method and accordingly the results of prior periods have not been restated. This method requires that 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, Nortel measured the cost of share-based awards granted or modified on or after January 1, 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 cost of these awards over the remaining service period following the provisions of SFAS 123R. For those grants prior to January 1, 2003, that were nonvested and outstanding as of January 1, 2006, Nortel will recognize the remaining cost of these awards over the remaining service period as required by the new standard.

Nortel did not accelerate the recognition of expense for those awards that applied to retirement eligible employees prior to the adoption of SFAS 123R, 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 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.

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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.

Stock-based compensation recorded during the years ended December 31 was as follows:

	2006			2005		2004
Stock-based compensation:
Stock option expense	$	93	(b)	$	87	$	77
RSU expense(a)		8			1		41
PSU expense		2			—		—
DSU expense(a)		—			1		(1	)
Total stock-based compensation reported — net of tax	$	103		$	89	$	117

(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.

Nortel estimates the fair value of stock options using the Black-Scholes-Merton option-pricing model, consistent with the provisions of SFAS 123R and SAB 107, and Nortel’s prior period pro forma disclosures of net earnings, including share-based compensation. The key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected term of the options, the volatility of Nortel’s stock, the risk-free rate, the annual forfeiture rate and Nortel’s dividend yield. Nortel believes that the Black-Scholes-Merton option-pricing model utilized to develop the underlying assumptions is appropriate in calculating the fair values of Nortel’s stock options.

The following weighted-average assumptions were used in computing the fair value of stock options for purposes of expense recognition and pro forma disclosures, as applicable, for the following periods:

	2006			2005			2004
Black-Scholes weighted-average assumptions
Expected dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility(a)		73.66	%		86.26	%		94.47	%
Risk-free interest rate(b)		5.00	%		4.11	%		2.96	%
Expected option life in years(c)		4			4			4
Weighted-average stock option fair value per option granted	$	12.21		$	18.81		$	52.08

(a)	The expected volatility of Nortel’s stock is estimated using the daily historical stock prices over a period equal to the expected term.
(b)	Nortel used the five year 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 the stock price on the date of grant. Nortel estimates the fair value of PSU awards using a Monte Carlo simulation model, consistent with the provisions of SFAS 123R. Certain assumptions used in the model include (but are not limited to) the following:

	2006
Monte Carlo assumptions
Beta (range)		2.0 - 2.1
Risk-free interest rate (range)(a)		4.79% - 5.10	%
Equity risk premium		5.00	%

(a)  The risk-free rate used was the three year government treasury bill rate.

164

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Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2006, the annual forfeiture rates applied to Nortel’s stock option plans were 13% and 7% for the RSU and PSU awards, respectively.

The compensation cost that has been charged against income for Nortel’s share-based award plans was $93, $87 and $77 for the years ended December 31, 2006, 2005 and 2004, respectively. The total income tax benefit recognized in the statements of operations for stock-based award compensation was nil for each of the years ended December 31, 2006, 2005 and 2004.

As of December 31, 2006, there was $147 of total unrecognized compensation cost related to Nortel’s stock option plans that is expected to be recognized over a weighted-average period of 1.6 years. As of December 31, 2006, there was $26 of total unrecognized compensation cost related to Nortel’s RSU awards granted which is expected to be recognized over a weighted-average period of 2.5 years. As of December 31, 2006, there was $8 of total unrecognized compensation cost related to Nortel’s PSU awards granted which is expected to be recognized over a weighted-average period of 2.5 years.

Cash received from exercise under all share-based payment arrangements was $2 for the year ended December 31, 2006, and $6 for the year ended December 31, 2005. Tax benefits realized by Nortel related to these exercises were nil for each of the years ended December 31, 2006 and 2005.

Suspension of Nortel stock based compensation plans

As a result of Nortel’s March 10, 2006 announcement that it and NNL would delay the filing of the 2005 Annual Reports, Nortel suspended, as of March 10, 2006, the grant of any new equity and exercise or settlement of previously outstanding awards under the SIP, the purchase of Nortel common shares under the ESPPs, the exercise of outstanding options granted under the 2000 Plan and the 1986 Plan, the exercise of outstanding options granted under employee stock option plans previously assumed by Nortel in connection with mergers and acquisitions and the purchase of units in a Nortel stock fund or purchase of Nortel common shares under defined contribution and investment plans. In the second quarter of 2006, Nortel lifted the suspension on the stock based compensation plans, upon its compliance with U.S. and Canadian regulatory securities filing requirements with the filing of Nortel’s and NNL’s 2006 First Quarter Reports.

20.   Related party transactions

In the ordinary course of business, Nortel engages in transactions with certain of its equity-owned investees that are under or are subject to Nortel’s significant influence and with joint ventures of Nortel. These transactions are sales and purchases of goods and services under usual trade terms and are measured at their exchange amounts.

165

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Notes to Consolidated Financial Statements — (Continued)

Transactions with related parties for the years ended December 31 are summarized as follows:

	2006		2005		2004
Revenues:
LG Electronics Inc.(a)	$	27	$	—	$	—
Vodavi Communications Systems Inc. (“Vodavi”)(b)		22		2		—
Other		5		2		1
Total	$	54	$	4	$	1
Purchases:
Bookham	$	33	$	20	$	73
LG Electronics Inc.(a)		238		41		—
Sasken Communications Technology Ltd. (“Sasken”)(c)		34		18		—
GNTEL Co., Ltd (“GNTEL”)(d)		74		10		—
Other		6		1		—
Total	$	385	$	90	$	73

(a)	LG holds a minority interest in LG-Nortel. Nortel’s sales and purchases relate primarily to certain inventory related items. As of December 31, 2006, accounts payable to LG was $76, compared to $18 as at December 31, 2005.
(b)	LG-Nortel currently owns a minority interest in Vertical Communications Ltd. (“Vertical”), which on December 1, 2006 acquired Vodavi. 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, 2006, accounts payable to Sasken was $2, compared to $2 as at December 31, 2005.
(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, 2006, accounts payable to GNTEL was $17, compared to nil as at December 31, 2005.

As of December 31, 2006 and 2005, accounts receivable from related parties were $13 and $8, respectively. As of December 31, 2006 and 2005, accounts payable to related parties were $97 and $26, respectively.

21.   Contingencies

Subsequent to Nortel’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, Nortel 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 allege, 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 Nortel’s announcement on March 10, 2004, in which it indicated it was likely that Nortel 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, Nortel 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 Nortel during certain periods between February 16, 2001 and July 28, 2004. The lawsuits allege, 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 Nortel’s financial results. These matters are also the subject of investigations by Canadian and U.S. securities regulatory and criminal investigative authorities.

166

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Notes to Consolidated Financial Statements — (Continued)

Nortel has entered into agreements to settle all of the Nortel I Class Actions and Nortel II Class Actions (the “Global Class Action Settlement”), 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 remains conditioned on, among other things, securities regulatory and stock exchange approvals and finalizing the court approval orders.

Under the terms of the Global Class Action Settlement, Nortel will pay $575 in cash and issue approximately 62,866,775 common shares of Nortel (representing approximately 14.5% of Nortel’s 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), reflecting Nortel’s 1 for 10 common share consolidation on December 1, 2006, to the plaintiffs, and Nortel will 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 Nortel’s bonus plan. On June 1, 2006, Nortel placed $575 plus accrued interest of $5 into escrow and has classified this amount as restricted cash. The total settlement amount will include all plaintiffs’ court-approved attorneys’ fees. As a result of the Global Class Action Settlement, Nortel has established a litigation reserve and recorded a charge to its full-year 2005 financial results of $2,474, $575 of which related to the cash portion of the Global Class Action Settlement, while $1,899 related to the equity component. A recovery of $219 was recorded as at December 31, 2006, to reflect the fair value mark-to-market adjustment of the Nortel common shares and the equity component of the litigation reserve will be adjusted in future quarters, based on the fair value of the Nortel common shares issuable, until the settlement is finalized. The administration of the settlement will be a complex and lengthy process. Once the securities regulatory and stock exchange approvals have been obtained and the court approval orders are finalized following the exhaustion of any appeals and appeal periods, the claims administrator will submit a list of approved claims to the appropriate courts for approval. Once all the courts have approved the claims, the process of distributing cash and share certificates to claimants can begin. It is not possible to predict how long the process will take, although it likely will be many months.

Nortel’s insurers have agreed to pay $228.5 in cash toward the settlement and Nortel has agreed to certain indemnification obligations with its insurers. Nortel 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, Nortel also agreed to certain corporate governance enhancements. These enhancements, which include 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, Nortel 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 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.

In April 2004, Nortel announced that it was under investigation by each of the SEC and the Ontario Securities Commission in connection with the restatements of its financial statements in 2003 and 2004. These investigations are ongoing.

In May 2004, Nortel 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, Nortel 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, Nortel, 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 Nortel Long-Term Investment Plan, who held shares of the Nortel Networks Stock Fund during the period from March 7, 2000, through

167

NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

November 28, 2006. 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’s common shares through the investment plan. A class of plaintiffs in this action has not yet been certified.

In January 2005, Nortel and NNL 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 NNL 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-judgement 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 Nortel and NNL asserting claims for, among other things, wrongful dismissal and seeking compensatory, aggravated and punitive damages, and pre-and post-judgment interest and costs.

Except as otherwise described herein, 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 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 Nortel has recorded in its 2005 and 2006 financial results as a result of the Global Class Action Settlement and the accrued liability for the Ontario Settlement, Nortel has not 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, Nortel 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, Nortel intends to defend these actions, suits, claims and proceedings, litigating or settling cases where in management’s judgement it would be in the best interest of shareholders to do so. Nortel 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 and current generation, management and disposal of hazardous substances and wastes. As of December 31, 2006, the accruals on the consolidated balance sheet for

168

NORTEL NETWORKS CORPORATION

Notes to Consolidated Financial Statements — (Continued)

environmental matters were $27. Based on information available as of December 31, 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 14 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 $27.

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 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 10% or more, depending on the circumstances). A de minimis potentially responsible party is generally considered to have contributed less than 10% (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 $27 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.

22.   Subsequent events

2007 Restructuring Plan

On February 7, 2007, Nortel announced a restructuring work plan (the “2007 Restructuring Plan”) that includes a net reduction of its global workforce by approximately 2,900 positions, as well as cost containment actions relating to its global real estate assets. In addition, Nortel plans to shift approximately 1,000 positions to lower-cost locations. The majority of the workforce reductions are expected to occur during the course of 2007 with the balance occurring in 2008. The 2007 Restructuring Plan will also reduce its global real-estate portfolio by approximately 500,000 square feet in 2007. The estimated cost of the 2007 Restructuring Plan initiatives is expected to be approximately $390, of which approximately $300 relates to the workforce reductions and approximately $90 to the real estate cost containment actions.

Nortel restatement of previously issued financial statements

On March 1, 2007 Nortel announced that it and NNL would restate their financial results for 2005, 2004 and the first nine months of 2006, and would have adjustments prior to 2004. As a result, Nortel delayed its filing of its annual report on Form 10-K for the year ended December 31, 2006 beyond its regulatory filing deadline of March 1, 2007. As a result of the breach of certain provisions of NNL’s EDC Support Facility related to the required restatement by NNL of certain of its prior period results, absent a waiver, EDC will have the right to refuse to issue additional support and to terminate its commitments under the Support Facility, subject to a 30 day cure period with respect to certain provisions. On March 9, 2007 NNL received a waiver from EDC in respect of its breaches.

As Nortel filed its 2006 Form 10-K within the 15-day period permitted by SEC Regulation 12B-25, and NNL filed its 2006 Form 10-K by the applicable March 31, 2007 deadline, the delay did not result in a breach of provisions with respect to Nortel’s outstanding indebtedness and related indentures.

* * * * *

169

Quarterly Financial Data (Unaudited)

The following financial data present the impact of the restatement on Nortel’s previously issued condensed consolidated statements of operations and cash flows for each of the quarters ended March 31, 2006; June 30, 2006; September 30, 2006; March 31, 2005; June 30, 2005; September 30, 2005; and December 31, 2005 and condensed consolidated balance sheets as at March 31, 2006; June 30, 2006; and September 30, 2006 (refer to note 4 of the accompanying consolidated financial statements for a description of the nature of the adjustments). The quarter ended December 31, 2006 has not been previously reported.

Nortel believes all adjustments necessary for a fair presentation of the results for the periods presented have been made.

170

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Three Months Ended
	March 31, 2006						March 31, 2005
	As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	2,080		$	2,088		$	2,162		$	2,156
Services		302			302			227			226
Total revenues		2,382			2,390			2,389			2,382
Cost of Revenues:
Products		1,305			1,296			1,258			1,266
Services		169			169			119			119
Total cost of revenues		1,474			1,465			1,377			1,385
Gross profit		908			925			1,012			997
Selling, general and administrative expense		595			610			578			582
Research and development expense		478			479			474			478
Amortization of intangibles		5			5			2			2
Special charges		5			5			14			14
(Gain) loss on sale of businesses and assets		(35	)		(39	)		22			24
Shareholder litigation settlement expense		19			19			—			—
Operating earnings (loss)		(159	)		(154	)		(78	)		(103	)
Other income — net		69			56			54			53
Interest expense
Long-term debt		(46	)		(45	)		(50	)		(50	)
Other		(24	)		(16	)		(3	)		(3	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(160	)		(159	)		(77	)		(103	)
Income tax benefit (expense)		(23	)		(25	)		(16	)		(18	)
		(183	)		(184	)		(93	)		(121	)
Minority interests — net of tax		9			6			(14	)		(11	)
Equity in net earnings (loss) of associated companies — net of tax		(2	)		(2	)		1			1
Net earnings (loss) from continuing operations		(176	)		(180	)		(106	)		(131	)
Net earnings from discontinued operations — net of tax		—			—			2			2
Net earnings (loss) before cumulative effect of accounting change		(176	)		(180	)		(104	)		(129	)
Cumulative effect of accounting change — net of tax		9			9			—			—
Net earnings (loss)	$	(167	)	$	(171	)	$	(104	)	$	(129	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.39	)	$	(0.39	)	$	(0.25	)	$	(0.30	)
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.39	)	$	(0.39	)	$	(0.25	)	$	(0.30	)

(i)  Commencing in the third quarter of 2006 Nortel disclosed revenues and cost of revenues from both its products and services. Previous quarters have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

171

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2006						June 30, 2006
	As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	2,421		$	2,459		$	4,501		$	4,547
Services		323			321			625			623
Total revenues		2,744			2,780			5,126			5,170
Cost of revenues:
Products		1,502			1,535			2,807			2,831
Services		176			177			345			346
Total cost of revenues		1,678			1,712			3,152			3,177
Gross profit		1,066			1,068			1,974			1,993
Selling, general and administrative expense		596			614			1,191			1,224
Research and development expense		489			498			967			977
Amortization of intangibles		6			6			11			11
In-process research and development expense		16			16			16			16
Special charges		45			49			50			54
(Gain) loss on sale of businesses and assets		10			12			(25	)		(27	)
Shareholder litigation settlement recovery		(510	)		(510	)		(491	)		(491	)
Operating earnings (loss)		414			383			255			229
Other income — net		51			64			120			120
Interest expense
Long-term debt		(59	)		(58	)		(105	)		(103	)
Other		(11	)		(19	)		(35	)		(35	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		395			370			235			211
Income tax benefit (expense)		(27	)		(29	)		(50	)		(54	)
		368			341			185			157
Minority interests — net of tax		1			4			10			10
Equity in net earnings (loss) of associated companies — net of tax		(3	)		(3	)		(5	)		(5	)
Net earnings (loss) from continuing operations		366			342			190			162
Net earnings from discontinued operations — net of tax		—			—			—			—
Net earnings (loss) before cumulative effect of accounting change		366			342			190			162
Cumulative effect of accounting change		—			—			9			9
Net earnings (loss)	$	366		$	342		$	199		$	171
Basic and diluted earnings (loss) per common share
— from continuing operations	$	0.84		$	0.79		$	0.46		$	0.39
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	0.84		$	0.79		$	0.46		$	0.39

(i)  Commencing in the third quarter of 2006 Nortel disclosed revenues and cost of revenues from both its products and services. Previous quarters have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

172

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2005						June 30, 2005
	As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	2,329		$	2,320		$	4,491		$	4,476
Services		290			289			517			515
Total revenues		2,619			2,609			5,008			4,991
Cost of Revenues:
Products		1,333			1,321			2,591			2,587
Services		152			152			271			271
Total cost of revenues		1,485			1,473			2,862			2,858
Gross profit		1,134			1,136			2,146			2,133
Selling, general and administrative expense		588			592			1,166			1,174
Research and development expense		488			492			962			970
Amortization of intangibles		2			2			4			4
In-process research and development expense		—			—			—			—
Special charges		92			92			106			106
(Gain) loss on sale of businesses and assets		11			9			33			33
Shareholder litigation settlement recovery		—			—			—			—
Operating earnings (loss)		(47	)		(51	)		(125	)		(154	)
Other income — net		74			73			128			126
Interest expense
Long-term debt		(51	)		(51	)		(101	)		(101	)
Other		(1	)		(1	)		(4	)		(4	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(25	)		(30	)		(102	)		(133	)
Income tax benefit (expense)		9			6			(7	)		(12	)
		(16	)		(24	)		(109	)		(145	)
Minority interests — net of tax		(17	)		(14	)		(31	)		(25	)
Equity in net earnings (loss) of associated companies — net of tax		1			1			2			2
Net earnings (loss) from continuing operations		(32	)		(37	)		(138	)		(168	)
Net earnings (loss) from discontinued operations — net of tax		(1	)		(1	)		1			1
Net earnings (loss) before cumulative effect of accounting change		(33	)		(38	)		(137	)		(167	)
Cumulative effect of accounting change		—			—			—			—
Net earnings (loss)	$	(33	)	$	(38	)	$	(137	)	$	(167	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.07	)	$	(0.08	)	$	(0.32	)	$	(0.39	)
— from discontinued operations		(0.00	)		(0.00	)		0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.07	)	$	(0.08	)	$	(0.32	)	$	(0.39	)

(i)  Commencing in the third quarter of 2006 Nortel disclosed revenues and cost of revenues from both its products and services. Previous quarters have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

173

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2006						September 30, 2006
	As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	2,640		$	2,595		$	7,141		$	7,142
Services		315			331			940			954
Total revenues		2,955			2,926			8,081			8,096
Cost of revenues:
Products		1,646			1,614			4,453			4,445
Services		184			189			529			535
Total cost of revenues		1,830			1,803			4,982			4,980
Gross profit		1,125			1,123			3,099			3,116
Selling, general and administrative expense		605			585			1,796			1,809
Research and development expense		480			474			1,447			1,451
Amortization of intangibles		8			8			19			19
In-process research and development expense		—			—			16			16
Special charges		25			22			75			76
(Gain) loss on sale of businesses and assets		(16	)		(15	)		(41	)		(42	)
Shareholder litigation settlement expense (recovery)		38			38			(453	)		(453	)
Operating earnings (loss)		(15	)		11			240			240
Other income — net		51			58			171			178
Interest expense
Long-term debt		(85	)		(85	)		(190	)		(188	)
Other		(20	)		(20	)		(55	)		(55	)
Earnings (loss) from continuing operations before income taxes,
minority interests and equity in net earnings (loss) of associated companies		(69	)		(36	)		166			175
Income tax benefit (expense)		(9	)		(15	)		(59	)		(69	)
		(78	)		(51	)		107			106
Minority interests — net of tax		(19	)		(11	)		(9	)		(1	)
Equity in net earnings (loss) of associated companies — net of tax		(2	)		(1	)		(7	)		(6	)
Net earnings (loss) from continuing operations		(99	)		(63	)		91			99
Net earnings from discontinued operations — net of tax		—			—			—			—
Net earnings (loss) before cumulative effect of accounting change		(99	)		(63	)		91			99
Cumulative effect of accounting change		—			—			9			9
Net earnings (loss)	$	(99	)	$	(63	)	$	100		$	108
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.23	)	$	(0.14	)	$	0.23		$	0.25
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.23	)	$	(0.14	)	$	0.23		$	0.25

(i)  The earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

174

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2005						September 30, 2005
	As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	2,193		$	2,165		$	6,684		$	6,641
Services		325			325			842			840
Total revenues		2,518			2,490			7,526			7,481
Cost of revenues:
Products		1,350			1,338			3,941			3,925
Services		190			190			461			461
Total cost of revenues		1,540			1,528			4,402			4,386
Gross profit		978			962			3,124			3,095
Selling, general and administrative expense		567			572			1,733			1,746
Research and development expense		443			447			1,405			1,417
Amortization of intangibles		7			7			11			11
In-process research and development expense		—			—			—			—
Special charges		39			39			145			145
(Gain) loss on sale of businesses and assets		3			3			36			36
Shareholder litigation settlement expense (recovery)		—			—			—			—
Operating earnings (loss)		(81	)		(106	)		(206	)		(260	)
Other income — net		53			56			181			182
Interest expense
Long-term debt		(54	)		(54	)		(155	)		(155	)
Other		(3	)		(3	)		(7	)		(7	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(85	)		(107	)		(187	)		(240	)
Income tax benefit (expense)		(39	)		(41	)		(46	)		(53	)
		(124	)		(148	)		(233	)		(293	)
Minority interests — net of tax		(15	)		(12	)		(46	)		(37	)
Equity in net earnings (loss) of associated companies — net of tax		1			1			3			3
Net earnings (loss) from continuing operations		(138	)		(159	)		(276	)		(327	)
Net earnings from discontinued operations — net of tax		2			2			3			3
Net earnings (loss) before cumulative effect of accounting change		(136	)		(157	)		(273	)		(324	)
Cumulative effect of accounting change		—			—			—			—
Net earnings (loss)	$	(136	)	$	(157	)	$	(273	)	$	(324	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.32	)	$	(0.37	)	$	(0.64	)	$	(0.75	)
— from discontinued operations		0.00			0.00			0.00			0.00
Basic and diluted earnings (loss) per common share	$	(0.32	)	$	(0.37	)	$	(0.64	)	$	(0.75	)

 (i) The earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

175

Condensed Consolidated Statements of Operations (unaudited)

				Three Months Ended
				December 31, 2005
	Three Months Ended			As Previously
	December 31, 2006(a)			Reported(b)			As Restated
	(Millions of U.S. dollars, except per share amounts)
Revenues:
Products	$	3,016		$	2,665		$	2,697
Services		306			332			331
Total revenues		3,322			2,997			3,028
Cost of revenues:
Products		1,822			1,635			1,665
Services		177			180			180
Total cost of revenues		1,999			1,815			1,845
Gross profit		1,323			1,182			1,183
Selling, general and administrative expense		694			680			683
Research and development expense		488			451			457
Amortization of intangibles		7			6			6
In-process research and development expense		6			—			—
Special charges		29			25			24
(Gain) loss on sale of businesses and assets		(164	)		11			11
Shareholder litigation settlement expense		234			2,474			2,474
Operating earnings (loss)		29			(2,465	)		(2,472	)
Other income (expense) — net		34			122			113
Interest expense
Long-term debt		(84	)		(52	)		(54	)
Other		(13	)		(4	)		(3	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(34	)		(2,399	)		(2,416	)
Income tax benefit (expense)		9			102			134
		(25	)		(2,297	)		(2,282	)
Minority interests — net of tax		(58	)		(4	)		(2	)
Equity in net earnings (loss) of associated companies — net of tax		3			1			—
Net earnings (loss) from continuing operations		(80	)		(2,300	)		(2,284	)
Net earnings from discontinued operations — net of tax		—			(2	)		(2	)
Net earnings (loss) before cumulative effect of accounting change		(80	)		(2,302	)		(2,286	)
Cumulative effect of accounting change		—			—			—
Net earnings (loss)	$	(80	)	$	(2,302	)	$	(2,286	)
Basic and diluted earnings (loss) per common share
— from continuing operations	$	(0.19	)	$	(5.30	)	$	(5.26	)
— from discontinued operations		0.00			(0.00	)		(0.00	)
Basic and diluted earnings (loss) per common share	$	(0.19	)	$	(5.30	)	$	(5.26	)

(a)

The fourth quarter ended December 31, 2006 had not been previously reported.

(b)

Previously reported in the Unaudited Quarterly Financial Data section of the 2005 Annual Report on Form 10-K/A. Commencing in the third quarter of 2006 Nortel disclosed revenues and cost of revenues from both its products and services. Previous quarters have been updated to reflect this presentation change. Additionally, the earnings per share amounts have been updated to reflect the 1 for 10 share consolidation.

See notes 3, 7, 10 and 16 to the accompanying consolidated financial statements for the impact of accounting changes, special charges, acquisitions, divestitures and closures and capital stock, respectively, that affect the comparability of the

176

above selected financial data. Additionally, the following significant items were recorded in the fourth quarters of 2006 and 2005:

•  During the fourth quarter of 2006 Nortel recorded $12 of revenues related to the contract with BSNL that was entered into in 2004. The corresponding amount recorded in the fourth quarter of 2005 related to this contract was $228.

•  During the fourth quarter of 2006 Nortel recorded a shareholder lawsuit expense of $234, to reflect the fair value mark-to-market adjustment of the Nortel common shares issuable to the plaintiffs of the shareholder lawsuit, upon settlement. In the fourth quarter of 2005, the shareholder lawsuit expense of $2,474 was initially recorded.

•  During the fourth quarter of 2006, Nortel recorded a gain of $166 on the sale of assets and liabilities relating to its UMTS access products and services.

177

Condensed Consolidated Balance Sheets (unaudited)

	March 31, 2006						June 30, 2006						September 30, 2006
	As Previously						As Previously						As Previously
	Reported(i)			As Restated			Reported(i)			As Restated			Reported(i)			As Restated
	(Millions of U.S. dollars)
ASSETS
Current assets
Cash and cash equivalents	$	2,695		$	2,695		$	1,904		$	1,904		$	2,600		$	2,600
Restricted cash and cash equivalents		77			77			646			646			628			628
Accounts receivable — net		2,620			2,569			2,785			2,796			2,804			2,795
Inventories — net		1,984			2,297			2,035			2,366			1,834			2,139
Deferred income taxes — net		388			388			348			348			405			405
Other current assets		823			821			833			802			755			739
Total current assets		8,587			8,847			8,551			8,862			9,026			9,306
Investments		246			244			209			209			211			212
Plant and equipment (net of restated accumulated depreciation as of March 31, 2006 of $2,233; June 30, 2006 — $2,306; September 30, 2006 — $2,298)		1,531			1,529			1,574			1,572			1,559			1,557
Goodwill		2,680			2,685			2,588			2,588			2,589			2,589
Intangible assets — net		166			166			205			205			184			184
Deferred income taxes — net		3,606			3,639			3,728			3,764			3,651			3,687
Other assets		1,025			760			971			702			979			716
Total assets	$	17,841		$	17,870		$	17,826		$	17,902		$	18,199		$	18,251
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	1,069		$	1,071		$	1,065		$	1,059		$	949		$	951
Payroll and benefit-related liabilities		778			783			861			859			793			790
Contractual liabilities		297			297			258			263			233			221
Restructuring liabilities		84			84			111			113			93			93
Other accrued liabilities		1,675			1,653			1,800			1,815			1,872			1,864
Deferred revenue and advanced billings		2,709			2,767			2,717			2,768			2,484			2,556
Loan payable		1,300			1,300			—			—			—
Long-term debt due within one year		168			168			18			18			18			18
Total current liabilities		8,080			8,123			6,830			6,895			6,442			6,493
Long-term debt		2,445			2,446			3,752			3,752			4,446			4,446
Deferred income taxes — net		109			109			107			107			107			107
Deferred revenue		970			957			948			947			1,011			994
Other liabilities		4,808			4,825			4,290			4,347			4,136			4,165
Total liabilities		16,412			16,460			15,927			16,048			16,142			16,205
Minority interests in subsidiary companies		754			769			738			755			742			757
Guarantees, commitments and contingencies (refer to notes 13, 14 and 21 of this report)
SHAREHOLDERS’ EQUITY
Common shares		33,935			33,930			33,932			33,932			33,936			33,936
Additional paid-in capital		3,295			3,300			3,326			3,326			3,352			3,352
Accumulated deficit		(35,692	)		(35,773	)		(35,326	)		(35,431	)		(35,425	)		(35,494	)
Accumulated other comprehensive loss		(863	)		(816	)		(771	)		(728	)		(548	)		(505	)
Total shareholders’ equity		675			641			1,161			1,099			1,315			1,289
Total liabilities and shareholders’ equity	$	17,841		$	17,870		$	17,826		$	17,902		$	18,199		$	18,251

 (i) Certain amounts have been reclassified to reflect the presentation adopted in the annual 2006 consolidated financial statements.

178

Condensed Consolidated Statements of Cash Flows (unaudited)

	2006
	Three Months Ended						Six Months Ended						Nine Months Ended
	March 31						June 30						September 30
	As Previously						As Previously						As Previously
	Reported			As Restated			Reported			As Restated			Reported			As Restated
	(Millions of U.S. dollars)
Net cash from (used in):
Operating activities of continuing operations	$	(174	)	$	(174	)	$	(282	)	$	(282	)	$	(328	)	$	(283	)
Investing activities of continuing operations
Expenditures for plant and equipment		(99	)		(99	)		(177	)		(177	)		(260	)		(260	)
Proceeds on disposals of plant and equipment		87			87			89			89			125			125
Restricted cash and cash equivalents		3			3			(567	)		(567	)		(546	)		(546	)
Acquisitions of investments and businesses — net		(121	)		(121	)		(125	)		(125	)		(134	)		(134	)
Proceeds on sale of investments and businesses		30			30			111			111			199			199
Investing activities of continuing operations		(100	)		(100	)		(669	)		(669	)		(616	)		(616	)
Financing activities of continuing operations
Dividends paid by subsidiaries to minority interests		(18	)		(18	)		(31	)		(31	)		(46	)		(46	)
Increase in notes payable		4			4			27			27			88			88
Decrease in notes payable		(3	)		(3	)		(12	)		(12	)		(30	)		(75	)
Proceeds from long-term debt		1,300			1,300			1,300			1,300			3,300			3,300
Repayments of long-term debt		(1,275	)		(1,275	)		(1,425	)		(1,425	)		(2,725	)		(2,725	)
Debt issuance cost		—			—			—			—			(42	)		(42	)
Decrease in capital leases payable		(5	)		(5	)		(9	)		(9	)		(12	)		(12	)
Issuance of common shares		1			1			1			1			1			1
Financing activities of continuing operations		4			4			(149	)		(149	)		534			489
Effect of foreign exchange rate changes on cash and cash equivalents		14			14			53			53			59			59
Net cash from (used in) continuing operations		(256	)		(256	)		(1,047	)		(1,047	)		(351	)		(351	)
Net cash from (used in) operating activities of discontinued operations		—			—			—			—			—			—
Net decrease in cash and cash equivalents		(256	)		(256	)		(1,047	)		(1,047	)		(351	)		(351	)
Cash and cash equivalents at beginning of period		2,951			2,951			2,951			2,951			2,951			2,951
Cash and cash equivalents at end of period	$	2,695		$	2,695		$	1,904		$	1,904		$	2,600		$	2,600

179

Condensed Consolidated Statements of Cash Flows (unaudited)

	2005
	Three Months Ended						Six Months Ended						Nine Months Ended
	March 31						June 30						September 30
	As Previously						As Previously						As Previously
	Reported			As Restated			Reported			As Restated			Reported			As Restated
	(Millions of U.S. dollars)
Net cash from (used in):
Operating activities of continuing operations	$	(263	)	$	(262	)	$	(153	)	$	(154	)	$	(297	)	$	(297	)
Investing activities of continuing operations
Expenditures for plant and equipment		(54	)		(54	)		(124	)		(124	)		(176	)		(176	)
Proceeds on disposals of plant and equipment		—			—			10			10			10			10
Restricted cash and cash equivalents		1			—			9			10			9			9
Acquisitions of investments and businesses — net		(2	)		(2	)		(448	)		(448	)		(449	)		(449	)
Proceeds on sale of investments and businesses		83			83			167			167			308			308
Investing activities of continuing operations		28			27			(386	)		(385	)		(298	)		(298	)
Financing activities of continuing operations
Dividends paid by subsidiaries to minority interests		(14	)		(14	)		(24	)		(24	)		(33	)		(33	)
Increase in notes payable		20			20			38			38			59			59
Decrease in notes payable		(26	)		(26	)		(46	)		(46	)		(64	)		(64	)
Proceeds from long-term debt		—			—			—			—			—			—
Repayments of long-term debt		—			—			—			—			—			—
Decrease in capital leases payable		(1	)		(1	)		(5	)		(5	)		(8	)		(8	)
Issuance of common shares		—			—			1			1			4			4
Financing activities of continuing operations		(21	)		(21	)		(36	)		(36	)		(42	)		(42	)
Effect of foreign exchange rate changes on cash and cash equivalents		(35	)		(35	)		(85	)		(85	)		(86	)		(86	)
Net cash from (used in) continuing operations		(291	)		(291	)		(660	)		(660	)		(723	)		(723	)
Net cash from (used in) operating activities of discontinued operations		36			36			34			34			34			34
Net decrease in cash and cash equivalents		(255	)		(255	)		(626	)		(626	)		(689	)		(689	)
Cash and cash equivalents at beginning of period		3,685			3,685			3,685			3,685			3,685			3,685
Cash and cash equivalents at end of period	$	3,430		$	3,430		$	3,059		$	3,059		$	2,996		$	2,996

180

Supplemental information (Millions of U.S. dollars) (unaudited)

     (a)   Adjustments

The following tables summarize the revenue adjustments and other adjustments to net earnings (loss) (refer to note 4 of the accompanying consolidated financial statements for a description of the nature of the adjustments).

	2006
	Revenues							Cost of Revenues
	Three		Three		Three			Three			Three		Three
	Months		Months		Months			Months			Months		Months
	Ended		Ended		Ended			Ended			Ended		Ended
	March 31		June 30		September 30			March 31			June 30		September 30
As previously reported	$	2,382	$	2,744	$	2,955		$	1,474		$	1,678	$	1,830
Adjustments:
Pension and post-retirement errors		—		—		—			3			3		1
Revenue recognition errors		8		36		(29	)		(15	)		13		(4	)
Other errors		—		—		—			3			18		(24	)
As restated	$	2,390	$	2,780	$	2,926		$	1,465		$	1,712	$	1,803

	2006
	Net earnings (loss)
	Three			Three			Three
	Months			Months			Months
	Ended			Ended			Ended
	March 31			June 30			September 30
As previously reported	$	(167	)	$	366		$	(99	)
Adjustments:
Pension and post-retirement errors		(8	)		(8	)		(2	)
Revenue recognition errors		19			20			(22	)
Other errors		(15	)		(36	)		60
As restated	$	(171	)	$	342		$	(63	)

	2005
	Revenues											Cost of Revenues
	Three			Three			Three			Three		Three			Three			Three			Three
	Months			Months			Months			Months		Months			Months			Months			Months
	Ended			Ended			Ended			Ended		Ended			Ended			Ended			Ended
	March 31			June 30			September 30			December 31		March 31			June 30			September 30			December 31
As previously reported	$	2,389		$	2,619		$	2,518		$	2,997	$	1,377		$	1,485		$	1,540		$	1,815
Adjustments:
Pension and post-retirement errors		—			—			—			—		4			3			4			4
Revenue recognition errors		(7	)		(10	)		(28	)		31		5			(16	)		(19	)		28
Other errors		—			—			—			—		(1	)		1			3			(2	)
As restated	$	2,382		$	2,609		$	2,490		$	3,028	$	1,385		$	1,473		$	1,528		$	1,845

	2005
	Net earnings (loss)
	Three			Three			Three			Three
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	March 31			June 30			September 30			December 31
As previously reported	$	(104	)	$	(33	)	$	(136	)	$	(2,302	)
Adjustments:
Pension and post-retirement errors		(12	)		(12	)		(12	)		(12	)
Revenue recognition errors		(11	)		6			(8	)		4
Prior period tax error		—			—			—			36
Other errors		(2	)		1			(1	)		(12	)
As restated	$	(129	)	$	(38	)	$	(157	)	$	(2,286	)

181

	2006
	Revenues				Cost of Revenues
	Six		Nine		Six			Nine
	Months		Months		Months			Months
	Ended		Ended		Ended			Ended
	June 30		September 30		June 30			September 30
As previously reported	$	5,126	$	8,081	$	3,152		$	4,982
Adjustments:
Pension and post-retirement errors		—		—		6			7
Revenue recognition errors		44		15		(2	)		(6	)
Other errors		—		—		21			(3	)
As restated	$	5,170	$	8,096	$	3,177		$	4,980

	2006
	Net earnings (loss)
	Six			Nine
	Months			Months
	Ended			Ended
	June 30			September 30
As previously reported	$	199		$	100
Adjustments:
Pension and post-retirement errors		(16	)		(18	)
Revenue recognition errors		39			17
Other errors		(51	)		9
As restated	$	171		$	108

	2005
	Revenues						Cost of Revenues
	Six			Nine			Six			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	June 30			September 30			June 30			September 30
As previously reported	$	5,008		$	7,526		$	2,862		$	4,402
Adjustments:
Pension and post-retirement errors		—			—			7			11
Revenue recognition errors		(17	)		(45	)		(11	)		(30	)
Other errors		—			—			—			3
As restated	$	4,991		$	7,481		$	2,858		$	4,386

	2005
	Net earnings (loss)
	Six			Nine
	Months			Months
	Ended			Ended
	June 30			September 30
As previously reported	$	(137	)	$	(273	)
Adjustments:
Pension and post-retirement errors		(24	)		(36	)
Revenue recognition errors		(5	)		(13	)
Other errors		(1	)		(2	)
As restated	$	(167	)	$	(324	)

As noted in note 4 of the accompanying audited consolidated financial statements, Nortel recorded adjustments related to pensions and post-retirement benefit errors, revenue recognition errors, a prior period tax error, and other adjustments the more significant of which are described below. For additional information regarding the pension and post-retirement benefit errors and the prior period tax error see note 4.

