##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


|                                              |  |                                                                                             
|--------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                             |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|                                             
|For the Quarterly Period Ended March 31, 2006
|                                             
|OR                                           
|o                                             |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From

to


Commission file number: 000-30758


Nortel Networks Limited


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Canada                                                             |  | 62-12-62580                             
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

|                                                                  |  |           
|----------------------------------------------------------------- |  | ----------
|8200 Dixie Road, Suite 100                                        |  | L6T 5P6   
|Brampton, Ontario, Canada(Address of Principal Executive Offices) |  | (Zip Code)

Registrants Telephone Number Including Area Code
(905) 863-0000




þ o




þ o o




o þ




1,460,978,638 shares of common stock without nominal or par
value










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##### 










TABLE OF CONTENTS


|                                 |  |                                                                                           |    |  |    | 
|-------------------------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|                                
|PART I
    FINANCIAL INFORMATION
|ITEM 1.                          |  | Condensed Consolidated Financial Statements
    (unaudited)                               |    |  | 1  | 
|ITEM 2.                          |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |  | 42 | 
|ITEM 3.                          |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |  | 78 | 
|ITEM 4.                          |  | Controls and Procedures                                                                   |    |  | 79 | 
|                                
|PART II
     OTHER INFORMATION  
|ITEM 1.                          |  | Legal Proceedings                                                                         |    |  | 83 | 
|ITEM 1A.                         |  | Risk Factors                                                                              |    |  | 84 | 
|ITEM 6.                          |  | Exhibits                                                                                  |    |  | 90 | 
|SIGNATURES                       |  |                                                                                           | 92 | 
|Exhibit 10.15                   
|Exhibit 31.1                    
|Exhibit 31.2                    
|Exhibit 32                      



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














i



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##### Table of Contents



NORTEL NETWORKS LIMITED





Condensed Consolidated Statements of Operations
(unaudited)


|                                                                                                                                                     |                |                              |       |              |      |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ---------------------------- | ----- | ------------ | ---- | - | ----- | --- | -
|                                                                                                                                                     |                | Three months ended March 31, |      
|                                                                                                                                                     |                |                              |      
|                                                                                                                                                     |                | 2006                         |       |              | 2005 |  
|                                                                                                                                                     |                |                              |       |              |      |  
|                                                                                                                                                     |                |                              |       | As restated* |     
|                                                                                                                                                     |                | (Millions of U.S. dollars)   |      
|Revenues                                                                                                                                             |                | $                            | 2,382 |              |      | $ | 2,389 |    
|Cost of revenues                                                                                                                                     |                |                              | 1,473 |              |      |   | 1,375 |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Gross profit                                                                                                                                         |                |                              | 909   |              |      |   | 1,014 |    
|Selling, general and administrative expense                                                                                                          |                |                              | 594   |              |      |   | 574   |    
|Research and development expense                                                                                                                     |                |                              | 474   |              |      |   | 471   |    
|Amortization of intangibles                                                                                                                          |                |                              | 5     |              |      |   | 2     |    
|Special charges                                                                                                                                      |                |                              | 5     |              |      |   | 14    |    
|(Gain) loss on sale of businesses and
    assets(a)                                                                                                  |                |                              | (42   | )            |      |   | 22    |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Operating earnings (loss)                                                                                                                            |                |                              | (127  | )            |      |   | (69   | )  
|Other income  net                                                                                                                                   |                |                              | 70    |              |      |   | 55    |    
|Interest expense                                                                                                                                     |                |                              |       |              |      |   |       |    
|                                                                                                                                                     | Long-term debt |                              |       | (25          | )    |   |       | (29 | )
|                                                                                                                                                     | Other          |                              |       | (23          | )    |   |       | (2  | )
|                                                                                                                                                     |                |                              |       |              |      |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                              | (105  | )            |      |   | (45   | )  
|Income tax benefit (expense)                                                                                                                         |                |                              | (23   | )            |      |   | (15   | )  
|                                                                                                                                                     |                |                              |       |              |      |  
|                                                                                                                                                     |                |                              | (128  | )            |      |   | (60   | )  
|Minority interests  net of tax                                                                                                                      |                |                              | 21    |              |      |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                              | (2    | )            |      |   | 1     |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Net earnings (loss) from continuing operations                                                                                                       |                |                              | (109  | )            |      |   | (64   | )  
|Net earnings from discontinued operations  net of tax                                                                                               |                |                              |      |              |      |   | 2     |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Net earnings (loss) before cumulative effect of accounting change                                                                                    |                |                              | (109  | )            |      |   | (62   | )  
|Cumulative effect of accounting change  net of tax
    (note 15)                                                                                    |                |                              | 9     |              |      |   |      |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Net earnings (loss)                                                                                                                                  |                |                              | (100  | )            |      |   | (62   | )  
|Dividends on preferred shares                                                                                                                        |                |                              | 12    |              |      |   | 9     |    
|                                                                                                                                                     |                |                              |       |              |      |  
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                            | (112  | )            |      | $ | (71   | )  
|                                                                                                                                                     |                |                              |       |              |      |  






|    |                        
|--- | -----------------------
|(a) | Includes related costs.



|  |           
|- | ----------
|* | See note 3

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


1



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##### Table of Contents



NORTEL NETWORKS LIMITED


Condensed Consolidated Balance Sheets (unaudited)


|                                                                        |                                                                                                                     |                            |         |       |              |   |         |       | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----- | ------------ | - | ------- | ----- | 
|                                                                        |                                                                                                                     | March 31,                  |         |       | December 31, |  
|                                                                        |                                                                                                                     | 2006                       |         |       | 2005         |  
|                                                                        |                                                                                                                     |                            |         |       |              |  
|                                                                        |                                                                                                                     | (Millions of U.S. dollars, |        
|                                                                        |                                                                                                                     | except for share amounts)  |        
|ASSETS                                                                 
|Current assets                                                          |                                                                                                                     |                            |         |       |              |   |         |      
|                                                                        | Cash and cash equivalents                                                                                           |                            | $       | 2,655 |              |   | $       | 2,876 | 
|                                                                        | Restricted cash and cash equivalents                                                                                |                            |         | 77    |              |   |         | 77    | 
|                                                                        | Accounts receivable  net                                                                                           |                            |         | 2,930 |              |   |         | 3,166 | 
|                                                                        | Inventories  net                                                                                                   |                            |         | 1,984 |              |   |         | 1,804 | 
|                                                                        | Deferred income taxes  net                                                                                         |                            |         | 388   |              |   |         | 377   | 
|                                                                        | Other current assets                                                                                                |                            |         | 595   |              |   |         | 567   | 
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total current assets                                                    |                                                                                                                     |                            | 8,629   |       |              |   | 8,867   |      
|Investments                                                             |                                                                                                                     |                            | 244     |       |              |   | 244     |      
|Plant and equipment  net                                               |                                                                                                                     |                            | 1,528   |       |              |   | 1,559   |      
|Goodwill                                                                |                                                                                                                     |                            | 2,511   |       |              |   | 2,412   |      
|Intangible assets  net                                                 |                                                                                                                     |                            | 166     |       |              |   | 172     |      
|Deferred income taxes  net                                             |                                                                                                                     |                            | 3,606   |       |              |   | 3,629   |      
|Other assets                                                            |                                                                                                                     |                            | 1,009   |       |              |   | 1,026   |      
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total assets                                                            |                                                                                                                     | $                          | 17,693  |       |              | $ | 17,909  |      
|                                                                        |                                                                                                                     |                            |         |       |              |  
|                                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY                                   
|Current liabilities                                                     |                                                                                                                     |                            |         |       |              |   |         |      
|                                                                        | Trade and other accounts payable                                                                                    |                            | $       | 1,066 |              |   | $       | 1,178 | 
|                                                                        | Payroll and benefit-related liabilities                                                                             |                            |         | 776   |              |   |         | 799   | 
|                                                                        | Contractual liabilities                                                                                             |                            |         | 297   |              |   |         | 346   | 
|                                                                        | Restructuring liabilities                                                                                           |                            |         | 84    |              |   |         | 95    | 
|                                                                        | Other accrued liabilities                                                                                           |                            |         | 3,570 |              |   |         | 3,365 | 
|                                                                        | Long-term debt due within one year                                                                                  |                            |         | 168   |              |   |         | 1,446 | 
|                                                                        | Loan payable                                                                                                        |                            |         | 1,300 |              |   |         |      | 
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total current liabilities                                               |                                                                                                                     |                            | 7,261   |       |              |   | 7,229   |      
|Long-term debt                                                          |                                                                                                                     |                            | 645     |       |              |   | 639     |      
|Deferred income taxes  net                                             |                                                                                                                     |                            | 109     |       |              |   | 104     |      
|Other liabilities                                                       |                                                                                                                     |                            | 3,862   |       |              |   | 4,037   |      
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total liabilities                                                       |                                                                                                                     |                            | 11,877  |       |              |   | 12,009  |      
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Minority interests in subsidiary companies                              |                                                                                                                     |                            | 217     |       |              |   | 244     |      
|Guarantees, commitments and contingencies (notes 11, 12
    and 17)     |                                                                                                                     |                            |         |       |              |   |         |      
|                                                                       
|SHAREHOLDERS EQUITY                                                   
|Preferred shares, without par value  Authorized
    shares: unlimited; |                                                                                                                     |                            |         |       |              |   |         |      
|                                                                        | Issued and outstanding shares: 30,000,000 as of March 31,
    2006 and 30,000,000 as of December 31, 2005           |                            |         | 536   |              |   |         | 536   | 
|Common shares, without par value  Authorized shares:
    unlimited;    |                                                                                                                     |                            |         |       |              |   |         |      
|                                                                        | Issued and outstanding shares: 1,460,978,638 as of
    March 31, 2006 and 1,460,978,638 as of December 31,
    2005 |                            |         | 1,211 |              |   |         | 1,211 | 
|Additional paid-in capital                                              |                                                                                                                     |                            | 22,211  |       |              |   | 22,193  |      
|Accumulated deficit                                                     |                                                                                                                     |                            | (17,509 | )     |              |   | (17,397 | )    
|Accumulated other comprehensive loss                                    |                                                                                                                     |                            | (850    | )     |              |   | (887    | )    
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total shareholders equity                                              |                                                                                                                     |                            | 5,599   |       |              |   | 5,656   |      
|                                                                        |                                                                                                                     |                            |         |       |              |  
|Total liabilities and shareholders equity                              |                                                                                                                     | $                          | 17,693  |       |              | $ | 17,909  |      
|                                                                        |                                                                                                                     |                            |         |       |              |  

