**Exhibit 10.5****Nortel Networks Limited Annual Incentive Plan (AIP)****Section 1:**  **Introduction**     The Nortel Networks Limited Annual Incentive Plan (the “Plan” or “AIP”) is a short-term,incentive bonus plan that provides the potential for “Eligible Employees” (as defined below) toreceive cash awards based on their contributions to the success of the “Company”1,conditioned on the Company meeting its objectives.     The Plan is intended to drive business performance and customer and shareholder value byrewarding Eligible Employees for their contributions to the Company’s overall success. An EligibleEmployee’s contribution is determined by two factors: (1) the impact of that employee’s role onbusiness results and (2) that employee’s achievement of individual performance objectives duringthe employee’s active service with the Company. The actual award received by an Eligible Employeewill reflect (1) an employee’s job scope, complexity, and responsibilities, and that employee’scontribution and achievement, during the Plan Period2 and (2) the Company’s performanceas indicated by the Nortel Performance Factor (the “Nortel Performance Factor”).**Section 2:**  **Annual Incentive Plan Eligibility**     Generally, regular full-time and regular part-time3 Company employees are eligibleto participate in the Plan (“Eligible Employees”), subject to the following: (1) Eligible employees who participate in other incentive plans for a fullcalendar month or the greater portion of a month, as determined by the Company, arenot eligible to participate in the Plan during that calendar month. For purposes ofthis document, “other incentive plans” mean sales incentive compensation or any otherincentive/bonus arrangements which the Company determines have been offered in lieu ofthe Plan; 1 For purposes of the Plan, the “Company” is defined as Nortel Networks Limited and itssubsidiaries and affiliates and other entities, which it controls directly orindirectly and which have been approved for participation in the Plan by theperson holding the most senior position responsible for human resources or theequivalent at the Company as identified by the CHRC (the “SeniorVice-President, HR”). 2 Each calendar year consists of one PlanPeriod — from January 1 through December 31. The Plan Period(s) for eachcalendar year may be changed by the CHRC (as defined in Section 2) and Board ofDirectors (as defined in Section 2) at any time. 3 For purposes of the Plan, regular full-timeand regular part-time Company employees are those employees who are eligiblefor participation in the Company health benefit plans based on their regularlyscheduled hours.
 

 

- 2 - (2) Subject to applicable law, employees who are covered under a collective laboragreement are not eligible unless that collective labor agreement provides for theirparticipation in the Plan;  (3) Individuals determined by the Company to be students, co-op students,interns, temporary4, or non-payroll workers are ineligible for the Plan;  (4) The Compensation and Human Resources Committee of the Boards of Directors ofNortel Networks Corporation and Nortel Networks Limited (“CHRC”) and the Board ofDirectors of Nortel Networks Limited (the “Board of Directors”) may determine thatcertain Company employees (including employees who are not otherwise eligible for thePlan) may be eligible to receive an award from a Discretionary Bonus Pool createdpursuant to Section 5 hereof;  (5) Subject to applicable law, to be eligible for either a full or pro-ratedaward for any given Plan Period: (a) an employee must have been actively employed in arole that is eligible under the Plan or other incentive plan (“Incentive EligibleRole”) for at least three full calendar months in that Plan Period 5and (b)the employee must have been an employee in an Incentive Eligible Role on or beforeOctober 1 of that Plan Period6. For purposes of this document, anemployee will be considered to be “actively employed” for any calendar month in whichthe employee actually works for at least one day or as otherwise required underapplicable contract or law. Notwithstanding the foregoing and subject to applicablelaw, employees whose employment terminates before December 31 of a Plan Period are noteligible to receive a Plan award for that Plan Period.  (6) Pro-rated awards may be made to employees who transfer into or out ofpositions covered by other incentive plans, move from or to a job that is ineligiblefor the Plan or who are on a Company approved leave of absence or on “notice” oftermination of employment for part of the Plan Period, provided that the employeemeets the other Plan requirements set out above. However, subject to applicable law,an employee is not eligible for a Plan payout for any calendar month in which theemployee is not actively employed in a position eligible under the Plan. If anemployee meets the above Plan requirements, but is actively employed in a positionthat is eligible under the Plan for less than the full Plan Period, the employee’sAnnual Incentive Plan award will be based on the number of months the employee is 4 Where legally required, temporary full timeemployees on fixed term contracts with the Company may be included as EligibleEmployees subject to the other conditions in Section 2 of the Plan. 5 The required period of active employment maybe changed by the CHRC and Board of Directors at any time. 6 The dates on which an employee must beemployed in an Incentive Eligible Role may be changed by the CHRC and Board ofDirectors at any time.