182

Revenue recognition errors:

Errors related principally to complex arrangements with multiple deliverables in which the timing of revenue recognition was determined to be incorrect. For certain of Nortel’s multiple element arrangements where certain elements such as PCS, specified upgrade rights and/or non-essential hardware or software products or services remained undelivered, Nortel determined that the undelivered element could not be treated as a separate unit of accounting because fair value could not be established. Accordingly, Nortel should have deferred revenue, and related costs, until the earlier of the point in time that fair value of the undelivered element could be established or all the remaining elements have been delivered. These corrections resulted in an increase/ (decrease) of revenue of ($1), $7, and $10 for the first three quarters of 2006 and decreases in revenue of $10, $13, $10, and $4 for the four quarters of 2005. The related cost of revenue impact resulted in increases/ (decreases) of ($13), $9 and $13 for the first three quarters of 2006 and ($8), ($8), ($4), and $16 for the four quarters of 2005.

During the third quarter of 2006, Nortel previously recognized $40 of revenue that had been previously deferred by LG-Nortel due to the fact that it believed that LG-Nortel had a practice of providing implicit PCS for which they did not have fair value. A subsequent detailed review of the Enterprise products sold by LG-Nortel led to a conclusion in the third quarter of 2006 that LG-Nortel did not have a practice of providing implicit PCS for certain Enterprise products. As a result, revenue should have been recognized upon delivery. Nortel had previously recorded a cumulative correction of this error in the third quarter of 2006 and, as a result of this restatement, has now recorded it in the appropriate periods. The correction of this error resulted in a $40 reduction in revenue in the third quarter of 2006, with corresponding increases of $10, $14, and $16 in the fourth quarter of 2005, and the first and second quarters of 2006 and a $17 reduction in cost of revenues in the third quarter of 2006, with corresponding increases of $6, $5, and $6 for the fourth quarter of 2005, and the first and second quarters of 2006. Nortel also recorded reductions to minority interest to reflect the noncontrolling interest’s share of the impact of these restatement adjustments.

Previous misapplication of SOP 81-1 resulted in errors on revenues recognized in an arrangement between 2003 and the first quarter of 2006. The misapplication related to the calculation of liquidated damages estimated to be incurred as a result of contractual commitments related to network outages. Prior to the second quarter of 2006, Nortel estimated its liquidated damages based on a quarterly network outage estimate. In the second quarter of 2006, Nortel determined that it should have been recognizing product credits based on an estimate of the total expected outages for the arrangement. Nortel had previously corrected the resulting revenue errors in the second quarter of 2006 and, as a result of the restatement, has recorded the correction in the appropriate periods. The corrections have resulted in an increase/(decrease) in revenue and gross profit of $5, $8 and $5 for the first three quarters of 2006, and ($7), $8, nil and $15 for the four quarters of 2005.

In 2004, Nortel entered into a software arrangement where the customer had the right to suspend payments until delivery of certain future products; therefore, the arrangement fee was not fixed or determinable. Pursuant to SOP 97-2, if at the outset of the arrangement the fee is not fixed or determinable, once all other revenue recognition criteria have been satisfied, revenue should be recognized as payments become due. Previously, the fee was recognized ratably over the term. Due to the lack of a fixed or determinable fee, the amount recognized ratably should have been capped at the amount that was due and payable from the customer. The correction of this error resulted in an increase/(decrease) in both revenue and gross profit of $1, ($5), ($4) for the first three quarters of 2006, and ($3), $5, ($5), and $10 for the four quarters of 2005.

Other errors

As part of this restatement, Nortel corrected several individually immaterial adjustments relating to prior periods that had been previously recorded in the third quarter of 2006. The errors related to errors in warranty calculations, inventory valuation and other errors. The correction of these errors resulted in a $24 reduction in cost of revenues in the third quarter of 2006, with an offsetting $24 increase in cost of revenues in the second quarter of 2006.

In the third quarter of 2006, Nortel corrected for royalty payments that should have been accrued in the second quarter of 2006. As part of this restatement, Nortel recorded the royalty payments in the correct period, resulting in a $7 reduction in cost of revenues in the third quarter of 2006 with a corresponding $7 increase in the second quarter of 2006.

As part of this restatement, Nortel corrected for various individually immaterial expenses previously recorded in the third quarter of 2006 which related to the second quarter of 2006. The errors related to invoicing issues by certain suppliers and invoicing cut-off errors, which resulted in delayed recognition of accruals. The correction of these errors resulted in an $18 reduction in SG&A expense in the third quarter of 2006, with an offsetting $18 increase in the second quarter of 2006.

183

As part of this restatement, Nortel corrected for asset impairments that had been provided for previously under Nortel’s restructuring plans in the second quarter of 2006 and errors in the timing of accruals for special charges related to Nortel’s 2006 Restructuring Plan. These corrections resulted in a $3 reduction in special charges in the third quarter of 2006, with an offsetting increase in the second quarter of 2006.

In the third quarter of 2006, Nortel expensed $4 in R&D costs related to inventory that had been previously incorrectly deferred in the first and second quarters of 2006. As part of this restatement, Nortel recorded this correction in the appropriate period, resulting in a $4 reduction in R&D expense in the third quarter of 2006, with an offsetting $3 increase in the second quarter of 2006 and $1 increase in the first quarter of 2006.

Classification Errors

In the second quarter of 2006 Nortel corrected a classification error related to securitization charges incurred in the first quarter of 2006, previously recorded in interest expense — other that should have been recorded in other income — net. As part of this restatement, Nortel has recorded this correction in the appropriate period. This correction resulted in an $8 increase in other income — net in the second quarter of 2006, and a corresponding $8 decrease in other income — net the first quarter of 2006 and an $8 increase in interest expense — other in the second quarter of 2006, and a corresponding $8 decrease in interest expense in the first quarter of 2006.

Nortel corrected a classification error identified in the fourth quarter of 2006 related to the treatment of certain short-term promissory notes classified as notes payable in the third quarter of 2006. Nortel determined that these notes should be classified as trade payable and corrected this classification error as part of this restatement. As a result of this classification error, the movement of these balances had been recorded in cash flows from (used in) financing activities in the third quarter consolidated statement of cash flows. The correction of the classification resulting in $45 reduction in net cash used in operating activities, with a $45 offsetting reduction in net cash from financing activities for the nine months ended September 30, 2006.

An error related to the classification between inventories — net and other assets was identified in the fourth quarter of 2006. Nortel identified certain deferred costs that were classified as long-term and included in other assets but that related to arrangements where the associated deferred revenue was recorded as a current liability. Nortel has corrected this error and reclassified these deferred costs as a component of inventory — net, included in current assets. This correction resulted in increases in inventory — net and corresponding decreases in other assets of $260, $265, and $265, respectively for the March 31, June 30, and September 30, 2006 condensed consolidated balance sheets.

184

(b)   Segments

The following tables sets forth information by segment:

	2006
	Three Months						Three Months						Three Months
	Ended						Ended						Ended
	March 31						June 30						September 30
													As Previously
	Previously(i)			As Restated			Previously(i)			As Restated			Reported			As Restated
Revenues
Mobility and Converged Core Networks	$	1,282		$	1,265		$	1,433		$	1,463		$	1,541		$	1,522
Enterprise Solutions		439			462			475			491			609			581
Metro Ethernet Networks		306			308			465			457			429			432
Global Services		291			291			309			307			316			331
Total reportable segments		2,318			2,326			2,682			2,718			2,895			2,866
Other		64			64			62			62			60			60
Total revenues	$	2,382		$	2,390		$	2,744		$	2,780		$	2,955		$	2,926
Management EBT
Mobility and Converged Core Networks	$	72		$	75		$	110		$	99		$	109		$	113
Enterprise Solutions		(56	)		(41	)		(68	)		(57	)		(6	)		(18	)
Metro Ethernet Networks		(32	)		(26	)		50			41			13			21
Global Services		89			89			93			90			89			100
Total reportable segments		73			97			185			173			205			216
Other		(232	)		(262	)		(225	)		(229	)		(240	)		(211	)
Total Management EBT		(159	)		(165	)		(40	)		(56	)		(35	)		5
Amortization of intangibles		(5	)		(5	)		(6	)		(6	)		(8	)		(8	)
In-process research and development expense		—			—			(16	)		(16	)		—			—
Special charges		(5	)		(5	)		(45	)		(49	)		(25	)		(22	)
Gain (loss) on sale of businesses and assets		35			39			(10	)		(12	)		16			15
Shareholder litigation settlement expense (recovery)		(19	)		(19	)		510			510			(38	)		(38	)
Income tax benefit (expense)		(23	)		(25	)		(27	)		(29	)		(9	)		(15	)
Net earnings (loss) from continuing operations	$	(176	)	$	(180	)	$	366		$	342		$	(99	)	$	(63	)

(i)  During the third quarter of 2006, Nortel changed its reportable segments. The third quarter of 2006 and the related 2005 comparatives had been previously reported under the new reportable segments. Nortel did not previously report quarterly financial data for the first two quarters of 2006 reflecting its new reportable segments. These amounts have been reclassified to conform to the new reportable segments.

185

	2005
													Three Months
	Three Months						Three Months						Ended						Three Months
	Ended						Ended						September 30						Ended
	March 31						June 30						As Previously						December 31
	Previously(i)			As Restated			Previously(i)			As Restated			Reported			As Restated			Previously(i)			As Restated
Revenues
Mobility and Converged Core Networks	$	1,369		$	1,366		$	1,333		$	1,331		$	1,251		$	1,226		$	1,716		$	1,757
Enterprise Solutions		465			464			609			605			534			535			502			501
Metro Ethernet Networks		297			295			352			349			366			364			408			400
Global Services		257			256			307			306			302			301			308			307
Total reportable segments		2,388			2,381			2,601			2,591			2,453			2,426			2,934			2,965
Other		1			1			18			18			65			64			63			63
Total revenues	$	2,389		$	2,382		$	2,619		$	2,609		$	2,518		$	2,490		$	2,997		$	3,028
Management EBT
Mobility and Converged Core Networks	$	138		$	130		$	108		$	121		$	38		$	29		$	214		$	224
Enterprise Solutions		10			9			69			66			25			25			(3	)		(7	)
Metro Ethernet Networks		(58	)		(59	)		(20	)		(22	)		(16	)		(18	)		10			(3	)
Global Services		78			77			98			97			85			84			96			96
Total reportable segments		168			157			255			262			132			120			317			310
Other		(220	)		(230	)		(191	)		(202	)		(182	)		(189	)		(203	)		(213	)
Total Management EBT		(52	)		(73	)		64			60			(50	)		(69	)		114			97
Amortization of intangibles		(2	)		(2	)		(2	)		(2	)		(7	)		(7	)		(6	)		(6	)
Special charges		(14	)		(14	)		(92	)		(92	)		(39	)		(39	)		(25	)		(24	)
Gain (loss) on sales of businesses and asset		(22	)		(24	)		(11	)		(9	)		(3	)		(3	)		(11	)		(11	)
Shareholder litigation settlement (expense) recovery		—			—			—			—			—			—			(2,474	)		(2,474	)
Income tax benefit (expense)		(16	)		(18	)		9			6			(39	)		(41	)		102			134
Net earnings (loss) from continuing operations	$	(106	)	$	(131	)	$	(32	)	$	(37	)	$	(138	)	$	(159	)	$	(2,300	)	$	(2,284	)

(i)  During the third quarter of 2006, Nortel changed its reportable segments. The third quarter of 2006 and the related 2005 comparatives had been previously reported under the new reportable segments. Nortel did not previously report quarterly financial data for the first two quarters and the fourth quarter of 2005 reflecting its new reportable segments. These amounts have been reclassified to conform to the new reportable segments.

(c)  Other income — net

	2006
	Three Months						Three Months				Three Months
	Ended						Ended				Ended
	March 31						June 30				September 30
	As Previously						As Previously				As Previously
	Reported			As Restated			Reported		As Restated		Reported			As Restated
Interest income	$	16		$	16		$	19	$	19	$	23		$	23
Gain (loss) on sale or write down of investments		(1	)		(1	)		2		2		(7	)		(7	)
Currency exchange gains (losses)		10			2			16		17		(2	)		1
Other — net		44			39			14		26		37			41
Other income — net	$	69		$	56		$	51	$	64	$	51		$	58

186

	2005
	Three Months						Three Months				Three Months
	Ended						Ended				Ended
	March 31						June 30				September 30
	As Previously						As Previously				As Previously
	Reported			As Restated			Reported		As Restated		Reported		As Restated
Interest income	$	14		$	16		$	15	$	17	$	16	$	18
Gain (loss) on sale or write down of investments		(5	)		(5	)		21		21		—		—
Currency exchange gains (losses)		28			26			19		16		16		17
Other — net		17			16			19		19		21		21
Other income — net	$	54		$	53		$	74	$	73	$	53	$	56

(d)  Accounts receivable — net:

	March 31, 2006						June 30, 2006						September 30, 2006
	As Previously						As Previously						As Previously
	Reported			As Restated			Reported			As Restated			Reported			As Restated
Trade receivables	$	2,044		$	2,044		$	2,076		$	2,122		$	2,237		$	2,310
Notes receivable		69			4			208			164			165			91
Contracts in process		600			621			602			616			500			496
		2,713			2,669			2,886			2,902			2,902			2,897
Less: provision for doubtful accounts		(93	)		(100	)		(101	)		(106	)		(98	)		(102	)
Accounts receivable — net	$	2,620		$	2,569		$	2,785		$	2,796		$	2,804		$	2,795

(e)   Inventories — net:

	March 31, 2006						June 30, 2006						September 30, 2006
	As Previously						As Previously						As Previously
	Reported			As Restated			Reported			As Restated			Reported			As Restated
Raw materials	$	781		$	786		$	744		$	782		$	772		$	772
Work in progress		56			54			44			16			8			8
Finished goods		856			858			894			906			790			788
Deferred costs		2,110			2,157			2,153			2,191			2,050			2,094
		3,803			3,855			3,835			3,895			3,620			3,662
Less: provision for inventory		(1,033	)		(1,032	)		(1,070	)		(1,069	)		(1,067	)		(1,067	)
Inventories — net		2,770			2,823			2,765			2,826			2,553			2,595
Less: long term deferred costs		(786	)		(526	)		(730	)		(460	)		(719	)		(456	)
Current inventories — net	$	1,984		$	2,297		$	2,035		$	2,366		$	1,834		$	2,139

187

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders and Board of Directors of Nortel Networks Corporation

We have audited the consolidated financial statements of Nortel Networks Corporation and subsidiaries (“Nortel”) as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006, management’s assessment of the effectiveness of Nortel’s internal control over financial reporting as of December 31, 2006 and the effectiveness of Nortel’s internal control over financial reporting as of December 31, 2006, and have issued our reports thereon dated March 15, 2007 (which report on the consolidated financial statements expressed an unqualified opinion, includes an explanatory paragraph relating to the restatement of the consolidated financial statements as of December 31, 2005 and for the years ended December 31, 2005 and 2004, 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; and which report on the effectiveness of Nortel’s internal control over financial reporting expressed an unqualified opinion on management’s assessment of the effectiveness of Nortel’s internal control over financial reporting and an adverse opinion on the effectiveness of Nortel’s internal control over financial reporting because of a material weakness); 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.

The consolidated financial statement schedule of Nortel as of December 31, 2005 and 2004 and for the years ended December 31, 2005 and 2004 has been restated. We therefore withdraw our previous report dated April 28, 2006 on that financial statement schedule, as originally filed.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Toronto, Canada

March 15, 2007

188

Schedule II
Consolidated

NORTEL NETWORKS CORPORATION

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 2006	$	173	$	5		$	56		$	122
Year 2005 — As restated	$	179	$	(10	)	$	(4	)	$	173
Year 2004 — As restated	$	486	$	(178	)	$	129		$	179

(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 $34, $33 and $65 as of December 31, 2006, 2005 and 2004, respectively.

189

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 United States (“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 Peter W. Currie, respectively), pursuant to Rule 13a-15 under the Unites States Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures as at December 31, 2006. Based on this evaluation, management including the CEO and CFO have concluded that our disclosure controls and procedures as at December 31, 2006 were not 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.

In making this evaluation, management including the CEO and CFO, considered, among other matters:

•  the material weakness in our internal control over financial reporting that we and our independent registered chartered accountants, Deloitte, have identified (as more fully described below);

•  management’s conclusion that our internal control over financial reporting was not effective as at December 31, 2006, and Deloitte’s attestation report with respect to that assessment and conclusion, each pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, included in this Item 9A;

•  the conclusion of the CEO and CFO that our disclosure controls and procedures as at the end of each quarter in 2006 were not effective, included in Item 4 of each of our 2006 Quarterly Reports; and

•  our successive restatements of our financial statements, the findings of the Independent Review summarized in the “Summary of Findings and of Recommended Remedial Measures of the Independent Review,” submitted to the Audit Committee in January 2005 by WilmerHale and Huron Consulting Services LLC, (the “Independent Review Summary”), included in Item 9A of our 2003 Annual Report, the findings of the Revenue Independent Review included in Item 9A of the 2005 Annual Report, and the findings of the Internal Audit Review included in Item 4 of our 2006 First Quarter Report.

In light of this conclusion, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting, as described below. Accordingly, management believes, based on its knowledge, that (i) 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 they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.

Restatement of previously issued financial statements

As a result of the pension plan changes we announced in June 2006 (see note 9, “Employee benefit plans” to the accompanying audited consolidated financial statements for additional details), third party actuarial firms retained by us performed re-measurements of the pension and post-retirement benefit plans in the third quarter of 2006, at which time one of the firms discovered potential errors (generally originating in the late 1990s) in the historical actuarial calculations they had originally performed for the U.S. pension plan assets. Throughout the fourth quarter of 2006 and into 2007, Nortel investigated these potential errors, including initiating a review by Nortel and its third party actuaries of each of its significant pension and post-retirement benefit plans. As a result of this review and through our ongoing remediation efforts with respect to our previously reported internal control deficiencies, we identified certain errors. These matters have been discussed with the Staff of the SEC, including as part of our responses to Staff comments on our and NNL’s periodic filings with the SEC. These Staff comments included comments on disclosure in our and NNL’s Quarterly Reports on Form 10-Q for the quarter ended September 30, 2006, or the 2006 Third Quarter Report, with respect to adjustments related to prior periods which were included in our and NNL’s third quarter 2006 financial statements. As a result of the current restatement, these adjustments have now been reflected in the correct periods in our restated financial statements. Consequently, we have restated our consolidated balance sheet as of December 31, 2005 and consolidated statement of operations, changes in equity and comprehensive income (loss) and statement of cash flows for the years

190

ended December 31, 2005 and 2004. The adjustments primarily relate to: (i) pension and post-retirement errors, (ii) revenue recognition errors, (iii) a prior year tax error, and (iv) other errors. For more information relating to this restatement, please see note 4 of the accompanying audited consolidated financial statements, as well as “Restatements; Remedial Measures and the Elimination of Material Weaknesses; Related Matters” in the MD&A section of this report. The internal control implications of these errors are: (i) the pension and post-retirement errors are the result of errors in calculations performed by third party actuaries and not the result of an internal control deficiency, (ii) the revenue and cost of revenue errors are the result of deficiencies comprising the material weakness described below, (iii) the prior year tax error is isolated to a single error in 2005 for which controls were effective in 2006 and (iv) the other errors were considered individually and in the aggregate and did not constitute a material weakness. The restatement process included the maintenance of a restatement database to track adjustments, the involvement and oversight by senior finance management, open dialogue with Deloitte & Touche LLP, our independent registered chartered accountants, and discussion with the Audit Committee and Board of Directors.

The current restatement involved the restatement of our consolidated financial statements for 2004, 2005 and the first nine months of 2006. Amendments to our prior filings with the SEC would be required in order for us to be in full compliance with our reporting obligations under the Securities Exchange Act of 1934. However, any amendments to our 2004 Annual Report and 2005 Annual Report and the Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, June 30, and September 30, 2006 and 2005, respectively, would in large part repeat the disclosure contained in this report. Accordingly, we do not plan to amend these or any other prior filings. We believe that we have included in this report all information needed for current investor understanding.

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) and 15d-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 should include 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 applicable 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.

Management, including the CEO and CFO, assessed the effectiveness of our internal control over financial reporting, and concluded that the following material weakness in our internal control over financial reporting existed, as at December 31, 2006:

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 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 regards to the LG-Nortel joint

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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.

For purposes of this report, the term “material weakness” means a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. 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 and PCAOB Standard No. 4.

Because of the material weakness described above, management has concluded that, as at December 31, 2006, we did not maintain effective internal control over financial reporting based on those criteria.

Our independent registered chartered accountants have issued an attestation report expressing 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 at December 31, 2006, which report appears at the end of this Item 9A.

In part as a result of the compensating procedures and processes that we are applying to our financial reporting process, during the preparation of our financial statements for recent periods (including 2004, 2005 and 2006), we identified a number of adjustments to correct accounting errors related to prior periods, including the errors corrected in the most recent restatement, as more fully discussed in note 4, “Restatement of previously issued financial statements” to the accompanying audited consolidated financial statements. In the past, we also recorded adjustments that were immaterial to the then-current period and to the prior periods in the financial statements for the then-current period. As long as we continue to have a material weakness in our internal control over financial reporting, we may in the future identify similar adjustments to prior period financial information. Adjustments that may be identified in the future could require further restatement of our financial statements. Furthermore, the threshold for our being required to restate financial information in the future is potentially very low in the current regulatory environment due in part to the fact that we currently, and in the near future expect to, operate at close to break-even levels of earnings (loss). We have received comments on our periodic filings from the Staff of the SEC’s Division of Corporation Finance. As part of this comment process, we may receive further comments from the Staff of the SEC relating to this Annual Report on Form 10-K. If, as a result of these matters described above, we are required to amend this report or restate certain of our financial information, it may have a material adverse effect on any of our business and results of operations. For example, a future restatement may result in delays in filing our periodic reports which in turn may result in breaches of our public debt indentures and obligations under the EDC Support Facility which may affect our liquidity. The current restatement resulted in a breach of certain provisions of the EDC Support Facility, for which NNL obtained a waiver on March 9, 2007.

Remedial Measures and the Elimination of Material Weaknesses Reported in the 2005 Annual Report

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 Independent Review Summary. Those governing remedial principles were designed to prevent recurrence of the inappropriate accounting conduct found in the Independent Review, 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.

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See the Independent Review Summary for further information concerning these governing principles as they relate to three identified categories — people, processes and technology.

As of December 31, 2005, and as recently as of September 30, 2006, we reported the following five material weaknesses in internal control over financial reporting:

•  lack of compliance with written Nortel procedures for monitoring and adjusting balances related to certain accruals and provisions, including restructuring charges and contract and customer accruals;

•  lack of compliance with Nortel procedures for appropriately applying applicable GAAP to the initial recording of certain liabilities, including those described in SFAS No. 5, and to foreign currency translation as described in SFAS No. 52;

•  lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S. GAAP to transactions, including, but not limited to, revenue transactions;

•  lack of a clear organization and accountability structure within the accounting function, including insufficient review and supervision, combined with financial reporting systems that are not integrated and which require extensive manual interventions; and

•  lack of sufficient awareness of, and timely and appropriate remediation of, internal control issues by Nortel personnel.

For additional information relating to the control deficiencies that resulted in these material weaknesses, see Items 9A of our 2003, 2004 and 2005 Annual Reports on Form 10-K.

During 2006, we continued to build on the remedial actions in 2004 and 2005 and implemented significant changes to our internal control over financial reporting and continued to develop and implement remedial measures to address the material weaknesses that existed as of December 31, 2005, as well as to implement the recommendations for remedial measures in the Independent Review Summary. The following are the key changes in internal control over financial reporting and remedial measures implemented that addressed these material weaknesses and substantially addressed the recommendations, set out in the three categories of people, processes and technology:

People

1. Established new executive management team that 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 who were involved in these practices. After evaluating individual conduct and knowledge, management has taken further employee disciplinary actions in 2006.

2. 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 ongoing 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, we 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.

3. Through the Global Finance Training and Communications (“GFTC”) group, which reports to the Assistant Controller, we have 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. We retained third party resources and expertise as we considered appropriate to assist with the development and delivery of these training programs. In addition, in the first quarter of 2006, we established an Executive Global Finance Training Council 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. As new accounting guidance, pronouncements and directives on U.S. GAAP are promulgated, the Controller and other members of the GFTC now provide quarterly training and updates, by webcast.

4. We 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. We believe 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

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oversee these four key functions. We have put in place a compliance infrastructure, as well as a consistent approach to corporate discipline for breaches of our policies, procedures and Code of Conduct. The Chief Compliance Officer reports directly to the CEO and the Audit Committee, and only the Audit Committee can hire or fire the Chief Compliance Officer. The ethics function issued an updated Code of Conduct in September 2006, and we implemented mandatory training in the new Code’s provisions and employee certification, where permitted by applicable law. We have enhanced our 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.

5. We created a Compliance Committee in February 2006 to oversee the effectiveness of our compliance program, policies, procedures, and the Code of Conduct and provide direction to the Office of Compliance. The Compliance Committee is now composed of the 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 Chief Compliance Officer reports on the activities of the Compliance Committee to the Audit Committee on a quarterly basis.

Processes

6. With the exception of joint venture entities and Nortel Government Solutions, we segregated the FP&A function from the Control function over a six-month period, from September 2005 to February 2006. These functions are now separate, and the Control organization has had the exclusive authority to approve and post general ledger entries commencing with the closing of our books and records for the quarter ended March 31, 2006, other than tax-related entries which are approved by our Tax organization.

7. 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. We have adopted internal finance process guidelines (“FPGs”) 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. We have recruited new directors of both GRG and GTA, with appropriate technical qualifications, from outside Nortel. Management has also increased the staffing of GRG and GTA and upgraded the technical qualifications of their respective personnel

8. Since April 2004, responsibility for drafting and revising our 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 our 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 our accounting policies accordingly. As at December 31, 2006, GFPP has developed twenty-five accounting guidelines (“AGs”) on various topics, including accruals, provisions, revenue recognition and foreign exchange. In addition, GFPP has developed thirteen FPGs on various topics, including manual journal entries, balance sheet reviews, revenue recognition documentation and account reconciliations. We issue monthly newsletters to Finance employees on new policies, AGs and FPGs.

9. In the first quarter of 2006, we 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. 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. We have implemented additional measures in an effort to ensure that all such 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 our 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.

10. Starting in 2004, 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

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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. 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, incremental compliance reviews were commenced in 2005 for all MJEs over a specified dollar value for compliance with the new documentation requirements for MJEs, and are conducted by Nortel’s Global MJE Center of Excellence.

11. Beginning with the filing of our 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. All of the materials relevant to each PCA are loaded into a database that is accessible by all appropriate parties. Commencing in 2005, management directed each region and business unit to review its PCAs and provide an explanation of the cause of the entries and identify the remedial action to minimize the risk of recurrence of MJEs being submitted after the initial consolidation of the financial statements.

12. 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.

13. Starting in 2005, 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, all balance sheet accounts 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 our Corporate Consolidations group and presented by the Controller to the Audit Committee quarterly.

14. 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 business unit 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 these meetings for each business unit, the business unit leaders 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.

15. Recognizing that timely and accurate account reconciliations are a priority, 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.

16. With respect to foreign exchange, in 2005, management enhanced its annual functional currency study which ultimately determines the methodology for translating subsidiary foreign currency results to U.S. dollar reporting currency.

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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.

17. 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. In the first quarter of 2004, the Audit Committee realigned the reporting responsibilities for Internal Audit, hired a new Internal Audit leader as of July 2005, and directed senior management to strengthen significantly the internal audit function. 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.

18. As part of the efforts to increase awareness of and timely and appropriate remediation of internal controls, in the second quarter of 2006, we 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 VP 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 initiatives, there was significant remediation in 2006 of internal control deficiencies identified in various business processes that impact internal control over financial reporting.

     Technology

19. The 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, we 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. We further implemented standard and enhanced controls regarding change management to applications to ensure the changes are appropriately tested, approved and implemented. In addition, we implemented enhanced security protection of data files used to transfer data from one application to another. 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.

     Conclusion

Management believes that the remedial measures and other actions to significantly improve internal control over financial reporting described above, individually and in the aggregate, addressed most of the internal control issues in the five material weaknesses. As at December 31, 2006, management has concluded that these measures resulted in the elimination of the five material weaknesses, with the exception of the deficiencies that comprise the revenue related material weakness as at December 31, 2006, as described above.

Continuing Remedial Measures

Based on the progress during 2006 and into 2007, management’s goal is the remediation of our material weakness during the course of 2007 and to the full implementation of the remedial measures contained in the Independent Review Summary. We continue to identify, develop and implement remedial measures in light of management’s assessment of the effectiveness of internal control over financial reporting, in order to strengthen our internal control over financial reporting and disclosure controls and procedures, and to address the material weakness in our internal control over financial

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reporting as at December 31, 2006, as well as to ensure we continue to sustain the remedial measures taken to address the adopted recommendations in the Independent Review Summary.

For example, during the course of 2006, we have strengthened the Finance function in the LG-Nortel joint venture, including installing a new leader of this function. In addition, since December 31, 2006, we have appointed an individual in the GRG group 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 contract review policy. All such contracts that impacted 2006 results have been reviewed prior to the filing of this report.

Further, new guidelines and training were developed in the second half of 2006 to improve revenue recognition processes. Additional training courses and tools for non-finance roles are being developed and deployed. Analysis of the revenue related processes will continue during 2007 to identify key controls that should be added to these processes, in particular with respect to cross-functional interactions.

In an effort to improve our financial reporting systems and capabilities, to simplify our multiple accounting systems, and to reduce the number of MJEs, we 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 our systems into a single integrated financial software system. Based on that advice, we 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. We completed the finance design and build for the initial scope of the SAP system, including general ledger functionality, by August 2006, and these processes are planned to be tested and fully deployed during 2007. Processes for additional activities will be built upon this first phase of functionality. We completed process design for these additional activities and management expects that the build, testing and deployment will be completed by the third quarter of 2007.

Management continues to assess the internal and external resources that will be needed to continue to implement, support, sustain and monitor the effectiveness of our ongoing and future remedial efforts. The Board of Directors continues to monitor the ongoing implementation efforts.

Changes in Internal Control Over Financial Reporting

In addition to actions related to the remedial measures described above, during the fiscal quarter ended December 31, 2006, the following changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

Systems Segregation of Duties

We deployed a software application that is designed to help us ensure segregation of duties relating to some of our information system applications. The deployed software maintains an audit trail of software changes that are made to some key information system applications.

Pension and Post-Retirement Plans

We implemented enhanced oversight and monitoring controls over the actuarial valuations relating to pension and post-retirement benefit plans performed by our actuaries by implementing a comprehensive, analytical review of the valuations used to project our obligations and period expenses related to those plans.

FIN 48

We implemented a number of new controls, including reviewer checklists and certification for completeness over the processes relating to the recognition and measurement of positions taken or expected to be taken for income taxes in anticipation of our adoption of FIN 48 on January 1, 2007.

Treasury Swaps

As a result of designating certain interest rate swaps for hedge accounting, we engaged a third party to perform the effectiveness testing of our hedging activities undertaken with respect to certain indebtedness. We have implemented new controls to oversee and monitor this outsourcing activity and to review the testing results to determine if the hedge meets the effectiveness criteria.

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders and Board of Directors of Nortel Networks Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Nortel Networks Corporation and subsidiaries (“Nortel”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Nortel’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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Nortel’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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. 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 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

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 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, Nortel 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 Nortel’s customer arrangements, in order to ensure that related revenues were accurately recorded in accordance with U.S. GAAP As well, Nortel requires 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 regards 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,

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Nortel utilizes 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.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2006, of Nortel and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that Nortel did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Nortel has not maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the Company and our report dated March 15, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule (which report on the consolidated financial statements includes an explanatory paragraph relating to the restatement of the consolidated financial statements as of December 31, 2005 and for the years ended December 31, 2005 and 2004, 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).

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Toronto, Canada

March 15, 2007

ITEM 9B.   Other Information

Not Applicable.

PART III

ITEM 10.   Directors, Executive Officers and Corporate Governance

The information required by this item is included under the headings “Election of Directors”, “Executive Officers and Certain Other Non-Executive Board Appointed Officers”, “Security Ownership of Directors and Management — Section 16(a) Beneficial Ownership Reporting Compliance”, and “Statement of Corporate Governance Practices — Code of Ethics and Chief Ethics Officer/Chief Compliance Officer”, “— Nomination of Directors” and “— Board Committees — Audit Committees” in our 2007 proxy circular and proxy statement relating to our 2007 Annual and Special Meeting of Shareholders filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act, or our 2007 Proxy Circular and Proxy Statement, and is incorporated herein by reference.

ITEM 11.   Executive Compensation

The information required by this item is included under the headings “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our 2007 Proxy Circular and Proxy Statement and is incorporated herein by reference.

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ITEM 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is included under the headings “Equity-Based Compensation Plan Information”, “Voting Shares” and “Security Ownership of Directors and Management” in our 2007 Proxy Circular and Proxy Statement and is incorporated herein by reference.

ITEM 13.   Certain Relationships and Related Transactions, and Director Independence

The information required by this item is included under the headings “Transactions with Related Persons and Indebtedness — Transactions with Related Persons” and “Statement of Corporate Governance Practices — Board Size, Board Composition and Independence” in our 2007 Proxy Circular and Proxy Statement and is incorporated herein by reference.

ITEM 14.   Principal Accountant Fees and Services

Auditor Independence

The information required by this item is included under the heading “Auditor Independence” in our 2007 Proxy Circular and Proxy Statement and is incorporated herein by reference.

Change in Certifying Accountant

Deloitte & Touche LLP, or Deloitte & Touche, are our and Nortel Networks Limited’s, or NNL’s, independent public accountants for the fiscal year 2006.

Following an evaluation conducted by us as part of our corporate renewal process, on December 1, 2006, our board of directors proposed that KPMG LLP, or KPMG, serve as our principal independent public accountants commencing with fiscal year 2007, subject to shareholder approval of such appointment. Assuming KPMG’s appointment is approved by our shareholders, KPMG will also be appointed as NNL’s principal independent public accountants commencing with fiscal year 2007. The proposed change in independent public accountants does not result from any disagreement or dissatisfaction between us and Deloitte & Touche.

The audit reports of Deloitte & Touche on our and NNL’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 this report and NNL’s Form 10-K, our management and that of NNL concluded that a material weakness in internal control over financial reporting existed as of December 31, 2006. 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 reports, or (2) reportable events described under Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934 (or Regulation S-K).