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


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NORTEL NETWORKS LIMITED


Condensed Consolidated Statements of Cash Flows
(unaudited)


|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ------------ | ---- | - | ----- | ---- | ---- | -
|                                                                            |                                                                                                                                                                                                   | Three months ended March 31,                                                |      
|                                                                            |                                                                                                                                                                                                   |                                                                             |      
|                                                                            |                                                                                                                                                                                                   | 2006                                                                        |       |              | 2005 |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |       | As restated* |     
|                                                                            |                                                                                                                                                                                                   | (Millions of U.S. dollars)                                                  |      
|Cash flows from (used in) operating activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |       |     
|                                                                            | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $     | (109         | )    |   | $     | (64  | )   
|                                                                            | 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                                               |       |              | 60   |   |       |      | 81   |  
|                                                                            |                                                                                                                                                                                                   | Equity in net (earnings) loss of associated companies                       |       |              | 2    |   |       |      | (1   | )
|                                                                            |                                                                                                                                                                                                   | Stock option compensation                                                   |       |              | 25   |   |       |      | 18   |  
|                                                                            |                                                                                                                                                                                                   | Deferred income taxes                                                       |       |              | 16   |   |       |      | 8    |  
|                                                                            |                                                                                                                                                                                                   | Other liabilities                                                           |       |              | 73   |   |       |      | 79   |  
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |       |              | (41  | ) |       |      | 27   |  
|                                                                            |                                                                                                                                                                                                   | Other  net                                                                 |       |              | 87   |   |       |      | (120 | )
|                                                                            |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |       |              | (248 | ) |       |      | (253 | )
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|                                                                            | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |       | (135         | )    |   |       | (225 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Cash flows from (used in) investing activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |       |     
|                                                                            | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |       | (99          | )    |   |       | (54  | )   
|                                                                            | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |       | 87           |      |   |       |     |     
|                                                                            | Restricted cash and cash equivalents                                                                                                                                                              |                                                                             |       | 3            |      |   |       | 1    |     
|                                                                            | Acquisitions of investments and businesses  net of
    cash acquired                                                                                                                             |                                                                             |       | (121         | )    |   |       | (2   | )   
|                                                                            | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |       | 27           |      |   |       | 83   |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|                                                                            | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |       | (103         | )    |   |       | 28   |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Cash flows from (used in) financing activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |       |     
|                                                                            | Dividends paid                                                                                                                                                                                    |                                                                             |       | (18          | )    |   |       | (14  | )   
|                                                                            | Increase in notes payable                                                                                                                                                                         |                                                                             |       | 4            |      |   |       | 20   |     
|                                                                            | Decrease in notes payable                                                                                                                                                                         |                                                                             |       | (3           | )    |   |       | (26  | )   
|                                                                            | Borrowings in loan payable                                                                                                                                                                        |                                                                             |       | 1,300        |      |   |       |     |     
|                                                                            | Repayment of long-term debt                                                                                                                                                                       |                                                                             |       | (1,275       | )    |   |       |     |     
|                                                                            | Decrease in capital leases payable                                                                                                                                                                |                                                                             |       | (5           | )    |   |       | (1   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|                                                                            | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |       | 3            |      |   |       | (21  | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                                                                                                                                                                   |                                                                             | 14    |              |      |   | (35   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Net cash from (used in) continuing operations                               |                                                                                                                                                                                                   |                                                                             | (221  | )            |      |   | (253  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             |      |              |      |   | 36    |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                                                                                                   |                                                                             | (221  | )            |      |   | (217  | )   
|Cash and cash equivalents at beginning of period                            |                                                                                                                                                                                                   |                                                                             | 2,876 |              |      |   | 3,606 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  
|Cash and cash equivalents at end of period                                  |                                                                                                                                                                                                   | $                                                                           | 2,655 |              |      | $ | 3,389 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |  






|  |           
|- | ----------
|* | See note 3

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


3



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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)


(millions of U.S. dollars, unless otherwise stated)


1.     Significant accounting
policies




| |                      
| | ---------------------
| | Basis of presentation









| |                    
| | -------------------
| | Comparative figures





| |                                 
| | --------------------------------
| | Recent accounting pronouncements



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In February 2006, the United States Financial Accounting
    Standards Board (FASB), issued Statement of
    Financial Accounting Standard (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 hybrid financial
    instrument that contains an embedded derivative that otherwise
    would require bifurcation under SFAS No. 133,
    Accounting for Derivative Instruments and Hedging
    Activities (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 the
    prohibition on a qualifying special-purpose entity from holding
    a derivative financial instrument that pertains to a beneficial
    interest other than another derivative financial instrument.
    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.

4



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | 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 loan
    servicing rights and the financial instruments used to hedge
    risks associated with those rights. SFAS 156 requires that
    servicing rights be valued initially at fair value, and
    subsequently accounted for at either fair value, or amortized
    over the economic life of the related lease. 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.

2.     Accounting changes




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





| |                    
| | -------------------
| | (b) Inventory Costs





| |                        
| | -----------------------
| | (c) Share-Based Payment





| |                                             
| | --------------------------------------------
| | (d) Accounting Changes and Error Corrections



5



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


3.     Restatement of previously
issued financial statements




10-K








| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain complex arrangements with multiple deliverables were
    previously fully accounted for under the percentage of
    completion method of SOP 81-1, but elements outside of the
    scope of SOP 81-1 should have been examined for separation
    under the guidance in EITF Issue No. 00-21 Revenue
    Arrangements with Multiple Deliverables (EITF
    00-21); and
| |  | Certain complex arrangements accounted for under the
    percentage-of-completion method did not meet the criteria for
    this treatment in SOP 81-1 and should instead have been
    accounted for using completed contract accounting under
    SOP 81-1.                                                                                                                      





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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




Condensed Consolidated Statement of Operations (unaudited)
for the three months ended March 31, 2005


|                                                                                                                                                     |                |            |       |     |             |   |      |             |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ---------- | ----- | --- | ----------- | - | ---- | ----------- |  | - | ----- | --- | -
|                                                                                                                                                     |                | As         |       |     |             |   |     
|                                                                                                                                                     |                | previously |       |     |             |   |     
|                                                                                                                                                     |                | reported   |       |     | Adjustments |   |      | As restated | 
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Revenues                                                                                                                                             |                | $          | 2,536 |     |             | $ | (147 | )           |  | $ | 2,389 |    
|Cost of revenues                                                                                                                                     |                |            | 1,477 |     |             |   | (102 | )           |  |   | 1,375 |    
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Gross profit                                                                                                                                         |                |            | 1,059 |     |             |   | (45  | )           |  |   | 1,014 |    
|Selling, general and administrative expense                                                                                                          |                |            | 570   |     |             |   | 4    |             |  |   | 574   |    
|Research and development expense                                                                                                                     |                |            | 471   |     |             |   |     |             |  |   | 471   |    
|Amortization of intangibles                                                                                                                          |                |            | 2     |     |             |   |     |             |  |   | 2     |    
|Special charges                                                                                                                                      |                |            | 21    |     |             |   | (7   | )           |  |   | 14    |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |            | 1     |     |             |   | 21   |             |  |   | 22    |    
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Operating earnings (loss)                                                                                                                            |                |            | (6    | )   |             |   | (63  | )           |  |   | (69   | )  
|Other income  net                                                                                                                                   |                |            | 47    |     |             |   | 8    |             |  |   | 55    |    
|Interest expense                                                                                                                                     |                |            |       |     |             |   |      |             |  |   |       |    
|                                                                                                                                                     | Long-term debt |            |       | (29 | )           |   |      |            |  |   |       | (29 | )
|                                                                                                                                                     | Other          |            |       | (2  | )           |   |      |            |  |   |       | (2  | )
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |            | 10    |     |             |   | (55  | )           |  |   | (45   | )  
|Income tax benefit (expense)                                                                                                                         |                |            | (15   | )   |             |   |     |             |  |   | (15   | )  
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|                                                                                                                                                     |                |            | (5    | )   |             |   | (55  | )           |  |   | (60   | )  
|Minority interests  net of tax                                                                                                                      |                |            | (5    | )   |             |   |     |             |  |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |            | 1     |     |             |   |     |             |  |   | 1     |    
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Net earnings (loss) from continuing operations                                                                                                       |                |            | (9    | )   |             |   | (55  | )           |  |   | (64   | )  
|Net earnings from discontinued operations  net of tax                                                                                               |                |            | 2     |     |             |   |     |             |  |   | 2     |    
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Net earnings (loss)                                                                                                                                  |                |            | (7    | )   |             |   | (55  | )           |  |   | (62   | )  
|Dividends on preferred shares                                                                                                                        |                |            | 9     |     |             |   |     |             |  |   | 9     |    
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 
|Net earnings (loss) applicable to common shares                                                                                                      |                | $          | (16   | )   |             | $ | (55  | )           |  | $ | (71   | )  
|                                                                                                                                                     |                |            |       |     |             |   |      |             | 