 

- 3 -   actively employed in a Plan eligible position divided by the number of months in thePlan Period, with the following exception. For purposes of determining the amount of apro-rata Annual Incentive Plan award, an employee will not be considered to be activelyemployed in a Plan eligible position in a calendar month in which (a) the employeeparticipates in another incentive plan for that full calendar month or (b) the employeeparticipates in another incentive plan for the greater portion of the month, each asdetermined by the Company.  (7) Employees who meet all of the Plan eligibility requirements, but who leaveemployment with the Company between the end of the Plan Period and the related paymentdate for the award, other than for reasons determined by the Company to be related toinappropriate actions, misconduct, dismissal for cause (where applicable) orunsatisfactory performance, will be eligible for an award for the applicable PlanPeriod;  (8) An employee’s Management Team7 has the right, in consultation withthe relevant Human Resources Business prime, to make limited exceptions to the‘actively employed’ requirements set out in Section 2(5) and (6) above where requiredby law or where the Management Team determines that circumstances clearly warrant anexception. Exceptional circumstances might include approved leaves where warranted byapplicable law (e.g. maternity, paternity, parental, military, family, or medical),disability, outsourcing, divestiture, or death. In such situations, if the employeehas, while actively employed in a Plan eligible position, substantially achievedhis/her individual objectives, the employee’s Management Team may grant partialawards. If awards are paid in these circumstances, the awards will be pro-rated toreflect the number of months the employee was actively employed in a Plan eligibleposition, as defined in Section 2(5) above, and will be commensurate with theemployee’s contribution and achievement. Notwithstanding anything in the foregoingto the contrary, nothing in the Plan shall preclude the Company paying an employee anaward under the Plan for more than the number of months the employee was activelyemployed in a Plan eligible position pursuant to that individual employee’semployment termination agreement, which the Senior Vice-President, HR has approved;and  (9) Company affiliates and joint ventures may choose to offer the Plan or asimilar plan subject to the approval of the Senior Vice-President, HR.**Section 3:**  **Award Elements** 7 The “Management Team” consists of themanagers with whom the employee has a direct or indirect reporting relationshipas set out in the Organization Structure Manager (“OSM”) or its equivalent asmaintained by the Company from time to time.

 

- 4 -     An Eligible Employee’s cash award for a Plan Period under the Plan will be based on thefollowing formula:100%8 of Annual Base Salary x (# Months actively employed in a Plan eligibleposition / # Months in Plan Period) [“Pro-Ration Factor”] x Award % x NortelPerformance Factor. Annual Base Salary means the annualized regular compensation paid to an Eligible Employee,excluding any other compensation, such as, but not limited to, bonuses, commissions, overtime, andrelocation benefits. The Annual Base Salary for these purposes will be measured for all EligibleEmployees at a uniform time on or after October 1st of the applicable Plan Period to bedetermined in the sole discretion of the Senior Vice-President, HR.Award % is the percentage of Annual Base Salary that is used to compute the Plan award foreach Eligible Employee. For Job Complexity Indicator (“JCI”) 1-6, the Award % ranges from 0% to40% of Annual Base Salary. For JCI 55, the Award % ranges from 0% to 400% of Annual Base Salary.The JCI level for these purposes will be measured concurrently with Annual Base Salary as describedabove. For each JCI, the Senior Vice-President, HR may set a suggested narrower award range,intended to reflect a market trend to give certain Eligible Employees with higher levels ofresponsibility a higher incentive potential as a percentage of Annual Base Salary. Within theranges approved by the CHRC and the Board of Directors, an Eligible Employee’s Management Team willdetermine the recommended Award % for that employee for each Plan Period based on the employee’sjob scope, complexity and responsibilities and the employees’ contributions and achievements duringthe Plan Period. An Eligible Employee’s recommended Award % is subject to review, modification andapproval by the Senior Management Team as provided in Section 4.9The total Plan award for all Eligible Employees for a Plan Period (reflecting the NortelPerformance Factor) is recommended by the Senior Management Team for approval by the CHRC and theBoard of Directors after the end of the Plan Period.Nortel Performance Factor is calculated based on the achievement by the Company of keycorporate objectives for the Plan Period. The objectives are approved by the CHRC and the Board ofDirectors for each Plan Period. The Nortel Performance Factor may be based on one or moreperformance metrics, each with specific targets. The performance metrics may have equal ordifferent weightings. Performance metrics are the general corporate goals for the Plan Period, suchas profitability, market momentum, or customer loyalty. Targets shall be based on objective and/orsubjective criteria established to measure, directly or indirectly, the performance metrics.Weightings shall be the relative 8 The percentage of Annual Base Salary that isapplied to the formula may be changed by the CHRC and Board of Directors at anytime. 9 For purposes of the Plan only, the “SeniorManagement Team” shall consist of the President and Chief Executive Officer,the Chief Financial Officer and the Senior Vice-President, HR of NortelNetworks Limited.