We have furnished this disclosure to Deloitte & Touche for their review and requested that Deloitte furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not they agree with our statements. A copy of the letter furnished by Deloitte & Touche in response to that request, dated March 16, 2007, is being filed as Exhibit 16 to this report.

During the fiscal years ended December 31, 2006 and 2005, and through March 16, 2007, we 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 our financial statements, and neither a written report nor oral advice was provided to us that KPMG concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue, except that during the periods indicated and as part of our process of consultation of complex accounting issues, we consulted with KPMG on issues arising in our analysis prior to reaching conclusions on accounting issues related to: revenue recognition, including the application of the criteria for separation of multiple element

200

arrangements under Emerging Issues Task Force Issue 00-21 and American Institute of Certified Public Accountants Statement of Position, or 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 Statement of Financial Accounting Standard, or SFAS, No. 133; the accounting for certain grants of performance stock units under our 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, we 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).

PART IV

ITEM 15.   Exhibits and Financial Statement Schedules

1.   Financial Statements

The index to the Consolidated Financial Statements appears on page 88.

2.   Financial Statement Schedules

	Page
Quarterly Financial Data (Unaudited)		170
Report of Independent Registered Chartered Accountants		188
II — Valuation and Qualifying Accounts and Reserves, Provisions for Uncollectibles		189

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	191
Report of Independent Registered Chartered Accountants	89

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, 2006.

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 10.5, 10.22 to 10.36, 10.39 to 10.41, 10.47 to 10.56, 10.58 to 10.59, 10.61 to 10.67, 10.76 and items 10.84 to 10.87 relate to management contracts or compensatory plans or arrangements.

201

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 Corporation’s Current Report on Form 8-K dated May 1, 2000).
	*3	.1	Restated Certificate and Articles of Incorporation of Nortel Networks Corporation (filed as Exhibit 3 to Nortel Networks Corporation’s Current Report on Form 8-K dated October 18, 2000).
	*3	.2	By-Law No. 1 of Nortel Networks Corporation (filed as Exhibit 3.2 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
	3	.3	Restated Certificate and Articles of Amendment of Nortel Networks Corporation dated November 9, 2006.
	*4	.1	Shareholders Rights Plan Agreement dated as of March 13, 2000 between Nortel Networks Corporation and Montreal Trust Company of Canada, which includes the Form of Rights Certificate as Exhibit A thereto, as amended by the Registration Statement on Form 8-A/A filed on May 1, 2000, as further amended and restated by Registration Statement dated February 14, 2003 (filed as Exhibit 3 to Nortel Networks Corporation’s Registration Statement on Form 8-A/A filed on April 25, 2003).
	*4	.2	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	.3	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).
	*4	.4	Indenture dated as of December 15, 2000 among Nortel Networks Limited, as issuer and guarantor, Nortel Networks Capital Corporation, as issuer, and Citibank, N.A., as trustee, related to debt securities authenticated and delivered thereunder (filed as Exhibit 4.1 to Registration Statement on Form S-3 (No. 333-51888) of Nortel Networks Limited and Nortel Networks Capital Corporation).
	*4	.5	First Supplemental Indenture dated as of February 1, 2001 to Indenture dated as of December 15, 2000 among Nortel Networks Limited, as issuer and guarantor, Nortel Networks Capital Corporation, as issuer, and Citibank, N.A., as trustee, related to 6.125% Notes due 2006 (filed as Exhibit 4.1 to Nortel Networks Limited’s Current Report on Form 8-K dated February 2, 2001).
	*4	.6	Instrument of Resignation, Appointment and Acceptance entered into as of December 19, 2002, effective as of January 2, 2003, among Nortel Networks Limited, as issuer and guarantor, Nortel Networks Capital Corporation, as issuer, Citibank, N.A. and Deutsche Bank Trust Company Americas, with respect to the Indenture dated as of December 5, 2000, as supplemented by a First Supplemental Indenture dated as of February 1, 2001 related to debt securities (filed as Exhibit 4.6 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*4	.7	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	.8	Amended and Restated Shareholders Rights Plan Agreement dated as of February 28, 2006 effective June 29, 2006, pursuant to an amended and restated shareholder 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 Corporation’s Form 8-A12B/A dated June 29, 2006).
	*4	.9	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 Corporation’s Current Report on Form 8-K dated July 6, 2006).
	*4	.10	First Supplemental 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 Corporation’s Current Report on Form 8-K dated July 6, 2006).

202

Exhibit
No			Description
	*4	.11	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 Corporation’s Current Report on Form 8-K dated July 6, 2006).
	*4	.12	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 Corporation’s Current Report on Form 8-K dated July 6, 2006).
	*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 Corporation’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 Corporation’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 (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
	*10	.5	Purchase Contract and Unit Agreement dated as of June 12, 2002 among Nortel Networks Corporation, Computershare Trust Company of Canada, as purchase contract agent, and Holders (as defined therein) from time to time (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
	*10	.6	U.S. Guarantee and Security Agreement dated as of the first day of the “Collateral Period” (as defined therein) among Nortel Networks Limited, Nortel Networks Inc. and certain of their subsidiaries and JPMorgan Chase Bank, as Collateral Agent as terminated by Letter, Termination Agreement and Full and Final Release and Discharge all dated as of October 24, 2005 (filed as Exhibits 99.1, 99.2 and 99.7 respectively to Nortel Networks Corporation’s Current Report on Form 8-K dated October 28, 2005).
	*10	.7	Amendment No. 1 dated as of December 12, 2002 to the U.S. Guarantee and Security Agreement dated as of April 4, 2002 among Nortel Networks Limited, Nortel Networks Inc., the Subsidiary Lien Grantors party thereto and JPMorgan Chase Bank, as Collateral Agent, as terminated by Letter, Termination Agreement and Full and Final Release and Discharge all dated as of October 24, 2005 (filed as Exhibits 99.1, 99.2 and 99.7 respectively to Nortel Networks Corporation’s Current Report on Form 8-K dated October 28, 2005).
	*10	.8	Canadian Guarantee and Security Agreement dated as of the first day of the “Collateral Period” (as defined therein) among Nortel Networks Limited and certain of its subsidiaries and JPMorgan Chase Bank, as Collateral Agent, as terminated by Letter, Termination Agreement and Full and Final Release and Discharge all dated as of October 24, 2005 (filed as Exhibits 99.1, 99.3 and 99.7 respectively to Nortel Networks Corporation’s Current Report on Form 8-K dated October 28, 2005).
	*10	.9	Amendment No. 1 dated as of December 12, 2002 to the Canadian Guarantee and Security Agreement dated as of April 4, 2002 among Nortel Networks Limited, Nortel Networks Inc., the Subsidiary Guarantors party thereto and JPMorgan Chase Bank, as Collateral Agent, as terminated by Letter, Termination Agreement and Full and Final Release and Discharge all dated as of October 24, 2005 (filed as Exhibits 99.1, 99.3 and 99.7 respectively to Nortel Networks Corporation’s Current Report on Form 8-K dated October 28, 2005).
	*10	.10	Form of Nortel Networks Limited Foreign Subsidiary Guarantee dated as of April 4, 2002 and schedule thereto listing the specific foreign subsidiary guarantees which are not attached as exhibits (filed as Exhibit 10.8 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.11	Amendment No. 1 dated as of December 12, 2002 to certain Foreign Subsidiary Guarantees dated as of April 4, 2002 among Nortel Networks (Ireland) Limited, Nortel Networks UK Limited, Nortel Networks (Asia) Limited and JPMorgan Chase Bank, as Collateral Agent, as terminated by Letter, Termination Agreements and Full and Final Release and Discharge all dated as of October 24, 2005 (filed as Exhibits 99.1 to 99.7 respectively to Nortel Networks Corporation’s Current Report on Form 8-K dated October 28, 2005).

203

Exhibit
No			Description
	*10	.12	Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks Limited, the Subsidiary Guarantors party thereto and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.9 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.13	Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks Limited, Nortel Networks International Corporation and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.10 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.14	Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks Inc. and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.11 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.15	Pledge Agreement dated as of April 4, 2002 among Nortel Networks Limited, Nortel Networks International Finance & Holding B.V., Nortel Networks S.A., and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.12 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.16	Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks International Finance & Holding B.V., Nortel Communications Holdings (1997) Limited, Nortel Networks AB and JPMorgan Chase Bank, as Collateral Agent, together with(a) the Supplementing Pledge Agreement dated as of April 4, 2002 among Nortel Networks International Finance & Holding, B.V. and JPMorgan Chase Bank, as Collateral Agent,(b) the Pledge Agreement Supplement dated as of April 4, 2002 between Nortel Networks Limited and JPMorgan Chase Bank, as Collateral Agent, and(c) the Pledge Agreement Supplement dated as of April 4, 2002 between Nortel Networks U.K. Limited and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.13 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.17	Foreign Pledge Agreement dated as of April 4, 2002 between Nortel Networks International Finance & Holding B.V. and JPMorgan Chase Bank, as Collateral Agent, together with(a) the Pledge Agreement Supplement, dated as of April 4, 2002 between Nortel Networks Optical Components Limited and JPMorgan Chase Bank, as Collateral Agent, and(b) the Pledge Agreement Supplement dated as of April 4, 2002 between Nortel Networks International Finance & Holding B.V., Nortel Networks Optical Components Limited and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.14 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.18	Pledge Agreement Supplement dated as of May 20, 2002 between Nortel Networks Mauritius Ltd and JPMorgan Chase Bank, as Collateral Agent supplementing the Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks International Finance & Holding B.V., Nortel Communications Holdings (1997) Limited, Nortel Networks AB and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
	*10	.19	Pledge Agreement Supplement dated as of May 15, 2002 between Nortel Networks International Finance & Holding B.V. and JPMorgan Chase Bank, as Collateral Agent, supplementing the Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks International Finance & Holding B.V., Nortel Communications Holdings (1997) Limited, Nortel Networks AB and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.6 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
	*10	.20	Pledge Agreement Supplement dated as of June 4, 2002 between Nortel Networks Singapore Pte Ltd, and JPMorgan Chase Bank, as Collateral Agent, supplementing the Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks International Finance & Holding B.V., Nortel Communications Holdings (1997) Limited, Nortel Networks AB and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.7 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
	*10	.21	Pledge Agreement Supplement dated as of May 15, 2002 between Nortel Networks Limited and JPMorgan Chase Bank, as Collateral Agent, supplementing the Foreign Pledge Agreement dated as of April 4, 2002 among Nortel Networks Limited, the Subsidiary Guarantors party thereto and JP Morgan Chase Bank, as Collateral Agent (filed as Exhibit 10.8 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
	*10	.22	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 (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.23	Supplementary Pension Credits Arrangement (filed as Exhibit 10.14 to Nortel Networks Corporation’s Registration Statement on Form S-1 (No. 2-71087)).

204

Exhibit
No			Description
	*10	.24	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	.25	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 Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.26	Agreement between a director of Nortel Networks Corporation and Nortel Networks Limited and the respective companies dated June 22, 2001, setting forth the arrangements with respect to serving as non-executive chairman of each of the board of directors of Nortel Networks Corporation and Nortel Networks Limited (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
	*10	.27	Amended general description of cash bonus for employees and executives of Nortel Networks Corporation and Nortel Networks Limited as originally filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (filed as Exhibit 10.01 to the Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
	*10	.28	Nortel Networks Corporation Directors’ Deferred Share Compensation Plan 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 10.7 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005).
	*10	.29	Nortel Networks Limited Directors’ Deferred Share Compensation Plan effective June 30, 1998 as amended and restated 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 10.74 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 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 Corporation’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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.32	Nortel Networks NA Inc., formerly known as Bay Networks, Inc., 1994 Stock Option Plan as Amended and Restated, as amended effective May 1, 2000 (filed as Exhibit 4.3 to Post-Effective Amendment No. 2 on Form S-8 to Nortel Networks Corporation’s Registration Statement on Form S-4 (No. 333-9066)).
	*10	.33	Nortel Networks/BCE 1985 Stock Option Plan (Plan of Arrangement 2000) (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
	*10	.34	Nortel Networks/BCE 1999 Stock Option Plan (Plan of Arrangement 2000) (filed as Exhibit 10.6 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
	*10	.35	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 10.25 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
	*10	.36	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 on Form S-8 (No. 333-11558)).
	*10	.37	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 May 9, 2006 and December 14, 2006 (filed as Exhibit 99.1 to Nortel Networks Corporation’s Current Report on Form 8-K dated December 15, 2006).
	*10	.38	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 Corporation’s Current Report on Form 8-K dated October 28, 2005).

205

Exhibit
No			Description
	*10	.39	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 10.4 to the Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
	*10	.40	Notice of Blackout to Nortel Networks Corporation’s Board of Directors and Executive Officers Regarding Suspension of Trading dated March 10, 2004 (filed as Exhibit 99.2 to Nortel Networks Corporation’s Current Report on Form 8-K dated March 10, 2004).
	*10	.41	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
	*10	.42	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	**10	.43	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 (filed as Exhibit 10.4 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	**10	.44	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 (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	**10	.45	Master Contract Logistics Services Agreement dated June 29, 2004 between Nortel Networks Limited and Flextronics Telecom Systems, Ltd., amended as of February 8, 2005 (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	**10	.46	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.47	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 Corporation (filed as Exhibit 10.1 to Nortel Networks Corporation’s Current Report on Form 8-K dated August 18, 2005).
	*10	.48	Peter Currie, Executive Vice-President and Chief Financial Officer Employment Letter dated January 20, 2005 (filed as Exhibit 10.2 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.49	Gary Daichendt, President and Chief Operating Officer Employment Letter dated March 2, 2005 (filed as Exhibit 10.6 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.50	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.51	The Nortel 2005 Stock Incentive Plan (as filed with the 2005 Proxy Statement) (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.52	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

206

Exhibit
No			Description
	*10	.53	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.54	Summary of remuneration, retirement compensation and group life insurance of the Chairman of the Board, Directors and Chairman of Committees of Nortel Networks Corporation effective June 29, 2005 (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.55	Summary of remuneration, retirement compensation and group life insurance of the Chairman of the Board, Directors and Chairman of Committees of Nortel Networks Limited effective June 29, 2005 (filed as Exhibit 10.6 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.56	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.57	Proxy Agreement effective as of July 29, 2005 with respect to Capital Stock of Nortel Government Solutions Inc. by and among Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Inc., Nortel Government Solutions Inc., James Frey, Thomas McInerney, Gregory Newbold, and the United States Department of Defense (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
	*10	.58	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
	*10	.59	Termination Agreement dated September 7, 2005 between Nicholas DeRoma, Chief Legal Officer and Nortel Networks Corporation (filed as Exhibit 10.06 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). The Agreement terminated the remuneration arrangement previously filed as Exhibits 10.3 and 10.4 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
	*10	.60	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.61	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 10.68 to Nortel Network Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005). The letter agreement terminated the employment arrangements previously filed as Exhibit 10.2 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarterly period September 30, 2004.
	*10	.62	Nicholas DeRoma, former Chief Legal Officer, Letter Agreement dated December 20, 2005 amending the Termination Agreement dated September 7, 2005 (filed as Exhibit 10.69 to Nortel Networks Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005).
	*10	.63	Steve Pusey, Executive Vice-President and President, Eurasia, Letter Agreement dated September 29, 2005 concerning a retention bonus (filed as Exhibit 10.70 to Nortel Networks Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005).
	*10	.64	Mike Zafirovski, President and Chief Executive Officer, Indemnity Agreement dated January 18, 2006 with effect from October 31, 2005 (filed as Exhibit 10.72 to Nortel Networks Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005).
	*10	.65	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 10.75 to Nortel Networks Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005).
	*10	.66	Brain 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 10.76 to Nortel Networks Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005).

207

Exhibit
No			Description
	*10	.67	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	.68	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 Corporation’s Current Report on Form 8-K dated February 2, 2006).
	*10	.69	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 Corporation’s Current Report on Form 8-K dated February 2, 2006).
	*10	.70	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 Corporation’s Current Report on Form 8-K dated February 2, 2006).
	*10	.71	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 Corporation’s Current Report on Form 8-K dated February 2, 2006).
	*10	.72	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 Corporation’s Current Report on Form 8-K dated May 19, 2006).
	*10	.73	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 Corporation’s Current Report on Form 8-K dated February 21, 2006).
	*10	.74	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 Corporation’s Current Report on Form 8-K dated February 21, 2006).
	*10	.75	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 Corporation’s Current Report on Form 8-K dated February 21, 2006).
	*10	.76	Forms of Instruments of Award generally provided to recipients of Restricted Stock Units and Performance Stock Units granted under the Nortel 2005 Stock Incentive Plan and Form of Instrument of Grant generally provided to recipients of stock options granted under the Nortel 2005 Stock Incentive Plan (filed as Exhibit 10.15 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
	**10	.77	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 10.10 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	**10	.78	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 10.11 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.79	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.80	Court Order, dated June 20, 2006, in the matter captioned Association de Protection des Epargnants et. al. Investisseurs du Québec v. Corporation Nortel Networks, Superior Court of Quebec, District of Montreal, No. 500 06-000126-017 (filed as Exhibit 10.13 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.81	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.82	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).

208

Exhibit
No			Description
	*10	.83	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.84	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.85	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 Network Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
	*10	.86	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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
	10	.87	The Nortel 2005 Stock Incentive Plan as Amended and Restated on November 6, 2006 with effect on December 1, 2006.
	***10	.88	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 the registrant’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 the registrant’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 the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as amended and restated.
	10	.89	Share and Asset Sale Agreement between Nortel Networks Limited and Alcatel-Lucent dated December 4, 2006.
	10	.90	First Amendment to the Share and Asset Sale Agreement between Nortel Networks Limited and Alcatel-Lucent dated December 29, 2006.
	12	.	Computation of Ratios.
	14	.	Nortel Code of Business Conduct.
	16	.	Letter dated March 16, 2007, from Deloitte & Touche LLP regarding Change in Certifying Accountant.
	21	.	Subsidiaries of the Registrant.
	23	.	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.
***	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.

209

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 16^th day of March, 2007.

NORTEL NETWORKS CORPORATION

  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 16^th day of March, 2007.

Signature	Title
Principal Executive Officer
/s/  Mike S. Zafirovski (Mike S. Zafirovski)	President and Chief Executive Officer, and a Director
Principal Financial Officer
/s/  Peter W. Currie (Peter W. Currie)	Executive Vice-President and Chief Financial Officer
Principal Accounting Officer
/s/  Paul W. Karr (Paul W. Karr)	Controller

210

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 March 16, 2007.)

211

EX-3.3

Exhibit 3.3

      Industry Canada                                                          Industrie Canada

Certificate of Amendment	Certificat de modification
Canada Business Corporations Act	Loi canadienne sur les sociétés par actions

Nortel Networks Corporation/

Corporation Nortel Networks

375438-3

Name of corporation-Dénomination de la société

Corporation number-Numéro de la société

I hereby certify that the articles of the above-named corporation were amended:

Je certifie que les statuts de la société susmentionnée ont été modifiés:

a)	under section 13 of the Canada Business Corporations Act in accordance with the attached notice;
b)	under section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares;
c)	under section 179 of the Canada Business Corporations Act as set out in the attached articles of amendment;
d)	under section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization;

o

o

þ

o

a)	en vertu de l’article 13 de la Loi canadienne sur les sociétés par actions, conformément à1’avis ci-joint;
b)	en vertu de l’article 27 de la Loi canadienne sur les sociétés par actions, tel qu’il est indiqué dans les clauses modificatrices ci-jointes désignant une série d’actions;
c)	en vertu de l’article 179 de la Loi canadienne sur les sociétés par actions, tel qu’il est indiqué dans les clauses modificatrices ci-jointes;
d)	en vertu de l’article 191 de la Loi canadienne sur les sociétés par actions, tel qu’il est indiqué dans les clauses de réorganisation ci-jointes;

      Richard G. Shaw

Director - Directeur

November 9, 2006/le 9 novembre 2006

Date of Amendment - Date de modification

Industry Canada

Canada Business
Corporations Act Industrie Canada

Loi canadienne sur les
sociétés par actions FORM 4
ARTICLES OF AMENDMENT
(SECTIONS 27 OR 177) FORM ULAIRE 4
CLAUSES MODIFICATRICES
(ARTICLES 27 OU 177)

1 — Name of the Corporation           Dénomination sociate de la société		2 — Corporation No.           No de la société
Nortel Networks Corporation/Corporation Nortel Networks		375438-3
3 — The articles of the above-named corporation are amended as follows:	Les statuts de fa société mentionnée ci-dessus sont modifiés de la facon suivanate:

Effective as at 12:01:01 a.m., (Toronto time) on December 1, 2006, the authorized capital of the Corporation shall be altered by consolidating all of the issued and outstanding common shares of the Corporation without par value on the basis of one post-consolidation share for every ten pre-consolidation shares.

The Corporation shall pay to registered shareholders who would otherwise be entitled to a fractional share as a result of such consolidation a cash amount equal to the product obtained by multiplying the fraction by the average closing price of the common shares of the Corporation (as adjusted to reflect the consolidation) on the New York Stock Exchange for the ten trading days immediately prior to the effective date of the consolidation or if such price or prices are not available, the fractional share payment shall be based on such other price or prices as determined by the board of directors of the Corporation in its sole discretion. The Corporation shall pay to those shareholders whose latest address as shown in the records of the Corporation is in Canada, the Canadian dollar equivalent of any fractional share payment to which such shareholders are entitled, converting such payments from United States dollars into Canadian dollars based upon the noon spot rate published by the Bank of Canada on the business day immediately prior to the effective date of the consolidation.

To the extent permitted under applicable law, the right to receive payment of any amount in respect of a fractional share interest shall expire on the third anniversary date of the effective date of the consolidation, and any amounts payable in respect of fractional share interests which remain unclaimed on such date shall be forfeited to the Corporation.

Avec prise dàeffet. 0 h 1 min 1 s (heure de Toronto) le l^er décembre 2006, le capital autorisé de la Société sera modifié au moyen du regroupement de toutes les actions ordinaires émises et en circulation sans valeur nominale de la Société a raison d’une action postregroupement pour chaque tranche de dix actions préregroupement.

La Société versera aux actionnaires inscrits qui seraient autrement fondés a recevoir une fraction d’action par suite de ce regroupement une somme en espéces égale au produit obtenu en multipliant la fraction par le cour de clôture moyen des actions ordinaires de la Société (ajusté pour tenir compte du regroupement d’actions) à la Bourse de New York pendant la période de dix jours de négociation précédant la date de prise d’effet du regroupement ou, si ce ou ces cours ne sont pas disponibles, le paiement à l’égard de la fraction d’action sera fondé sur le ou les autres cours pouvant étre déterminés par le Conseil d’administration de la Société, à son entiére satisfaction. La Société versera aux actionnaires dont la derniére adresse figurant dans ses registres se trouve au Canada l’équivalent en dollars canadiens de tout paiement auquel ces actionnaires ont droit pour leur fraction d’action, aprés avoir converti en dollars canadiens les paiements libellés en dollars américains au cours du comptant à midi publié par Ia Banque du Canada le jour ouvrable précédant la date de prise d’effet du regroupement.

Dans la mesure permise par les lois applicables, le droit au paiement de tout montant à légard d’une fraction d’action expirera au troisiéme anniversaire de la date de prise d’effet du regroupement et les actionnaires perdront toutes les sommes payables relativement aux fractions d’action qui n’auront pas été réclamées a cette date, lesquelles seront retournées a la Société.

Signature /s/ Gordon A. Davies	Printed Name - Nom en lettres  moutées  Gordon A. Davies	4 — Capacity of - En qualité de  General Counsel —  Corporate and	5 — Tel. No. - No de tel.  905-863-1144
		Corporate Secretary
FOR DEPARTMENTAL USE ONLY — Á L’USAGE DU MINISTÈRE SEULEMENT

IC 3069 (2003/06)

R9 NOV’06 10:32

EX-10.87

EXHIBIT 10.87

December 1, 2006

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 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

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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

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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,

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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, 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

           (vii) determine whether, and the extent to which, adjustments shall be made pursuant to Section 11 and the terms of any such adjustments.

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          (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 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 425 of the Code.

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          (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.

          (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

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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 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) or (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.

          (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 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

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appropriate to comply with the applicable provisions of Code Section 409A 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

           (iv) in any combination of the foregoing.

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     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.

14

     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.

          (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

15

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 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.

16

           (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.

          (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.

17

          (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.

     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.

18

          (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.

     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:

19

     (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 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

20

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) 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.

          (d) 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.

21

     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 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.

22

EX-10.88

EXHIBIT 10.88

Confidential Portions omitted and filed separately with the Securities and Exchange
Commission. Bullet point denote omissions.

AGREEMENT

THIS AGREEMENT (“Agreement”) is entered into between Nortel Networks Limited, a Canadian corporation with a place of business at 8200 Dixie Road, Suite 100, Brampton, Ontario L6T 5P6 (“Nortel”) and Flextronics Telecom Systems, Ltd., a company organized under the laws of Mauritius (“Flextronics”), and shall be effective as of October 13, 2006 (“Effective Date”). Nortel and Flextronics agree as follows:

1. Restructuring Costs. In the event that Flextronics determines that it is necessary to restructure a legacy System House, then Nortel agrees to reimburse Flextronics for any severance, shut down or other restructuring costs incurred by Flextronics related to any restructuring of any legacy System Houses (“Restructuring Costs”) up to a maximum of [•]; provided that, Flextronics provides Nortel with supporting evidence, in reasonable detail, of the Restructuring Costs in respect of which it is seeking reimbursement. Flextronics and Nortel will work together to mitigate the parties’ exposure to Restructuring Costs, including any exposure to Nortel for Restructuring Costs or similar costs. Nortel may delay the reimbursement of up to [•] of the [•] until Nortel determines that Flextronics has followed a satisfactory mitigation process, which determination Nortel will make no later than [•]. The parties will continue to work together to try to identify alternatives for using the capacity at the legacy System Houses in order to avoid any such restructuring or reorganization.

2. Inventory

     2.1. Nortel and Flextronics will implement a joint operational program to create the best in class supply chain, including at least a [•] inventory turns model at the System House level. In the event that this operational program does not increase inventory turns to acceptable levels within [•] will meet to discuss and agree on a solution for supplementing this operational program so that the System Houses can reach at least [•] inventory turns.

     2.2. Beginning on the Effective Date, Nortel will purchase [•]. Nortel agrees to purchase [•]; and (b) all [•].

     2.3. After mitigation by Flextronics, Nortel agrees to purchase on [•], and every [•] following, all [•]. [•].

     2.4. Nortel agrees that for a commercially reasonable portion of the EMS Products that Nortel awards to a third party supplier through the BT process, or if Nortel modifies its inventory terms with any EMS Suppliers, then Nortel will require that such EMS Suppliers own such EMS Products until Flextronics pulls the EMS Products at the System House, or, if this is not practical at any non-legacy System House, then Nortel will own such EMS Products.

3. SH Pricing and ICRs. “Trigger Date” means with respect to each of Chateaudun, Calgary and Montreal, if and when [•] of the demand for [•], respectively. Effective as of the Trigger Date, Nortel and Flextronics agree to increase prices at the legacy System Houses by a factor equal to [•]. On the applicable Trigger Date for each of the legacy System Houses, Nortel and Flextronics agree to (a) eliminate the excess uplift model; and (b) Flextronics will pass to Nortel the ICRs that Flextronics is holding as of the Trigger Date at the applicable Systems House. In addition, beginning with each respective Trigger Date, Nortel and Flextronics will meet to adjust MPLP pricing as needed to reallocate the fixed overhead to the Products remaining in the legacy System Houses. Flextronics will make commercially reasonable efforts to reduce the overhead costs.

4. Calgary. [•]. Flextronics will not be required to make the November 1st payment until (a) Nortel announces the award of the Calgary business; and (b) Flextronics and Nortel agree that a satisfactory competitive process was followed in making the award. Nortel must receive Flextronics’s CDMA Product Family bid by close of business October 4, 2006. [•].

5. System House and EMS Product Sourcing. [•]

6. Component Sourcing Control. Nortel and Flextronics agree that the Materials Management roles and responsibilities must be aligned. Nortel may unilaterally change the “NC” or “SC” designation of a supplier on written notice to Flextronics; provided that, if Nortel is going to change a designation, it must do so before Nortel commences any benchmarking activities (such as a BT “Wave”).

7. Source Code Access and Ownership. Flextronics will provide all source code and Nortel IP and licenseable IP when Nortel requests, including providing Nortel with the requested test set software for all Products. Flextronics will not be obligated to provide any support or other services to enable Flextronics’s competitors. Flextronics will

1

Confidential Portions omitted and filed separately with the Securities and Exchange
Commission. Bullet point denote omissions.

continue to support NPI test development and provide software development services on a purchase order basis pursuant to design orders. Nortel will pay the unamortized portion of the amounts due for the test software and any remaining Day 1 software NBV, and Product pricing will be adjusted accordingly.

8. Open Book. Flextronics will provide Nortel with detailed Material Cost and Transformation Cost data (including historical) for the legacy System Houses. Flextronics will provide Material Cost data (including historical) only for the non-legacy System Houses and applicable Flextronics “Tier 1” manufacturing sites.

9. Wave 1. Nortel will award at least [•] of the [•] to Flextronics, to be moved to Flextronics’s Guadalajara operations at the “Mexico” quoted price bid by Flextronics.

10. Binding Amendment; Order of Precedence. This Agreement amends the Amended and Restated Master Contract Manufacturing Services Agreement dated as of June 29, 2004, as amended (the “MCMSA”), the Asset Purchase Agreement dated as of June 29, 2004, as amended (the “APA”), and any related agreements, schedules or exhibits, as applicable (the “Allegro Agreements”). In the event of any conflict or inconsistency between the terms and conditions of this Agreement and such Allegro Agreements, which conflict or inconsistency is inconsistent with the intent of the parties hereto, the terms and conditions of this Agreement shall control. All other terms and conditions of the Allegro Agreements shall remain unchanged; nothing herein shall be construed as relieving either party of any right or obligation under the Allegro Agreements except as expressly set forth herein.

11. Miscellaneous. Capitalized terms not defined in this Agreement have the meaning set forth in the MCMSA and APA. To the extent applicable, references to “Flextronics” include Flextronics or the applicable Flextronics Company. All references to “Nortel” means Nortel Networks as defined in the MCMSA.

IN WITNESS WHEREOF, the parties hereto have signed this Agreement by their duly authorized representatives, to be effective as of the Effective Date first above written.

NORTEL NETWORKS LIMITED		FLEXTRONICS TELECOM SYSTEMS, LTD.
By:	/s/ J. Joel Hackney	By:	/s/ M. Marimuthu
Name:	J. Joel Hackney	Name:	Manny Marimuthu
Title:	Senior Vice President Global Operations and Quality	Title:	Director

2

EX-10.89

EXHIBIT 10.89

SHARE AND ASSET SALE AGREEMENT

between

NORTEL

and

ALCATEL LUCENT

1

ARTICLE 1 DEFINITIONS			5
ARTICLE 2 PURCHASE AND SALE OF ASSETS AND SHARES			6
2.1	Purchase and Sale		6
	2.1.1	Assets	6
	2.1.2	Excluded Assets	6
	2.1.3	Assumed Liabilities	8
	2.1.4	Excluded Liabilities	9
	2.1.5	Shares	9
2.2	Price		10
	2.2.1	Purchase Price	10
	2.2.2	Receivable Payment	10
	2.2.3	Adjustments to the Purchase Price	10
	2.2.4	Pre-Closing Statement	11
	2.2.5	Post-Closing Additional Cash Payments	11
	2.2.6	Interest	13
	2.2.7	Purchase Price Allocation	13
2.3	Closing		13
	2.3.1	Closing Date	13
	2.3.2	Closing Actions and Deliveries	13
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER			14
3.1	Organization and Corporate Power		14
3.2	Authorization; Binding Effect; No Breach		14
3.3	Litigation		15
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE SELLER			15
4.1	Organization and Corporate Power		15
4.2	Authorization; Binding Effect; No Breach		15
4.3	Additional Representations and Warranties of the Seller		16
ARTICLE 5 COVENANTS AND OTHER AGREEMENTS			16
5.1	General		16
	5.1.1	Closing Cooperation / Access to information	16
	5.1.2	Filings and Approvals	17
	5.1.3	Revised Schedules	17
	5.1.4	Public Announcements	18
5.2	Conduct of Business		18
5.3	Transaction Expenses		19
5.4	Confidentiality		19
5.5	Warranty Liabilities and Known Product Defects		20
	5.5.1	Standard Warranty Liabilities	20
	5.5.2	Extended Warranty Liabilities	20
	5.5.3	Known Product Defects	20
5.6	Adjustment		21
5.7	Certain Payments Received from Third Parties		22
5.8	Consents — Seller Contracts		22
5.9	Bundled Contracts		23
5.10	Insurance		23

5.11	Additional Equipment		23
5.12	Additional Inventory		24
5.13	Invoices		24
5.14	Release of Permitted Liens		25
5.15	Transition		25
5.16	Additional Covenants		25
ARTICLE 6 NON-COMPETE			26
ARTICLE 7 EMPLOYMENT AND EMPLOYEE BENEFIT MATTERS			27
ARTICLE 8 TAX MATTERS			27
8.1	Transfer Taxes		27
8.2	Transfer Tax Indemnity		28
8.3	Tax Characterization of Certain Payments and Credits		28
8.4	Tax Responsibility		29
8.5	Tax Credits; Tax Refunds		29
8.6	Notices		29
ARTICLE 9 INDEMNIFICATION			30
9.1	Indemnification Obligations		30
	9.1.1	Indemnification by the Seller	30
	9.1.2	Indemnification by the Purchaser	30
	9.1.3	Indemnification under the Other Transaction Documents	30
9.2	Limitations on Indemnification		31
	9.2.1	Monetary Limitations	31
	9.2.2	Time Period for Claims	31
	9.2.3	Disclosures	32
9.3	Defense of Third Party Actions		32
9.4	Cooperation		32
9.5	Sole Remedy		33
9.6	Calculation of Loss		33
9.7	Mitigation obligation		33
9.8	Limitations on Losses		33
9.9	Assignment of Claims		34
ARTICLE 10 CONDITIONS TO THE CLOSING			34
ARTICLE 11 MISCELLANEOUS			35
11.1	Termination		35
11.2	Rights on Termination		35
11.3	Remedies		35
11.4	Consent to Amendments; Waivers		36
11.5	Successors and Assigns		36
11.6	Third Party Rights		36
11.7	Time of the Essence		36
11.8	Governing Law; Submission to Jurisdiction		36
11.9	Notices		37
11.10	Schedules		37
11.11	Counterparts		37
11.12	Construction; Joint Drafting		37

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11.13	Severability	38
11.14	Headings	38
11.15	Entire Agreement	38
EXHIBIT 1 DEFINITIONS		40
EXHIBIT 4.3 ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLER		50
0	Transfer of the New Shares	50
1	Title to Tangible Assets	50
2	Seller Contracts	50
3	Intellectual Property	51
4	Litigation	52
5	Nokia O2	52
6.	Intentionally omitted	52
7	Inventory	52
8	Owned Equipment	52
9	Financial Information	52
10	Actions Since Financial Statements	53
11	Compliance with Laws	53
12	Absence of certain Commercial Practices	54
13	Insolvency	54
14	Nortel Products	54
15	Product Development	54
16	Subsidies	54
17	Sales of the Seller	54
18	Accuracy of Disclosure	55
19	Supplier Contracts	55
20	LG-Nortel Supply	55
21	Representations and Warranties	55
EXHIBIT 2.2.7 PURCHASE PRICE ALLOCATION		56
EXHIBIT 2.2.5 POST-CLOSING ADDITIONAL CASH PAYMENT STATEMENT		58

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SHARE AND ASSET SALE AGREEMENT

BETWEEN

• Alcatel Lucent, a société anonyme organized under the laws of France, registered with the Paris Registry of Companies under number B 542 019 096, with offices 54 rue la Boétie, 75008 Paris (“Purchaser”),

on the one hand,

AND

• Nortel Networks Limited, a corporation organized under the laws of Canada, with offices at 195 The West Mall, T05-04-005, Toronto, Ontario M9C 5K1, Canada (“Seller”),

on the other hand.