7



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


Adjustments




|                                                                          |  |                    |       |  
|------------------------------------------------------------------------- |  | ------------------ | ----- | -
|                                                                          |  | Three months ended |      
|                                                                          |  | March 31,          |      
|                                                                          |  | 2005               |      
|                                                                          |  |                    |      
|Revenues  as previously reported                                         |  | $                  | 2,536 |  
|Adjustments:                                                              |  |                    |       |  
|Application of SOP 81-1                                                   |  |                    | 82    |  
|Interaction between multiple revenue recognition accounting
    standards |  |                    | (183  | )
|Application of SAB 104 and SOP 97-2                                       |  |                    | (53   | )
|Other revenue recognition adjustments                                     |  |                    | 7     |  
|                                                                          |  |                    |      
|Revenues  as restated                                                    |  | $                  | 2,389 |  
|                                                                          |  |                    |      
|Net earnings (loss)  as previously reported                              |  | $                  | (7    | )
|Adjustments:                                                              |  |                    |       |  
|Application of SOP 81-1                                                   |  |                    | 9     |  
|Interaction between multiple revenue recognition accounting
    standards |  |                    | (26   | )
|Application of SAB 104 and SOP 97-2                                       |  |                    | (26   | )
|Other revenue recognition adjustments                                     |  |                    | (3    | )
|(Gain) loss on sale of businesses                                         |  |                    | (21   | )
|Foreign
    exchange(i)                                                   |  |                    | 2     |  
|Other                                                                     |  |                    | 10    |  
|                                                                          |  |                    |      
|Net earnings (loss)  as restated                                         |  | $                  | (62   | )
|                                                                          |  |                    |      






|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Includes the foreign exchange gains and losses resulting from
    the Third Restatement adjustments, and the correction of certain
    foreign exchange errors.

Revenue Recognition Adjustments:




| |                        
| | -----------------------
| | Application of SOP 81-1





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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                                                                          
| | -------------------------------------------------------------------------
| | Interaction between multiple revenue recognition
    accounting standards

00-21.




00-21 00-21


97-2




| |                                    
| | -----------------------------------
| | Application of SAB 104 and SOP 97-2

97-2






9



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)






| |                                      
| | -------------------------------------
| | Other revenue recognition adjustments



Other adjustments:








4.     Consolidated financial
statement details






| |                                      
| | -------------------------------------
| | Consolidated statements of operations



| |                    
| | -------------------
| | Other income  net:

|                                                 |  |              |    |   |      |   |    |  
|------------------------------------------------ |  | ------------ | -- | - | ---- | - | -- | -
|                                                 |  | Three months |   
|                                                 |  | ended        |   
|                                                 |  | March 31,    |   
|                                                 |  |              |   
|                                                 |  | 2006         |    |   | 2005 |  
|                                                 |  |              |    |   |      |  
|Interest income                                  |  | $            | 15 |   |      | $ | 14 |  
|Gain (loss) on sale or write down of investments |  |              | (1 | ) |      |   | (5 | )
|Currency exchange gains (losses)                 |  |              | 9  |   |      |   | 29 |  
|Other  net                                      |  |              | 47 |   |      |   | 17 |  
|                                                 |  |              |    |   |      |  
|Other income (expense)  net                     |  | $            | 70 |   |      | $ | 55 |  
|                                                 |  |              |    |   |      |  



10



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                            
| | ---------------------------
| | Consolidated balance sheets



| |                           
| | --------------------------
| | Accounts receivable  net:

|                                      |  |           |       |   |              |   |       |  
|------------------------------------- |  | --------- | ----- | - | ------------ | - | ----- | -
|                                      |  | March 31, |       |   | December 31, |  
|                                      |  | 2006      |       |   | 2005         |  
|                                      |  |           |       |   |              |  
|Trade receivables                     |  | $         | 2,354 |   |              | $ | 2,570 |  
|Notes receivable                      |  |           | 69    |   |              |   | 122   |  
|Contracts in process                  |  |           | 600   |   |              |   | 611   |  
|                                      |  |           |       |   |              |  
|                                      |  |           | 3,023 |   |              |   | 3,303 |  
|Less: provision for doubtful accounts |  |           | (93   | ) |              |   | (137  | )
|                                      |  |           |       |   |              |  
|Accounts receivable  net             |  | $         | 2,930 |   |              | $ | 3,166 |  
|                                      |  |           |       |   |              |  



| |                   
| | ------------------
| | Inventories  net:

|                                      |  |           |        |   |              |   |        |  
|------------------------------------- |  | --------- | ------ | - | ------------ | - | ------ | -
|                                      |  | March 31, |        |   | December 31, |  
|                                      |  | 2006      |        |   | 2005         |  
|                                      |  |           |        |   |              |  
|Raw materials                         |  | $         | 781    |   |              | $ | 777    |  
|Work in process                       |  |           | 56     |   |              |   | 50     |  
|Finished goods                        |  |           | 856    |   |              |   | 819    |  
|Deferred costs                        |  |           | 2,110  |   |              |   | 2,014  |  
|                                      |  |           |        |   |              |  
|                                      |  |           | 3,803  |   |              |   | 3,660  |  
|Less: provision for inventory         |  |           | (1,033 | ) |              |   | (1,039 | )
|                                      |  |           |        |   |              |  
|Inventories  net                     |  |           | 2,770  |   |              |   | 2,621  |  
|Less: long-term deferred
    costs(a) |  |           | (786   | ) |              |   | (817   | )
|                                      |  |           |        |   |              |  
|Current inventories  net             |  | $         | 1,984  |   |              | $ | 1,804  |  
|                                      |  |           |        |   |              |  






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



| |                      
| | ---------------------
| | Other current assets:

|                         |  |           |     |  |              |   |     | 
|------------------------ |  | --------- | --- |  | ------------ | - | --- | 
|                         |  | March 31, |     |  | December 31, |  
|                         |  | 2006      |     |  | 2005         |  
|                         |  |           |     |  |              |  
|Prepaid expenses         |  | $         | 222 |  |              | $ | 198 | 
|Income taxes recoverable |  |           | 73  |  |              |   | 68  | 
|Other                    |  |           | 300 |  |              |   | 301 | 
|                         |  |           |     |  |              |  
|Other current assets     |  | $         | 595 |  |              | $ | 567 | 
|                         |  |           |     |  |              |  

11



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                           
| | --------------------------
| | Plant and equipment  net:

|                                 |                         |           |        |        |              |   |        |        |  
|-------------------------------- | ----------------------- | --------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                 |                         | March 31, |        |        | December 31, |  
|                                 |                         | 2006      |        |        | 2005         |  
|                                 |                         |           |        |        |              |  
|Cost:                            |                         |           |        |        |              |   |        |       
|                                 | Land                    |           | $      | 40     |              |   | $      | 45     |  
|                                 | Buildings               |           |        | 1,171  |              |   |        | 1,265  |  
|                                 | Machinery and equipment |           |        | 2,253  |              |   |        | 2,180  |  
|                                 | Capital lease assets    |           |        | 212    |              |   |        | 213    |  
|                                 | Sale lease-back assets  |           |        | 88     |              |   |        | 80     |  
|                                 |                         |           |        |        |              |  
|                                 |                         |           | 3,764  |        |              |   | 3,783  |       
|                                 |                         |           |        |        |              |  
|Less accumulated depreciation:   |                         |           |        |        |              |   |        |       
|                                 | Buildings               |           |        | (428   | )            |   |        | (455   | )
|                                 | Machinery and equipment |           |        | (1,710 | )            |   |        | (1,674 | )
|                                 | Capital lease assets    |           |        | (81    | )            |   |        | (78    | )
|                                 | Sale lease-back assets  |           |        | (17    | )            |   |        | (17    | )
|                                 |                         |           |        |        |              |  
|                                 |                         |           | (2,236 | )      |              |   | (2,224 | )     
|                                 |                         |           |        |        |              |  
|Plant and equipment 
    net(a) |                         | $         | 1,528  |        |              | $ | 1,559  |       
|                                 |                         |           |        |        |              |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included assets held for sale with a carrying value of $69 and
    $136 as of March 31, 2006 and December 31, 2005,
    respectively, related to owned facilities that were being
    actively marketed. These assets were written down in previous
    periods to their estimated fair values less costs to sell. The
    write downs were included in special charges. Nortel expects to
    dispose of all of these facilities during 2006.