 

- 5 -weight or percentage accorded in the Nortel Performance Factor for achieving each specific target.After approval by the CHRC and the Board of Directors, the Company’s objectives for the Plan Periodwill be communicated to Eligible Employees. The Nortel Performance Factor is deemed to be 1.0(achievement) throughout the Plan Period and is then adjusted by the CHRC and the Board ofDirectors based on their determination of corporate performance. The President and Chief ExecutiveOfficer may, in his sole discretion, recommend to the CHRC and the Board of Directors that theNortel Performance Factor be adjusted with respect to certain business units, JCI levels or anyother groups of employees and the CHRC and the Board can approve such adjustment to the NortelPerformance Factor, in their sole discretion, based on additional factors that the President/CEOand the CHRC and Board determine in their sole discretion are relevant to the award includingwithout limitation, collective relative contribution to achievement of the key Company objectivesduring the Plan Period.**Section 4:**  **Annual Incentive Plan Awards**Awards for each Plan Period are calculated based on 100%10 of an Eligible Employee’sAnnual Base Salary, the Pro-Ration Factor, the Eligible Employee’s Award % (which reflects theemployee’s job scope, complexity and responsibilities, and that employee’s contribution andachievement, during the Plan Period), and the Nortel Performance Factor (that is, the Company’sbusiness performance for the Plan Period as determined by the CHRC and the Board of Directors).When warranted, cash awards will be made as soon as practicable following the close of theapplicable Plan Period and the calculation of any award.Any award under the Plan to an Eligible Employee is subject to the discretion of the EligibleEmployee’s Management Team and Senior Management Team and the CHRC and the Board of Directors.That is, an Eligible Employee’s Management Team determines, in its discretion, the Award % for anEligible Employee subject to review, modification and approval by the Senior Management Team.Specifically, the Senior Management Team reserves the right, in its discretion, to review andadjust Eligible Employees’ Award percentages, which are assigned to those Eligible Employees bytheir Management Team to reflect its assessment of the employees’ contributions to the business orthe achievement of the Company’s key objectives, as well as to ensure that the final payouts, ifany, are within appropriate budgetary guidelines. The CHRC and the Board of Directors determine,in their discretion, the achievement of the targets for the performance metrics and the finalcalculation of the Nortel Performance Factor (which may include a determination of a NortelPerformance Factor of zero, even if certain of the performance metrics targets are achieved, and/oran adjustment to the relative weighting of the performance metrics.) During the Plan Period, theCHRC and the Board of Directors can review Company objectives, performance measures, weightings,and targets to determine whether they remain appropriate. The CHRC and the Board of Directors may,at their sole discretion, adjust the Company objectives, performance 10 The percentage of Annual Base Salary that isapplied to the formula may be changed by the CHRC and Board of Directors at anytime.