RECITALS

WHEREAS each of the companies listed in Schedule 1.1 (other than the Seller) as a Designated Seller is a direct or indirect Affiliate (as defined below) of the Seller (collectively with the Seller, the “Designated Sellers”);

WHEREAS each of the companies listed in Schedule 1.1 (other than the Purchaser) as a Designated Purchaser is a direct or indirect Affiliate (as defined below) of the Purchaser (collectively with the Purchaser, the “Designated Purchasers”);

WHEREAS the Seller has agreed to transfer, or cause the Designated Sellers to transfer, and the Purchaser has agreed to purchase and assume, or cause the Designated Purchasers to purchase and assume, the Shares, the Assets and the Assumed Liabilities (each as defined below) upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the respective covenants, representations and warranties made herein, and of the mutual benefits to be derived hereby, the Primary Parties (as defined below) agree as follows:

ARTICLE 1
DEFINITIONS

For the purposes of this Agreement, certain terms are defined in Exhibit 1. Exhibit 1 also indicates the terms that are defined in the recitals and Articles of this Agreement.

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ARTICLE 2
PURCHASE AND SALE OF ASSETS AND SHARES

2.1 Purchase and Sale

2.1.1 Assets

Subject to the terms and conditions of this Agreement (and in particular subject to Section 2.1.5 as relates to the French Assets), at the Closing, or in connection with those Assets which are transferred in accordance with provision of Article 5 at any later date referred to or provide in such Article 5, the Purchaser shall and shall cause the other relevant Designated Purchasers to purchase or be assigned and assume from the relevant Designated Sellers (the name of which is set forth in Schedule 1.1), and the Seller shall and shall cause the other relevant Designated Sellers to transfer or assign to the relevant Designated Purchasers, the Shares and all of the Seller’s and such Designated Seller’s rights, title and interest in and to the following assets (such assets of any such Designated Seller are referred to herein as the “Designated Country Assets” and all Designated Country Assets are collectively referred to herein as the “Assets”), free and clear of all Liens other than the Permitted Liens:

(1)	the Inventory as of the Closing Date;
(2)	the Owned Equipment as of the Closing Date;
(3)	the rights of the Seller or any other Designated Seller arising after the Closing Date under the contracts pursuant to which the Leased Equipment are leased to the Designated Sellers as of the Closing Date, subject to the other party (parties) to such contracts having consented to the assignment thereof;
(4)	the rights under the Seller Contracts arising after the Closing Date (but including all rights under invoices issued after the Closing Date in connection with Nortel Products or Nortel Services sold or delivered prior to the Closing Date or for work performed prior to Closing);
(5)	the Business Information, subject to Section 2.1.2(4);
(6)	the Transferred Intellectual Property, subject to the Seller’s right to retain copies of such Transferred Intellectual Property (including source codes relating thereto); and
(7)	any and all assets to be transferred to the Designated Purchasers in accordance with the provisions of Article 5.

2.1.2 Excluded Assets

The Assets shall not include the following (collectively, the “Excluded Assets”):

(1) without prejudice to the payment of the Receivable Payment and to the provisions of Section 2.1.1.(4), any rights under invoices (including all inter-company invoices) validly issued on or prior to the Closing Date in connection with Nortel Products or

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Nortel Services sold or delivered or for work performed on or prior to the Closing Date, any cash and cash equivalents, promissory notes and securities of the Designated Sellers (receivables, all bank account balances and all petty cash);

(2)	any refunds due from, or payments due on, claims with the insurers of any of the Designated Sellers in respect of losses arising prior to the Closing Date;
(3)	other than the Seller Contracts and the contracts related to the Leased Equipment, any rights of the Designated Sellers under any contract, arrangement or agreement;
(4)	any books, records and files other than the Business Information and such portion of the Business Information that the Designated Sellers are required by Law or by any agreement with a Third Party to retain, subject to the Designated Sellers providing copies thereof to the Designated Purchasers (to the extent providing such copies is not in breach of Law or contract);
(5)	any rights to any intellectual property owned by a Third Party embedded in Nortel Products or Nortel Services which are used in other products or services supplied or provided by any Designated Seller;
(6)	all rights to Tax refunds, credits or similar benefits relating to the Assets or the Business allocable to the Seller or the other Designated Sellers under Article 8;
(7)	any and all assets listed in Schedule 2.1.2(7) irrespective of their use in connection with the Business, subject to 5.11(1); and
(8)	any and all other assets and rights of the Designated Sellers not referred to in Section 2.1.1.

For the avoidance of doubt, no right of any kind, including rights under invoices validly issued on or prior to the Closing Date in connection with Nortel Products or Nortel Services sold or delivered on or prior to the Closing Date or for work performed on or prior to the Closing Date (but excluding all rights arising under invoices to be issued after the Closing Date), of the Designated Sellers against LG-Nortel Co. Ltd or GDNT or assets owned by LG-Nortel Co. Ltd or GDNT (unless set forth in a Local Agreement under which GDNT is a party) are being transferred under this Agreement; it being specified that any and all assets mainly relating to the Business that LG-Nortel Co. Ltd or GDNT holds or has made available to a third-party but which in both cases are (i) owned by the Seller or any of its Affiliates or (ii) which the Seller or any of its Affiliates has the right to obtain that it be returned to it free of charge shall be transferred in accordance with the provisions of Section 2.1.1 (such assets shall be referred to as the “LG-Nortel Co. Ltd/GDNT Assets”). In the event the Purchase Price has been reduced under Section 2.2.3 (v) and/or the Seller has paid an amount in accordance with Section 2.2.5 (ii) in connection with a shortfall in Owned Equipment, the Purchaser shall pay to the Seller an amount equal to the contract value (and if none at net book value) of any LG-Nortel Co. Ltd/GDNT Assets transferred to the Purchaser or any Designated Purchaser pursuant to the foregoing up to the net sum borne by the Seller under Sections 2.2.3 (v) and/or 2.2.5 (ii) (as such sum may have been reduced by any previous payment which may have been made in accordance with this provision). In the event that the Seller has to pay an amount for such asset to be returned to it, the Purchaser will have an option to buy it at the same amount.

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2.1.3 Assumed Liabilities

On the terms and subject to the conditions set forth in this Agreement (and in particular subject to Section 2.1.5 as relates to the French Assumed Liabilities), at the Closing the Purchaser shall and shall cause the relevant Designated Purchaser to assume and become responsible for, and to perform, discharge and pay when due, and indemnify the Designated Sellers against and hold each of them harmless from, the following Liabilities if (except in connection with (5) below) the events giving rise to such obligations and liabilities came into existence after the Closing Date and relate to or arise out of the relevant Designated Country Assets (such obligations and liabilities are referred to herein as the “Designated Country Assumed Liabilities” and all Designated Country Assumed Liabilities are collectively referred to herein as the “Assumed Liabilities”):

(1)	all Liabilities that arise with respect to the ownership and operation of the Assets;
(2)	all Liabilities arising from or in connection with the performance of the Seller Contracts (or breach thereof), but excluding all obligations arising under invoices from suppliers under the Seller Contracts that are validly issued on or before the Closing Date;
(3)	all Liabilities resulting from any licensing assurances, agreements or undertakings relating to the Transferred Intellectual Property which the Designated Sellers may have granted or committed to Third Parties including applicable standard bodies, which, except for Liabilities applicable to standard bodies, are included in (a) Seller Contracts with a customer, (b) a contract between Designated Seller and a customer, obligations of which are being subcontracted to a Designated Purchaser under the Subcontract Agreement, and (c) the list of cross-licenses and other licenses listed in Schedule 3.1 of the Disclosure Letter;
(4)	all Liabilities for, or related to any obligation for, any Tax that the Purchaser or any other Designated Purchaser bears under Article 8 of this Agreement (including, for the avoidance of doubt, Transfer Taxes); and
(5)	subject to the provisions of Section 5.5.1 and 5.5.2, all obligations under any Standard Warranty Liability and Extended Warranty Liability relating to Nortel Products and Nortel Services which have been supplied under (i) a Seller Contract or (ii) any Bundled Contract to the extent such obligations relate to the Business only.

Specific provisions relating to Liabilities arising in connection with employment-related matters are provided for in Schedule 7.

For the sake of clarity, any assumption of liability pursuant to this Section 2.1.3 shall in no event waive the rights of the Purchaser resulting from the representations and warranties of the Seller provided for in Exhibit 4.3.

2.1.4 Excluded Liabilities

Subject to the provisions of Article 7 in respect to matters relating to Assumed Employees, neither the Purchaser nor any of the other Designated Purchasers will assume at the Closing

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any of the obligations or liabilities not expressly assumed pursuant to Section 2.1.3 (collectively, “Excluded Liabilities”) and in particular, without limitation, the following liabilities:

(1)	all Liabilities arising or which by their terms are to be observed, paid or discharged or performed on or before the Closing Date with respect to the Seller Contracts and the Bundled Contracts, including obligations arising under invoices issued and due under the Seller Contracts on or before the Closing Date;
(2)	warranty and other Liabilities with respect to the Business arising from facts pre-dating the Closing Date, except for those mentioned under Section 2.1.3(5) above; and
(3)	all Liabilities for, or related to any obligation for, any Tax that Seller or any Designated Seller bears under Article 8 of this Agreement.

Specific provisions relating to Liabilities arising in connection with employment-related matters are provided for in Schedule 7.

2.1.5 Shares

The Primary Parties agree that the transfer of the French Assets and the assumption of the Assumed Liabilities relating to or arising out of the French Assets (the “French Assumed Liabilities”) shall be completed through the three following steps:

(1) Prior to the Closing Date, the Seller shall cause Nortel Networks S.A., a société anonyme organized under the laws of France, registered with the Registry of Companies of Versailles under number B 389 516 741 (“NN SA”) and the Purchaser shall cause Diselec, a société par actions simplifiée organized under the laws of France, registered with the Paris Registry of Companies under number B 491 687 422 (“Diselec”), to enter into an agreement relating to the contribution by NN SA to Diselec of the French Assets and the French Assumed Liabilities (the “Contribution Agreement” and such transaction, the “Contribution”);

(2) Immediately prior to the Closing, the Purchaser shall cause Alcatel CIT, as sole shareholder of Diselec, to (i) approve the Contribution in the terms set forth in the Contribution Agreement and (ii) acknowledge the resulting issuance of new shares of Diselec (the “Shares”) and the resulting increase in the share capital of Diselec, and

(3) At the Closing, the Seller shall cause NN SA and the Purchaser shall cause Alcatel CIT to execute a share purchase agreement (the “Share Purchase Agreement”) pursuant to which NN SA shall sell to Alcatel CIT and Alcatel CIT shall acquire from NN SA, with effect as of the Closing Date, the Shares.

(the above steps (1) to (3), the “French Acquisition Structure”).

The Primary Parties acknowledge that the transfer of the French Assets and the assumption of the French Assumed Liabilities in accordance with the above described steps is a transfer technicality and that the provisions of this Agreement (and in particular the principles set forth in Sections 2.1.1, 2.1.2, 2.1.3 and 2.1.4 and the representations and warranties made by

6

the Seller and the other Designated Sellers under Article 4 and Exhibit 4.3) and of the Ancillary Agreements shall apply to the French Assets and the French Assumed Liabilities as if such assets and liabilities were directly transferred from NN SA to Alcatel CIT.

Without prejudice to the relevant Designated Purchaser and Alcatel CIT’s liability for all Transfer Taxes relating to the French Acquisition Structure in accordance with Section 8.1, NN SA and Diselec shall effect the Contribution to be treated as contribution of a complete and autonomous business (branche complète et autonome d’activité).

2.2 Price

2.2.1 Purchase Price

Subject to the provisions of Section 2.2.2, in consideration of the transfer of the New Shares, of the Assets and of the rights granted under the License Agreement, on the Closing Date, the Purchaser on its own behalf and as agent for the other Designated Purchasers shall (x) assume and become obligated to pay, perform and discharge, when due, the Assumed Liabilities and (y) pay by wire transfer to the Seller, on its own behalf and as agent for the other Designated Sellers, in immediately available funds, an amount of three hundred twenty million US dollars (USD 320,000,000) (the “Purchase Price”), as adjusted pursuant to Section 2.2.3 below.

2.2.2 Receivable Payment

Within 45 days after the Closing Date, the Seller shall pay by wire transfer to the Purchaser, in immediately available funds, an amount of twenty three million US dollars (USD 23,000,000) in consideration of receivables net of the payables of the Business that are not transferred to the Purchaser, irrespective of the actual amount of receivables actually collected and payables actually paid by the Designated Sellers (the “Receivable Payment”).

Upon Closing, the Seller shall provide the Purchaser with a 45-day promissory note in the form set out in Exhibit 2.2.2 for such Receivable Payment (the “Promissory Note”) and upon its due date shall make such payment without raising any rights to counterclaim or set-off.

2.2.3 Adjustments to the Purchase Price

The amount of the Purchase Price shall be reduced by:

(i)	an amount equal to the sum of reserves set forth for Standard Warranty Liabilities in the unaudited management statements of operations for the Business as the last day of Nortel fiscal month immediately preceding the Closing Date (the “SWL Reserve”);
(ii)	an amount equal to the sums of reserves set forth for Extended Warranty Liabilities in the unaudited management statements of operations for the Business as of the last day of Nortel fiscal month immediately preceding the Closing Date (the “EWL Reserve”);
(iii)	an amount equal to the sums set forth for Known-Product Defects in the unaudited management statements of operations for the Business as of the last day of Nortel

7

fiscal month immediately preceding the Closing Date (the “KPD Advance”);

(iv)	any shortfall between the net book value of the Inventory set out in the Pre-Closing Statement and five million US dollars (USD 5,000,000) (“Pre-Closing Inventory Shortfall”); and
(v)	any shortfall between the net book value of the Owned Equipment set out in the Pre-Closing Statement and fifty million US dollars (USD 50,000,000) (“Pre-Closing Owned Equipment Shortfall”).
(vi)	an amount equal to the sums that must be paid at Closing to the Purchaser in accordance with Clause 5(a)(i) of Schedule 7 in connection with the Canadian retirement benefit obligations.

The above mentioned unaudited management statements of operations for the Business shall be in compliance with the Nortel Accounting Principles.

2.2.4 Pre-Closing Statement

At least ten (10) Business Days prior to the Closing Date, the Seller shall deliver to the Purchaser a statement setting forth the expected net book value of the Owned Equipment and of the Inventory at Closing (the “Pre-Closing Statement”) prepared in good faith and executed by the senior finance person responsible for the Business at the Seller setting out in reasonable detail calculations (expressed in US dollars) of the Purchase Price adjustments set out in Section 2.2.3 above.

2.2.5 Post-Closing Additional Cash Payments

A Post-Closing Additional Cash Payment Statement shall be prepared in accordance with the terms of Exhibit 2.2.5.

     (i) Post-Closing Inventory Additional Cash Payment

          (a) If and to the extent the net book value of the Inventory shown in the Post-Closing Additional Cash Payment Statement is below both a) the one set out in the Pre-Closing Statement and b) five million US dollars (USD 5,000,000), the Seller, acting on its own behalf and as agent of the Designated Sellers, shall pay to the Purchaser, acting on its own behalf and as agent of the Designated Purchasers, an amount equal to the difference between the net book value of the Inventory set out in the Pre-Closing Statement and that set out in the Post-Closing Additional Cash Payment Statement up to a ceiling equal to the difference between five million US dollars (USD 5,000,000) and the net book value of the Inventory amount as set out in the Post-Closing Additional Cash Payment Statement.

          (b) If and to the extent x) the net book value of the Inventory set out in the Post-Closing Additional Cash Payment Statement is greater than that set out in the Pre-Closing Statement and y) the net book value of the Inventory shown in the Pre-Closing Statement is below five million US dollars (USD 5,000,000), the Purchaser, acting on its own behalf and as agent of the Designated Purchasers, shall pay to the Seller, acting on its own behalf and as agent of the Designated Sellers, an amount equal to the difference between the net book value of the Inventory set out in the Post-Closing Additional Cash Payment Statement and that set

8

out in the Pre-Closing Statement, it being specified that if such amount is greater than the Pre-Closing Inventory Shortfall, the Purchaser acting on its own behalf and as agent of the Designated Purchasers, shall pay to the Seller, acting on its own behalf and as agent of the Designated Sellers, an amount equal to the Pre-Closing Inventory Shortfall only.

     (ii) Post-Closing Owned Equipment Additional Cash Payment

          (a) If and to the extent the net book value of the Owned Equipment shown in the Post-Closing Additional Cash Payment Statement is below both a) the one set out in the Pre-Closing Statement and b) fifty million US dollars (USD 50,000,000), the Seller, acting on its own behalf and as agent of the Designated Sellers, shall pay to the Purchaser, acting on its own behalf and as agent of the Designated Purchasers, an amount equal to the difference between the net book value of the Owned Equipment set out in the Pre-Closing Statement and that set out in the Post-Closing Additional Cash Payment Statement up to a ceiling equal to the difference between fifty million US dollars (USD 50,000,000) and the net book value amount Owned Equipment set out in the Post-Closing Additional Cash Payment Statement.

          (b) If and to the extent x) the net book value of the Owned Equipment set out in the Post-Closing Additional Cash Payment Statement is greater than that set out in the Pre-Closing Statement and y) the net book value of the Owned Equipment shown in the Pre-Closing Statement is below fifty million US dollars (USD 50,000,000), the Purchaser, acting on its own behalf and as agent of the Designated Purchasers, shall pay to the Seller, acting on its own behalf and as agent of the Designated Sellers, an amount equal to the difference between the net book value of the Owned Equipment set out in the Post-Closing Additional Cash Payment Statement and that set out in the Pre-Closing Statement; it being specified that if such amount is greater than the Pre-Closing Owned Equipment Shortfall, the Purchaser acting on its own behalf and as agent of the Designated Purchasers, shall pay to the Seller, acting on its own behalf and as agent of the Designated Sellers, an amount equal to the Pre-Closing Owned Equipment Shortfall only.

     (iii) Payments to be made under paragraph (i) and (ii) above shall be made in cash by wire transfer of immediately available funds to the bank account designated in writing by Purchaser or the Seller within five (5) Business Days of determination of the Post-Closing Additional Cash Payment Statement. Any payment to the Purchaser under Sections 2.2.5(i) or 2.2.5(ii) shall be offset against payments to the Seller under Sections 2.2.5(i) or 2.2.5(ii) and any payments to the Seller under Sections 2.2.5(i) or 2.2.5(ii) shall be offset against payments to the Purchaser under Sections 2.2.5(i) or 2.2.5(ii).

     (iv) For the avoidance of doubt, it is understood that the value of any Owned Equipment or Inventory that is the subject of an Open Purchase Order shall only be counted towards the satisfaction of the above minimum transfer amounts in Sections 2.2.3, 2.2.4, 2.2.5(i) and 2.2.5(ii) (fifty million US dollars (USD 50,000,000) for Owned Equipment and five million US dollars (USD 5,000,000) for Inventory) to the extent that such Open Purchase Order has been paid, or to the extent it has been paid if not paid in full, by a Designated Seller prior to Closing or will be paid by a Designated Seller at anytime thereafter.

2.2.6 Interest

Any payment to be made in accordance with Section 2.2.5(i) and 2.2.5(ii) above shall include

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interest thereon calculated from the date of determination of the Post-Closing Additional Cash Payment Statement to the date of payment at a rate per annum of one per cent above the EURIBOR. Such interest shall accrue from day to day.

2.2.7 Purchase Price Allocation

The Purchaser and the Seller shall prepare a Purchase Price allocation in accordance with the provisions set out Exhibit 2.2.7.

2.3 Closing

2.3.1 Closing Date

The completion of the purchase and sale of the Assets and the assumption of the Assumed Liabilities (the “Closing”) shall take place at the offices of Cleary Gottlieb Steen & Hamilton LLP, London, England (or such other place as may be agreed by the Seller and the Purchaser) commencing at 9:00 a.m. local time, on the earlier of December 31^st, 2006, January 27^th, 2007 or February 24^th, 2007 if on such date all of the conditions set forth under Article 10 herein have been satisfied for more than (10) Business Days or, if permissible, waived by their beneficiary, or on such other date as shall be mutually agreed upon in writing by the Purchaser and the Seller. For the purpose of the Transaction Documents, the Assets and the Assumed Liabilities are deemed to be transferred to the Purchaser or the other Designated Purchasers at midnight on the day of Closing (the “Closing Date”). If the Closing occurs in December 2006, the parties agree that the Closing Date shall be midnight December 31, 2006, and that they will cause all steps towards the Closing to be completed on or prior December 15^th, 2006 (provided the steps set forth in Exhibit 2.2.7 have then been completed) so that the delivery of the documents to be exchanged and the payment to be made hereunder at Closing be completed on December 29, 2006 with all transfers to be made hereunder being automatically effective on December 31, 2006.

2.3.2 Closing Actions and Deliveries

At Closing:

• the Primary Parties shall enter and shall cause the other Designated Sellers and the other Designated Purchasers, as the case may be, and the Seller shall cause Guangdong Nortel Telecommunications Equipment Co. and, subject to Section 10.7, LG-Nortel Co. Ltd. to enter into the Ancillary Agreements to which they are parties respectively, to the extent such agreements have not yet been entered into, and perform their respective obligations to be performed under the Ancillary Agreements;

• each Primary Party shall deliver copies of the resolutions of its board of directors or other equivalent bodies and that, where legally required or expressly provided for in the by-laws of the concerned Designated Seller and Purchaser, of the Designated Sellers and the Designated Purchasers authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements;

• the Seller shall cause NN SA to deliver to the Purchaser a duly executed share transfer form showing the transfer, to the Designated Purchaser for France, of the Shares;

• the Purchaser shall deliver to the Seller the Promissory Note duly executed; and

• the Purchaser shall deliver, or cause to be delivered, to the Seller and the other relevant

10

Designated Sellers, and the Seller shall deliver, or cause to be delivered, to the Purchaser and the other relevant Designated Purchasers, all documents specifically required by the Transaction Documents or applicable Law (it being understood, however, that such instruments shall not require the Purchaser, the other Designated Purchasers, the Seller, the other Designated Sellers or any other Person to make any additional representations, warranties or covenants, express or implied, not contained in this Agreement or the relevant Local Asset Sale Agreement).

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

The Purchaser hereby represents and warrants to the Seller that as of the date of the Agreement as well as on the Closing Date:

3.1 Organization and Corporate Power

3.1.1 The Purchaser is a corporation organized and validly existing under the laws of France. Each Designated Purchaser other than the Purchaser is a corporation organized and validly existing under the laws of the jurisdiction in which it is organized. Each of the Purchaser and the Designated Purchasers has the requisite corporate power and authority to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is or will become a Party.

3.1.2 The Purchaser and each of the other Designated Purchasers is qualified to do business as contemplated by this Agreement and the other Transaction Documents and to own or lease and operate its properties and assets, including the Assets or the relevant Designated Country Assets, as applicable.

3.2 Authorization; Binding Effect; No Breach

3.2.1 The execution, delivery and performance of each Transaction Document to which the Purchaser or any of the other Designated Purchasers is a Party have been duly authorized by the Purchaser and the other relevant Designated Purchaser, as applicable. Each Transaction Document to which the Purchaser or any other Designated Purchaser is a Party constitutes, or upon execution thereof will constitute, a valid and binding obligation of the Purchaser or such other Designated Purchaser, as applicable, enforceable against such Person in accordance with its respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization and other similar Laws affecting generally the enforcement of the rights of contracting Parties, by provision of Laws regarding the currency of judgments, and subject to a court’s discretionary authority with respect to the granting of a decree ordering specific performance or other equitable remedies.

3.2.2 Except as set forth in Schedule 3.2.2, the execution, delivery and performance by each of the Purchaser and the other Designated Purchasers of the Transaction Documents to which the Purchaser or such other Designated Purchaser is, or on the Closing Date will be, a Party do not and will not conflict with or result in a breach of the terms, conditions or provisions of, constitute a default under, result in a violation of, or require any authorization, consent, approval, exemption or other action by or declaration or notice to any third Person pursuant to (i) the articles, charter or by-laws of the Purchaser or the other relevant Designated

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Purchaser, (ii) any material agreement, instrument, or other document to which the Purchaser or the other relevant Designated Purchaser is a party or to which any of its assets is subject or (iii) any Laws to which the Purchaser, the other Designated Purchaser, or any of their assets is subject, except, in the case of (ii) and (iii) above, for such defaults, violations, actions and notifications that would not individually or in the aggregate hinder or impair the performance by the Purchaser or the other Designated Purchasers of any of their obligations under any Transaction Document.

3.3 Litigation

There is no Action involving or affecting the Purchaser or any other Designated Purchaser that seeks to enjoin, prevent, alter or delay any of the transactions contemplated by the Transaction Documents before any Government Entity or arbitration tribunal and, to the Purchaser’s Knowledge, no such Action has been threatened in writing.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE SELLER

The Seller hereby represents and warrants to the Purchaser that as of the date of this Agreement as well as on the Closing Date and subject to the matters disclosed in the Disclosure Letter:

4.1 Organization and Corporate Power

The Seller is organized and validly existing under the Laws of Canada. Each Designated Seller is a corporation organized and validly existing under the laws of the jurisdiction in which it is organized. Each of the Designated Sellers has the requisite corporate power and authority to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is or will become a Party.

Each of the Designated Sellers is qualified to do business and to own and operate its assets, including the Designated Country Assets, as applicable in each jurisdiction in which its ownership of property or conduct of business relating to the Business requires it to so qualify.

4.2 Authorization; Binding Effect; No Breach

4.2.1 The execution, delivery and performance of each Transaction Document to which any of the Designated Sellers is, or on the Closing Date will become, a Party have been duly authorized by the relevant Designated Sellers, as applicable. Each Transaction Document to which a Designated Seller is a Party constitutes, or upon execution thereof will constitute, a legal, valid and binding obligation of the Designated Seller, as applicable, enforceable against it in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization and similar Laws affecting generally the enforcement of the rights of contracting parties, by provisions of the Laws regarding the currency of judgments and subject to a court’s discretionary authority with respect to the granting of a decree ordering specific performance or other equitable remedies.

4.2.2 The execution, delivery and performance by each of the Designated Sellers of the Transaction Documents to which such Designated Seller is, or on the Closing Date will be, a Party do not and will not conflict with or result in a breach of the terms, conditions or

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provisions of, constitute a default under, result in a violation of, result in the creation or imposition of any Lien upon any of the Assets, or require any authorization, consent, approval, exemption or other action by or declaration or notice to any third Person pursuant to (i) the articles, charter or by-laws of the relevant Designated Sellers, (ii) any material agreement, instrument or other document to which the relevant Designated Sellers are a party or to which any of its assets is subject or (iii) any Laws to which the Designated Sellers or any of the Assets are subject, except, in the case of (ii) and (iii) above, for such defaults, violations, actions and notifications that would not individually or in the aggregate hinder or impair the performance by the Designated Sellers of any of their obligations under any Transaction Document.

4.3 Additional Representations and Warranties of the Seller

The Seller further represents and warrants to the Purchaser in the terms set out in Exhibit 4.3 and in Clause 43 and 44 of Schedule 7 with respect to the Shares, the Assets and the Business, on the date of this Agreement as well as on the Closing Date (or, if made as of a specified date, as of such date) and subject to the matters disclosed in the Disclosure Letter.

ARTICLE 5
COVENANTS AND OTHER AGREEMENTS

5.1 General

5.1.1 Closing Cooperation / Access to information

Each of the Parties shall use its good faith efforts to satisfy the Closing conditions, and in particular to agree on the final form of the Ancillary Agreements listed in Exhibit 10.6 and obtain any approvals required to execute such (e.g., Board of Directors approval of LGN), and to take, or cause to be taken, or to do, or cause to be done, all things necessary to satisfy the conditions to the obligations under the Transaction Documents of the Parties over which each has control and to cause the transactions contemplated under the Transaction Documents to be consummated, in accordance with the terms thereof.

From the date hereof to the Closing Date, the Seller shall and undertakes to procure that the Designated Sellers shall furnish to the Purchaser and its counsels and advisers (i) reasonable access during normal business hours to the senior management, offices, properties, contracts, and books and records of the Seller and the other Designated Sellers (in respect of the Business) and shall furnish promptly to the Purchaser all other (ii) available information concerning the Business (including its properties and operations), as the Purchaser may from time to time reasonably request; provided, however that the Seller shall not be required to provide (or cause to be provided) (x) any Tax-related information (except for Assumed Employee tax and social charges information that may be necessary for the Designated Purchasers to properly effect the transfer of such employees on their payrolls), or (y) such information (including any Assumed Employee related information) or access to the extent that it would cause the Seller or the other Designated Sellers to be in breach of any obligation or in violation of applicable Law.

For a period of five (5) years from Closing, the Seller and the Purchaser shall, and undertake to procure that the other Designated Sellers and the other Designated Purchasers,

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respectively, shall retain the books, records and documents in connection with the Business and shall allow the other party reasonable access to such books, records and documents, including to take copies at the expense of the party requesting such copies. The preceding sentence shall not apply to Tax-related information nor to any information the Seller is not required to provide pursuant to the preceding paragraph.

5.1.2 Filings and Approvals

To the extent not yet made before the date hereof, except for the China filings (where each Party shall bear the costs of its own filing), the Purchaser shall make at its expense all requisite filings with the relevant Government Entities referred to in Section 10.1 within eight (8) Business Days of the date hereof and shall promptly answer to any request for information from said authorities. The Seller shall and shall cause the other Designated Sellers to provide the Purchaser with all information available to it which the Purchaser may reasonably request for the purpose of preparing such filings provided, however, that (x) no such information shall be required to be provided by the Seller if it determines, acting reasonably, that, such information is material and competitively sensitive or that the provision of such information could reasonably be expected to have a material adverse effect upon it if the transactions contemplated by this Agreement were not completed, and (y) in any such case the Purchaser and the Seller shall cooperate with a view to establishing a mutually satisfactory procedure for providing such information directly to the Government Entity requiring or requesting such information, and the Seller required to provide such information shall provide it directly to such Government Entity.

The Purchaser shall inform the Seller on a regular basis as to the contents of communications with the relevant Government Entities. In particular, the Purchaser will not make any notification in relation to the transactions contemplated hereunder without first providing the Seller with a copy of such notification in draft form and giving the Seller an opportunity to comment before it is filed with the relevant Government Entities, and shall consider and take account of all reasonable comments made by the Seller in this respect. The Purchaser shall promptly inform the Seller of the satisfaction of the condition precedent referred to in Section 10.1 and in any event no later than two (2) Business Days of becoming aware thereof.

Notwithstanding the above, the Seller shall make, at its own expense, all requisite filings with the relevant Government Entities as it may be required to by such Government Entities in relation with this Agreement.

5.1.3 Revised Schedules

The Seller shall deliver to the Purchaser, at least five (5) Business Days prior to the Closing Date, revised Schedules to (i) the representations and warranties and the Local Asset Sales Agreement (if applicable) to reflect any matters related to the Closing at issue that have occurred from and after the date of this Agreement, that, if existing on the date of execution of this Agreement, would have resulted in a disclosure or exception with regard to any such representation and warranty; and (ii) the Designated Country Assets to reflect updated or missing information (it being expressly specified that the Seller shall not be entitled to update Schedule 2.1.2(7) or to make significant changes to the Owned Equipment list without the Steering Committee’s approval),

provided, however, that even though the Purchaser shall have waived a right in accordance

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with the provisions of Section 10.3, the Purchaser shall be entitled to be indemnified by the Seller for any Losses resulting from (x) any breach of a representation or warranty made by the Seller in this Agreement, unless and to the extent such breach or exception was referred to in the Disclosure Letter as of the date hereof or (y) facts or events disclosed in the revised Schedules, in both (x) and (y) in accordance with the indemnification provisions of Article 9 hereof (and subject to the limitations therein set forth), provided, however, in connection with the Owned Equipment, that the Purchaser and the other Designated Purchasers shall not be entitled to any indemnification in connection with the revision of Schedule 2.1.1(2), without prejudice of the provisions of Sections 2.2.3(v) and 2.2.5.

5.1.4 Public Announcements

Subject to each Primary Party’s disclosure obligations imposed by Law, the Purchaser and the Seller shall cooperate, and shall cause each of the Designated Purchasers and the other Designated Sellers to cooperate, with each other in the development and distribution of all news releases, other public information disclosures and announcements, including announcements and notices to customers, suppliers and employees, with respect to this Agreement, or any of the transactions contemplated by this Agreement and the other Transaction Documents and shall not issue any such announcement or statement prior to consultation with, and the approval of, the other Primary Party (such approval not to be unreasonably withheld or delayed); provided that approval shall not be required where the disclosing party reasonably determines, after consultation with such other Primary Party, that such disclosure is required by Law.

5.2 Conduct of Business

The Seller covenants and agrees that except as otherwise contemplated or permitted by this Agreement or the applicable Local Asset Purchase Agreement, from the date hereof to the Closing Date,

(i) it shall conduct the Business or cause the Designated Country Business, as conducted by the applicable Designated Seller, to be conducted in the ordinary course consistent with past practice and will make all commercially reasonable efforts consistent with past practice to preserve the Business and the Assets, and to preserve its relationship with customers, suppliers, contractors and other service providers with whom the Seller or such Designated Seller deal in connection with the Business, and so as to ensure all representations and warranties of the Seller remain true and correct in all material respects as of the Closing, and

(ii) without the prior consent of the Purchaser, which consent shall not be unreasonably withheld or delayed, it shall not and shall not permit any of the other Designated Sellers to:

a)

enter into any modifications of any Seller Contract which modification requires the expenditure net of any additional revenues by any of the Designated Sellers or its counterparty in excess of one million US dollars (USD 1,000,000) (or its equivalent in local currency), exclusive of VAT. Terminate any Seller Contract, unless the other party to the Seller Contract avails itself of a right to termination;

b)

issue any purchase order for Owned Equipment with a value in excess of two hundred thousand US dollars (USD 200,000) (or its equivalent in local currency);

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c)	dispose of any Asset or any interest in such asset other than in the ordinary course of Business;
d)	create any Lien over all or any of the Assets (excluding the Transferred Intellectual Property), except Permitted Liens, or grant any rights under Licensed Intellectual Property which would prevent Seller and/or other Designated Sellers from granting the rights on Licensed Intellectual Property pursuant to the License Agreement royalty-free, except that subject to the foregoing, the Seller will continue to operate in the normal course until the Closing Date and such normal course will include, among other things, sales of product;
e)	create any Lien or enter into any license, over the patented Transferred Intellectual Property, except for broad patent cross licenses not specifically directed to UMTS Access products or other licenses granted in connection with the sale of Nortel Products to customers or license in connection with the manufacturing of Nortel Products in the normal course of business;
f)	agree to take any of the actions set forth in the foregoing paragraphs a) to e);
g)	take any of the actions set out in Clause 45 of Schedule 7.

For purposes of clarity, the transactions contemplated in Sections 2.1.5 and 5.9 are exceptions to the above covenants, though such exceptions apply only to the extent that they are strictly necessary to achieve these transactions.

5.3 Transaction Expenses

Each of the Purchaser and the Seller shall bear its own costs and expenses (including brokerage commissions, finders’ fees or similar compensation, and legal fees and expenses) incurred in connection with this Agreement, the Transaction Documents and the transactions contemplated hereby. For the avoidance of doubt, any Tax related costs and expenses are subject only to the provisions of Article 8.

5.4 Confidentiality

The Parties acknowledge that the Confidentiality Agreement remains in full force and effect in accordance with its terms, which are incorporated herein by reference, and the Parties agree to be bound thereby in the same manner and to the same extent as if the terms had been set forth herein in full, provided, however that the confidentiality obligations shall remain in force for a five-year period as from the Closing Date, notwithstanding the termination provision in the Confidentiality Agreement.

5.5 Warranty Liabilities and Known Product Defects

5.5.1 Standard Warranty Liabilities

To the extent that the SWL Reserve is less than three million three hundred and thirty three thousand three hundred and thirty three US Dollars (USD 3,333,333), the Seller will reimburse the Purchaser and any other Designated Purchaser any reasonable costs incurred by any of them for the performance of the Standard Warranty Liabilities after the Closing Date if such costs exceed in the aggregate one and a half times the SWL Reserve and only for that

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portion of the costs which exceed such amount. To the extent that the SWL Reserve is not less than three million three hundred and thirty three thousand three hundred and thirty three US Dollars (USD 3,333,333) the Seller will reimburse the relevant Designated Purchasers for any reasonable costs incurred by any of them for the performance of the Standard Warranty Liabilities after the Closing Date in excess of five million US Dollars (USD 5,000,000). For purpose of implementing this provision, the Purchaser shall invoice the Seller within thirty (30) days following the expiration of each calendar quarter.