| |          
| | ---------
| | Goodwill:



|                                  |                  |            |       |     |              |   |    |       |  |   |       |    |   |   |       |     |  
|--------------------------------- | ---------------- | ---------- | ----- | --- | ------------ | - | -- | ----- |  | - | ----- | -- | - | - | ----- | --- | -
|                                  |                  | Enterprise |       |     |              |   |    |       | 
|                                  |                  | Solutions  |       |     | Mobility and |   |    |       |  |  
|                                  |                  | and        |       |     | Converged    |   |    |       |  |  
|                                  |                  | Packet     |       |     | Core         |   |    |       |  |  
|                                  |                  | Networks   |       |     | Networks     |   |    | Other |  |   | Total |   
|                                  |                  |            |       |     |              |   |    |       |  |   |       |   
|Balance  as of December 31, 2005 |                  | $          | 2,048 |     |              | $ | 86 |       |  | $ | 278   |    |   | $ | 2,412 |    
|Change:                           |                  |            |       |     |              |   |    |       |  |   |       |    |   |   |       |    
|                                  | Additions(a)     |            |       | 101 |              |   |    |      |  |   |       |   |   |   |       | 101 |  
|                                  | Disposal         |            |       |    |              |   |    |      |  |   |       |   |   |   |       |    |  
|                                  | Foreign exchange |            |       | 2   |              |   |    | 2     |  |   |       |   |   |   |       | 4   |  
|                                  | Other(b)         |            |       |    |              |   |    |      |  |   |       | (6 | ) |   |       | (6  | )
|                                  |                  |            |       |     |              |   |    |       |  |   |       |   
|Balance  as of March 31, 2006    |                  | $          | 2,151 |     |              | $ | 88 |       |  | $ | 272   |    |   | $ | 2,511 |    
|                                  |                  |            |       |     |              |   |    |       |  |   |       |   






|    |                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The additions of $101 relate to the estimated goodwill acquired
    as a result of the Tasman Networks, Inc. (Tasman
    Networks) acquisition, during the three months ended
    March 31, 2006. See note 9 for additional information.
|   
|(b) | Relates to a $6 reduction of goodwill recorded as part of the
    acquisition of Nortel Government Solutions Incorporated
    (formerly PEC Solutions Inc.) (NGS), as a result of
    a tax adjustment.                                 



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                         
| | ------------------------
| | Intangible assets  net:

|                               |  |           |     |  |              |   |     | 
|------------------------------ |  | --------- | --- |  | ------------ | - | --- | 
|                               |  | March 31, |     |  | December 31, |  
|                               |  | 2006      |     |  | 2005         |  
|                               |  |           |     |  |              |  
|Other intangible
    assets(a) |  | $         | 129 |  |              | $ | 135 | 
|Pension intangible assets      |  |           | 37  |  |              |   | 37  | 
|                               |  |           |     |  |              |  
|Intangible assets  net        |  | $         | 166 |  |              | $ | 172 | 
|                               |  |           |     |  |              |  






|    |                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other intangible assets are being amortized over a weighted
    average period of approximately nine years ending in 2014, based
    on their expected pattern of benefit to future periods using
    estimates of undiscounted cash flows. The amortization expense
    is partially denominated in a foreign currency and may fluctuate
    due to changes in foreign exchange rates.



| |                           
| | --------------------------
| | Other accrued liabilities:

|                                                                           |  |           |       |  |              |   |       | 
|-------------------------------------------------------------------------- |  | --------- | ----- |  | ------------ | - | ----- | 
|                                                                           |  | March 31, |       |  | December 31, |  
|                                                                           |  | 2006      |       |  | 2005         |  
|                                                                           |  |           |       |  |              |  
|Outsourcing and selling, general and administrative related
    provisions |  | $         | 247   |  |              | $ | 255   | 
|Customer deposits                                                          |  |           | 64    |  |              |   | 38    | 
|Product related provisions                                                 |  |           | 56    |  |              |   | 42    | 
|Warranty provisions (note 11)                                              |  |           | 198   |  |              |   | 206   | 
|Deferred revenue                                                           |  |           | 1,508 |  |              |   | 1,289 | 
|Miscellaneous taxes                                                        |  |           | 56    |  |              |   | 65    | 
|Income taxes payable                                                       |  |           | 65    |  |              |   | 81    | 
|Interest payable                                                           |  |           | 19    |  |              |   | 40    | 
|Advance billings in excess of revenues recognized to date on
    contracts |  |           | 1,219 |  |              |   | 1,194 | 
|Other                                                                      |  |           | 138   |  |              |   | 155   | 
|                                                                           |  |           |       |  |              |  
|Other accrued liabilities                                                  |  | $         | 3,570 |  |              | $ | 3,365 | 
|                                                                           |  |           |       |  |              |  



| |                   
| | ------------------
| | Other liabilities:

|                                                                 |  |           |       |  |              |   |       | 
|---------------------------------------------------------------- |  | --------- | ----- |  | ------------ | - | ----- | 
|                                                                 |  | March 31, |       |  | December 31, |  
|                                                                 |  | 2006      |       |  | 2005         |  
|                                                                 |  |           |       |  |              |  
|Pension, post-employment and post-retirement benefit liabilities |  | $         | 2,439 |  |              | $ | 2,459 | 
|Restructuring liabilities (note 6)                               |  |           | 184   |  |              |   | 203   | 
|Deferred revenue                                                 |  |           | 970   |  |              |   | 1,073 | 
|Other long-term provisions                                       |  |           | 269   |  |              |   | 302   | 
|                                                                 |  |           |       |  |              |  
|Other liabilities                                                |  | $         | 3,862 |  |              | $ | 4,037 | 
|                                                                 |  |           |       |  |              |  

13



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                                      
| | -------------------------------------
| | Consolidated statements of cash flows



| |                                            
| | -------------------------------------------
| | Change in operating assets and liabilities:

|                                                      |  |                 |      |   |      |   |      |  
|----------------------------------------------------- |  | --------------- | ---- | - | ---- | - | ---- | -
|                                                      |  | Three months    |     
|                                                      |  | ended March 31, |     
|                                                      |  |                 |     
|                                                      |  | 2006            |      |   | 2005 |  
|                                                      |  |                 |      |   |      |  
|Accounts receivable  net                             |  | $               | 238  |   |      | $ | (141 | )
|Inventories  net                                     |  |                 | (128 | ) |      |   | (43  | )
|Income taxes                                          |  |                 | (26  | ) |      |   | (18  | )
|Restructuring liabilities                             |  |                 | (30  | ) |      |   | (119 | )
|Accounts payable, payroll and contractual liabilities |  |                 | (244 | ) |      |   | (99  | )
|Other operating assets and liabilities                |  |                 | (58  | ) |      |   | 167  |  
|                                                      |  |                 |      |   |      |  
|Change in operating assets and liabilities            |  | $               | (248 | ) |      | $ | (253 | )
|                                                      |  |                 |      |   |      |  



| |                                     
| | ------------------------------------
| | Interest and taxes paid (recovered):

|                                  |  |                 |    |  |      |   |    | 
|--------------------------------- |  | --------------- | -- |  | ---- | - | -- | 
|                                  |  | Three months    |   
|                                  |  | ended March 31, |   
|                                  |  |                 |   
|                                  |  | 2006            |    |  | 2005 |  
|                                  |  |                 |    |  |      |  
|Cash interest paid                |  | $               | 66 |  |      | $ | 45 | 
|Cash taxes paid (recovered)  net |  | $               | 26 |  |      | $ | 14 | 

5.     Segment information




| |                    
| | -------------------
| | General description







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobility and Converged Core Networks 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 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. In addition,
    Nortels carrier circuit and packet voice solutions provide
    a complete range of voice solutions to its service provider
    customers, 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.
| |  | Enterprise Solutions and Packet Networks provides
    (i) enterprise circuit and packet voice solutions,
    (ii) data networking and security solutions and
    (iii) optical networking solutions. Nortels solutions
    for enterprises are used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

14



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to build new networks and transform their existing
    communications network into a more cost effective, packet-based
    network supporting data, voice and multimedia communications.
    Nortels optical networking and carrier data networking and
    security solutions provide voice, data and multimedia
    communication solutions to its service provider customers that
    operate wireline networks.