 

- 6 -measures, weightings, targets, and/or plan payouts for the Plan Period, as they deem necessary, toreflect changes in business conditions or other circumstances.Subject to applicable law, the Senior Vice-President, HR, may approve the reduction of Plan awardspayable to Eligible Employees for a Plan Period by the full or partial amount of other bonuses orsimilar payments, including, without limitation, Company performance related payments required byapplicable law, that are payable to such employees in respect of any part of such Plan Period.The Senior Vice-President, HR, will have sole discretion to determine those bonuses or paymentsthat are subject to the preceding sentence and the amount of any such reduction to the Plan award.Plan awards are considered income and are therefore subject to national, state/provincial, and/orlocal taxes. All appropriate taxes and other withholdings will be deducted from any such awardsand payments as required by applicable law.Depending on local laws and policies, Plan awards may have an impact on some benefits and may ormay not be included in the “eligible earnings” for purposes of capital accumulation and retirementplans offered in the various regions by the Company. Where appropriate, deductions may be madefrom Plan awards in accordance with the specific capital accumulation and retirement plan in whichthe Eligible Employee participates.If the CHRC, in its sole discretion, upon consideration of facts and circumstances determined bythe CHRC to be relevant, concludes that an Eligible Employee has committed an intentionalmisconduct, as defined in the CHRC Policy Regarding Recoupment of Incentive Compensation (the“Recoupment Policy”) relating to the forfeiture and/or recoupment of incentive compensation,including Annual Incentive Plan award payments, the Eligible Employee shall forfeit any planned butunpaid Plan award and/or reimburse the Company the amount of the Plan award received, as determinedby the CHRC.**Section 5**:  **Discretionary Bonus Pool**During a Plan Period, the CHRC and the Board of Directors may consider the creation of a separateDiscretionary Bonus Pool under the Plan to provide discretionary, incremental bonus awards. Theseawards may be made to all employees of the Company or employees of the Company who individually orin groups made a relative contribution that significantly added to the overall success of theCompany, whether or not the employees are eligible to participate in the Plan under the criteriaset out in Section 2 of this document. The determination that a Company employee is eligible for aDiscretionary Bonus Pool award does not otherwise entitle that employee to generally participate inthe Plan. The CHRC and the Board of Directors have complete discretion to determine: theestablishment of the Discretionary Bonus Pool; the eligibility criteria for participation; anyperformance metrics, weightings and targets; the achievement, if any, of the targets for theperformance metrics; and the amount of the awards, if any, paid from the Discretionary Bonus Pool.Whether or not an Eligible Employee receives a Plan

 

- 7 -award shall have no effect on that employee’s eligibility to receive a Discretionary Bonus Pool award.Discretionary Bonus Pool awards will be considered income and therefore subject to national,state/provincial, and/or local taxes. All appropriate taxes and other withholdings will bededucted from the award as required by applicable law.Depending on local laws and policies, Discretionary Bonus Pool awards may have an impact on somebenefits and may or may not be included in the “eligible earnings” for purposes of capitalaccumulation and retirement plans offered in the various regions by the Company. Whereappropriate, deductions may be made from the Discretionary Bonus Pool awards in accordance with thespecific capital accumulation and retirement plan in which the employee participates.**Section 6:**  **Interpretations and Amendments**This document, as amended from time to time, constitutes the “Nortel Networks Limited AnnualIncentive Plan”. In the event of any conflicts or inconsistencies between the provisions of thePlan and any other document or communication, written or oral, concerning the Plan, the provisionsof this document, as amended from time to time, shall govern.The Senior Vice-President, HR, subject to approval of the CHRC and the Board of Directors incertain cases shall interpret the provisions of the Plan, which shall be final and binding on theCompany and all Plan participants. This document is also subject to interpretation to comply withapplicable laws. It is not and shall not be construed as either an employment contract or as acontract concerning the subject matter contained herein. There is no guarantee that any awardunder the Plan will actually be paid. Any award is determined at the discretion of an EligibleEmployee’s Management Team, the Senior Management Team and the CHRC and the Board of Directors, asthe case may be. If such awards, however, are paid, they shall be determined and paid inaccordance with the provisions herein.The Plan can only be terminated or amended by the Board of Directors, which shall have the fullauthority, at any time, to terminate the Plan or to delete, modify and/or add to any and all terms,conditions, and provisions of the Plan.As adopted by the Board of Directors of Nortel Networks Limited on July 25, 2002, as amendedon January 23, 2003 with effect from January 1, 2003, as amended on July 28, 2003 with effect fromJanuary 1, 2003, as amended on February 26, 2004 with effect from January 1, 2004, as amended onMarch 9, 2006 with effect from January 1, 2006, and as amended on March 15, 2007 with effect fromJanuary 1, 2007