The obligation of the Seller under this Section 5.5.1 shall only apply in connection with valid claims notified by Third Parties and for which the relevant Designated Purchaser has substantiated in a reasonable fashion the costs incurred in the performance of the Standard Warranty Liabilities.

5.5.2 Extended Warranty Liabilities

Within thirty (30) days from the expiration of each calendar quarter of the twenty-four (24) month period following the Closing Date, the Purchaser shall inform the Seller of the costs incurred in connection with Extended Warranty Liabilities during the preceding quarter. If the total costs incurred by the Designated Purchasers in connection with the Extended Warranty Liabilities exceed the EWL Reserve, the Seller shall reimburse such difference to the Purchaser in immediately available funds, it being provided that:

• for any amount claimed by the Purchaser above the EWL Reserve, the Seller shall only be liable under this Section 5.5.2 for reasonable costs that the relevant Designated Purchaser has substantiated in a reasonable fashion, and

• the obligation of the Seller under this Section 5.5.2 shall only apply in connection with valid claims notified by Third Parties.

If there remains any outstanding Extended Warranty Liabilities after the expiration of the twenty-four (24) month period following the Closing Date, the Designated Purchasers shall be liable for those outstanding Extended Warranty Liabilities and shall have no right to make any claim against any of the Designated Sellers in this respect and no Designated Seller shall retain any liability in this connection.

If the amount of the EWL Reserve exceeds the total costs incurred by the Designated Purchasers in connection with such Extended Warranty Liabilities, the Purchaser shall keep such difference and have no reimbursement obligation to the Seller for such excess funds.

5.5.3 Known Product Defects

To the extent that the Known Product Defect involves a supplier of a Designated Seller, at the Seller’s option, (x) the Seller shall, or shall cause the relevant Designated Seller to, assign to the Purchaser its warranty claim against the relevant supplier or (y) the relevant Purchaser shall return the defective component to the relevant Designated Seller and the Parties shall cooperate in good faith in asserting the warranty claim against the relevant supplier. In all cases, the Purchaser shall be entitled to any monetary relief awarded by a supplier in connection with a warranty claim relating to a Known Product Defect.

Within thirty (30) days from the expiration of each calendar quarter of the twenty-four (24)

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month period following the Closing Date, the Purchaser shall inform the Seller of the costs incurred in connection with KPD Liabilities during the preceding quarter and:

• if the amount of the KPD Reserve exceeds the total costs incurred by the Designated Purchasers in connection with KPD Liabilities up to such date, the Purchaser shall keep such difference and have no reimbursement obligation to the Seller for such excess funds;

• if the total costs incurred by the Designated Purchasers in connection KPD Liabilities exceed the KPD Reserve, the Seller shall reimburse such difference to the Purchaser in immediately available funds,

it being provided however that for any amount claimed by the Purchaser above the KPD Reserve amount the Seller shall only be liable under this Section 5.5.3 for reasonable costs that the relevant Designated Purchaser has substantiated in a reasonable fashion and it being specified that any monetary relief awarded by a supplier and received by a Designated Purchaser in connection with a warranty claim relating to a Known Product Defect shall be deducted from the costs for which the Purchaser is entitled to reimbursement under this Section 5.5.3.

If there remains any outstanding KPD Liability after the expiration of the twenty-four (24) months period following the Closing Date, the Designated Purchasers shall be liable for those outstanding KPD Liabilities and shall have no right to make any claim against any of the Designated Sellers in this respect and no Designated Seller shall retain any liability in this connection.

5.6 Adjustment

Subject to the second paragraph of this Section 5.6, (a) the Seller will reimburse the Purchaser or any other Designated Purchasers for all reasonable costs and related margin in connection with any obligations under all of the Seller Contracts (other than the Warranty Liabilities) which are contractually required to be, and are, performed by the Purchaser or any other Designated Purchasers and for which the Seller or any other Designated Seller has been compensated for by the customer (the “Seller Adjustment Amount”) and (b) the Purchaser will reimburse any Designated Seller for all reasonable costs and related margin in connection with any obligations under all of the Seller Contracts which were contractually required to be, and were, performed by any of the Designated Sellers and for which the Purchaser or any other Designated Purchaser is compensated for by the customer (the “Purchaser Adjustment Amount”), provided, however that in no event under (a) or (b) shall the respective amount exceed the amount the other Party has received from the customer with respect to concomitant obligation.

If the Seller Adjustment Amount is greater than the Purchaser Adjustment Amount and such difference is greater than five hundred thousand US dollars (USD 500,000), the Seller shall pay the Purchaser the amount of the difference in excess of five hundred thousand US dollars (USD 500,000). If the Purchaser Adjustment Amount is greater than the Seller Adjustment Amount, the Purchaser shall have no obligation to pay the Seller any such difference.

5.7 Certain Payments Received from Third Parties

Subject to the provisions of Sections 5.6 and 5.13, to the extent that after the Closing Date,

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(a) the Purchaser or any other Designated Purchaser receives any payment that is for the account of a Designated Seller according to the terms of this Agreement, the Purchaser or the relevant Designated Purchaser shall promptly deliver such amount to the Seller, and (b) the Seller or any of the Designated Sellers receives any payment that is for the account of the Purchaser or any of the other Designated Purchasers according to the terms of this Agreement, the Seller shall promptly deliver such amount to the Purchaser.

5.8 Consents — Seller Contracts

Before, at and after the Closing, the Seller shall use its reasonable efforts to obtain, as soon as practicable, the consent of each Person that is required to transfer to the Purchaser and the other Designated Purchasers the rights and obligations under each Seller Contract and the Seller shall keep the Purchaser advised on a regular basis, and the Purchaser shall reasonably cooperate in such efforts; provided, however, (i) that the Seller shall be under no obligation to compromise any right, asset or benefit or to expend any amount or incur any Liability in seeking such consents, other than those rights, assets, benefits or liabilities that are not significant in the Seller’s reasonable opinion, and the failure to obtain any or all of such consents shall not entitle the Purchaser to terminate this Agreement or not to complete the transactions contemplated hereby and (ii) all consents shall be obtained on such terms that shall not modify any terms of the Seller Contracts or require the Purchaser or any other Designated Purchaser to make any termination or indemnity payments or to incur any other liabilities for termination including following the Closing Date, except with the relevant Designated Purchaser’s consent or except as otherwise provided in the relevant Seller Contract.

At least five (5) Business Days before the Closing, the Seller shall deliver a written notice to the Purchaser setting forth a complete list of such Seller Contracts that, notwithstanding such reasonable efforts, will not be fully transferred at the Closing (such contracts, permits and licenses, the “Not Yet Transferred Contracts”). The delivery of such notice shall not relieve either party of its obligations under the first sentence of this Section 5.8.

The Seller and the Purchaser shall cooperate in any lawful arrangement to provide that the Purchaser and the other Designated Purchasers shall receive all benefits (without any deduction for cost or otherwise, set-off or counterclaim) and be responsible for all Liabilities under each Not Yet Transferred Contract until all necessary consents are obtained and the full transfer thereof is effective, and as between the Seller (or the other Designated Sellers) and the Purchaser (or the other designated Purchasers), the Not yet Transferred Contracts shall be deemed to be assigned. Unless and until the rights and obligations under the Not Yet Transferred Contracts are effectively transferred to the Purchaser and the other Designated Purchasers, the Seller and the other Designated Sellers shall not agree to any material variation of, or modifications to, termination of, or waiver of any right under or in relation to those contracts without the prior approval of the Purchaser or the relevant Designated Purchaser, as applicable.

The fact that the transfer of any Asset or the assumption of any Assumed Liability requires the consent of a Third Person shall in no way alter the foregoing rights and responsibilities of the parties.

Nothing in this Agreement shall be construed as an attempt to transfer any contract, permit of license that is by its terms non-transferable without the consent of another party thereto.

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5.9 Bundled Contracts

Before the Closing, each of the Purchaser or any other relevant Designated Purchaser, on the one hand, and the relevant Designated Seller, on the other hand, shall use their reasonable efforts to enter into arrangements with the other party to each customer contract which includes the sale of Nortel Products and Nortel Services and the sale of other Designated Seller products and services (a “Bundled Contract”), with effect following the Closing Date, to amend the Bundled Contracts so as delete all obligations and Liabilities therefrom as they relate to the Nortel Products and the Nortel Services and that a new contract is entered with into with the applicable customer and which only relates to Nortel Products and Nortel Services, in which event such new contract shall be deemed to be a Seller Contract; provided, however, that the Seller shall be under no obligation to compromise any right, asset or benefit or to expend any amount or incur any Liability in obtaining such arrangements or consents, and further provided, that the rights and obligations of the supplier in such Seller Contract have not been respectively restricted and broadened or modified in any material way.

For those Bundled Contracts for which such arrangements could not be entered into five Business Days prior to the Closing Date, and to the extent that the Purchaser waives the Closing condition regarding the unbundling of such Bundled Contract, the Seller shall or shall cause the other relevant Designated Sellers to provide or cause to be provided to the Purchaser or a Designated Purchaser, the benefits of such Bundled Contracts in so far as they relate to the Business under the terms and conditions of the agreement which the relevant Parties will enter into in the form attached as Exhibit P (the “Subcontract Agreement”). The contract with O2 and Mobisle Communications Limited (“Malta”) shall not be unbundled and the Subcontract Agreement shall apply to O2 and Malta.

5.10 Insurance

Effective on the Closing Date, the Business shall cease to be insured by the insurance policies of the Seller and the Designated Sellers.

5.11 Additional Equipment

At the latest on the day falling four (4) months (or one (1) month with respect to subparagraph (3) as it pertains to assets used to provide Administrative Services) after the Closing Date, the Purchaser shall be entitled to request of the Seller that certain tangible equipment that were utilized by a Designated Seller in connection with the Business prior to the Closing Date and which have not been transferred at Closing be transferred as if they had been transferred in accordance with the terms of Section 2.1.1. to the Purchaser or another identified Designated Purchaser (the “Additional Equipment”) subject to such equipment:

(1)	not being equipment falling within the Excluded Assets referred to in Section 2.1.2(7), as such list of Excluded Assets may be modified between the date hereof and January 31st, 2007;
(2)	being owned by a Designated Seller as of the Closing; and
(3)	mainly relating to the Business or, if for equipment used to provide Administrative Services either (a) exclusively used by the Business or (b) mainly used by the Business if (i) determined by the Steering Committee acting reasonably and in good

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faith by majority vote or (ii) is not or will not be used by a Designated Seller to provide any of the services under the Transition Services Agreement, provided such asset is required for the operation of the Business by the Purchaser.

In such event, the Seller shall, or shall cause the Designated Sellers to, transfer such Additional Equipment to the Designated Purchaser identified by the Purchaser at no additional charge, except that had the Purchase Price been reduced pursuant to Sections 2.2.3(v) and/or 2.2.5(ii), then such price reduction shall give rise to immediate repayment to the Seller for the lower of (x) the net book value of the Additional Equipment as of the Closing Date transferred in accordance with this Section 5.10 or (y) the difference between USD 50 million and the net amount paid by the Seller to the Purchaser under Sections 2.2.3(v) and 2.2.5(ii).

At the latest on the day falling four (4) months after the Closing Date, the Purchaser shall be entitled to request of the Seller that the lease agreements, if any, relating to Leased Equipment that were utilized by a Designated Seller in connection with the Business prior to the Closing Date and which are not included in the Assets transferred in accordance with Section 2.1.1(3) be assigned to the Purchaser or another identified Designated Purchaser subject to the relevant Third Party approval of such lease agreement assignment.

5.12 Additional Inventory

For a period of three (3) years after the Closing Date, any Nortel Product that is returned for free by a Third Party (including customers) to any of the Designated Sellers shall be immediately transferred at no cost (other than costs for any shipping, storage or handling) to the relevant Designated Purchasers, including Nortel Products installed in the O2 network. Notwithstanding the preceding sentence and except for Nortel Products installed in the O2 network, in the event the Purchase Price has been reduced under Section 2.2.3 (iv) and/or the Seller has paid an amount in accordance with Section 2.2.5 (i) in connection with a shortfall in Inventory, the relevant Designated Purchaser shall pay to the relevant Designated Seller a price to be agreed between the Parties up to the net sum borne by the Seller under Sections 2.2.3 (iv) and/or 2.2.5 (i) (as such sum may be reduced by any previous payment which may have been made in accordance with this provision).

This Section 5.12 shall not apply where a Product is returned to the Designated Party by a customer in connection with warranty obligations owed to such customer.

5.13 Invoices

For the sake of clarity, the Seller undertakes not to, and undertakes to procure that its Affiliates (including the Designated Sellers) shall not, issue any invoices (including inter-company invoices) after the Closing Date in connection with the Business including for works performed, or services delivered, prior to the Closing Date.

5.14 Release of Permitted Liens

Subject to the provisions of Article 8, the Seller undertakes to cause the release, at its own cost, of the Permitted Liens relating to the Assets as soon as the obligation secured by such Permitted Lien becomes due and payable or within five (5) days, reimburse the Purchaser for the cost of such release in the event that the Purchaser has obtained such release.

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5.15 Transition

Those portions of the Transition Plan that have not been finalized shall be finalized by the Steering Committee prior to the Closing Date in order to achieve a smooth transition upon Closing. The Steering Committee shall also make recommendations with respect to the Transition Services Agreement and monitor the performance thereof. The Primary Parties shall cause their Affiliates to perform the Transition Plan; it being provided that the Designated Sellers shall be under no obligation to take any implementing steps thereunder prior to the Closing Date to the extent such implementing step would be reasonably likely to have a detrimental effect on any Designated Seller in the event of termination of this Agreement.

5.16 Additional Covenants

5.16.1 Except for Assets which are located at the sites that are the subject of Real Estate Agreements, the Parties shall cooperate to ensure that within a reasonable period after the Closing Date, (i) the Inventory, the Owned Equipment and the Business Information, to the extent applicable, forming the Assets as of the Closing Date have been removed from the Designated Sellers’ facilities, taking into consideration the amount of such Assets at a particular facility, at the sole cost of the relevant Designated Purchasers and that (ii) the data files included in the Assets as of the Closing Date are segregated and migrated at the sole cost of the Seller from the Designated Sellers’ servers to the servers designated by the Designated Purchasers, except as otherwise provided for in the Transition Services Agreement.

5.16.2 Following the Closing Date, the Purchaser shall not use and shall cause each of its Affiliates not to use any item (including software) (the “Software”) loaded or embedded in the Owned Equipment transferred on the Closing Date if such Software is not included in the Assets or licensed to a Designated Purchaser under the License Agreement, except as otherwise provided for in the Transition Services Agreement. The Purchaser shall, and shall cause that the relevant other Designated Purchaser, as soon as is reasonably practicable and in any event no later than thirty (30) days after the Closing Date, delete all such non-transferred Software from any of the Owned Equipment transferred at Closing on which it is installed, except as otherwise provided for in the Transition Services Agreement.

5.16.3 The Seller shall, and shall cause the Designated Sellers to, assign to the Purchaser or any other Designated Purchaser all of the rights of the relevant Designated Sellers against Third Party suppliers of Inventory.

5.16.4 As from the date hereof until the Closing Date, the Seller undertakes to procure that LG-Nortel Co. Ltd shall order supplies in connection with the Business in the ordinary course of business and consistent with past practices and that it shall not take steps to accelerate the order and delivery of supplies in advance of the date on which they are usually ordered and delivered.

5.17 In the event that the Seller wants to dispose of its GSM business, before committing to such disposal, the Seller will give the Purchaser a 30 day prior notice in order to allow the Purchaser to make an offer for such business if it so desires. This right of the Purchaser will be effective until eighteen months after the Closing Date. Such notice shall be the Seller’s sole obligation with respect to such disposal.

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ARTICLE 6
NON-COMPETE

6.1 As from the Closing Date and for a period of three (3) years thereafter to and including the date which is the third anniversary of the Closing Date, the Seller shall not and shall cause its Affiliates not to directly or indirectly, sell, license or lease Products or provide any installation, commissioning or hardware and software maintenance services for Products sold leased or licensed by the Designated Sellers prior to the Closing Date or by the Purchaser or the Designated Purchasers after the Closing Date; provided, however, that the Seller shall have the right to contract with a customer to provide any such services only if it agrees to subcontract such services; whereupon, the Seller shall first offer to subcontract such services to the Purchaser and should the Purchaser not agree within a commercially reasonable period of time to perform such services at market prices and terms, less an administrative fee, then the Seller will then source such services to a Third Party.
The prohibition in this Article 6 shall apply worldwide.

Such prohibition shall not be applicable to:

(a)	any activities in Korea carried out by LG-Nortel Co Ltd. in accordance with the Korea Development and Distribution Agreements,
(b)	any subcontracting relationship between any Designated Seller and the Purchaser (or any other Designated Purchaser) contemplated in the Transaction Documents,
(c)	the sale, lease or license of MIMO products, including for incorporation within Products, provided, however, if a Product incorporates elements of MIMO technology, then such prohibition shall apply to such Product,
(d)	a change of Control of the Seller, except where such change of Control results from a combination involving an exchange of shares and following which (A) the former shareholders of the Seller own (i) directly more than fifty percent (50%) of the voting rights of the surviving entity or (ii) indirectly more than fifty percent (50%) of the voting rights of the Seller and (B) no shareholder other than a former shareholder of Nortel may exercise Control over the Seller,
(e)	the Seller’s acquisition of assets from, or a Controlling interest in, an entity where such assets or entity generated at least one billion US dollars (USD 1,000,000,000) in revenues in the telecommunication equipment market during the twelve (12) months immediately prior to the Closing Date, and less than 40% of such revenues were derived from a Competing Business.

6.2 If the Seller makes an acquisition that includes a Competing Business, which acquisition is not subject to the exclusion referred in paragraph (e) above, upon the completion of such acquisition,

(i) The Seller shall immediately announce publicly its intention to divest such Competing Business and effectively close the divestiture within ten (10) months of the closing of the concerned acquisition. The Seller shall allow the Purchaser to participate as a

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	potential acquirer of the Competing Business in the bidding process. During this ten (10) month period, all commercial relations between the Competing Business and the Seller shall cease except for standard transition services (excluding, for purposes of clarity, distribution of both Products and/or associated services);
(ii)	If the Seller does not succeed in effecting such divestiture within the ten-month period referred in paragraph (i) above, it shall immediately at the end of such period at its option either terminate all business of the Competing Business or place the Competing Business under a trust to be managed independently for an additional nine (9) months;

(iii) If at the end of the nine-month period referred in paragraph (ii) above, the Competing Business has not been sold by the trustee, then it shall cease all business.

The divestment obligation provided for in this paragraph 6.2 shall be applicable as long as the acquisition is made during the three-year non-compete period provided in Section 6.1 above, even though the effectiveness of the divestment may occur after such period.

The Seller agree that the restrictions contained in Sections 6.1 and 6.2 are no greater than are reasonable and necessary for the protection of the interest of the Purchaser and the other Designated Purchasers but if any such restriction shall be held to be void but would be valid if deleted in part or reduced in application, such restriction shall apply with such deletion or modification as may be necessary to make it valid and enforceable.

ARTICLE 7
EMPLOYMENT AND EMPLOYEE BENEFIT MATTERS

Specific provisions with regards to employee matters are provided in Schedule 7 hereto.

ARTICLE 8
TAX MATTERS

8.1 Transfer Taxes

The Parties agree that Transfer Taxes linked to any internal reorganization carried out prior to the Closing by the Seller within its group in connection with the Business shall be borne by Seller.

Notwithstanding the above and irrespective of any provision contained in the Contribution Agreement, the relevant Designated Purchaser and Alcatel CIT shall be liable for all Transfer Taxes specifically related to the French Acquisition Structure, it being provided that the Seller does not give any representation as to the characterization of the French Assets and French Assumed Liabilities as a complete and autonomous business.

The parties agree that the Purchase Price is exclusive of any Transfer Taxes. The Purchaser shall (on behalf of itself and the other Designated Purchasers and Alcatel CIT) pay directly to the appropriate taxing authority, within the time specified therefor, all applicable Transfer

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Taxes payable in connection with the transactions contemplated by this Agreement (other than Transfer Taxes linked to any internal reorganization carried out prior to Closing by the Seller within its group in connection with the Business, except as provided above with regards to the French Acquisition Structure), the License Agreement, the Transition Service Agreement, and the Real Estate Agreements, provided that, if any such Transfer Taxes are required to be collected, remitted or paid by the Seller or any agent thereof (as requested by the Seller or any other Designated Seller), the Purchaser shall (on behalf of itself and the other Designated Purchasers and Alcatel CIT) pay such Transfer Taxes to the Seller, any other Designated Seller or any such agent, as applicable, at the Closing or thereafter, as applicable, as requested of or by the Seller.

If the Purchaser or any other Designated Purchaser or Alcatel CIT wishes to claim any exemption relating to, or a reduced rate of, Transfer Taxes, in connection with the transactions contemplated herein, the Purchaser (acting on behalf of any other Designated Purchaser or Alcatel CIT, as the case may be) shall be solely responsible for ensuring that such exemption or election applies and, in that regard, shall provide the Seller or any other applicable Designated Seller prior to Closing with its permit number, GST, VAT or other similar registration numbers and/or any appropriate certificate of exemption, election and/or other document or evidence to support the claimed entitlement to such exemption by the Purchaser, or such other Designated Purchaser or Alcatel CIT, as the case may be.

8.2 Transfer Tax Indemnity

The Purchaser shall (and shall cause any other applicable Designated Purchaser or Alcatel CIT to) indemnify and hold harmless the Seller and the other Designated Sellers from and against all Transfer Taxes, interest and penalties payable by the Purchaser or such other Designated Purchaser or Alcatel CIT in connection with the transactions contemplated by this Agreement (other than Transfer Taxes linked to any internal reorganization carried out prior to Closing by the Seller within its group in connection with the Business, except as provided above with regards to the French Acquisition Structure), the License Agreement, the Transition Service Agreement, and the Real Estate Agreements and any Losses relating to Transfer Taxes in connection with the transactions contemplated by this Agreement and such other agreements (including any legal and accounting fees and expenses) that the Seller or any other Designated Seller may be required to pay or remit pursuant to an applicable Law, including (i) any Losses that may arise if the Purchaser or another Designated Purchaser or Alcatel CIT’s claimed exemption or election from Transfer Taxes is found to be invalid by the relevant tax authority and (ii) any added costs to the Seller or any other Designated Seller in connection with the unavailability of certain elections, exemptions or reduction in respect of Transfer Taxes.

8.3 Tax Characterization of Certain Payments and Credits

The Seller and the Purchaser agree to treat (i) all payments made pursuant to Sections 2.2.5 (Post-Closing Additional Cash Payment), 5.5.1 (Standard Warranty Liabilities), 5.5.2 (Extended Warranty Liabilities), 5.5.3 (Known Product Defects), 5.11 (Additional Equipment), and 5.12 (Additional Inventory) and (ii) all payments made either to or for the benefit of the other party under any indemnity provisions of this Agreement and for any misrepresentations or breach of warranty or covenants as adjustments to the Purchase Price for Tax purposes and that such treatment shall govern for purposes hereof to the extent permitted under applicable Tax Law.

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8.4 Tax Responsibility

Except as otherwise provided in this Article 8, (i) Seller shall and shall cause the other Designated Sellers, as the case may be, to bear all Taxes of any kind relating to the Assets or the conduct or operation of the Business for all Tax periods or portions thereof ending on or before the Closing Date and (ii) Purchaser shall and shall cause the other Designated Purchasers to bear all Taxes relating to the Assets or the conduct or operation of the Business for all Tax periods or portions thereof beginning after the Closing Date.

With respect to any Tax relating to the Assets or the conduct or operation of the Business in which the applicable Tax law does not allow the Closing Date to be treated as the last day of a taxable year or period (including the taxe professionnelle), such Tax shall be allocated between portions of a Tax period that includes (but does not end on) the Closing Date (a, “Straddle Period”) in the following manner: (i) in the case of a Tax imposed in respect of property and that applies ratably to a Straddle Period, the amount of Tax allocable to a portion of the Straddle Period shall be the total amount of such Tax for the period in question multiplied by a fraction, the numerator of which is the total number of days in such portion of such Straddle Period and the denominator of which is the total number of days in such Straddle Period, and (ii) in the case of sales, value-added and similar transaction-based Taxes (other than Transfer Taxes allocated under Section 8.1 of this Agreement), shall be allocated to the portion of the Straddle Period in which the relevant transaction occurred. With respect to the taxe professionnelle, the amount of Tax that will be allocated is the taxe professionnelle as capped by the added value limitation (if any), as provided by Article 1647 B sexies of the French Tax Code.

8.5 Tax Credits; Tax Refunds

The Seller or the other applicable Designated Sellers shall be entitled to any refunds or credits of Taxes relating to the Assets or the Business for any taxable period (or portion thereof) ending on or prior to the Closing Date.

The Purchaser or the applicable Designated Purchasers shall be entitled to any refunds or credits of Taxes relating to the Assets or the Business for any taxable period (or portion thereof) beginning after the Closing Date.

8.6 Notices

Purchaser and Seller shall promptly inform each other in writing (within sixty (60) days after receiving notice thereof or a reasonable earlier time if an earlier response is required by law) of any assessment, notice of deficiency, determination, or other equivalent formal notification by a taxing authority of an asserted additional Tax liability in respect of all Taxes indemnified under this Article 8, such that the Person so informed shall have the maximum amount of time within which to review and/or prepare any required response.

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ARTICLE 9
INDEMNIFICATION

9.1 Indemnification Obligations

9.1.1 Indemnification by the Seller

Subject to the other provisions of this Article 9, the Seller shall indemnify and hold harmless the Purchaser and the other Designated Purchasers and any of the Purchaser’s or the other Designated Purchaser’s employees, officers or directors (collectively, “Purchaser Indemnitees”) from and against any Losses that any Purchaser Indemnitee may suffer, sustain or become subject to, directly or indirectly as a result of:

(a) the breach by the Seller or any of the other Designated Sellers of any representation or warranty made by the Seller or any of the other Designated Sellers in this Agreement, the License Agreement or any Local Asset Sale Agreement;

(b) the breach by the Seller or any of the other Designated Sellers of any covenant or agreement made by the Seller or any of the other Designated Sellers in this Agreement, the License Agreement or any Local Asset Sale Agreement; and

(c) the Excluded Assets and the Excluded Liabilities.

For the sake of clarity, if a Loss can be indemnified by the Seller under both Section 9.1.1(a) and Section 9.1.1(c), the Purchaser shall be entitled to choose at its own discretion the ground on which it whishes to be so indemnified.

9.1.2 Indemnification by the Purchaser

Subject to the other provisions of this Article 9 (and in addition to the provisions of Section 8.2), the Purchaser shall indemnify and hold harmless the Seller and the other Designated Sellers and any of the Designated Sellers’ employees, officers or directors (collectively, “Seller Indemnitees”) from and against any Losses that any Seller Indemnitee may suffer, sustain or become subject to, directly or indirectly as a result of:

(a) the breach by the Purchaser or any of the Designated Purchasers of any representation or warranty made by the Purchaser or any of the Designated Purchasers, as the case may be, in this Agreement, the License Agreement or any Local Asset Sale Agreement;

(b) the breach by the Purchaser or any of the Designated Purchasers of any covenant or agreement made by the Purchaser or any of the Designated Purchasers in this Agreement, the License Agreement or any Local Asset Sale Agreement, as applicable; and

(c) the Assets and the Assumed Liabilities.

9.1.3 Indemnification under the Other Transaction Documents

For the avoidance of doubt, the provisions of this Article 9 shall not apply to the liability of the Parties arising under the Transaction Documents other than this Agreement, the Local

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Asset Sale Agreements and the License Agreement, which liability shall be solely governed by the terms of such other agreements.

9.2 Limitations on Indemnification

9.2.1 Monetary Limitations

Notwithstanding anything to the contrary in this Agreement, the Local Asset Sale Agreements and the License Agreement with respect to the Designated Sellers’ representations and warranties contained in this Agreement or any such agreements, the following limitations shall apply to the liability of the Seller and the other Designated Sellers pursuant to Article 9.1.1(a) arising from the breach by the Seller or any of the other Designated Sellers of any representation or warranty made by the Seller or any of the other Designated Sellers in this Agreement, the License Agreement or any Local Asset Sale Agreement, other than those representations made under Sections 4.1 (Organization and Corporate Power), 4.2 (Authorization; Binding Effect; No Breach), Clause 0 of Exhibit 4.3 (Transfer of the Shares), Clause 1 of Exhibit 4.3 (Title to Tangible Assets) and Clause 17 of Exhibit 4.3 (Sales of the Seller):

(i)	The Seller and the other Designated Sellers shall not have any liability until the aggregate amount of all Losses indemnifiable hereunder exceeds one million US dollars (USD 1,000,000), following which the Seller shall be liable from the first US dollar; for the purpose of computing such one million amount, any Loss sustained in a currency other than the US Dollar shall be converted into US Dollars on the basis of the exchange rate prevailing as of the date such Loss has been sustained as computed of the basis of such exchange rate as published in The Wall Street Journal as of such date;
(ii)	The maximum liability of the Seller and the other Designated Sellers shall not exceed one hundred and sixty million United States dollars (US$160,000,000), except in relation to Losses resulting from a fraudulent conduct in which case the cap shall not apply and the Liability of the Seller and the Designated Sellers resulting from such fraudulent conduct shall not be taken into account for the purpose of calculating whether the cap has been reached; and
(iii)	The Seller and the other Designated Sellers shall have no liability in connection with any particular event, fact or development unless and until the Loss indemnifiable hereunder and arising from such particular event, fact or development exceeds twenty thousand US dollars (USD 20,000) or the equivalent of this amount in any other currency as computed on the basis of the exchange rate prevailing as of the date the relevant Loss has been sustained as computed of the basis of such exchange rate as published in The Wall Street Journal as of such date.

9.2.2 Time Period for Claims

Notwithstanding anything to the contrary in this Agreement, the Local Asset Sale Agreements and the License Agreement with respect to the Designated Sellers’ representations and warranties contained in Article 4 and Schedule 4.3 and Schedule 7 of this Agreement or any such agreements, the Seller and the other Designated Sellers shall have no liability with respect to such representations and warranties and the Purchaser and the other

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Designated Purchaser will not be entitled to recover any indemnification for any Losses arising from the breach by the Seller or any of the other Designated Sellers of any representation or warranty made by the Seller or any of the other Designated Sellers in this Agreement, the License Agreement or any Local Asset Sale Agreement, unless written notice of a claim for Losses (given in good faith and specifying, in reasonable detail, the nature thereof) is delivered to the Seller before end of the eighteenth month after the Closing Date.

For the avoidance of doubt, the provisions of this Section 9.2.2 shall not apply to the claims made by either Party in connection with Losses other than those specifically referred to in the preceding paragraph. Claims under Article 8 shall be validly made by either Party until the expiration of the applicable statutes of limitation (including extensions) plus three months.

9.2.3 Disclosures

The Seller shall not be liable in respect of any claim made on the basis of Section 9.1.1(a) to the extent it is based on a matter which is expressly disclosed in the Disclosure Letter (including its Exhibits and Schedules); it being specified for the avoidance of doubt that any disclosure made in the Disclosure Letter relating to a given representation is deemed to be made against such representation only, .

9.3 Defense of Third Party Actions

9.3.1 Promptly upon receipt by a Party of notice of any Action or threatened Action by a Third Party against an Indemnified Party that could reasonable give rise to a right to indemnification pursuant to this Article 9 (“Third Party Action”), such Party shall immediately give written notice describing the Third Party Action in reasonable detail to the Party who may become obligated to provide indemnification (the “Indemnifying Party”).

9.3.2 In connection with any Third Party Action, the Indemnifying Party shall have the right, at its option, to assume the defense of such Third Party Action at any time upon delivery of written notice to the Party seeking indemnity (the “Indemnified Party”) in respect thereof. If the Indemnifying Party assumes the defense of any such Third Party Action, the Indemnifying Party shall select counsel reasonably acceptable to the Indemnified Party to conduct the defense of such Third Party Action, shall take all steps reasonably necessary in the defense or settlement thereof and shall at all times diligently and promptly pursue the resolution thereof.

9.4 Cooperation

Each Primary Party shall cooperate, and cause its respective Affiliates to cooperate, in the defense of any Third Party Action and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith. All costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party. Under no circumstances shall the Indemnified Party compromise any such Third Party Action without the written consent of the Indemnifying Party (such consent not to be unreasonably withheld or delayed).

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9.5 Sole Remedy

From and after the Closing Date, the sole and exclusive remedy for money damages of the Primary Parties hereto in connection with the purchase and sale of the Assets and the other transactions contemplated by this Agreement, the Local Asset Sale Agreements and the License Agreement shall be pursuant to the indemnification provisions set forth in this Article 9, and no Primary Party, the other Designated Sellers or the other Designated Purchasers shall have the right to bring any proceeding against any other Primary Party, the other Designated Sellers or the other Designated Purchasers, as the case may be, for a breach of any representation, warranty, covenant or agreement contained in any such agreement, whether in contract, tort or otherwise, except pursuant to this Article 9; provided that this Section 9.5 shall not limit the right of any party under applicable Law to an injunction or other equitable relief for breach of any covenant or agreement.

9.6 Calculation of Loss

9.6.1 The amount of the Loss shall take into account and shall be increased by an amount equal to the effective Taxation of the payment made by the Seller as a result of the Loss, it being understood that “effective Taxation” means tax due for the tax year that Purchaser receives the payment from Seller.

9.6.2 Notwithstanding anything to the contrary herein, the Seller shall only be liable under this Article 9 for Losses actually sustained by Purchaser Indemnitees and subject to the amount of the Loss being decreased by (x) the amount of any Tax Benefit and (y) any compensatory payments received by a third-parties. If the Seller pays an indemnity in respect of a Loss, which Loss is subsequently compensated in all or in part by a third party, the amount recovered shall be refunded to the Seller immediately upon recovery (but only up to the amount paid by the Seller in respect of such Loss). In addition, any indemnification due by the Seller shall be computed without regard to any multiple, price-earnings or equivalent ratio implicit in negotiating and/or setting the Purchase Price.

9.7 Mitigation obligation

The Purchaser Indemnitees shall procure that all commercially reasonable steps are taken to avoid or mitigate any Losses which might give rise to a claim against the Seller including using their commercially reasonable efforts to recover from third parties (including insurance companies) the amount of any indemnity in relation to a Loss.

9.8 Limitations on Losses

Except by way of indemnification arising out of any Third Party Action and notwithstanding anything in this Agreement, the Local Asset Sale Agreements and the License Agreement to the contrary, under no circumstances shall any Party be liable to any Indemnified Party under this Article 9 or any other provision of this Agreement, the Local Asset Sale Agreements and the License Agreement for punitive damages or indirect, special, incidental, or consequential damages (but in each case excluding loss of profits (manque à gagner)), or damage to reputation, arising out of or in connection with any such agreement or the transactions contemplated thereby or any breach or alleged breach of any of the terms thereof.

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9.9 Assignment of Claims

If the Indemnified Party receives any payment from an Indemnifying Party in respect of any Losses pursuant to Article 9 and the Indemnified Party could have recovered all or a part of such Losses from a Third Party (a “Potential Contributor”) based on the underlying claim for indemnification asserted against the Indemnifying Party, the Indemnified Party shall assign, on a non-recourse basis and without any representation or warranty, such of its rights to proceed against the Potential Contributor as are necessary to permit the Indemnifying Party to recover from the Potential Contributor the amount paid by it as indemnification to the Indemnified Party, it being understood that the Indemnifying Party shall act reasonably so as to not hinder the operations of the Indemnified Party.

Any payment subsequently received by the Indemnifying Party from a Potential Contributor in relation to the payment to the Indemnified Party shall be distributed, (i) first to the Indemnified Party in the amount of any insurance deductible or similar payment required to be paid by the Indemnified Party prior to the Indemnifying Party being required to make any payment to the Indemnified Party, (ii) second to the Indemnifying Party in an amount equal to the payments made to the Indemnified Party, plus reasonable costs and expenses incurred in investigating, defending or otherwise incurred in connection with addressing such claim, and (iii) the balance, if any, to the Indemnified Party.