| |         
| | --------
| | Segments



|                                               |  |           |       |   |           |   |       |  
|---------------------------------------------- |  | --------- | ----- | - | --------- | - | ----- | -
|                                               |  | March 31, |       |   | March 31, |  
|                                               |  | 2006      |       |   | 2005      |  
|                                               |  |           |       |   |           |  
|Revenues                                       |  |           |       |   |           |   |       |  
|Mobility and Converged Core Networks           |  | $         | 1,426 |   |           | $ | 1,486 |  
|Enterprise Solutions and Packet Networks       |  |           | 871   |   |           |   | 878   |  
|                                               |  |           |       |   |           |  
|Total reportable segments                      |  |           | 2,297 |   |           |   | 2,364 |  
|Other                                          |  |           | 85    |   |           |   | 25    |  
|                                               |  |           |       |   |           |  
|Total revenues                                 |  | $         | 2,382 |   |           | $ | 2,389 |  
|                                               |  |           |       |   |           |  
|Management EBT                                 |  |           |       |   |           |   |       |  
|Mobility and Converged Core Networks           |  | $         | 118   |   |           | $ | 190   |  
|Enterprise Solutions and Packet Networks       |  |           | (43   | ) |           |   | (24   | )
|                                               |  |           |       |   |           |  
|Total reportable segments                      |  |           | 75    |   |           |   | 166   |  
|Other                                          |  |           | (193  | ) |           |   | (177  | )
|                                               |  |           |       |   |           |  
|Total Management EBT                           |  |           | (118  | ) |           |   | (11   | )
|                                               |  |           |       |   |           |  
|Amortization of intangibles                    |  |           | (5    | ) |           |   | (2    | )
|Special charges                                |  |           | (5    | ) |           |   | (14   | )
|Gain (loss) on sale of businesses and assets   |  |           | 42    |   |           |   | (22   | )
|Income tax benefit (expense)                   |  |           | (23   | ) |           |   | (15   | )
|                                               |  |           |       |   |           |  
|Net earnings (loss) from continuing operations |  | $         | (109  | ) |           | $ | (64   | )
|                                               |  |           |       |   |           |  



15



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


6.     Special charges










|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |    |  
|--------------------------------------------------- | -------------------------------- | ----------------------------------------- | -- | ---------- | --------- | - | --------- | ----------- | --- | --------------- | ------------ | --------------- | ---- | - | --- |  | --- | - | - | - | -- | -
|                                                    |                                  |                                           |    |            |           |   |           |             |     | Special Charges |             
|                                                    |                                  |                                           |    | Contract   |           |   |           |             |     |                 |              |                
|                                                    |                                  |                                           |    | settlement |           |   | Plant and |             |     |                 | Three months |                
|                                                    |                                  | Workforce                                 |    |            | and lease |   |           | equipment   |     |                 |              | ended March 31, |     
|                                                    |                                  | reduction                                 |    |            | costs     |   |           | write downs |     | Total           |              |                 | 2006 |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |  
|2004 Restructuring Plan                             |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |  
|Provision balance as of December 31,
    2005(a)    |                                  | $                                         | 21 |            |           | $ | 61        |             |     | $               |             |                 |      | $ | 82  |  |     |   |   |  
|                                                    | Revisions to prior accruals:     |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    |                                  | For the three months ended March 31, 2006 |    |            | 2         |   |           |             | 4   |                 |              |                 |     |   |     |  | 6   |   |   | $ | 6  |  
|                                                    | Cumulative provision (drawdowns) |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    | adjustments in 2006:             |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    |                                  | Cash drawdowns                            |    |            | (13       | ) |           |             | (5  | )               |              |                 |     |   |     |  | (18 | ) |   |   |    |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    
|Provision balance as of March 31, 2006              |                                  | $                                         | 10 |            |           | $ | 60        |             |     | $               |             |                 |      | $ | 70  |  |     |   |   |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    
|2001 Restructuring Plan                             |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |  
|Provision balance as of December 31,
    2005(a)    |                                  | $                                         | 3  |            |           | $ | 213       |             |     | $               |             |                 |      | $ | 216 |  |     |   |   |  
|                                                    | Revisions to prior accruals:     |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    |                                  | For the three months ended March 31, 2006 |    |            | 1         |   |           |             | (2  | )               |              |                 |     |   |     |  | (1  | ) |   |   | (1 | )
|                                                    | Cumulative provision (drawdowns) |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    | adjustments in 2006:             |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     |   |   |   |   
|                                                    |                                  | Cash drawdowns                            |    |            | (1        | ) |           |             | (16 | )               |              |                 |     |   |     |  | (17 | ) |   |   |    |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    
|Provision balance as of March 31, 2006              |                                  | $                                         | 3  |            |           | $ | 195       |             |     | $               |             |                 |      | $ | 198 |  |     |   |   |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    
|Total provision balance as of March 31,
    2006(a) |                                  | $                                         | 13 |            |           | $ | 255       |             |     | $               |             |                 |      | $ | 268 |  |     |   |   |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    
|Total special charges                               |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |     |  |     | $ | 5 |  
|                                                    |                                  |                                           |    |            |           |   |           |             |     |                 |              |                 |      |   |    






|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of March 31, 2006 and December 31, 2005, the
    short-term provision balance was $84 and $95, respectively, and
    the long-term provision balance was $184 and $203, respectively.

16



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)






| |                        
| | -----------------------
| | 2004 Restructuring Plan



| |                                  
| | ---------------------------------
| | Three months ended March 31, 2006









| |                                  
| | ---------------------------------
| | Three months ended March 31, 2005







17



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                                     
| | ------------------------------------
| | 2004 Restructuring Plan  by Segment



|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |   |    | 
|------------------------------------------------------------------- | ---------------------------------------- | ----------------------------------------- | -- | ---------- | --------- | - | --------- | ----------- | - | - | ----- | - | - | - | -- | - | -- | 
|                                                                    |                                          |                                           |    | Contract   |           |   |           |             |  
|                                                                    |                                          |                                           |    | settlement |           |   | Plant and |             |   |  
|                                                                    |                                          | Workforce                                 |    |            | and lease |   |           | equipment   |   |   |      
|                                                                    |                                          | reduction                                 |    |            | costs     |   |           | write downs |   |   | Total |  
|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |  
|2004 Restructuring Plan                                             |                                          |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |  
|                                                                    | Mobility and Converged Core Networks     |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |   |   
|                                                                    |                                          | For the three months ended March 31, 2006 |    | $          | 1         |   |           | $           | 2 |   |       | $ |  |   |    | $ | 3  | 
|                                                                    | Enterprise Solutions and Packet Networks |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |   |   
|                                                                    |                                          | For the three months ended March 31, 2006 |    |            | 1         |   |           |             | 2 |   |       |   |  |   |    |   | 3  | 
|                                                                    | Other                                    |                                           |    |           |           |   |           |            |   |   |       |  |   |   |    |  |   
|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |  
|Total special charges for the three months ended March 31,
    2006 |                                          | $                                         | 2  |            |           | $ | 4         |             |   | $ |      |   |   | $ | 6  |  
|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |  
|                                                                    | Mobility and Converged Core Networks     |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |   |   
|                                                                    |                                          | For the three months ended March 31, 2005 |    | $          | 11        |   |           | $           | 1 |   |       | $ | 1 |   |    | $ | 13 | 
|                                                                    | Enterprise Solutions and Packet Networks |                                           |    |            |           |   |           |             |   |   |       |   |   |   |    |   |   
|                                                                    |                                          | For the three months ended March 31, 2005 |    |            | 5         |   |           |             | 7 |   |       |   |  |   |    |   | 12 | 
|                                                                    | Other                                    |                                           |    |           |           |   |           |            |   |   |       |  |   |   |    |  |   
|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |  
|Total special charges for the three months ended March 31,
    2005 |                                          | $                                         | 16 |            |           | $ | 8         |             |   | $ | 1     |   |   | $ | 25 |  
|                                                                    |                                          |                                           |    |            |           |   |           |             |   |   |       |  



| |                        
| | -----------------------
| | 2001 Restructuring Plan



| |                                  
| | ---------------------------------
| | Three months ended March 31, 2006









| |                                  
| | ---------------------------------
| | Three months ended March 31, 2005









18



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


|                   |  |               |    |                  |  |                  |   |                    |  |              |    |   |  |   |   |  |  |   |    | 
|------------------ |  | ------------- | -- | ---------------- |  | ---------------- | - | ------------------ |  | ------------ | -- | - |  | - | - |  |  | - | -- | 
|                   |  | Accrued       |    | Costs during the |  | Payments during  |   | Adjustments during |  | Accrued     
|                   |  | balance as of |    | three months     |  | the three months |   | the three months   |  | balance as  
|                   |  | December 31,  |    | ended March 31,  |  | ended March 31,  |   | ended March 31,    |  | of March 31,
|                   |  | 2005          |    | 2006             |  | 2006             |   | 2006               |  | 2006        
|                   |  |               |    |                  |  |                  |   |                    |  |             
|Lease
    costs(a) |  | $             | 25 |                  |  | $                |  |                    |  | $            | (1 | ) |  | $ | 4 |  |  | $ | 28 | 
|                   |  |               |    |                  |  |                  |   |                    |  |              |    |   |  |   |   |  |  |   |    | 






|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Total estimated costs, net of estimated sublease income,
    associated with these accruals are $69, of which $25 was drawn
    down by cash payments of $22 and non-cash adjustments of $3
    prior to January 1, 2006.