ARTICLE 10
CONDITIONS TO THE CLOSING

The Primary Parties obligation to effect, or to cause the Designated Sellers and the Designated Purchasers, to effect the Closing is subject to the satisfaction as of the Closing Date of the following conditions precedent; it being provided that the conditions set forth under Sections 10.2, 10.3, 10.5, 10.7 and 10.8 are provided for the sole benefit of, and may be waived at any time by, the Purchaser, subject however to the condition set forth under Section 10.7 which shall also be provided for the benefit of the Seller in so far as it relates to the form of the Korea Agreements and the W-NMS Cooperation Agreement:

10.1 Confirmation, whether by formal notification of approval or through lapse of time signifying absence of objection to the proposed transaction, that no objection exists to the proposed transaction under E.U., Chinese and Israeli antitrust, competition or similar Laws.

10.2 No Material Adverse Change shall have occurred.

10.3 No breach of any of the Seller’s representations and warranties under this Agreement has occurred, except to the extent any such breach does not result in a Material Adverse Change.

10.4 Completion, to the reasonable satisfaction of the Parties of all their respective obligations to consult with Employees’ Representatives in connection with the transactions contemplated in this Agreement.

10.5 The Bundled Contracts, except for those with O2, Partner and Malta, shall have been unbundled in accordance with Section 5.9 and the consent required to transfer on the Closing date the Seller Contracts resulting from such unbundling to any Designated Purchaser shall

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have been obtained.

10.6 The form of the Ancillary Agreements listed in Exhibit 10.6 has been agreed upon by the Primary Parties and, if applicable, the other parties thereto, and all of the Ancillary Agreements to which Flextronics is a party, and the Amending Agreement (to which Flextronics is also a party) have been executed by Flextronics.

10.7 The Board of Directors of LG-Nortel Co. Ltd. has approved the Korea Agreements.

10.8 The Third Party Software License Agreements have become or can immediately become effective in favour of the Designated Purchasers.

10.9 The Transition Plan has been agreed by the Steering Committee and any action to be performed by the Parties before the Closing under the Transition Plan has been performed in all material respects.

10.10 No preliminary or permanent injunction issued by any competent Government Entity shall be in effect preventing (i) the execution of the Ancillary Agreements (except for the China R&D Agreements), and/or (ii) the consummation of the transfer (or the consummation of their contribution followed by the sale of the New Shares as relates to France) of the Designated Country Assets located in either (x) any one of the following countries: France, Canada and China or (y) at least two of the following countries: Spain, Italy and the United Kingdom.

10.11 Seller shall modify any license for intellectual property between Seller and LG-Nortel Co. Ltd. so as to remove therefrom LG-Nortel Co. Ltd.’s right to use any of the Transferred Intellectual Property for the commercial exploitation of the Nortel Products and the Nortel Services (“Business IP”), conditioned upon Purchaser granting to LG-Nortel Co. Ltd. the right to use the Business IP, upon the same terms that are in effect as of the date hereof between Seller and LG-Nortel Co. Ltd. as may be required by LG-Nortel Co. Ltd. for the performance of any obligations (a) that LG-Nortel Co. Ltd. may have as of the date hereof, (b) under the Korea Agreements, to the extent such rights are not contained therein, or (c) that LG-Nortel Co. Ltd. may then have upon the termination of any of the Korea Agreements, as those may have been agreed by the Purchaser, or, if not agreed to by the Purchaser, set forth in (a) or (b), in each case only to the extent such obligations are not assumed by the Purchaser. Similarly, Seller shall modify, mutatis mutandis, any license for intellectual property between Seller and Guangdong Nortel Telecommunications Equipment Co. under the same conditions as above.

ARTICLE 11
MISCELLANEOUS

11.1 Termination

This Agreement may be terminated:

(i)	by mutual written consent of the Seller and the Purchaser;
(ii)	by either Primary Party upon written notice to the other at any time if the Closing

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does not take place prior to February 27, 2007 as a result of a condition for the benefit of such Primary Party set forth in Article 10 not being satisfied;

provided, however, that the right to terminate this Agreement pursuant to (ii) above shall not be available to any Party whose action or failure to act has been a principal cause of or resulted in the failure of a closing condition to be satisfied and such action or failure to act constitutes a material breach of this Agreement or any of the other Transaction Documents.

11.2 Rights on Termination

If this Agreement is terminated pursuant to Section 11.1, all further obligations of the Parties under or pursuant to this Agreement shall terminate without further liability of any Party to the other except for the provisions of Sections (i) 5.1.4 (Public Announcements), (ii) 5.3 (Transaction Expenses), (iii) Section 5.4 (Confidentiality) and (iv) 11.8 (Governing Law; Submission to Jurisdiction); provided, that nothing herein shall relieve any Party hereto from liability for any breach of this Agreement or any of the Ancillary Agreements occurring before the termination hereof and thereof.

11.3 Remedies

No failure to exercise, and no delay in exercising, any right, remedy, power or privilege under this Agreement by any Party will operate as a waiver of such right, remedy, power or privilege, nor will any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise of such right, remedy, power or privilege or the exercise of any other right, remedy, power or privilege.

11.4 Consent to Amendments; Waivers

No Party to this Agreement shall be deemed or taken to have waived any provision of this Agreement or any of the other Transaction Documents unless such waiver is in writing, and then such waiver shall be limited to the circumstances set forth in such written waiver. This Agreement and the Ancillary Agreements shall not be amended, altered or qualified except by an instrument in writing signed by all the Parties hereto or thereto, as the case may be.

11.5 Successors and Assigns

Except as otherwise expressly provided in this Agreement, all representations, warranties, covenants and agreements set forth in this Agreement or any of the Ancillary Agreements by or on behalf of the Parties hereto or thereto will be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, whether so expressed or not, except that none of this Agreement, any of the Ancillary Agreements or any of the rights, interests or obligations hereunder or thereunder may be assigned by any Party hereto or thereto without the prior written consent of the other Party hereto, which consent may be withheld in such party’s sole discretion; provided that the Designated Purchasers shall be entitled to assign their rights hereunder to one or more other Affiliates of the Purchaser, provided that such assignment does not adversely affect the rights of, or impose any additional costs or obligations (except with the prior written consent) on, any Designated Seller.

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11.6 Third Party Rights

Except as otherwise expressly provided under this Agreement, a person who is not a party to this Agreement has no right to enforce any term of, or enjoy any benefit under, this Agreement.

11.7 Time of the Essence

Time shall be of the essence of this Agreement between the date hereof and the Closing both as regards any dates, times and periods mentioned and as regards any dates, times and periods which may be substituted for them in accordance with this Agreement or by agreement in writing between the Seller and the Purchaser.

11.8 Governing Law; Submission to Jurisdiction

This agreement shall be construed in accordance with and governed by the Laws of the French Republic, without giving effect to its conflict of laws principles.

The Parties hereto irrevocably agree that all disputes, claims or matters arising out of or in any connection with this Agreement shall be subject to the Rules of Arbitration of the International Chamber of Commerce; the arbitration shall take place in London (England) and shall be held in the English language.

11.9 Notices

All demands, notices, communications and reports provided for in this Agreement shall be in writing and shall be either sent by facsimile transmission with confirmation to the number specified below or personally delivered or sent by reputable overnight courier service (delivery charges prepaid) to any Party at the address specified below, or at such address, to the attention of such other Person, and with such other copy, as the recipient party has specified by prior written notice to the sending party pursuant to the provisions of this Section.

If to the Purchaser to:
Alcatel Lucent
54, rue la Boétie
75008 Paris
France

Attention: Legal Department

If to the Seller, to:

Nortel Networks Limited
195 The West Mall
T05-04-005, Toronto
Ontario M9C 5K1
Canada

Attention: The Company’s Secretary

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Any such demand, notice, communication or report shall be deemed to have been given pursuant to this Agreement when delivered personally, when confirmed if by facsimile transmission, or on the calendar day after deposit with a reputable overnight courier service, as applicable.

11.10 Appendages

The appendages constitute a part of this Agreement and are incorporated into this Agreement for all purposes as if fully set forth herein

11.11 Counterparts

The Parties may execute this Agreement in two or more counterparts (no one of which need contain the signatures of all Parties), each of which will be an original and all of which together will constitute one and the same instrument.

11.12 Construction; Joint Drafting

Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular, and all words in any gender shall extend to and include all genders. All references to domestic, foreign, federal, state or provincial statutes herein are references to such statutes as amended and in effect at the applicable time. Whenever used, the words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.

The Primary Parties acknowledge that this Agreement has been jointly drafted by them and no presumption to the contrary shall result from the fact that this Agreement has been typed by the Seller or its counsel.

11.13 Severability

If any provision, clause, or part of this Agreement or any of the Ancillary Agreements, or the application thereof under certain circumstances, is held invalid, the remainder of this Agreement or such other Ancillary Agreements, or the application of such provision, clause or part under other circumstances, shall not be affected thereby unless such invalidity materially impairs the ability of the Parties to consummate the transactions contemplated by this Agreement and the Ancillary Agreements.

11.14 Headings

The headings used in this Agreement are for the purpose of reference only and shall not affect the meaning or interpretation of any provision of this Agreement.

11.15 Entire Agreement

This Agreement sets forth the entire understanding of the Parties relating to the subject matter hereof, and all prior or contemporaneous understandings, agreements, representations and warranties whether written or oral, are superseded and are hereby terminated.

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IN WITNESS WHEREOF, the Parties have duly executed this Asset Sale Agreement as of the date first written above.

NORTEL NETWORKS LIMITED
By:	/s/ Mark Cooper
	Name:	Mark Cooper
	Title:	Attorney-in-Fact for Nortel Networks Limited in London on 4th December 2006
ALCATEL LUCENT
By:	/s/ Liaqat Ali Sadiq
	Name:	Liaqat Ali Sadiq
	Title:	Attorney-in-Fact for Alcatel Lucent SA in London on 4th December 2006

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EXHIBIT 1

DEFINITIONS

“Action” means any litigation, action, suit, charge, arbitration, audit, investigation, or other legal, administrative or judicial proceeding.

“Administrative Services” means any ancillary corporate services to or in support of the Business (by the Seller, its Affiliates or any other Person), including treasury services, legal services, information technology services, tax services, human resources services, employee benefits services, risk management services, finance services, group purchasing services, logistics services, property management services, environmental support services and custom and excise services, in each case including services relating to the provision of access to design tools and databases, and any computer software used in connection therewith.

“Affiliate” means, as to any Person, any other Person that directly or indirectly Controls, or is under common Control with, or is Controlled by, such Person.

“Agreed Upon Procedures” means the procedures described in Schedule 1.2.

“Agreement” means this asset sale agreement and all Schedules attached hereto.

“Alcatel CIT” means Alcatel CIT a société anonyme organized under the laws of France, having a share capital of €265,364,340, whose registered office is located at 12, rue de la Baume, registered with the Registry of Commerce and Companies of Paris under the number 338 966 385.

“Amending Agreements” means the Amending Agreement between Flextronics and Alcatel Lucent modifying the agreement that is assigned to Alcatel Lucent under the Assignment and Assumption Agreement.

“Ancillary Agreements” means the Local Asset Sale Agreements, the Real Estate Agreements, the License Agreement, the OEM Agreement, the OEM Development Agreement, the Transition Services Agreement, the Subcontract Agreement, the Korea Agreements, the China Manufacturing Agreement, the China R&D Agreement and the R&D Transfer Agreements, the Assignment and Assumption Agreement, the Inventory Agreement, the W-NMS Cooperation Agreement, the Patent Assignment Agreement and the S18K Cooperation Agreement. The form of the Ancillary Agreements listed in Exhibit 10.6 has not been agreed to by Primary Parties.

“Antitrust Approvals” has the meaning set forth in Section 10.1.

“ASB” means Alcatel Shanghai Bell Co., Ltd.

“Assets” has the meaning set forth in Section 2.1.1.

“Asset Acquisition Statement” has the meaning set forth in Exhibit 2.2.7.

“Asset Allocation Statement” “ has the meaning set forth in Exhibit 2.2.7.

“Assignment and Assumption Agreement” means the agreement among Alcatel CIT, on the one hand, and Flextronics, the Seller and/or any other relevant Designated Sellers, on the other hand, in connection with the temporary assignment of the supply agreements entered into in connection with the Business between Flextronics and any Designated Sellers, to Alcatel CIT, in the form attached hereto as Exhibit A.

“Assumed Liabilities” has the meaning set forth in Section 2.1.3.

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“Bundled Contracts” has the meaning set forth in Section 5.9, all of which are set forth in Schedule 5.9(A).

“Business” means the business of developing, manufacturing and selling the Nortel Products and of supplying the Nortel Services, as conducted by the Designated Sellers as at the Closing Date.

“Business Day” shall mean a day on which the banks are opened for business in Toronto, Ontario, Canada and in Paris, France (Saturdays, Sundays and public holidays excluded).

“Business Information” means, subject to applicable limitations necessary for compliance with the applicable country privacy Laws, originals or copies of all books, records, reports, correspondence in any form, films, microfilms, files, electronically stored data and documentation in the possession or under control of the Designated Sellers or any other Affiliate of the Seller, used or held for use with respect to the Business or the Assets, including information, policies and procedures, Owned Equipment manuals and materials, procurement documentation used in connection with the Business but excluding Tax information; it being provided that Tax information shall include information for countries within the European Union relating to payroll, employment and social security or social security taxes or impositions to the extent that such information would not cause the Seller to be in breach of any obligation or in violation with applicable Law.

“China Manufacturing Agreement” means the manufacturing services agreement between GDNT and ASB and/or any other Designated Purchasers relating to the provision of certain Nortel Products, in the form attached hereto as Exhibit D.

“China R&D Agreement” means the master research and development services agreement between ASB and GDNT in the form attached hereto as Exhibit E.

“Closing” has the meaning set forth in Section 2.3.1.

“Closing Date” has the meaning set forth in Section 2.3.1.

“Competing Business” means a business (other than the Business) which activity is the sale, license or lease of Products or any installation, commissioning or hardware or software maintenance services for Products.

“Confidentiality Agreement” means the confidentiality agreement between the Purchaser and the Seller dated July 12, 2004.

“Contribution” means the contribution of the French Assets in accordance with the terms of the Contribution Agreement.

“Contribution Agreement” has the meaning set forth in Section 2.1.5 and shall be substantially in the form attached hereto as Exhibit F.

“Control”, including, with its correlative meanings, “Controlled by” and “under common Control with”, means, in connection with a given Person, the possession, directly or indirectly, of the power of either (i) elect more than fifty percent (50%) of the directors of such Person or (ii) direct or cause the direction of the management and policies of such Person, whether through the ownership of securities, contract or otherwise.

“Designated Country” means a country (or countries) identified on Schedule 1.1 attached hereto.

“Designated Country Assets has the meaning set forth in Section 2.1.1.

“Designated Purchasers” has the meaning set forth in the preamble to this Agreement.

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“Designated Sellers” has the meaning set forth in the preamble to this Agreement.

“Diselec” has the meaning set forth in Section 2.1.5.

“Disclosure Letter” means the document disclosing information relating to or forming exceptions to the representations and warranties of the Seller and the other Designated Sellers provided in Section 4 and Exhibit 4.3 of this Agreement.

“Draft Post-Closing Additional Cash Payment Statement” shall have the meaning set forth in Exhibit 2.2.5.

“Employee Representatives” means employee representatives, works councils, unions, other representatives of the employees or the employees of the Applicable Designated Sellers whom the Applicable Designated Sellers are required pursuant to the Transfer Regulations to provide information to and/or consult with regarding the matters contemplated by this Agreement.

“Environmental Laws” shall mean any and all civil and criminal laws and generally all international, EU, national and local laws, statutes, ordinances, orders, codes, rules, regulations, judgments, decrees, injunctions or agreements with any governmental or regulatory body, applicable up to Closing Date and relating to:

(a)	the health and safety of human and/or;
(b)	the protection, remediation or restoration of the environment, and/or;
(c)	noise, odor, pollution, land use, biodiversity and/or;
(d)	the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or release of any Hazardous Materials.

“Excluded Assets” has the meaning set forth in Section 2.1.2.

“Excluded Liabilities” has the meaning set forth in Section 2.1.4.

“Extended Warranty Liability” means the liability incurred as a result of any warranty in excess of 12-months granted by the Designated Sellers in connection with Nortel Products delivered prior to the Closing Date.

“Financial Statements” has the meaning set forth in Clause 9 of Exhibit 4.3.

“French Assets” means the Assets for France.

“French Assumed Liabilities” has the meaning set forth in Section 2.1.5.

“GAAP” means the United States generally accepted accounting principles.

“GDNT” means Guangdong Nortel Telecommunications Equipment Co..

“Government Entity” or “Government Entities” means any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing.

“Hazardous Materials” means any natural or artificial substance (whether in the form of solid, gas, vapor or liquid alone or in combination with any other substance) that is regulated as a pollutant, contaminant or hazardous substance, material or waste under the Environmental Laws.

“Indemnified Party” has the meaning set forth in Section 9.3.2.

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“Indemnifying Party” has the meaning set forth in Section 9.3.1.

“Intellectual Property” means all of the following rights wherever in the world enforceable: (i) patents and pending and filed patent applications (including all provisional, divisional, continuation in part and reissue patent(s), utility models, inventors’ certificates and invention disclosures; (ii) copyrights; (iii) trade secrets and other confidential and non-public business or technical information; (iv) industrial designs, and (v) rights to limit the access, use or disclosure of confidential information by any Person.

“Inventory” means, as of any date, all inventories of raw materials, manufactured and purchased parts, Product prototypes and models, spare parts, work-in-process, packaging, field trial equipments, stores and supplies purchased or acquired for use in connection with the conduct of the Business as of such date, assigned finished goods inventories (which are finished goods assigned to a specific customer order) and unassigned finished good inventories (which are finished goods not yet assigned to a specific customer order) together, as of the Closing Date, with Inventory forming the subject of Open Purchase Orders which shall have been delivered to a customer of the Business, if applicable, the Seller or the other Designated Sellers as of the Closing Date. For information purposes, a list of the Inventory as at 30 June 2006 is set out in Schedule 2.1.1(1). If applicable, this Schedule shall show the net book value of each item comprised in the Inventory as set out in the Financial Statements.

“Inventory Additional Cash Payment” shall have the meaning set forth in Section 2.2.3.

“Inventory Agreement” means the agreement among Alcatel CIT, Flextronics Telecom Systems (“FTS”), the Seller and/or any other relevant Designated Seller, in connection with the Business related inventory owned by FTS or its Subsidiaries at the Closing Date and certain rights on the Business related tangible assets owned by FTS or its Subsidiaries, in the form attached as Exhibit G.

“Inventory Expert” means Lowendal.

“Knowledge” or “aware of” or “notice of” or a similar phrase shall mean, with reference to Seller or the other Designated Sellers, the knowledge of those Persons listed on Exhibit [·] after reasonable inquiry, and with reference to Purchaser, the knowledge of those Persons listed on Exhibit [·] after reasonable inquiry.

“Known Product Defect” means any of those defects affecting a Nortel Product delivered prior to the Closing Date described in Exhibit [·]; and a “KPD Liability” means the liability of the Designated Sellers in connection with a Known Product Defect.

“Korea Agreements” means (i) the Distribution Agreement between Alcatel CIT and LG-Nortel Co. Ltd, (ii) the Conferral Agreement between Alcatel CIT, Nortel Networks (Asia) Ltd and LG-Nortel Co. Ltd, (iii) the Supplemental Agreement between Nortel Networks Limited and Alcatel CIT, (iv) the Local Manufacturing Agreement between Alcatel CIT and LG-Nortel Co. Ltd, (v) the Master Development Services Agreement between Alcatel-Lucent and LG-Nortel Co.Ltd and (vi) the Transfer Agreements among Nortel Networks Limited, Alcatel-Lucent, and LG-Nortel Co. Ltd. for each of the five SOW’s, i.e., SOW for UMTS UA4, UMTS UA5, RRH, dBTS 6100 and dBTS 2U, all in the forms attached as Exhibit H.

“Law” means, with respect to any Person, any domestic or foreign, federal, state, provincial, local or municipal statute, law, by-law, common law, ordinance, rule, regulation, order, writ, injunction, directive, judgment, decree, policy or guideline having the force of law, or other requirement of any Government Entity applicable to such Person or any of its Affiliates or any of their respective properties, assets, officers, directors, employees, consultants or agents (in connection with such officer’s, director’s, employee’s, consultant’s or agent’s activities on

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behalf of such Person or any of its Affiliates).

“Leased Equipment” means those furniture (located on the Business premises), development, testing, prototyping, computing and communications equipment and all other tangible personal property mainly used in the Business as of the Closing (excluding in any cases any intellectual property covering, embodied in or connected to any of the foregoing) which are leased by the Designated Sellers. The Leased Equipment shall not include the equipment the Designated Purchasers are entitled to use as a result of the rights they are granted under the Real Estate Agreements and shall only include tangible equipment that is used in connection with Administrative Services to the extent it exclusively relates to the Business.

“Liabilities” means debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or undeterminable, including those arising under any Law or Action and those arising under any contract, agreement, arrangement, commitment or undertaking or otherwise.

“License Agreement” means the intellectual property license agreement to be entered into between the Seller and/or any other Designated Sellers, on the one hand, and the Purchaser and/or any other Designated Purchasers, on the other hand, on or prior to the Closing in the form attached hereto as Exhibit I.

“Licensed Intellectual Property” means the intellectual property being licensed under the License Agreement.

“Lien” means any lien, mortgage, hypothec, pledge, security interest, encumbrance, easement, encroachment, right-of-way, restrictive covenant, real property license, charge, prior claim, lease or conditional sale arrangement.

“Local Asset Sale Agreements” (and individually, a “Local Asset Sale Agreement”) means the Contribution Agreement, the Share Purchase Agreement and the agreements providing for the sale and purchase of the Assets (except for the French Assets) in each of the Designated Country, the latters being based on the template agreements attached hereto as Exhibit J.

“Losses” means all demands, claims, Actions or causes of action, assessments, losses (including loss of profits but excluding loss of opportunities (perte d’une chance)), damages, costs, expenses, liabilities, judgments, awards, fines, sanctions, penalties, charges and amounts paid in settlement, including (i) interest on cash disbursements in respect of any of the foregoing at the prevailing commercial interest rate in effect from time to time, compounded quarterly, from the date each such cash disbursement is made until the Party incurring the same shall have been indemnified in respect thereof; and (ii) the reasonable out-of-pocket costs, fees and expenses of attorneys, experts, accountants, appraisers, consultants, witnesses, investigators and any other agents of such Party.

“Material Adverse Change” means a material adverse change in, or effect on, the Business taken as a whole; provided, however, that a Material Adverse Change shall not include any change or effect directly resulting from (i) any change in Law, GAAP or interpretations thereof that apply to the Business; (ii) any change in general economic, business or financial market conditions, or in conditions in the telecommunications industry; (iii) regional or global economic, regulatory, political changes, events or conditions or (iv) the public announcement of the transactions contemplated by this Agreement.

“NN SA” has the meaning set forth in Section 2.1.5. “Not Yet Transferred Contracts” has the meaning set forth in Section 5.8.

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“Nortel Accounting Principles” means the accounting policies employed in the consolidated accounts of the Seller since and for the 2005 financial year without any change in the accounting policies used, except as provided for in the annual accounts of Nortel Networks Corporation, which is the ultimate parent company of the group of companies that include the Designated Sellers, and always in compliance with GAAP.

“Nortel Products” means those Products that are manufactured and marketed by the Seller or any other Designated Sellers as of the Closing Date, the list of which is attached as Schedule 1.6.

“Nortel Services” means network implementation and maintenance services directly associated with the Nortel Products.

“OEM Agreement” means the agreement between the Seller and/or any other Designated Sellers, on the one hand, and the Purchaser and/or any other Designated Purchasers, on the other hand, relating to the sale by the Seller and/or any other Designated Sellers to the Purchaser and/or any other Designated Purchasers of certain Seller proprietary products relating to the Business, in the form attached hereto as Exhibit K.

“OEM Development Agreement” means the agreement between the Seller and/or any other Designated Sellers, on the one hand, and the Purchaser and/or any other Designated Purchasers, on the other hand, relating to the development by the Seller and/or any other Designated Sellers of new features of certain of the products which are subject to the OEM Agreement, in the form attached hereto as Exhibit L.

“Open Purchase Orders” means all purchase orders or other commitments issued by Seller or any of the other Designated Sellers before the Closing Date for the supply of tangible assets (including inventory) and services for use in the Business.

“Owned Equipment” means (i) those furniture (located on the Business premises), development, testing, field trial equipments, prototyping, computing and communications equipment and all other tangible personal property mainly used in the Business as of the Closing Date (excluding in any cases any intellectual property covering, embodied in or connected to any of the foregoing) and (ii) any tangible equipment that is used in connection with Administrative Services relating exclusively (unless listed in Schedule 2.1.1(2), if any, or otherwise specified in Section 5.11) to the Business, both (i) and (ii) which are owned by the Designated Sellers, including assets forming the subject of Open Purchase Orders which shall have been delivered to the Designated Sellers as of the Closing Date). Each Owned Equipment with a gross book value in excess of two thousands (2,000) euros are listed on Schedule 2.1.1(2). If applicable, this Schedule shall show the gross and net book value of each item comprised in the Owned Equipment.

“Patent Assignment Agreement” means the agreement by which the Seller will assign to the Purchaser the Transferrred Intellectual Property that are patents.

“Party” or “Parties” means individually or collectively, as the case may be, the Designated Sellers and the Designated Purchasers.

“Permitted Liens” means (i) Liens for Taxes or governmental assessments, charges or claims the payment of which is not yet due; or for Taxes the validity of which are being contested in good faith by appropriate proceedings or arising or potentially arising under statutory provisions that have not at the time been filed and of which written notice has not been served pursuant to Law; (ii) statutory and other Liens imposed by Law incurred in the ordinary course of business for sums not yet delinquent or overdue or which are being contested in good faith; (iii) any prior commitments to which the Transferred Intellectual

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Property is subject and all licenses granted by any of the Designated Seller prior to the Closing Date.

“Person” means an individual, a partnership, a corporation, an association, a limited or unlimited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization or a Government Entity.

“Post-Closing Additional Cash Payment Statement” shall have the meaning set forth in Exhibit 2.2.5.

“Pre-Closing Statement” shall have the meaning set forth in Section 2.2.4.

“Primary Party” means each of the Seller and the Purchaser.

“Products” means the RNC and NodeB networking equipment and associated OAM (OMC-B and OMC-R) of which the technology conforms with the UTRAN portion of 3GPP releases 99, 5, 6 and 7. For the avoidance of doubt, the Products will only encompass those specific elements of the 3GPP definitions of UMTS within such releases that are specifically based on Wide Band Code Division Multiplexing Access (“WCDMA”) based technology. The following shall not be included within the definition of Products:

(i)	Orthogonal Frequency-Division Multiplexing (OFDM) technologies,
(ii)	Multiple Input Multiple Output (“MIMO”) technologies,
(iii)	Any and all products related to 3GPP Definitions for LTE (eNodeB, ASGW, aGW, ASG, UPE, MME, SAE Anchor, 3GPP Anchor and associated OAM equipment),
(iv)	voice and packet core networks (products above the RNC such as GGSN, SGSM, HLR, MSCHLR/HSS, Media gateway, CS Call server and similar, and IMS network elements such CSCF and its variants and IMS applications independent of the access technology),
(v)	Operations, Administration and Management (OA&M) functionality for the foregoing items (i) through (iv),
(vi)	The inter-operability of any of the foregoing with any elements of the Products, and
(vii)	GSM, CDMA or WiMax technologies.

“Purchase Price” has the meaning set forth in Section 2.2.1.

“Purchaser” has the meaning set forth in the preamble to this Agreement.

“Purchaser Adjustment Amount” has the meaning set forth in Section 5.6.

“Purchaser Indemnitees” has the meaning set forth in Section 9.1.1.

“R&D Transfer Agreements” means (i) the agreement to transfer to the relevant Designated Purchaser certain terms set forth between Nortel and Sasken Communications Technologies Limited and (ii) the agreement to transfer to the relevant Designated Purchaser certain terms set forth between Nortel and Mera Networks Inc., in the forms attached hereto as Exhibit M.

“Real Estate Agreements” means the Facilities Transition Agreement, the Lease Extension Agreement between Nortel Networks (China) Limited and Beijing Sun Dong An Co., Ltd, the Lease Assignment Agreement between Nortel Networks (China) Limited, Beijing Sun Dong An Co., Ltd and Alcatel Shanghai Bell Company Limited, the License Agreement (Ottawa Carling Campus) between the Seller and Alcatel Canada Inc., the License Agreement

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(Montreal BAN Campus) between the Seller and Alcatel Canada Inc., the contrat de sous-location between Nortel Networks S.A. and Diselec and the contrat de sous-location de courte durée between Nortel Networks S.A. and Diselec, of which relating to the Purchaser’s or any other Designated Purchasers’ temporary use of certain facilities being used by the Business as of the Closing Date, the Rent Credit and construction work required for some of such facilities , in the form attached hereto as Exhibit N.

“Receivable Payment” has the meaning set forth in Section 2.2.2.

“Rent Credit” means the Purchaser’s and the other Designated Purchasers’ entitlement to six months free rent in the amount of three million US dollars (USD 3,000,000) pursuant to the Real Estate Agreements.

“Reporting Accountant” means an accounting firm of international standing agreed upon by the Primary Parties, or, in the event the Primary Parties fail to agree, appointed by the Président of the Tribunal de Commerce de Paris at the request of the most diligent Party acting under summary proceedings.

“S18K Cooperation Agreement” means the agreement between the Seller and a Designated Purchaser in the form attached in Exhibit C.

“Seller” has the meaning set forth in the preamble to this Agreement.

“Seller Adjustment Amount” has the meaning set forth in Section 5.6.

“Seller Contracts” means those contracts that are identified on Schedule 2.1.1(3). The Seller Contracts shall also include the Open Purchase Orders placed after the date of this Agreement and the purchase orders from customers (if issued prior to Closing, only for those where the corresponding delivery to the Client has not been made prior to Closing) to the extent that the related tangible assets, including inventory, or services have not already been supplied or performed on or prior to the Closing Date.

“Shares” has the meaning set forth in Section 2.1.5.

“Share Purchase Agreement” has the meaning set forth in Section 2.1.5 in the form attached hereto as Exhibit O.

“Standard Warranty Liability” means the 12-month warranty granted by the Designated Sellers on Nortel Products delivered prior to the Closing Date.

“Steering Committee” shall mean the committee composed of Jean-Marie Lesur (or any successor to be designated by the Seller), Alain Biston (or any successor to be designated by the Seller and the Purchaser) and Philippe Keryer (or any successor to be designated by the Purchaser).

“Subcontract Agreement” has the meaning set forth in Section 5.9.

“Tax” means (a) any domestic or foreign federal, state, local, provincial, or municipal taxes or other impositions by any Government Entity, including the following taxes and impositions: net income, gross income, individual income, capital, value added, goods and services, gross receipts, sales, use, ad valorem, business rates, transfer, franchise, profits, business, real property, gains, service, service use, withholding, payroll, employment, social security, excise, severance, occupation, premium, property, customs, duties or other type of fiscal levy and all other taxes, fees, assessments, deductions, withholdings or charges of any kind whatsoever, together with any interest and penalties, additions to tax or additional amounts imposed or assessed with respect thereto and (b) any obligation to pay Taxes of a Third Party including pursuant to the application of a joint and several liability to pay taxes of

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such Third Party.

“Tax Benefit” means, with respect to any Loss incurred by an Indemnified Party the value of all Tax deductions, other reductions in taxable income and Tax credits to the Indemnified Party as a result of incurring or paying the Loss indemnified, net of any reduction in Tax credit or Tax deduction, or increase in taxable income, incurred by the Indemnified Party as a result of receiving the indemnification payment hereunder with respect to such Loss. For the avoidance of doubt, the value of all Tax deductions or other reductions in taxable income will equal the amount of such deduction or reduction multiplied by the marginal tax rate in effect applicable to the Indemnified Party.

“Tax Returns” means all returns, reports (including elections, declarations, disclosures, schedules, estimates and information returns) and other information filed or required to be filed with any Tax authority relating to Taxes.

“Third Party” means any non-Affiliate a Party.

“Third Party Action” has the meaning set forth in Section 9.3.1.

“Third Party Software License Agreements” means all the the software license agreements entered into by the Designated Sellers for those software used by the Business except those that a) do not concern off-the-shelf software or b) are not material to the operations of the Business, each of which is listed in Schedule 1.8.

“Transaction Documents” means this Agreement and the Ancillary Agreements and all other ancillary agreements to be entered into or documentation delivered by any Party pursuant to this Agreement or any Local Asset Sale Agreement.

“Transition Plan” means the transition plan attached hereto as Schedule 5.15.

“Transition Services Agreement” means the agreement between the Seller and/or any other Designated Sellers, on the one hand, and the Purchaser and/or any other Designated Purchasers, on the other hand, under which certain services are to be provided to the Purchaser and/or any other Designated Purchasers, to be executed on or prior to the Closing, in the form attached hereto as Exhibit Q.

“Transfer Fees” means all registration, transfer, conveyance, recording, license and other similar fees, expenses or charges.

“Transfer Taxes” means (a) all goods and services, sales, use, land transfer, gross receipt, documentary, value-added, stamp duties, and all other similar taxes or other like charges, together with interest, penalties or additional amounts imposed with respect thereto, incurred in connection with the transactions contemplated hereby and (b) any obligation to pay transfer taxes (as defined here above) of a Third Party including pursuant to the application of a joint and several liability to pay transfer taxes of such Third Party.

“Transferred Intellectual Property” means the patented intellectual property that is listed in Exhibit 2.1.1(5) and the non-patented intellectual property that is mainly used in the Business that is non-exhaustively listed in Exhibit 2.1.1(5), and including all Actions except those Actions that have been settled, and except those Actions asserted by the Seller or any other Designated Seller prior to the Closing Date.

“W-NMS Cooperation Agreement” means the agreement between the Seller and Alcatel CIT, in the form attached hereto as Exhibit R.

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EXHIBIT 4.3

ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLER

0 Transfer of the New Shares

At the Closing, the Shares will be owned by NN SA free of any Liens.

1 Title to Tangible Assets

Except for the Permitted Liens, as of the Closing Date, the Inventory and the Owned Equipment are legally and beneficially owned by the Designated Sellers, free and clear of all Liens, and those Designated Sellers have good and marketable title thereto and upon consummation of the transaction contemplated thereby, the Purchaser and the Designated Purchasers will have acquired good, marketable and exclusive title in the Inventory and the Owned Equipment, free and clear of all Liens, except for the Permitted Liens.

2 Seller Contracts

(1) Each Seller Contract is a valid and binding obligation of the Designated Seller which is a party thereto and, to the Knowledge of the Designated Sellers, to the other parties thereto, and is in full force and effect. Subject to obtaining the consent of the other party(ies) to the extent required, upon Closing, the Seller Contracts shall be validly transferred to the Designated Purchasers;

(2) Each relevant Designated Seller has complied in all material respects with the terms of each of the Seller Contracts during the past year;

(3) To the Knowledge of the Designated Sellers, no Third Party is in breach or default in any material respect under any Seller Contract;

(4) To the Knowledge of the Designated Seller, in the past six months, no party to a Seller Contract has made any request to renegotiate any material provision under a Seller Contract and to the Knowledge of the Designated Seller which is party to a Seller Contract, in the past six months, there has not been any attempt to renegotiate prices under a Seller Contract except as may result from the terms of the Seller Contracts; and

(5) No event, condition or occurrence has occurred (including the performance of the transactions contemplated in the Transaction Documents) which would constitute a breach or default or permit termination, modification or acceleration of any Seller Contract.

(6) As of the date hereof, the standard margin on any open order issued by a customer under a Seller Contract is determined by Seller to have a standard margin of zero or greater, with such determination based upon Seller’s consistent methodology for determining standard margin and consistent with the Agreed Upon Procedures.

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3 Intellectual Property

3.1 To the Knowledge of the Seller, and except for anything provided under the OEM agreement and any tools related to the Nortel Products that are not Licensed Intellectual Property or Transferred Intellectual Property, the Licensed Intellectual Property and the Transferred Intellectual Property are all the intellectual property owned by the Designated Sellers that are used in the Nortel Products and for the purpose of providing the Nortel Services as at the Closing Date, including such rights in and to (i) patents and pending and filed patent applications (including all provisional, divisional, continuation in part and reissue patents), utility models, inventors’ certificates and invention disclosures; (ii) copyrights; (iii) trade secrets and other confidential and non-public business or technical information; (iv) industrial designs; and (v) rights to limit the access, use or disclosure of confidential information by any Person. For the avoidance of doubt, the License Agreement provides the resolution procedure for addressing any Licensed Intellectual Property and Transferred Intellectual Property that is discovered after the Closing Date. For the further avoidance of doubt, to the Knowledge of the Seller, and except for anything provided under the OEM agreement and any tools related to the Nortel Products that are not Licensed Intellectual Property or Transferred Intellectual Property, the Licensed Intellectual Property and the Transferred Intellectual Property also include any such intellectual property owned by the Designated Sellers as of the Closing Date (i) which prior to the Closing Date, was or is being utilized in the design and development of past (if being supported by a Designated Seller as of the Closing Date) and potential products of the Business marketed or to be marketed by the Designated Sellers or (ii) which relates to Nortel Products.

To the Knowledge of the Seller, Exhibit 2.1.1(5) contains a true, complete and up-to-date list of the patented Transferred Intellectual Property and patented Licensed Intellectual Property registered in the name of the Designated Sellers or their Affiliates. To the Knowledge of the Seller, Section 3.1 of the Disclosure Letter contains a complete and accurate list of all licenses granted with respect to patented Transferred Intellectual Property registered in the name of the Designated Sellers and a list of previous divestitures executed by the Seller since January 1,1996 which may (or may not) include a license to the patented Transferred Intellectual Property.

Subject to the foregoing, as of the Closing Date the Transferred Intellectual Property is not subject to any Liens other than Permitted Liens and, as of the Closing Date, will be fully transferable and alienable.

3.2 The Designated Sellers are up-to-date with the payment of fees and have carried out all formalities necessary to ensure that the Transferred Intellectual Property that is filed as a patent application or issued patent is validly registered in the name of the relevant Designated Seller at the Closing Date. All necessary documents, recordations and certificates in connection with such property have been filed with the relevant authorities in the United States or foreign jurisdictions where it is registered or filed, as the case may be, for the purposes of prosecuting, establishing ownership and maintaining such property.

3.3 No Action relating to the infringement or breach of any Third Party’s intellectual property rights has been made in writing against any of the Designated Sellers in so far as relating to the Business in the past two years.

3.4 The Designated Sellers have taken all commercially reasonable measures to maintain

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the validity of and protect the proprietary nature of the Transferred Intellectual Property.

3.5 To the Knowledge of the Seller, no open source or public library software, including any version of any software licensed pursuant to any GNU public license, is, in whole or in part, embodied or incorporated in the Nortel Products.

To the Knowledge of the Seller, the source code and system documentation relating to the software in the Nortel Products included in the Transferred Intellectual Property (i) have at all times been maintained in confidence, (ii) have been disclosed by the Designated Sellers only to employees or contractors that are bound by appropriate nondisclosure obligations, and (iii) as of the Closing Date are not in escrow for the benefit of any Third Party rights in such source code and/or system documentation upon the occurrence of certain events.

4 Litigation

There is no Action pending before any Government Entity or arbitration tribunal involving or affecting the Business or the Assets, or that seeks to enjoin, prevent, alter or delay any of the transactions contemplated by the Transaction Documents, and, to the Seller’s Knowledge, no such Action has been threatened.

5 Nokia / O2

The only significant obligation under the Seller Contract between Nokia and the relevant Designated Seller with respect to the removal of Nortel Products from the O2 network is for such Designated Seller to accept the Nortel Products (at no cost to the Designated Seller) that have been removed.

6 [Intentionally omitted]

7 Inventory

7.1 The Inventory has been acquired in the ordinary course of business.

7.2 The Inventory has been properly handled and stored at all times in full compliance with the applicable specifications.

7.3 The Inventory does not involve any item in connection with which the Designated Sellers have performed manufacturing or integration work but to the extent any Inventory does, such Inventory has been manufactured in accordance with applicable Laws and the relevant contractual specifications, if any, and are free from material defects.

8 Owned Equipment

The Owned Equipment is in normal working condition, has been maintained in accordance with normal industry standards.

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9 Financial Information

9.1

Section 9.1 of the Disclosure Letter sets forth the unaudited management statements of assets and liabilities of the Business as of 31 March 2006 and the unaudited management statements of results of operations of the Business for the year 2005 and the six months ended 30 June 2006 (the “Financial Statements”). The Financial Statements fairly present the financial condition and results of operations of the Business for the relevant periods.

9.2

The Financial Statements have been prepared on a basis consistent with Seller’s past practices in preparing management statements of assets and liabilities and of results of operations and consistent with the Agreed Upon Procedures, and in particular:

(i)	the basis of valuation for stocks and work-in-progress has been consistent with the Nortel Accounting Principles, and
(ii)	the rate of depreciation applied in respect of each fixed asset is consistent with Nortel Accounting Principles and is adequate to write down the value of such fixed asset to its net realizable value as at the end of its useful working life.

9.3 There are no bank guarantees or performance bonds granted in connection with the Seller Contracts entered into with customers at the request of the Seller or its Affiliates other than those listed in Section 9.3 of the Disclosure Letter; such list stating the nature, purpose, duration and maximum amount of such guarantees or performance bonds. There are no outstanding undertakings of the Designated Sellers under any Seller Contracts to grant any such guarantees that has not been satisfied or complied with.

10 Actions Since Financial Statements

Between 30 June 2006 and the date hereof:

(a) No Material Adverse Change has occurred and no event, development, condition or circumstance that will likely result in a Material Adverse Change exists or has occurred;

(b) Except as otherwise contemplated by this Agreement or the Transaction Documents or in connection with the preparation of the transactions contemplated herein, the Business has been conducted in the ordinary course of business, on a basis consistent with past practice; and

(c) No Designated Seller (in respect of the Business) has received notice of any reimbursement obligation or other similar payment due under any Seller Contract;

(d) No Designated Seller has taken any of the actions set forth in clauses a) through e) of Section 5.2.

11 Compliance with Laws

To the Knowledge of the Designated Sellers, each Designated Seller (in respect of the

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Business) has complied with all Laws in all material respects that are or were applicable to it in connection with the conduct or operation of the Business or the ownership or use of any of the Assets. None of the Designated Sellers has received any complaint, citation or written notice of any civil, criminal, regulatory or administrative action, claim, investigation other proceeding or suit relating to the violation of Laws (including Environmental Laws) from any Government Entity relating to any material non-compliance of the Business or the Assets with Laws nor are there, based on the Seller’s Knowledge, any such complaint, citation, notice or notices threatened or pending.

Section 11 of the Disclosure Letter describes the compliance status of the Nortel Products with certain Environmental Laws.

12 Absence of certain Commercial Practices

To the knowledge of Seller, no member of the Nortel group (including the Designated Sellers), nor any officer, director, employee or agent of any of the foregoing (or any Person acting on behalf of any of the foregoing) in each case in respect of the Seller Contracts which is either a customer contract or a representative agreement, has carried out or agreed to carry out any practices which would be prohibited by The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted on 21 November 1997 by the Organization for Economic Co operation and Development, the U.S. Foreign Corrupt Practices Act of 1977, as amended or the EU Joint Action 98/742/JHA..

13 Insolvency

No Designated Seller is insolvent under the laws of its jurisdiction incorporation or unable to pay its debts as they fall due.

There are no proceedings in relation to any compromise or arrangement with creditors or any winding up, bankruptcy or other insolvency proceedings concerning the Designated Sellers and, to the Designated Sellers’ knowledge, no events have occurred which, under applicable laws, would justify such proceedings.

14 Nortel Products

To the Knowledge of Designated Sellers, except for the Known Product Defects, the Nortel Products are free from material defects and have been sold in accordance with applicable Laws and contractual commitments.

15 Product Development

To the Knowledge of Seller, the development programs of the Nortel Products are up to date and on track to meet all applicable targets with respect to future releases of the Nortel Products as such targets or releases have been included in the Seller Contracts.

16 Subsidies

There are no subsidies, individually or in the aggregate, granted to the Designated Sellers in respect of the Business which have an impact of greater than one hundred thousand US dollars (USD 100,000) for each of the relevant periods for the results of the operations of the

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Business portion of the Financial Statements.

17 Sales of the Seller

The Business did not generate “sales in or into the United States” (as this term is used in 16 C.F.R.802.51) in 2005 with respect to the Business in excess of fifty six million seven hundred thousand US dollars (USD 56,700,000).

Neither the aggregate value of the Canadian Assets nor the gross revenues from sales in or from Canada generated by the Canadian Assets, determined in the manner prescribed for the purposes of the Canadian Competition Act, exceeds CDN $50 million.

The term “Canadian Assets” refers to all Assets being acquired by the relevant Designated Purchasers that are located in Canada. “Canadian Competition Act” shall mean the Canadian Competition Act, R.S.C. 1985, c. C-34, as amended.

18 Accuracy of Disclosure

None of the Sellers’ representations, warranties or statements contained in this Agreement, or in the schedules hereto, contains any untrue statement of a material facts or omits to state any material fact necessary in order to make any of such representations, warranties or statements not misleading.

19 Supplier Contracts

All of the suppliers with which the Designated Sellers entered into contracts in connection with the Business by the Designated Sellers are listed in the Disclosure Letter.

20 LG-Nortel Supply

As from July 1, 2006 until the Closing Date, the Seller, the Designated Sellers and their Affiliates have delivered Nortel Products to and invoiced for such products LG-Nortel Co. Ltd in the ordinary course of business, consistent with past practices and have not takent steps to accelerate the order and delivery of Nortel Products supplies in advance of the date on which they are usually ordered and delivered.

21 Representations and Warranties

None of the Designated Sellers makes any representation or warranty with respect to the Shares, the Assets or the Business, express or implied, beyond those expressly made by the Seller in this Exhibit 4.3and it is understood that, except for the express representations and warranties of the Seller contained in this Exhibit 4.3, the Purchaser or any other Designated Purchaser takes the Assets on an “as is” and “where is” basis.

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EXHIBIT 2.2.7

PURCHASE PRICE ALLOCATION

     (i) As soon as practicable following the date of this Agreement but in no event later than five (5) days after the date of this Agreement, the Purchaser will provide to the Seller with the Purchaser’s proposed allocation among the Assets (including the non-compete and the Licensed Intellectual Property) of the Purchase Price net of (i) the Receivable Payment and (ii) the Rent Credit, plus the amount of the Assumed Liabilities (to the extent accrued for tax purposes) (the “Asset Acquisition Statement”). The Asset Acquisition Statement will be prepared in accordance with Section 1060 of the U.S. Tax Code and any other applicable Tax Law. The Asset Acquisition Statement will use net book value for the Owned Equipment and the Inventory (as determined by Seller using GAAP) and an independent appraisal for all other Assets, to the extent applicable. Such independent appraisal shall be at Purchaser’s expense and in writing and will be delivered to the Seller.

     (ii) Within ten (10) days after the receipt of such Asset Acquisition Statement, but in no event later than five (5) days before Closing Date, the Seller will allocate the total amount as shown on the Asset Acquisition Statement within the statutory jurisdictions in which the assets reside, including any objections to the Asset Acquisition Statement (the “Asset Allocation Statement”) and provide the Asset Allocation Statement to the Purchaser. In the event no changes are proposed in writing to the Purchaser within such time period, the Seller shall be deemed to have agreed to and accepted the Asset Acquisition Statement.

     (iii) Within ten (10) days after receipt of the Asset Allocation Statement, the Purchaser will propose in writing to the Seller any changes to such Asset Allocation Statement, whether with respect to allocations among assets or statutory jurisdictions (and in the event no such changes are proposed in writing to the Seller within such time period, the Purchaser will be deemed to have agreed to, and accepted, the Asset Allocation Statement). The Primary Parties will endeavor in good faith to resolve any differences with respect to the Asset Allocation Statement within ten (10) days after the Seller’s receipt of written notice of objection from the Purchaser.

     (iv) If the Purchaser withholds its consent to the allocation reflected in the Asset Allocation Statement and the Primary Parties are unable to resolve any differences, any remaining disputed matters will be finally and conclusively determined by the Reporting Accountant. Promptly, but not later than fifteen (15) days after its acceptance of appointment hereunder, the Reporting Accountant will determine (based solely on representations by the Seller and the Purchaser and not by independent review) only those matters in dispute and will render a written report as to the disputed matters and the resulting allocation of the Purchase Price net of (i) the Receivable Payment and (ii) the Rent Credit, plus the amount of the Assumed Liabilities (to the extent accrued for tax purposes) , which report shall be conclusive and binding upon the parties. The Purchaser and the Seller shall each pay one-half of the fees, cost and expenses of the Reporting Accountant.

     (v) The Purchaser shall or shall cause the other Designated Purchasers and the Seller shall and shall cause the other Designated Sellers, respectively, subject to the

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requirements of any applicable Tax law, to file all Tax Returns and reports consistent with the allocation provided in the Asset Allocation Statement, or, if applicable, the determination of the Reporting Accountant. Any subsequent adjustments under Sections 2.2.3, 8.3 or otherwise as required by applicable Tax Law to the Purchase Price net of (i) the Receivable Payment and (ii) the Rent Credit, plus the amount of the Assumed Liabilities (to the extent accrued for tax purposes) will be allocated appropriately and in a manner consistent with the methodology used to determine the allocation under this Exhibit 2.2.7. For the avoidance of doubt, if the Asset Allocation Statement is prepared before the Post Closing Additional Cash Payment Statement, such Asset Allocation Statement will be revised as is required so that the amount shown for the Owned Equipment and Inventory will be Seller’s net book value for each (using GAAP), as contemplated by paragraph (i) of this Exhibit 2.2.7.

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EXHIBIT 2.2.5

POST-CLOSING ADDITIONAL CASH PAYMENT STATEMENT

1 Form and Content of Post-Closing Additional Cash Payment Statement

The Post-Closing Additional Cash Payment Statement shall set out the net book value if relevant of the Inventory and the Owned Equipment as of the Closing Date.

2 Accounting Policies

2.1 The Post-Closing Additional Cash Payment Statement shall be drawn up in accordance with the Seller Accounting Principles, it being specified that notwithstanding anything herein to the contrary, the Owned Equipment and the Inventory shall be valued in accordance with GAAP.

2.2	The Post-Closing Additional Cash Payment Statement shall be expressed in US dollars. Amounts in other currencies shall be translated into US dollars using the relevant spot rate at the time of the Closing Date published on that day.
3	Preparation Inventories

3.1	No later than two (2) days following Closing, the Seller shall deliver to the Purchaser the Preliminary Draft Post-Closing Additional Cash Payment Statement regarding only the Inventories. Within fifteen (15) days of Closing, the Seller, the Buyer and the Inventory Expert shall perform a partial physical inventory of the Inventories. Within five (5) days of the conclusion of such physical inventory, the Inventory Expert shall deliver, for information purposes only, to the Seller and the Purchaser his report on the Preliminary Draft Post-Closing Additional Cash Payment Statement regarding only the Inventories. Within five (5) days of receipt of such report, the Seller shall deliver to the Purchaser the Draft Post-Closing Additional Cash Payment Statement taking into account the result of the report. In case of Inventory not valuated in the Draft Post Closing Additional Cash Payment Statement, valuation should be based on last price paid for the article, if any. During the course of the physical inventory, the Seller and the Relevant Sellers shall make available to the Inventory Expert all books and records, as long as they are relevant to the inventories of the UMTS access business and grant reasonable access to the premises during normal office hours. Purchaser will decide which sites/ countries it wants to review and supply at its own expenses the resources that are required to perform such physical inventory. Purchaser need to let Seller know with a reasonable notice period before the physical inventory the list of sites so that the proper arrangements can be made; it is understood by Purchaser that a physical inventory of the inventories may require the business to stop its activity or the physical inventory to be performed outside of normal business hours
3.2	Preparation Fixed assets
	No later than ten (10) days following Closing, the Seller shall deliver to the Purchaser the Preliminary Draft Post-Closing Additional Cash Payment Statement regarding the

55

	Owned Equipments. Within three (3) months of Closing, the Seller, the Buyer and the Inventory Expert shall perform a partial physical inventory of the Owned Equipments, it being understood that only the value of fixed assets will be checked. Within five (5) days of the conclusion of such physical inventory, the Inventory Expert shall deliver to the Seller and the Purchaser his report on the Preliminary Draft Post-Closing Additional Cash Payment Statement regarding the Owned Equipments only. Within five (5) days of receipt of such report, the Seller shall deliver to the Purchaser the Draft Post-Closing Additional Cash Payment Statement taking into account the result of the report. During the course of the physical inventory, the Purchaser and the relevant Purchasers, the Seller and the Relevant Sellers shall make available to the Inventory Expert all books, records and competent personnel as long as they are relevant to the Owned Equipments of the UMTS access business or where included in the transaction and grant reasonable access to the premises during normal office hours. Purchaser will decide which sites it wants to review and supply at its own expenses the resources that are required to perform such physical inventory.
3.3	The Purchaser and the Seller shall determine jointly the procedure to be followed by the Inventory Expert, whichshall apply the principles set out in Clause 2 of this Exhibit.
3.4	The expenses (including VAT) of the Reporting Accountant shall be paid by the Purchaser.
4	Agreement of the Draft Post Closing Additional Cash Payment Statement

4.1 In this paragraph the Draft Post-Closing Additional Cash Payment Statement regarding the Inventory and the Draft Post-Closing Additional Cash Payment Statement regarding the Owned Equipments are referred to as Draft Post-Closing Additional Cash Payment Statement. The Draft Post-Closing Additional Cash Payment Statement agreed or determined in accordance with the provision of Section 4 shall be referred to as to the “Post Closing Additional Cash Payment Statement”.

4.2

If the Purchaser does not within thirty (30) days of presentation to it of the Draft Post-Closing Additional Cash Payment Statement give notice to the Seller that it disagrees with the Draft Post-Closing Additional Cash Payment Statement or any item thereof, such notice stating the reasons for the disagreement in reasonable detail and specifying the adjustments which, in the Purchaser’s opinion should be made to the Draft Post-Closing Additional Cash Payment Statement (the “Purchaser’s Disagreement Notice”), the Draft Post-Closing Additional Cash Payment Statement shall be final and binding on the parties for all purposes.

If the Purchaser gives a Purchaser’s Disagreement Notice within such thirty (30) days, the Seller and the Purchaser shall attempt in good faith to reach agreement in respect of the Draft Post-Closing Additional Cash Payment Statement and, if they are unable to do so within twenty (20) days of such notification, the Seller or the Purchaser may by notice to the other require that the Draft Post-Closing Additional Cash Payment Statement be referred to an internationally recognized firm of independent public accountants as to which Seller and Purchaser mutually agree or, should Seller and Purchaser fail to agree within thirty (30) days from the submission by Seller of the

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	Sellers’ Disagreement Notice, Seller and Purchaser shall jointly request the designation of such firm by the President of the Tribunal de Commerce of Paris (such firm, the “Reporting Accountant”).
4.3	Except to the extent that the Seller and the Purchaser agree otherwise, the Reporting Accountant shall determine its own procedure but:

4.3.1 apart from procedural matters and as otherwise set out in this Agreement shall determine only:

(i)	whether any of the arguments for an alteration to the Draft Post-Closing Additional Cash Payment Statement put forward in the Purchaser’s Disagreement Notice is correct in whole or in part; and
(ii)	if so, what alterations should be made to the Draft Post-Closing Additional Cash Payment Statement in order to correct the relevant inaccuracy in it;

4.3.2	shall apply the principles set out in Clause 2 of this Exhibit;
4.3.3	shall make its determination as promptly as practicable after its appointment;
4.3.4	the procedure of the Reporting Accountant shall:

(i)	give the Seller and the Purchaser a reasonable opportunity to make written and oral representations to it;
(ii)	require that each party supply the other with a copy of any written representations at the same time as they are made to the Reporting Accountant;
(iii)	permit each party to be present while oral submissions are being made by the other party; and
(iv)	for the avoidance of doubt, the Reporting Accountant shall not be entitled to determine the scope of its own jurisdiction.

4.4 The determination of the Reporting Accountant shall:

4.4.1 be made in writing and made available for collection by the Seller and the Purchaser at the offices of the Reporting Accountant; and

4.4.2 unless otherwise agreed by the Seller and the Purchaser include reasons for each relevant determination.

4.5 The Reporting Accountant shall act, pursuant to Article 1592 of the Civil Code, as expert and not as arbitrator and its determination of any matter falling within its jurisdiction shall be final and binding on the Seller and Purchaser save in the event of manifest error (when the relevant part of its determination shall be void and the matter shall be remitted to the Reporting Accountant for correction). In particular, without

57

limitation, its determination shall be deemed to be incorporated into the Draft Post-Closing Additional Cash Payment Statement.

4.6 The expenses (including VAT) of the Reporting Accountant shall be borne equally between the Purchaser, on the one hand, and the Seller, on the other.

4.7 The Seller and Purchaser shall co-operate with the Reporting Accountant and comply with its reasonable requests made in connection with the carrying out of its duties under this Agreement. In particular, without limitation, the Parties shall keep up-to-date and, subject to reasonable notice, make available to the other’s representatives, the accountants and the Reporting Accountant all books, records and premises relating to the Business during normal office hours during the period from the appointment of the Reporting Accountant down to the making of the relevant determination.

4.8 Each party and the Reporting Accountant shall, and shall procure that its accountants and other advisers shall, keep all information and documents provided to them pursuant to this Exhibit 2.2.5 confidential and shall not use the same for any purpose, except for disclosure or use in connection with the preparation of the Post-Closing Additional Cash Payment Statement, the proceedings of the Reporting Accountant or another matter arising out of this Agreement or in defending any claim or argument or alleged claim or argument relating to this Agreement or its subject matter.

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SCHEDULE 10.6

Local Asset Sale Agreements

Real Estate Agreement relating to Beijing

Transition Services Agreement,

Subcontract Agreement,

China Manufacturing Agreement,

China R&D Agreement

R&D Transfer Agreements

S18K Cooperation Agreement

The five Statements of Works of the Korea Agreements UMTS UA4, UMTS UA5, RRH, dBTS 6100 and dBTS 2U.

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EX-10.90

EXHIBIT 10.90

EXECUTION COPY

FIRST AMENDMENT TO THE
SHARE AND ASSET SALE AGREEMENT

between

NORTEL

and

ALCATEL LUCENT

1

FIRST AMENDMENT TO THE

SHARE AND ASSET SALE AGREEMENT

     THIS FIRST AMENDMENT TO THE SHARE AND ASSET SALE AGREEMENT (this “Amendment”) dated December 29, 2006, is entered by and between Alcatel Lucent, a société anonyme organized under the laws of France, registered with the Paris Registry of Companies under number B 542 019 096, with offices 54 rue la Boétie, 75008 Paris (the “Purchaser”), and Nortel Networks Limited, a corporation organized under the laws of Canada, with offices at 195 The West Mall, T05-04-005, Toronto, Ontario M9C 5K1, Canada (the “Seller”).

     WHEREAS, Purchaser and Seller have entered into a Share and Asset Sale Agreement dated as of December 4, 2006, (the “Share and Asset Sale Agreement”).

     WHEREAS, Purchaser and Seller desire to enter into this Amendment to amend certain provisions of the Share and Asset Sale Agreement in accordance with the terms set forth herein.

     NOW, THEREFORE, in consideration of the premises and mutual covenants and conditions herein contained, Purchaser and Seller hereby agree as follows:

ARTICLE 1
DEFINITIONS

Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings ascribed to them in the Share and Asset Sale Agreement.

ARTICLE 2
FRENCH ACQUISITION STRUCTURE

2.1 Contribution Agreement

The parties agree that Contribution Agreement is the Convention d’Apport en Nature entered into between NN SA and Diselec on December 22, 2006. The Contribution Agreement is subject to the provisions of the Share and Asset Sale Agreement as amended hereby; in case of inconsistency between the terms of the Contribution Agreement and the Share and Asset Sale Agreement, the provisions of the Share and Asset Sale Agreement shall prevail.

2.2 Certain Employee Liabilities

The parties agree that the price for the sale of the Shares shall amount to USD 63,690,336. Such price shall be reduced by the amount of the liabilities set forth in Exhibit 4 of the Contribution Agreement relating to the employees transferred to Diselec, as such amount shall be determined and paid pursuant to the provisions of clause 4 of Part 2 of Schedule 7 to the Share and Asset Sale Agreement. All other employee liabilities relating to said employees accrued up to the Effective Time shall be governed by paragraph 1 of Part 2 of Schedule 7 to the Share and Asset Sale Agreement.

2.3 Diselec Employment Liabilities Costs

Seller and Purchaser agree that if NN SA books and deducts for tax purposes in its December 31, 2006 accounts a reserve corresponding to the employment related liabilities referred to in the second sentence of Section 2.2 above and if the deduction of such reserve is denied by the tax authorities, Purchaser shall pay to NN SA an amount equal to 80% of any interest and penalties paid to the tax authorities by NN SA as a result of such denial and any corresponding reasonable attorney’s fees.

2

2.4 Shares Adjustment Price

Article 2.1 of the Contribution Agreement provides that in the event the net book value of the Contribution as determined as of the Closing Date falls short of 921,076 Euros, the Seller shall cause NN SA to pay to Diselec a cash complementary contribution in the same amount (the “Cash Complement”). In the event such Cash Complement is paid, the price of the Shares shall be increased in the same amount and such amount to be immediately paid by Alcatel CIT to NN SA.

Accordingly, Seller and Purchaser agree to modify Article 2.2.3 of the Sale and Asset Share Purchase Agreement to provide that the Purchase Price shall be, as the case may be, increased by the amount of the Cash Complement.

2.5 French Acquisition Structure costs

Purchaser agrees to pay to the Seller on the Closing Date an amount of USD 125,000 as a reimbursement of certain costs associated with the French Acquisition Structure, which amount comes in full settlement as to any costs that the Designated Sellers may have incurred in relation therewith and which the Designated Sellers may wish to claim from the Designated Purchasers.

ARTICLE 3
ADMINISTRATIVE SERVICES

Seller and Purchaser agree to modify Article 5.11(3) of the Sale and Asset Sale Agreement in the following manner:

     “(3) mainly relating to the Business or, if for equipment used to provide Administrative Services either (a) exclusively used by the Business or (b) mainly used by the Business if (i) determined by the Steering Committee acting reasonably and in good faith by majority vote provided such asset is required for the operation of the Business by the Purchaser and (ii) is not or will not be used by a Designated Seller to provide any of the services under the Transition Services Agreement.”

ARTICLE 4
REIMBURSEMENTS

Seller shall be entitled to invoice Purchaser post Closing Date and Purchaser shall pay Seller for a) any services rendered by Seller to Purchaser in connection with work performed by Seller under the IUB Cooperation Agreement to the extent the Seller would have a contractual right to such payment under the said agreement, and b) work performed by Seller at the request of Purchaser under the Sales Support Agreement and the Customer Reseller Agreement (and more specifically in connection with sales support and support for the trial for SFR and Telecom Italia), each of which were signed prior to the execution of the Share and Asset Sale Agreement, to the extent the Seller would have a contractual right to such payment under the said agreements. Purchaser and Seller shall discuss in good faith justified compensation for any other services performed by Seller at the written request of Purchaser prior to the Closing Date, provided it can be demonstrated that these services were not in furtherance of the Share and Asset Sale Agreement and its Ancillary Agreements.

3

ARTICLE 5
PURCHASE PRICE ALLOCATION

Seller and Purchaser agree that the allocation of the Purchase Price (net of the adjustments provided under Section 2.2.3 of the Sale and Asset Sale Agreement) is set forth in Exhibit 5 hereto.

The Seller and the Purchaser shall cause Designated Sellers and Designated Purchasers to enter, as necessary, into amendments to the Local Asset Sale Agreements to reflect the above mentioned allocation of the Purchase Price.

ARTICLE 6
CUSTOMER CREDIT NOTES

Notwithstanding the provisions of Section 2.1.4 of the Agreement, to the extent any Seller liability under a credit note is transferred by any Designated Seller to a Designated Purchaser, either through a Local Asset Agreement, the assignment of a Seller Contract or in any other manner, the Seller shall, or shall cause the relevant Designated Seller, to indemnify the relevant Designated Purchaser within 30 days of the Designated Purchaser having applied such credit note against any amount invoiced by such Designated Purchaser to the relevant customer to the extent it is contractually required to apply such credit note.

As of Closing, the customer credit notes estimated amount is the following:

• Partner: 441,000.00$

• Orange: 4,500,000.00$

• Vodafone: 3,500,000.00$

To the Knowledge of Seller, there are no other credit notes that could be transferred to the Designated Purchasers.

To the extent such outstanding credit notes are linked to pre-Closing purchase orders and that all or part of these purchase orders are to be invoiced by and paid to a Designated Purchaser post-Closing, notwithstanding that these obligations are pre-Closing liabilities (since linked to past purchase orders) and are therefore Excluded Liabilities according to the Share and Asset Sale Agreement, the relevant Designated Purchaser will assume a pro-rata share of such credit notes based on the pro-rata of purchase orders such Designated Purchaser will have invoiced post-Closing.

ARTICLE 7
REVISED EXHIBITS

7.1 Exhibit 2.1.1.(3)

Seller and Purchaser agree to replace Exhibit 2.1.1.(3) of the Share and Asset Sale Agreement by Exhibit 2.1.1 (3) hereto.

7.2 Exhibit 5.9(A)

Seller and Purchaser agree to replace Exhibit 5.9(A) of the Share and Asset Sale Agreement by Exhibit 5.9 (A) hereto.

7.3 Exhibit O

Seller and Purchaser agree to replace Exhibit O of the Share and Asset Sale Agreements by Exhibit O

4

hereto.

7.4 Schedule 1.5

Seller and Purchaser agree to modify Schedule 1.5 of the Share and Asset Sale Agreements, to include one additional Known Product Defect described in Schedule 1.5 hereto.

7.5 Schedule 7

Seller and Purchaser agree to modify exhibit E1, E2 and E 4 of Schedule 7 of the Share and Asset Sale Agreements by exhibit E1, E2 and E 4 of Schedule 7 hereto.

7.6 JV License Agreements

Attached hereto under Exhibit 7.6 are copies of two licence amendments between (a) Seller and GDNT and (b) Seller and LG-Nortel Co. Ltd.

ARTICLE 8
CLOSING

To the extent that any conditions to Closing set forth Article 10 of the Share and Asset Sale agreement have not been satisfied, Seller and Purchaser hereby acknowledge that each of these Closing conditions has been waived.

To the extent such conditions have not been satisfied on Closing Date, each party shall make reasonable efforts post Closing to complete them.

In particular, (a) the parties shall agree on the terms of the Subcontract Agreement and (b) the Seller shall, or shall cause the Designated Sellers:

     (i) to make all reasonable efforts to perform within a reasonable time after Closing the unbundling of the following Seller Contracts (Section 10.5 of the Share and Asset Sale Agreement) listed in Exhibit 2.1.1(3) hereto;

     (ii) with regards to the Third Party Software License Agreements (Section 10.8 of the Share and Asset Sale Agreement), assist the Designated Purchasers in connection with providing them information with respect to licenses of the Designated Sellers and the entities from which the Designated Purchasers are attempting to obtain a similar license.

Unless waived by a customer, Alcatel shall cause to be issued performance bonds, where required under a Seller Contract.

ARTICLE 9
CLOSING PAYMENT

Seller and Purchaser agree that payments of the Purchase Price shall be on Closing Date:

a)	Amount allocated to the Assets and Assumed Liabilities: USD 292,747,647 (net of a Pre-Closing Owned Equipment Shortfall of USD 1,252,353 as per Section 2.2.3(v));
b)	Plus balance of payment to be made as per Section 2.2.1: USD 26,000,000;
c)	Less Purchase Price reduction as per Section 2.2.3(i), (ii), (iii) and (vi): USD 12,496,318;
d)	Net amount to be paid at Closing (a) +(b) — (c): USD 306,251,329 out of which 302,065,583 to be paid directly by the Purchaser to the Seller and the equivalent of USD 4,185,746 to be paid in RMB to the Designated Sellers located in China.

5

ARTICLE 10
ENTIRE AGREEMENT

The following sentence is added at the end of Section 11.15 of the Share and Asset Sale Agreement, which Section remains otherwise unchanged:

“In the event of any irreconcilable conflict between this Agreement and any of the Local Asset Sale Agreements and the License Agreement, the provisions of this Agreement shall prevail, regardless that certain Local Asset Sale Agreement may be subject to different governing laws.”

ARTICLE 11
MISCELLANEOUS

11.1 Other provisions

The provisions of the Share and Asset Sale Agreement that are not amended hereby remain in full force and effect.

11.2 Governing Law; Submission to Jurisdiction

This Amendment shall be construed in accordance with and governed by the Laws of the French Republic, without giving effect to its conflict of laws principles.

The Parties hereto irrevocably agree that all disputes, claims or matters arising out of or in any connection with this Amendment shall be subject to the Rules of Arbitration of the International Chamber of Commerce; the arbitration shall take place in London (England) and shall be held in the English language.

6

IN WITNESS WHEREOF, the Parties have duly executed this Amendment as of the date first written above.