| |                                     
| | ------------------------------------
| | 2001 Restructuring Plan  by Segment



|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |    |   |   |     |     |  
|------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | --------- | -- | ---------- | --------- | - | --------- | ----------- | - | - | ----- | -- | - | - | --- | --- | -
|                                                                    |                                                                                        |           |    | Contract   |           |   |           |             |  
|                                                                    |                                                                                        |           |    | settlement |           |   | Plant and |             |   |  
|                                                                    |                                                                                        | Workforce |    |            | and lease |   |           | equipment   |   |   |      
|                                                                    |                                                                                        | reduction |    |            | costs     |   |           | write downs |   |   | Total |   
|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |   
|2001 Restructuring Plan                                             |                                                                                        |           |    |            |           |   |           |             |   |   |       |    |   |   |     |    
|                                                                    | Mobility and Converged Core Networks
    For the three months ended March 31, 2006     |           | $  | 1          |           |   | $         | (1          | ) |   | $     |   |   |   | $   |    |  
|                                                                    | Enterprise Solutions and Packet Networks
    For the three months ended March 31, 2006 |           |    |           |           |   |           | (1          | ) |   |       |   |   |   |     | (1  | )
|                                                                    | Other                                                                                  |           |    |           |           |   |           |            |   |   |       |   |   |   |     |    |  
|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |   
|Total special charges for the three months ended March 31,
    2006 |                                                                                        | $         | 1  |            |           | $ | (2        | )           |   | $ |      |    |   | $ | (1  | )  
|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |   
|                                                                    | Mobility and Converged Core Networks
    For the three months ended March 31, 2005     |           | $  | (1         | )         |   | $         |            |   |   | $     |   |   |   | $   | (1  | )
|                                                                    | Enterprise Solutions and Packet Networks
    For the three months ended March 31, 2005 |           |    | (2         | )         |   |           |            |   |   |       | (8 | ) |   |     | (10 | )
|                                                                    | Other                                                                                  |           |    |           |           |   |           |            |   |   |       |   |   |   |     |    |  
|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |   
|Total special charges for the three months ended March 31,
    2005 |                                                                                        | $         | (3 | )          |           | $ |          |             |   | $ | (8    | )  |   | $ | (11 | )  
|                                                                    |                                                                                        |           |    |            |           |   |           |             |   |   |       |   



7.     Income taxes










19



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)














8.     Employee benefit plans








20



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




|                    |                                                                 |                 |    |      |      |   |    |      |  
|------------------- | --------------------------------------------------------------- | --------------- | -- | ---- | ---- | - | -- | ---- | -
|                    |                                                                 | Three months    |   
|                    |                                                                 | ended March 31, |   
|                    |                                                                 |                 |   
|                    |                                                                 | 2006            |    |      | 2005 |  
|                    |                                                                 |                 |    |      |      |  
|Pension expense:    |                                                                 |                 |    |      |      |   |    |     
|                    | Service cost                                                    |                 | $  | 35   |      |   | $  | 35   |  
|                    | Interest cost                                                   |                 |    | 113  |      |   |    | 116  |  
|                    | Expected return on plan assets                                  |                 |    | (113 | )    |   |    | (109 | )
|                    | Amortization of prior service cost                              |                 |    | 1    |      |   |    | 1    |  
|                    | Amortization of net losses (gains)                              |                 |    | 31   |      |   |    | 23   |  
|                    | Curtailment, contractual and special termination losses (gains) |                 |    | 1    |      |   |    | 12   |  
|                    |                                                                 |                 |    |      |      |  
|Net pension expense |                                                                 | $               | 68 |      |      | $ | 78 |     
|                    |                                                                 |                 |    |      |      |  



|                                 |                                    |                 |    |    |      |   |    |    |  
|-------------------------------- | ---------------------------------- | --------------- | -- | -- | ---- | - | -- | -- | -
|                                 |                                    | Three months    |   
|                                 |                                    | ended March 31, |   
|                                 |                                    |                 |   
|                                 |                                    | 2006            |    |    | 2005 |  
|                                 |                                    |                 |    |    |      |  
|Post-retirement benefit cost:    |                                    |                 |    |    |      |   |    |   
|                                 | Service cost                       |                 | $  | 2  |      |   | $  | 2  |  
|                                 | Interest cost                      |                 |    | 11 |      |   |    | 10 |  
|                                 | Amortization of prior service cost |                 |    | (1 | )    |   |    | (1 | )
|                                 |                                    |                 |    |    |      |  
|Net post-retirement benefit cost |                                    | $               | 12 |    |      | $ | 11 |   
|                                 |                                    |                 |    |    |      |  



9.   Acquisitions, divestitures and
closures




| |             
| | ------------
| | Acquisitions



| |                     
| | --------------------
| | Tasman Networks Inc.







21



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |             
| | ------------
| | Divestitures



| |                         
| | ------------------------
| | Manufacturing operations







10.     Long-term debt, credit and
support facilities






| |                
| | ---------------
| | Credit facility



22



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)










| |                 
| | ----------------
| | Support facility







23



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)






11.     Guarantees






| |                                                              
| | -------------------------------------------------------------
| | (a)     Business sale and
    business combination agreements













| |                                                              
| | -------------------------------------------------------------
| | (b)     Intellectual property
    indemnification obligations





24



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                         
| | ------------------------
| | (c)     Lease agreements







| |                                        
| | ---------------------------------------
| | (d)     Third party debt
    agreements







| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | (e)     Indemnification of banks
    and agents under credit facilities and EDC Support
    Facility









25



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)








| |                                             
| | --------------------------------------------
| | (f)     Other indemnification
    agreements











| |                   
| | ------------------
| | Product warranties



|                                |  |   |     |  
|------------------------------- |  | - | --- | -
|Balance as of December 31, 2005 |  | $ | 206 |  
|Payments                        |  |   | (64 | )
|Warranties issued               |  |   | 56  |  
|                                |  |   |    
|Balance as of March 31, 2006    |  | $ | 198 |  
|                                |  |   |    

26



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


12. Commitments




| |                                         
| | ----------------------------------------
| | Bid, performance related and other bonds





|                                               |  |           |     |  |              |   |     | 
|---------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | 
|                                               |  | March 31, |     |  | December 31, |  
|                                               |  | 2006      |     |  | 2005         |  
|                                               |  |           |     |  |              |  
|Bid and performance related
    bonds(a)       |  | $         | 221 |  |              | $ | 222 | 
|Other
    bonds(b)                             |  |           | 42  |  |              |   | 44  | 
|                                               |  |           |     |  |              |  
|Total bid, performance related and other bonds |  | $         | 263 |  |              | $ | 266 | 
|                                               |  |           |     |  |              |  






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(a) | Net of restricted cash and cash equivalent amounts of $36 and
    $36 as of March 31, 2006 and December 31, 2005,
    respectively.
|   
|(b) | Net of restricted cash and cash equivalent amounts of $28 and
    $31 as of March 31, 2006 and December 31, 2005,
    respectively.



| |                          
| | -------------------------
| | Venture capital financing



13.     Financing arrangements and
variable interest entities




| |                   
| | ------------------
| | Customer financing



27



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




|                                   |  |           |     |   |              |   |     |  
|---------------------------------- |  | --------- | --- | - | ------------ | - | --- | -
|                                   |  | March 31, |     |   | December 31, |  
|                                   |  | 2006      |     |   | 2005         |  
|                                   |  |           |     |   |              |  
|Drawn and outstanding  gross      |  | $         | 46  |   |              | $ | 51  |  
|Provisions for doubtful accounts   |  |           | (36 | ) |              |   | (35 | )
|                                   |  |           |     |   |              |  
|Drawn and outstanding 
    net(a) |  |           | 10  |   |              |   | 16  |  
|Undrawn commitments                |  |           | 50  |   |              |   | 50  |  
|                                   |  |           |     |   |              |  
|Total customer financing           |  | $         | 60  |   |              | $ | 66  |  
|                                   |  |           |     |   |              |  






|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included short-term and long-term amounts. Short-term and
    long-term amounts were included in accounts
    receivable  net and other assets, respectively, in
    the consolidated balance sheets.









| |                                            
| | -------------------------------------------
| | Consolidation of variable interest entities











28



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




14.     Comprehensive income
(loss)




|                                               |                                                                        |           |      |    |           |   |      |     |  
|---------------------------------------------- | ---------------------------------------------------------------------- | --------- | ---- | -- | --------- | - | ---- | --- | -
|                                               |                                                                        | March 31, |      |    | March 31, |  
|                                               |                                                                        | 2006      |      |    | 2005      |  
|                                               |                                                                        |           |      |    |           |  
|Net earnings (loss)                            |                                                                        | $         | (100 | )  |           | $ | (62  | )  
|Other comprehensive income (loss) adjustments: |                                                                        |           |      |    |           |   |      |    
|                                               | Change in foreign currency translation adjustment                      |           |      | 26 |           |   |      | (67 | )
|                                               | Unrealized gain (loss) on investments 
    net(a)                     |           |      | 18 |           |   |      | (7  | )
|                                               | Minimum pension liability adjustment  net                             |           |      | (1 | )         |   |      | 2   |  
|                                               | Unrealized derivative gain (loss) on cash flow
    hedges 
    net(b) |           |      | (6 | )         |   |      | (8  | )
|                                               |                                                                        |           |      |    |           |  
|Comprehensive income (loss)                    |                                                                        | $         | (63  | )  |           | $ | (142 | )  
|                                               |                                                                        |           |      |    |           |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Certain securities deemed available-for-sale by Nortel were
    measured at fair value. Unrealized holding gains (losses)
    related to these securities were excluded from net earnings
    (loss) and were included in accumulated other comprehensive
    income (loss) until realized. Unrealized gain (loss) on
    investments was net of tax of nil and nil for the three months
    ended March 31, 2006 and 2005, respectively.
|   
|(b) | During the three months ended March 31, 2006 and 2005, $5
    and $8 of net derivative gains (losses) were reclassified to
    other income (expense)  net, respectively. Nortel
    estimates that $2 of net derivative gains (losses) included in
    accumulated other comprehensive income (loss) will be
    reclassified into net earnings (loss) within the next
    12 months.                                                  