NORTEL NETWORKS LIMITED
By:	/s/ A.A. Navaratnam
	Name:	A.A. Navaratnam
	Title:	Attorney-in-Fact
ALCATEL LUCENT
By:	/s/ L.A. Sadiq
	Name:	L.A. Sadiq
	Title:	Attorney-in-Fact

7

Exhibit 2.1.1.(3)

Bundled Contracts which are to be “Unbundled” and Assigned/Novated to Purchaser
on Closing Date

		Purchaser Entity to be
Contract Parties	Contract Type	Assigned/Novated to
France Telecom S.A, located at 6, Place d’Alleray, 75505 Paris Cedex 15 and Nortel Networks S.A. located at Parc d’Activités de Magny-Châteaufort, 78117 Châteaufort.	Corporate sourcing contract n° 06 CG 643 for the purchase of UTRAN products and software releases and related services AND Maintenance Corporate Sourcing Contrat for 3G Ran Products N° 06 CG 645	Alcatel CIT SA, 7/9 Avenue Morane Saulnier, 78141 Vélizy, France
Mobistar SA/NV, Rue Colonel Bourg 149, 1140 Brussels, Belgium and Nortel Networks NV, , a Ikaroslaan 14, B-1930 Zaventem, Belgium	Local Implementation Contract N°9262 for the Supply of 3G Radio Access Products and Software Releases and associated Services on Belgium territories. AND Local Implementation Contract for 3G RAN Maintenance N°9264	Alcatel Bell NV, Copernicuslaan 50, B-2018 Antwerpen, Belgium.
ORANGE FRANCE, 1 avenue Nelson Mandela 94745 Arcueil Cédex, And Nortel Networks SA, Parc d’Activités de Magny Châteaufort, 78117 Châteaufort	Contrat d’application N°416 618 au Corporate Sourcing Contract N°06CG643 pour la fourniture de produits, de paliers logiciels et services associés relatifs aux réseaux UMTS AND Contrat d’Application N° 416 619 au Corporate Sourcing Contract N° 06CG645 pour la fourniture de prestation de maintenance relatifs au réseaux UMTS	Alcatel CIT SA, 7/9 Avenue Morane Saulnier, 78141 Vélizy, France

8

		Purchaser Entity to be
Contract Parties	Contract Type	Assigned/Novated to
PTK Centertel Sp. z o.o. ul. Skierniewicka 10a, 01-230 Warszawa, Poland, and Nortel Networks Polska Sp. z o. o., ul. Nowogrodzka 47a, 00-695 Warszawa, Poland	Implementation Contract for corporate sourcing contract n° 06CG643 for the purchase of UTRAN (3G) products and software releases and related services AND Implementation Contract for corporate sourcing contract N° 06CG645 maintenance for 3G RAN products
Orange Slovensko, a.s., Prievozská 6/A, 821 09 Bratislava, Slovak Republic, and Nortel Networks SA, Parc d ´Activités de Magny-Chateaufort, 78117 Chateaufort, France and Nortel Networks Slovensko, s.r.o., Obchodná 2, 811 06 Bratislava, Slovak Republic	Implementation Contract for corporate sourcing contract n° 06CG643 for the purchase of UTRAN (3G) products and software releases and related services AND Implementation Contract for corporate sourcing contract N° 06CG645 maintenance for 3G RAN products
Vodafone Ltd Vodafone House, The Connection, Newbury, Berkshire RG14 2FN and Nortel Networks UK Ltd, Maidenhead Office Park, Westacott Way, Maidenhead, Berkshire SL6 3QH.	“UMTS Access only” Contract of Adherence covering UMTS Access Deliverables and related Services for UK. (*)	Alcatel Telecom Limited Christchurch Way, Greenwich London SE10 0AG
Vodafone Omnitel N.V. whose registered address is in Amsterdam and administrative and operational office Ivrea, via Jervis 13 — 10015 Torino, Italy and Nortel Networks S.p.A , Via Montefeltro 6, 20156 Milan, Italy.	“UMTS Access only” Contract of Adherence covering UMTS Access Deliverables and related Services for Italy. (*)
Vodafone España S.A., Parque Empresarial La Moreleja, Avda. De Europa, 1, 28108 Alcobendas, Madrid, Spain and Nortel Networks Hispania S.p.A	“UMTS Access only” Contract of Adherence covering UMTS Access Deliverables and related Services for Spain. (*)	Alcatel España S.A. Ramírez de Prado 5 28045 Madrid

9

		Purchaser Entity to be
Contract Parties	Contract Type	Assigned/Novated to
Camino del Cerro de Los Gamos, 1, Edificio 6, Pozuelo de Alarcon, Madrid 28224, Spain.
Vodafone Comunicações Pessoais, S.A. , Avenida D. João II - -Lote 1.04.01, 8º Piso, Parque das Nações, 1998-017 Lisboa, Portugal and Northern Telecom (Portugal) S.p.A whose registered address is at Edificio Tivoli-Forum, Avenida da Liberdade, 180 A-3, 1250-146 Lisboa, Portugal.	“UMTS Access only” Contract of Adherence covering UMTS Access Deliverables and related Services for Portugal. (*)	Alcatel Portugal SA S. Gabriel 2750 Cascais
Austria Telecommunication GmbH (now Kapsch CarrierCom AG) and Nortel Networks S.A. (for supply of Hardware and Software) and Nortel Networks Austria GmbH (for installation and commissioning services).	UMTS Access supply and related installation services to end customer Mobilkom.
Kapsch CarrierCom AG and Nortel Networks Austria GmbH	UMTS Access support services to end customer Mobilkom.
Andrew Corporation, 3 Westbrook Corporate Center, Suite 900, Westchester, Illinois 60154 and Nortel Networks Limited, 8200 Dixie Road, Suite 100, Brampton, Ontario, Canada	OEM MicroNode B
Edge Wireless LLC, 650 SW Columbia, Suite 7200, Bend, Oregon, 97702 and Nortel Networks Inc, 2221 Lakeside Boulevard, Richardson, Texas 75082.	Trial
BEN HUR L. TRADE & SERVICES LTD. 19 Ha’knesset Hagdola Street, Tel Aviv, Israel 62917 and Nortel Networks Israel (Sales and Marketing) Limited.	Representative Agreement for UMTS business with Partner.	Alcatel Telecom Israel 94 Em Hamoshavot Rd. Park Azorim, Peth-Tikva Israel

(*) These documents are the softcopies received by the e-mails mentioned below:

10

Robert Shales” <rshales@nortel.com>

2006-12-19 20:22 19/12 VF Spain Unbundled UMTS Access Contract of Adherence — work in progress

“Robert Shales” <rshales@nortel.com>

2006-12-19 20:29 19/12 VF UMTS Access Global Price Book

“Robert Shales” <rshales@nortel.com>

2006-12-19 19:15 19/12 VF Portugal Unbundled UMTS Access Contract of Adherence — work in progress.

“Pascale-LAW Frossard” <pascalef@nortel.com>

2006-12-19 19:37 19/12 VF UK — Unbundled UMTS Access Contract of Adherence — Work in progress.

“Pascale-LAW Frossard” <pascalef@nortel.com>

2006-12-20 14:56 20/12 — Vodafone Italy — Unbundled CoA and other related documents — Work in progress

and the local Price Books:

“Robert Shales” <rshales@nortel.com>

22/12/2006 10:26 Confidential — Vodafone — UMTS Access Only CoAs — Local Price Books

“Robert Shales” <rshales@nortel.com>

22/12/2006 13:11 RE: Confidential — Vodafone — UMTS Access Only CoAs — Local Price Books

“Pascale-LAW Frossard” <pascalef@nortel.com>

21/12/2006 22:49 Confidential — Vodafone — UMTS Access Only CoAs — Local Price Books

11

Seller Contracts to be Assigned/Novated to Purchaser on Closing Date

		Purchaser Entity to
		be Assigned/Novated
Contract Parties	Contract Type	to
Bouygues Telecom, Arcs de Seine — 20, quai du Point du Jour — 92100 Boulogne-Billancourt, and Nortel Networks SA Parc d’Activités de Magny-Châteaufort, 78117 Châteaufort.	Conditions Générales de fourniture et de maintenance de reseau telecom 3G et de prestations associees And Conditions Particulières	Alcatel CIT SA, 7/9 Avenue Morane Saulnier, 78141 Vélizy, France
QUALCOMM Incorporated, 5775 Morehouse Drive, San Diego, CA 92121 and Nortel Networks Inc	System integration and interoperability testing between the QUALCOMM equipment and the Nortel equipment
Beijng Sun Dong An Co., Ltd and Nortel Networks (China) Limited	Beijing Property Lease	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
China Mobile Communications Group Corporation and Nortel Networks (China) Limited	Construction of China Mobile Lab for 3G Trial Systems (Phase I) Project	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
China Mobile Communications Company and Nortel Networks (China) Limited.	China Mobile 3G Lab R4 Equipment Trial Project	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
Guangdong Telecom Co. Ltd Science and Technology Research Institute and Nortel Networks (China) Limited	IOT Trial Agreement	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
Hebei Mobile Communications Co., Ltd and Nortel Networks (China) Limited	Trial	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai

12

		Purchaser Entity to
		be Assigned/Novated
Contract Parties	Contract Type	to
Hunan Mobile Communications Co., Ltd and Nortel Networks (China) Limited	Equipment Trial Agreement,	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
China Netcom Group Company Sichuan Branch and Nortel Networks (China) Limited	Equipment Trial Agreement	Alcatel Shanghai Bell Company Limited, 388 Ning Qiao Road Jin Qiao Export Processing Zone Pudong New Area, Shanghai
Nokia Corporation, Keilalahdentie 4, 02150 Espoo, Finland and Nortel Networks UK Ltd, Maidenhead Office Park, Westacott Way, Maidenhead, Berkshire SLG 3QH.	Return of Node Bs and RNCs from O2 Networks	Alcatel CIT, Avenue Charles de Gaulle, Ormes, 45915 ORLEANS CEDEX 9
LeasePlan Fleet Management (Polska) Sp.z o.o., ul. Bokserska 66, 02-0690 Warsaw Poland and Nortel Networks Polska Sp. z o., ul Nowogrodzka 47a, 00-695 Warsaw.	Vehicle lease for Poland
LeasePlan UK Ltd, 165 Bath Road, Slough, Berkshire,
SL1 4AA and Nortel Networks (UK) Ltd.	Vehicle lease for UK
TBA	Vehicle lease for France
TBA	Vehicle lease for Italy
TBA	Vehicle lease for Canada
TBA	Vehicle lease for China
TBA	Vehicle leases for Slovakia
Lease Plan Portugal - - Comercio e Aluguer de Autoóveis e Equipamentos Unipessoal, Lda. Quinta da Fonte - Edifcio Gil Eanes, Piso 3 2770-192 Paço de Arcos.	Vehicle lease for Portugal

13

		Purchaser Entity to
		be Assigned/Novated
Contract Parties	Contract Type	to
Pessoa Colectiva nº 502167610 Matriculada sob o nº 1883 na Convservatório do Reg. Com. De Cascasis
LEASE PLAN SERVICIOS, S.A., “Sociedad Unipersonal” Calle Francisca Delgado, núm. 9, 28109 - ALCOBENDAS (MADRID), C.I.F. A-78007473	Vehicle lease for Spain
Nortel Networks SA and Alcatel, 7-9avenue Morane Saulnier, 78141 Vélizy, France	“Pre Deal” UMTS Access Single Customer Reseller Agreement for Trial Purposes.	Société Française de Radiocommunication (SFR).
Nortel Networks SA and Alcatel, 7-9avenue Morane Saulnier, 78141 Vélizy, France	“Pre Deal” UMTS Access Single Customer Reseller Agreement for Trial Purposes.	Telecom Italia Mobile
Nortel Networks SA and Alcatel, 7-9avenue Morane Saulnier, 78141 Vélizy, France	“Pre Deal” UMTS Access Single Customer Reseller Agreement for Field Test Purposes.	TMN Portugal
Nortel Networks SA and Alcatel CIT, 12 rue de la Baume, 75008 Paris, France	“Pre Deal” SALES SUPPORT AGREEMENT for pre-sales support services.	SFR

14

Exhibit 5.9 (A)

Bundled/Unbundled Contracts where UMTS Access parts are to be Sub-Contracted to
Purchaser on Closing Date

		Purchaser Entity to be
Contract Parties	Contract Type	Sub-Contracted to
Mobisle Communications Ltd., at Spencer Hill, Marsa, Malta c/o Maltacom plc, and Nortel Networks SA Parc d’Activités de Magny-Châteaufort, les Jeunes Bois — Châteaufort, 78928 cedex 9, France	UMTS Supply Contract and Support and Service Agreement	Alcatel CIT SA, 7/9 Avenue Morane Saulnier, 78141 Vélizy, France
O2 (UK) Limited; O2 (Germany) GMBH & CO. OHG; O2 Communications (Ireland) Limited; Nortel Networks UK Limited; Nortel Networks Germany GMBH & CO KG and Nortel Networks (Ireland) Limited.	Supply of Mobile telecommunications network equipment and related services in the UK, Germany and the Republic of Ireland
O2 (UK) Limited and Nortel Networks UK Limited	Support of O2 UK UMTS Access Network
O2 (Germany) GMBH & CO. OHG and Nortel Networks Germany GMBH & CO KG	Support of O2 Germany UMTS Access Network
O2 (UK) Limited and Nortel Networks UK Limited	Training for O2 UK on UMTS Access Products
O2 (Germany) GMBH & CO. OHG and Nortel Networks Germany GMBH & CO KG	Training for O2 Germany on UMTS Access Products

15

		Purchaser Entity to be
Contract Parties	Contract Type	Sub-Contracted to
*Partner Communications Company Ltd. 8 Amal St., Afek Industrial Park, Rosh Ha’ayin, Israel and Nortel Networks Israel (Sales and Marketing) Limited.	Agreement for the supply of a 3G UMTS network (both Core & Access) and other telecommunications systems, equipment and related services	Alcatel Telecom Israel 94 Em Hamoshavot Rd. Park Azorim, Peth-Tikva Israel *

* Note: It is intended that the Partner Contract will be unbundled and transferred however there is a risk that this will not be achieved by Closing and therefore there may be a need to sub-contract this to Alcatel on a short term basis. This will be done on a full back-to-back basis as if the contract has been transferred.

16

EXHIBIT O

Modification of Exhibit O of the
Share and Asset Sale Agreement

17

CONTRAT DE CESSION D’ACTIONS

ENTRE:

Nortel Networks S.A., société anonyme de droit français au capital de 456.544.755 euros, dont le siège social est situé à Magny-Chateaufort, 78117 Chateaufort, immatriculée au Registre du commerce et des sociétés de Versailles sous le numéro B 389 516 741 et représentée pour les besoins des présentes par [·], dûment habilité à l’effet des présentes,

(ci-après dénommée, « NN SA » ou le « Cédant »);

de première part;

ET:

Alcatel CIT, société anonyme au capital de 265.364.340 euros, dont le siège social est situé au 12, rue de la Baume, 75008 Paris, immatriculée au Registre du commerce et des sociétés de Paris sous le numéro 338 966 385 et représentée pour les besoins des présentes par [·], dûment habilité à l’effet des présentes,

(ci-après dénommée, Alcatel CIT ou le « Cessionnaire »);

de seconde part.

NN SA et Alcatel CIT sont collectivement dénommées ci-après les « Parties ».

IL EST RAPPELE CE QUI SUIT:

Aux termes d’un contrat de langue anglaise Share and Asset Sale Agreement conclu le 4 décembre 2006 (le « Share and Asset Sale Agreement »), tel qu’ultérieurement modifié, la société Nortel Networks Limited, société de droit canadien, a transféré à Alcatel S.A., société de droit français, son activité d’accès radio UMTS, sous réserve de la levée de certaines conditions suspensives.

Les parties au Share and Asset Sale Agreement ont convenu que ledit transfert serait réalisé en France par le biais de la cession à Alcatel CIT des actions détenues par Nortel Networks S.A. dans Diselec, société par actions simplifiée à associé unique de droit français au capital de 40.000 euros (avant apport de l’activité d’accès radio UMTS) dont le siège est situé 12, rue de la Baume, 75008 Paris, immatriculée au Registre du commerce et des sociétés de Paris sous le numéro 491 687 422 (la « Société » ).

Le Cédant souhaite vendre et le Cessionnaire souhaite acheter 57.567 actions de la Société détenues par NN SA à la suite de la réalisation de l’augmentation de capital de ce jour.

18

CECI ETANT EXPOSE, IL A ETE CONVENU CE QUI SUIT:

ARTICLE 1 — ACHAT ET VENTE DES ACTIONS

Le Cédant cède, sous les garanties ordinaires de fait et de droit, au Cessionnaire, qui accepte, les Actions, libres de tous privilèges, sûretés, charges ou autres restrictions ou limitations de quelque nature que ce soit, ainsi que tous les droits qui y sont attachés.

Le prix des Actions (ci-après dénommé le « Prix ») est déterminé et payé conformément aux dispositions du Share and Asset Sale Agreement tel que modifié.

ARTICLE 2 — AJUSTEMENT DU PRIX

2.1 Ajustement de l’Actif Net

Le Cédant s’est porté garant auprès de Diselec de la valeur au 31 décembre 2006, de l’actif net apporté par le Cédant selon les termes d’un traité d’apport en date du 22 décembre 2006 conclu entre le Cédant et la Société (« l’Actif Net »).

Dans le cas où, la valeur nette totale de l’Actif Net au 31 décembre 2006 calculée sur la base des valeurs nettes comptables serait inférieure à 921.076 euros, le Cédant versera à Diselec une somme en espèces destinée à compenser cette perte de valeur (le « Montant Complémentaire »). Les Parties conviennent que dans un tel cas le Prix sera augmenté du Montant Complémentaire ; cette augmentation de prix sera payable sans délai.

2.2 Ajustement lié aux Passifs Sociaux

Les Parties conviennent que le Prix sera réduit du montant des passifs sociaux appréciés au 31 décembre 2006, figurant en Annexe 4 du Traité d’apport en nature conclu entre NN SA et Diselec le 22 décembre 2006, relatifs aux employés transférés par le Cédant à Diselec, tels que ces passifs seront déterminés selon les modalités prévues par le Schedule 7 — Employment Provisions du Share and Asset Sale Agreement ; cette réduction de prix sera remboursable sans délai.

ARTICLE 3 — PROPRIETE — JOUISSANCE

La cession des Actions prend effet après enregistrement de l’ordre de mouvement des Actions dans le registre de la Société. A compter de cette inscription, le Cessionnaire est propriétaire desdites Actions, en perçoit les revenus et bénéficie de tous les droits qui y sont attachés.

Le Cédant remet ce jour au Cessionnaire, qui le reconnaît, l’ordre de mouvement portant sur les Actions dûment complété et signé.

ARTICLE 4 — DECLARATION SPECIFIQUE DES PARTIES

Les Parties reconnaissent expressément que le présent contrat est soumis aux stipulations du contrat de langue anglaise Share and Asset Sale Agreement, notamment en ce qui concerne les déclarations et garanties faites au titre des Actions. Le présent contrat n’a pas pour objet et ne doit pas être interprété comme comportant des modifications, limitations ou renonciations de quelque sorte que ce soit aux termes et conditions stipulés au Share and Asset Sale Agreement. En cas de contradiction entre les stipulations du présent contrat et celles du Share and Asset Sale Agreement, les stipulations de ce dernier prévaudront.

ARTICLE 5 — DISPOSITIONS GENERALES

19

5.1	Frais. Le Bénéficiaire supportera l’intégralité des frais et coûts encourus en relation avec la l’exécution du présent contrat et des opérations qu’il prévoit. Les droits d’enregistrement relatifs à la cession des Actions seront intégralement supportés par le Cessionnaire.
5.2	Droit applicable. Le présent contrat est régi par le droit français.
5.3	Clause attributive de juridiction. Tout litige ou différend relatif à l’interprétation du présent contrat relèvera de la compétence exclusive du Tribunal de Commerce de Paris.
5.4	Pouvoir. Tous pouvoirs sont donnés au porteur d’un original des présentes ou d’extraits certifiés conformes des présentes constatant la réalisation définitive de la cession des Actions pour l’accomplissement de toutes les formalités légales.

Fait à [     ],
Le 31 décembre 2006
en cinq (5) exemplaires originaux.

Nortel Networks S.A.
Par: [·] Alcatel CIT
Par: [·]

20

EXHIBIT 1.5

Modification of Schedule 1.5 of the
Share and Asset Sale Agreement

21

Schedule 7

22

Exhibit 5

Purchase Price Allocation

23

Exhibit 7.6

JV License Agreements

24

EX-12

Exhibit 12

NORTEL NETWORKS CORPORATION
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges

	Years ended December 31,
(millions of U.S. dollars)	2006			2005			2004			2003			2002
	As restated			As restated			As restated			As restated			As restated
Earnings (loss) from continuing operations before income taxes as reported in the consolidated statements of operations		79			(2,692	)		(316	)		32			(3,430	)
Add:
Minority interest		59			39			33			48			(10	)
Equity in net loss of associated companies		3			(3	)		—			36			17
Earnings (loss) from continuing operations before minority interest, equity in net loss of associated companies and income taxes		141			(2,656	)		(283	)		116			(3,423	)
Add:
Fixed charges		414			286			270			297			433
Amortization of capitalized interest		—			—			—			(2	)		(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		—			—			—			—			4
Preference security dividend requirements of consolidated subsidiaries without fixed charges		—			—			—			—			—
Minority interest in pre-tax of subsidiaries without fixed charges		(59	)		(39	)		(33	)		(48	)		10
Income (loss) as adjusted		496			(2,410	)		(46	)		363			(2,978	)
Fixed charges:
Interest expense
— Long-term debt		272			209			192			178			220
— Other		68			10			10			28			52
Interest expense of finance subsidiaries		—			—			—			—			—
Interest expense of unconsolidated subs		—			—			—			—			—
1/3 of rental expense on operating leases deemed to be representative of interest expense		66			58			60			87			156
Preference security dividend requirements of consolidated subsidiaries		—			—			—			—			—
Amortized premiums, discounts and capitalized expenses related to indebtedness		8			9			8			4			1
		414			286			270			297			429
Ratio of earnings from continuing operations to fixed charges		1.2			*			*			1.2			*

* The earnings of Nortel Networks Corporation were inadequate to cover fixed charges for the years ended December 31, 2005, 2004 and 2002 by $2,695, $316 and $3,407 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

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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
Social Responsibility	39
Environmental Responsibility	40
Political Involvement	40
Contact Information for Ethics 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, the Ethics Office, the Ethics Action Line, or the Ethics 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.
2)	Call the confidential Ethics Action Line: ESN 333-3014 or (905) 863-3014 (worldwide); 1-800-683-3503 (North America only) or use the Ethics 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 Ethics Officer Susan Shepard by telephone (ESN 324-4220) or email (sshepard@nortel.com) or send a written communication marked “Private and Confidential — Complaint” to her at Nortel, 320 Park Avenue, New York, NY 10022. Or you may contact any other member of the Ethics Office. Contact information can be found on page 41.
4)	Contact one of the Ethics representatives in your region as listed on the Ethics web page under “Contacts.”
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, the Chief Compliance Officer, or the Chief Ethics 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.
>	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 Ethics Action Line or the Ethics Action Web Tool is really anonymous?

A. The Ethics Action Line and Ethics 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 the Ethics Office, 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, the Ethics Office, the Ethics Action Line, the Ethics 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 Law Risks

>	Do not have any discussions or other communications, including the exchange of emails, with competitors regarding prices, costs, product or service offerings, or contractual terms.
>	Use caution when attending industry conferences or standards organization meetings.
>	Do not accept competitors’ confidential pricing information from anyone, including an agent, representative, consultant, or customer.
>	When in doubt, consult with the Law Department before engaging in any activity that could violate competition laws.

Q & A:

Q. My manager told a customer that we were ready to begin testing the product, but I know that we haven’t even developed all the software yet. What should I do?

A. Misleading customers about our products violates the Code. You should report the matter, using the procedures set forth in the Code.

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 the Ethics Office. (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 college-bound 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— Representatives, Agents, Sales Consultants and Similar Appointments

     209.01— Appointment, Termination and Approval of Representatives, Agents, Sales Consultants and Other Similar Appointments

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 within regional expense limits, which are set forth in 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. If, for example, you are offering tickets to a sporting or cultural event, you must attend the event as well; 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 Third Parties

401.03 — Handling Unsolicited Disclosure of Ideas from Third Parties

712.02 — Procurement Business Conduct

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.

15

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 non-bank 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.

16

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

17

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 — General Auditor and Compliance

301.06 — Audit Report Follow-up Process

301.07 — Internal Audit Implementation Procedure

GB 001 — Payment and Reporting of Taxable Benefits

US 002 — Payroll Tax Reporting

US 003 — Internal Revenue Service Boycott Reporting Requirements

300.03 — 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.

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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

201.06 — Guide to Ethical Business Practices: Compliance, Enforcement, and Conflict of Interest

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 & Systems Security

205.04 — Protection of Confidential Information

206.01 — Systems Security

300.01 — Risk Management

320.28 — Use of Undisclosed Material Information

303.23 — Travel, Living and Entertainment Expenses

400.03 — Possession and Use of Third Party Software

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.

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 & Systems 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 non-disclosure 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 Third Parties

     401.03 — Handling Unsolicited Disclosure of Ideas from Third 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

27

permission or a license 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 — Patents, Industrial Designs and Inventions by Employees

     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 nondisclosure 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 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.

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 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:

     800.09 – Compensation and Long-Term Incentives

     800.11 — Employee Development and Performance Feedback

     800.18 — Employee Permanent Relocation Assistance

     800.28 — Internal Movement of Employees

     802.19 — Sexual Harrassment

     CA.007 — Employee Permanent Relocation Assistance to or within Canada

     US.009 — Employee Permanent Relocation Assistance to or within the United States

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. If you are a manager, diversity considerations should be part of your hiring, training and promotion decisions.

     Related Policies and Procedures:

     800.25 — Chronic Medical Conditions including AIDS

     802.19 — Sexual Harassment

     CA.005 — Equal Employment Opportunity

     CA.003 — Workplace Harassment

     US.008 — Equal Employment Opportunity/Affirmative Action

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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 — Substance-Free 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/Emergency Communications

     200.10 — Travel by Nortel Networks 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 — Environment, Health and Safety Management

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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

     US.010 — Collection, Maintenance and Release of Health Information

     CA.009 — Collection, Maintenance and Release of Health Information

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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

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Be Alert for ‘Red Flags’ that may indicate Export Control Law Violations:

>	The customer’s address is a P.O. Box or the customer’s facilities are not suitable for the product ordered.
>	The product is incompatible with the end customer’s business or its stated end use.
>	The shipping address is a forwarding/shipping agent.
>	The customer is known to have, or suspected of having, unauthorized dealings in embargoed countries or with denied parties.
>	The customer does not use commonly available installation and maintenance services.
>	The customer is reluctant or refuses to provide end-user information.
>	The customer requests non-standard payment terms or currencies.
>	The order amounts, packaging, or order routing do not correspond with normal industry practice.
>	The parties are known or suspected to be engaged in the development of biological, chemical, or nuclear weapons or ballistic missiles.

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

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.

>	Social Responsibility
>	Environmental Responsibility
>	Political Involvement

38

Social Responsibility

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.

Social responsibility 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

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 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 Ethics 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 Ethics 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 Ethics Action web tool: www.nortel.com/ethicsaction
4)	Send an E-mail: bethics@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 Ethics Officer, at sshepard@nortel.com.)
5)	Send a written communication:
	You may also send a written communication marked “Private and Confidential —Complaint” directly to Chief Ethics Officer Susan Shepard at Nortel, 320 Park Avenue, New York, NY 10022, or another member of her staff.
6)	Call any member of the Ethics Office directly:
	Susan Shepard, Chief Ethics Officer            ESN 324-4220 or (212) 317-4220
	Rob Timberg                                                 ESN 333-1246 or (905) 863-1246
	Lise Willard                                                   ESN 333-1559 or (905) 863-1559
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 Ethics 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
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
Ethics Action Line	5-8, 41
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:
Nortel
35 Davis Drive
Research Triangle Park, NC 27709 USA

In Canada:
Nortel
195 The West Mall
Toronto, Ontario M9C 5K1 Canada

In Caribbean and Latin America:
Nortel
1500 Concorde Terrace
Sunrise, FL 33323 USA

In Europe:
Nortel
Maidenhead Office Park, Westacott Way
Maidenhead Berkshire SL6 3QH UK
Phone: 00800 8008 9009 or
+44 (0) 870-907-9009

In Asia Pacific:
Nortel
Nortel Networks Centre
1 Innovation Drive
Macquarie University Research Park
Macquarie Park, NSW 2109
Australia
Tel +61 2 8870 5000

In Greater China:
Nortel
Sun Dong An Plaza
138 Wang Fu Jing Street
Beijing 10000
China
Phone: (86) 10 6510 8000

Nortel is a recognized leader in delivering communications capabilities that enhance the human experience, ignite and power global commerce, and secure and protect the world’s most critical information. Our next-generation technologies, for both service providers and enterprises, 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. Nortel does business in more than 150 countries. For more information, visit Nortel on the Web at www.nortel.com.

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 and the Globemark are trademarks of Nortel Networks. All other trademarks are the property of their owners.

Copyright © 2006 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.

EX-16

Exhibit 16

March 16, 2007

Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C.   20549-7561

Dear Sirs:

We have read Item 14 — Principal Accountant Fees and Services — Change in Certifying Accountant of Nortel Networks Corporation’s (Nortel) Annual Report on Form 10-K dated March 16, 2007, the section “Appointment of Auditors — Change in Independent Public Accountants” in Nortel’s proxy circular and proxy statement dated March 16, 2007 and Item 4.01 of Nortel’s Form 8-K dated March 16, 2007, and have the following comments:

1.	We agree with the statements made in the first, second, third, fourth, fifth and sixth paragraphs.
2.	We have no basis on which to agree or disagree with the statements made in the remaining paragraphs.

Yours truly,

/s/  Deloitte & Touche LLP
Independent Registered Chartered Accountants

Toronto, Canada

EX-21

Exhibit 21

Subsidiaries of the Registrant

	Organized under the laws of
1328556 Ontario Inc.	Ontario, Canada
AC Technologies, Inc.	State of Delaware
Alteon WebSystems AB	Sweden
Alteon WebSystems International Limited	Bermuda
Alteon WebSystems International, Inc.	State of Delaware
Alteon WebSystems, Inc.	State of Delaware
Architel Systems (U.S.) Corporation	State of Delaware
Architel Systems (UK) Limited	United Kingdom
Architel Systems Corporation	Canada
Bay Networks do Brasil Ltd.	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
CoreTek, Inc.	State of Delaware
CTFC Canada Inc.	Canada
Frisken Investments Pty. Ltd.	New South Wales, Australia
Integrated Information Technology Corporation	State of Illinois
Integrated Networks Limited	United Kingdom
Guangdong-Nortel Telecommunications Equipment Company Ltd.	People’s Republic of China
LG-Nortel Co. Ltd.	Korea
Matra Communication Cellular Terminals GmbH	Germany
Nortel (Management) Limited	United Kingdom
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 Finance France SAS	France
Nortel Government Solutions Incorporated	State of Delaware
Nortel LearnIT	State of Virginia
Nortel Limited	United Kingdom
Nortel Networks (Asia) Limited	Hong Kong
Nortel Networks (Austria) GmbH	Austria
Nortel Networks (Barbados) Finance Inc.	Barbados
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 (Luxembourg) S.A.	Luxembourg
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

	Organized under the laws of
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 Compania Anonima	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
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 Finance LLC	State of Delaware
Nortel Networks Financial Services Limited Liability Company	Hungary
Nortel Networks France SAS	France
Nortel Networks Germany GmbH & Co. KG	Germany
Nortel Networks Germany Verwaltungs-GmbH	Germany
Nortel Networks Global Corporation	Canada
Nortel GmbH	Germany
Nortel Networks Hispania, S.A.	Spain
Nortel Networks HPOCS (Denmark) Holding AS	Denmark (Copenhagen)
Nortel Networks HPOCS (Denmark) Holding ApS	Denmark (Copenhagen)
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 Limited	Canada
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 Optical Components (Switzerland) GmbH	Switzerland
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

	Organized under the laws of
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 U.S. Finance Inc.	State of Delaware
Nortel Networks UK Limited	United Kingdom
Nortel Technology Excellence Centre Private Limited	India
Nortel Telecomunicaciones S.A.	Colombia
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
Northern Telecom Comunicaciones de Colombia S.A.	Colombia
Northern Telecom France S.A.	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 Limited	United Kingdom
Sonoma Systems	State of California
Sonoma Systems Europe Limited	United Kingdom
Star 21 Networks GmbH	Germany
Telephone Switching International Limited	United Kingdom
TSFC Canada Inc.	Canada
X-CEL Communications Limited	United Kingdom
Xros, Inc.	State of Delaware

EX-23

Exhibit 23

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, relating to the consolidated financial statements, and consolidated financial statement schedule of Nortel Networks Corporation (“Nortel”) and to management’s report on the effectiveness of internal control over financial reporting (which report on the consolidated financial statements expressed an unqualified opinion, includes an explanatory paragraph relating to the restatement of the consolidated financial statements as of December 31, 2005 and for the years ended December 31, 2005 and 2004; 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; and which report on the consolidated financial statement schedule includes an explanatory paragraph relating to the restatement of the consolidated financial statement schedule as of December 31, 2005 and 2004 and for the years ended December 31, 2005 and 2004, and which report on internal control over financial reporting expressed an unqualified opinion on management’s assessment of the effectiveness of Nortel’s internal control over financial reporting and an adverse opinion on the effectiveness of Nortel’s internal control over financial reporting because of a material weakness) appearing in the Annual Report on Form 10-K of Nortel for the year ended December 31, 2006:

• Registration Statement on Form S-3
(Nortel Networks/BCE 1985 Stock Option Plan and the
Nortel Networks/BCE 1999 Stock Option Plan)
(333-11888)

• Registration Statement on Form S-3 and all Post-Effective Amendments thereto
(Qtera Corporation)
(333-11454)

• Registration Statement on Form S-3 and all Post-Effective Amendments thereto
(Dividend Reinvestment Plan)
(33-62270)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Stock Purchase Plan)
(333-11270)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks NA Inc. 1998 Employee Stock Purchase Plan)
(333-9570)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks NA Inc. 1994 Stock Option Plan)
(333-9066)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Qtera Corporation Amended and Restated Stock Incentive Plan)
(333-11452)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Periphonics Corporation 1995 Stock Option Plan, as Amended and
Periphonics Corporation 1995 Non-Employee Director Stock Option Plan)
(333-10980)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Clarify Inc. 1991 Stock Option/Stock Issuance Plan,
Clarify Inc. 1999 Non-Executive Stock Option/Stock Issuance Plan,
Clarify Inc. Amended and Restated 1995 Stock Option/Stock Issuance Plan,
Clarify Inc. Non-Employee Directors Option Plan,
OBJIX Systems Development, Inc. Stock Plan and
Certain Separate Option Agreements)
(333-11110)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated)
(333-11342)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated)
(333-6152)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated)
(33-88214)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated)
(33-61904)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated)
(33-11640)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Promatory Communications, Inc. 1997 Stock Plan and
Promatory Communications, Inc. 1999 Stock Plan)
(333-11798)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Inc. Long-Term Investment Plan)
(333-7366)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Inc. Long-Term Investment Plan)
(33-25333)

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks Corporation 2000 Stock Option Plan)
(333-11876)

• Registration Statement on Form S-8
(Xros, Inc. 1999 Stock Plan)
(333-12176)

• Registration Statement on Form S-8
(Architel Systems Corporation 1994 Flexible Stock Incentive Plan,
1996 Stock Option Plan of Architel Systems Corporation,
Amended and Restated Accugraph Corporation 1996 Stock Option Plan,
Accugraph Corporation Key Employee Stock Option Plan and
Accugraph Corporation 1992 Directors and Officers Stock Option Plan)
(333-12228)

• Registration Statement on Form S-8
(CoreTek, Inc. 1998 Employee, Director and Consultant Stock Option Plan)
(333-12286)

• Registration Statement on Form S-8
(EPiCON, Inc. 1995 Stock Plan, as Amended)
(333-12644)

• Registration Statement on Form S-8
(Alteon WebSystems, Inc. 2000 Non Statutory Incentive Plan,
1999 Equity Incentive Plan,
1999 Stock Purchase Plan and
Pharsalia Technologies, Inc. 2000 Equity Incentive Plan)
(333-12760)

• Registration Statement on Form S-8
(Sonoma Systems 1996 Stock Option Plan, as Amended and
Sonoma Systems 1999 Stock Option Plan, as Amended)
(333-49304)

• 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
(JDS Uniphase Corporation)
(333-57510)

• Registration Statement on Form S-8
(Nortel Networks Stock Purchase Plan)
(333-70482)

• Registration Statement on Form S-3
(Shasta Networks, Inc.)
(333-10310)

• Registration Statement on Form S-8
(Nortel Networks Company Savings Plan)
(333-70504)

• 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-8
(Nortel Networks Stock Purchase Plan)
(333-106633)

• Registration Statement on Form S-8
(Long-Term Investment Plan)
(333-106654)

• Registration Statement on Form S-8
(Nortel Global Stock Purchase Plan, Nortel U.S. Stock Purchase Plan and
Nortel Stock Purchase Plan for Members of the Nortel Savings and Retirement Program)
(333-126250)

• Registration Statement on Form S-8
(Nortel 2005 Stock Incentive Plan)
(333-135768)

/s/  Deloitte & Touche LLP

Independent Registered Chartered Accountants

Toronto, Canada
March 15, 2007

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, 2006, 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      16th      day of          March          , 2007.

/s/  J.H. BENNETT J.H. Bennett	/s/  M. BISCHOFF M. Bischoff	/s/  J.B. HUNT, JR. J.B. Hunt, Jr.
/s/  K.M. JOHNSON K.M. Johnson	/s/  J.A. MACNAUGHTON J.A. MacNaughton	/s/  J.P. MANLEY J.P. Manley
/s/  R.D. MCCORMICK R.D. McCormick	/s/  C. MONGEAU C. Mongeau	/s/  H.J. PEARCE H.J. Pearce
/s/  J.D. WATSON J.D. Watson	/s/  M.S. ZAFIROVSKI 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, 2006 of Nortel Networks Corporation;

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:  March 16, 2007

/s/ Mike S. Zafirovski

Mike S. Zafirovski

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

      Certification

I, Peter W. Currie, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Nortel Networks Corporation;

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:  March 16, 2007

/s/ Peter W. Currie

Peter W. Currie

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 Corporation, 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, 2006 (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:  March 16, 2007	/s/ Mike S. Zafirovski
	Mike S. Zafirovski
	President and Chief Executive Officer
Dated:  March 16, 2007	/s/ Peter W. Currie
	Peter W. Currie
	Executive Vice-President and Chief Financial Officer