15. Stock-based compensation plans




| |              
| | -------------
| | Stock options

1 3




29



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)












| |                                                           
| | ----------------------------------------------------------
| | Restricted stock unit plan and Performance stock
    units





30



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




|                             |  |             |       |  |               |          |            |             |  |             |           |  |  |   |   | 
|---------------------------- |  | ----------- | ----- |  | ------------- | -------- | ---------- | ----------- |  | ----------- | --------- |  |  | - | - | 
|                             |  |             |       |  |               | Weighted |            |             | 
|                             |  | Outstanding |       |  | Weighted-     |          |            | Average     |  |             |          
|                             |  | RSU         |       |  | average       |          |            | remaining   |  |             | Aggregate
|                             |  | awards      |       |  | grant date    |          |            | contractual |  |             | Intrinsic
|                             |  | granted     |       |  | fair value(a) |          |            | life        |  |             | value    
|                             |  |             |       |  |               |          |            |             |  |             |          
|                             |  | (thousands) |       |  |               |          | (in years) |             |  | (thousands)
|Balance at December 31, 2005 |  |             | 6,897 |  |               | $        | 3.15       |             |  |             | 9.7       |  |  | $ |  | 
|Granted RSU awards           |  |             |      |  |               | $        |           |             |  |             |          |  |  | $ |  | 
|Awards exercised             |  |             |      |  |               | $        |           |             |  |             |          |  |  | $ |  | 
|Awards forfeited             |  |             |      |  |               | $        |           |             |  |             |          |  |  | $ |  | 
|Awards expired               |  |             |      |  |               | $        |           |             |  |             |          |  |  | $ |  | 
|                             |  |             |       |  |               |          |            |             |  |             |           | 
|Balance at March 31, 2006    |  |             | 6,897 |  |               | $        | 3.15       |             |  |             | 9.5       |  |  | $ |  | 
|                             |  |             |       |  |               |          |            |             |  |             |           | 






|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|(a) | RSU awards do not have an exercise price therefore grant date
    weighted average fair value has been calculated.



Stock-based
compensation










31



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)






| |                     
| | --------------------
| | Pro forma disclosure



|                                                                |                                             |           |     |     |  
|--------------------------------------------------------------- | ------------------------------------------- | --------- | --- | --- | -
|                                                                |                                             | March 31, |    
|                                                                |                                             | 2005      |    
|                                                                |                                             |           |    
|Net earnings (loss) applicable to common shares 
    reported  |                                             | $         | (71 | )  
|                                                                | Stock-based compensation  reported         |           |     | 17  |  
|                                                                | Stock-based compensation  pro
    forma(a) |           |     | (25 | )
|                                                                |                                             |           |    
|Net earnings (loss) applicable to common shares  pro
    forma |                                             | $         | (79 | )  
|                                                                |                                             |           |    






|    |                                                                        
|--- | -----------------------------------------------------------------------
|(a) | Stock-based compensation  pro forma expense was net
    of tax of nil.







|                                                     |                      |           |    |    |           |   |    |    |  
|---------------------------------------------------- | -------------------- | --------- | -- | -- | --------- | - | -- | -- | -
|                                                     |                      | March 31, |    |    | March 31, |  
|                                                     |                      | 2006      |    |    | 2005      |  
|                                                     |                      |           |    |    |           |  
|Stock-based compensation:                            |                      |           |    |    |           |   |    |   
|                                                     | Stock option expense |           | $  | 14 | (b)       |   | $  | 18 |  
|                                                     | RSU
    expense(a)   |           |    | 2  |           |   |    |   |  
|                                                     | DSU
    expense(a)   |           |    |   |           |   |    | (1 | )
|                                                     |                      |           |    |    |           |  
|Total stock-based compensation reported  net of tax |                      | $         | 16 |    |           | $ | 17 |   
|                                                     |                      |           |    |    |           |  






|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Compensation related to employer portion of RSUs and Director
    Stock Units (DSUs) was net of tax of nil in each
    period.                                                                                                
|   
|(b) | Includes a reduction of stock option expense of approximately
    $9, recognized during the three months ended March 31,
    2006, to align Nortels recognition of stock option
    forfeitures with the adoption of SFAS 123R.





32



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)








| |                                                    
| | ---------------------------------------------------
| | Suspension of Nortel Stock based compensation plans



16.     Related party
transactions






|           |                                              |      |    |    |      |   |   |   | 
|---------- | -------------------------------------------- | ---- | -- | -- | ---- | - | - | - | 
|           |                                              | 2006 |    |    | 2005 |  
|           |                                              |      |    |    |      |  
|Revenues   |                                              | $    | 2  |    |      | $ |  |  
|           |                                              |      |    |    |      |  
|Purchases: |                                              |      |    |    |      |   |   |  
|           | Bookham                                      |      | $  | 3  |      |   | $ | 4 | 
|           | LG Electronics
    Inc.(a)                   |      |    | 53 |      |   |   |  | 
|           | Sasken Communications Technology
    Ltd.(b) |      |    | 8  |      |   |   |  | 
|           | Other                                        |      |    | 9  |      |   |   |  | 
|           |                                              |      |    |    |      |  
|Total      |                                              | $    | 73 |    |      | $ | 4 |  
|           |                                              |      |    |    |      |  






|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | LG Electronics Inc. (LG), is a minority interest
    holder of LG-Nortel. Nortels purchases relate primarily to
    certain inventory related items. As of March 31, 2006,
    accounts payable to LG were $37, compared to $18 as at
    December 31, 2005.                                                                  
|   
|(b) | Nortel currently owns a minority interest in Sasken
    Communications Technology Ltd (Sasken).
    Nortels purchases from Sasken relate primarily to software
    and other software development related purchases. As of
    March 31, 2006, accounts payable to Sasken were $3,
    compared to $2 as at December 31, 2005.



|                            |  |           |     |   |              |   |     |  
|--------------------------- |  | --------- | --- | - | ------------ | - | --- | -
|                            |  | March 31, |     |   | December 31, |  
|                            |  | 2006      |     |   | 2005         |  
|                            |  |           |     |   |              |  
|Consolidated balance sheets |  |           |     |   |              |   |     |  
|Owing from NNC              |  | $         | 204 |   |              | $ | 206 |  
|Owing from NNC subsidiaries |  |           | 106 |   |              |   | 98  |  
|Other related parties       |  |           | (36 | ) |              |   | (18 | )
|                            |  |           |     |   |              |  
|Related party receivables   |  | $         | 274 |   |              | $ | 286 |  
|                            |  |           |     |   |              |  

33



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)








17.     Contingencies






34



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)














35



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)














36



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)














37



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)








38



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)










| |                      
| | ---------------------
| | Environmental matters









de minimis


39



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)


de minimis de
minimis




18.     Subsequent events




| |                                       
| | --------------------------------------
| | Stock Exchanges and Regulatory Actions







| |                              
| | -----------------------------
| | Credit and Support Facilities





40



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NORTEL NETWORKS LIMITED


Notes to Condensed Consolidated Financial Statements
(unaudited)  (Continued)




| |                                                 
| | ------------------------------------------------
| | Completion of Flextronics Calgary plant transfer





| |                                 
| | --------------------------------
| | Proposed Class Action Settlement



41



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|        |                                                                    
|------- | -------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND

RESULTS OF OPERATIONS  TABLE OF CONTENTS


|                                                   |                                                                                      |                                             |    |    |    | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------- | -- | -- | -- | 
|Business Overview                                  |                                                                                      |                                             | 44 |   
|                                                   | Our Business                                                                         |                                             |    | 44 |   
|                                                   | Our Segments                                                                         |                                             |    | 44 |   
|                                                   | How We Measure Performance                                                           |                                             |    | 45 |   
|                                                   | Our Strategy                                                                         |                                             |    | 45 |   
|Developments in 2006                               |                                                                                      |                                             | 46 |   
|                                                   | Consolidated Results Summary                                                         |                                             |    | 46 |   
|                                                   | Significant Business Developments                                                    |                                             |    | 47 |   
|                                                   |                                                                                      | Proposed Class Action Settlement            |    |    | 47 | 
|                                                   |                                                                                      | Credit and Support Facilities               |    |    | 48 | 
|                                                   |                                                                                      | Acquisitions                                |    |    | 48 | 
|                                                   |                                                                                      | Joint Ventures                              |    |    | 48 | 
|                                                   |                                                                                      | Evolution of Our Supply Chain Strategy      |    |    | 48 | 
|Restatements; Material Weaknesses; Related Matters |                                                                                      |                                             | 49 |   
|                                                   | First and Second Restatements, Independent Review and Revenue
    Independent Review |                                             |    | 49 |   
|                                                   | Material Weaknesses in Internal Control over Financial Reporting                     |                                             |    | 49 |   
|                                                   | Third Restatement                                                                    |                                             |    | 49 |   
|                                                   | Third Restatement Impacts                                                            |                                             |    | 51 |   
|                                                   | Other Regulatory Actions and Pending Litigation                                      |                                             |    | 52 |   
|Results of Operations  Continuing Operations      |                                                                                      |                                             | 53 |   
|                                                   | Consolidated Information                                                             |                                             |    | 53 |   
|                                                   |                                                                                      | Revenues                                    |    |    | 53 | 
|                                                   |                                                                                      | Geographic Revenues                         |    |    | 54 | 
|                                                   | Gross Profit and Gross Margin                                                        |                                             |    | 55 |   
|                                                   | Operating Expenses                                                                   |                                             |    | 55 |   
|                                                   |                                                                                      | Selling, General and Administrative Expense |    |    | 55 | 
|                                                   |                                                                                      | Research and Development Expense            |    |    | 56 | 
|                                                   |                                                                                      | Special Charges                             |    |    | 56 | 
|                                                   | (Gain) Loss on Sale of Businesses and Assets                                         |                                             |    | 58 |   
|                                                   | Other Income  Net                                                                   |                                             |    | 58 |   
|                                                   | Interest Expense                                                                     |                                             |    | 58 |   
|                                                   | Income Tax Benefit (Expense)                                                         |                                             |    | 58 |   
|                                                   | Segment Information                                                                  |                                             |    | 59 |   
|                                                   |                                                                                      | Mobility and Converged Core Networks        |    |    | 60 | 
|                                                   |                                                                                      | Enterprise Solutions and Packet Networks    |    |    | 61 | 
|                                                   |                                                                                      | Other                                       |    |    | 62 | 
|Liquidity and Capital Resources                    |                                                                                      |                                             | 62 |   
|                                                   | Cash Flow                                                                            |                                             |    | 62 |   
|                                                   |                                                                                      | Operating activities                        |    |    | 63 | 
|                                                   |                                                                                      | Investing activities                        |    |    | 64 | 
|                                                   |                                                                                      | Financing activities                        |    |    | 65 | 
|                                                   |                                                                                      | Credit facilities                           |    |    | 65 | 
|                                                   | Future Uses and Sources of Liquidity                                                 |                                             |    | 66 |   
|                                                   | Future Uses of Liquidity                                                             |                                             |    | 66 |   
|                                                   |                                                                                      | Contractual cash obligations                |    |    | 66 | 
|                                                   |                                                                                      | Customer financing                          |    |    | 66 | 

42



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##### Table of Contents



|                                                          |                                                                           |                                                        |    |    |    | 
|--------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------ | -- | -- | -- | 
|                                                          | Future Sources of Liquidity                                               |                                                        |    | 66 |   
|                                                          |                                                                           | Available support facility                             |    |    | 67 | 
|                                                          |                                                                           | Shelf registration statement and base shelf prospectus |    |    | 68 | 
|                                                          | Credit Ratings                                                            |                                                        |    | 68 |   
|Off-Balance Sheet Arrangements                            |                                                                           |                                                        | 68 |   
|                                                          | Bid, Performance Related and Other Bonds                                  |                                                        |    | 68 |   
|                                                          | Receivables Securitization and Certain Variable Interest
    Transactions |                                                        |    | 69 |   
|Application of Critical Accounting Policies and Estimates |                                                                           |                                                        | 70 |   
|                                                          | Provisions for Doubtful Accounts                                          |                                                        |    | 70 |   
|                                                          | Provisions for Inventory                                                  |                                                        |    | 71 |   
|                                                          | Provisions for Product Warranties                                         |                                                        |    | 72 |   
|                                                          | Tax Asset Valuation                                                       |                                                        |    | 72 |   
|                                                          | Goodwill Valuation                                                        |                                                        |    | 73 |   
|                                                          | Special Charges                                                           |                                                        |    | 73 |   
|Accounting Changes and Recent Accounting Pronouncements   |                                                                           |                                                        | 74 |   
|                                                          | Accounting Changes                                                        |                                                        |    | 74 |   
|                                                          | Recent Accounting Pronouncements                                          |                                                        |    | 74 |   
|Outstanding Share Data                                    |                                                                           |                                                        | 75 |   
|Market Risk                                               |                                                                           |                                                        | 75 |   
|Equity Price Risk                                         |                                                                           |                                                        | 75 |   
|Environmental Matters                                     |                                                                           |                                                        | 75 |   
|Legal Proceedings                                         |                                                                           |                                                        | 76 |   
|Cautionary Notice Regarding Forward Looking Information   |                                                                           |                                                        | 76 |   

43



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS


You should read this Managements Discussion and
Analysis of Financial Condition and Results of Operation, or
MD&A, in combination with the accompanying unaudited
condensed consolidated financial statements prepared in
accordance with accounting principles generally accepted in the
United States, or U.S. GAAP.


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. These statements are subject to
important assumptions, risks and uncertainties, which are
difficult to predict and the actual outcome may be materially
different. Although we believe expectations reflected in such
forward-looking statements are reasonable based upon the
assumptions in this MD&A, they may prove to be inaccurate
and consequently our actual results could differ materially from
our expectations set out in this MD&A. In particular, the
risk factors described in the Risk Factors section
of this report and in our Annual Report on
Form 10-K for the
year ended December 31, 2005, or the 2005 Annual Report,
could cause actual results or events to differ materially from
those contemplated in forward-looking statements. Reference is
also made to the Cautionary Notice Regarding Forward
Looking Information below. 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.


Where we say we, us, our,
NNL or Nortel, we mean Nortel Networks
Limited or Nortel Networks Limited and its subsidiaries, as
applicable, and where we refer to the industry, we
mean the telecommunications industry. All dollar amounts in this
MD&A are in millions of United States, or U.S., dollars
unless otherwise stated. Certain 2005 amounts are presented on a
restated basis as described under Restatements; Material
Weaknesses; Related Matters   Third
Restatement, and reclassified to conform to our new
segments unless otherwise stated. Restated amounts presented
herein are consistent with those disclosed in our 2005 Annual
Report.


We are the principal direct operating subsidiary of Nortel
Networks Corporation, or NNC. NNC holds all of our outstanding
common shares but none of our outstanding preferred shares.
NNCs common shares are publicly traded on the New York
Stock Exchange, or NYSE, and Toronto Stock Exchange, or TSX,
under the symbol NT. Our cumulative Redeemable
Class A Preferred Shares Series 5 and Non-cumulative
Redeemable Class A Preferred Shares Series 7 are
traded on the TSX under the symbols NTL.PR.F and
NTL.PR.G, respectively. Acquisitions involving any
share consideration are completed by NNC, while acquisitions
involving only cash consideration are generally completed by
Nortel.


Business Overview


Our Business




Our Segments




44



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##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobility and Converged Core Networks 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 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. In addition, our
    carrier circuit and packet voice solutions provide a complete
    range of voice solutions to our service provider customers,
    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.
| |  | Enterprise Solutions and Packet Networks provides
    (i) enterprise circuit and packet voice solutions,
    (ii) data networking and security solutions and
    (iii) optical networking solutions. Our solutions for
    enterprises are used to build new networks and transform
    existing communications network into a more cost effective,
    packet-based network supporting data, voice and multimedia
    communications. Our optical networking and carrier data
    networking and security solutions provide voice, data and
    multimedia communication solutions to our service provider
    customers that operate wireline networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

How We Measure Performance




Our Strategy










45



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##### Table of Contents









Developments in 2006


Consolidated Results Summary




|                                               |                                             |                            |       |     |          |  |                    |           |  |   |          |     |  |  |      |      | 
|---------------------------------------------- | ------------------------------------------- | -------------------------- | ----- | --- | -------- |  | ------------------ | --------- |  | - | -------- | --- |  |  | ---- | ---- | 
|                                               |                                             | Three Months Ended         |       |     |          |  | Three Months Ended |           |  |  
|                                               |                                             | March 31,                  |       |     | % of     |  |                    | March 31, |  |   | % of     |    
|                                               |                                             | 2006                       |       |     | Revenues |  |                    | 2005      |  |   | Revenues |    
|                                               |                                             |                            |       |     |          |  |                    |           |  |   |          |    
|                                               |                                             | (Millions of U.S. dollars) |      
|Revenues                                       |                                             | $                          | 2,382 |     |          |  |                    |           |  | $ | 2,389    |     |  |  |      |     
|Gross profit                                   |                                             |                            | 909   |     |          |  | 38.2               |           |  |   | 1,014    |     |  |  | 42.4 |     
|Operating expenses                             |                                             |                            |       |     |          |  |                    |           |  |   |          |     |  |  |      |     
|                                               | Selling, general and administrative expense |                            |       | 594 |          |  |                    | 24.9      |  |   |          | 574 |  |  |      | 24.0 | 
|                                               | Research and development expense            |                            |       | 474 |          |  |                    | 19.9      |  |   |          | 471 |  |  |      | 19.7 | 
|                                               | Special charges                             |                            |       | 5   |          |  |                    | 0.2       |  |   |          | 14  |  |  |      | 0.6  | 
|Gain (loss) on sale of businesses and assets   |                                             |                            | 42    |     |          |  | 1.8                |           |  |   | (22      | )   |  |  | (0.9 | )   
|Operating earnings (loss)                      |                                             |                            | (127  | )   |          |  | (5.3               | )         |  |   | (69      | )   |  |  | (2.9 | )   
|Other income  net                             |                                             |                            | 70    |     |          |  | 2.9                |           |  |   | 55       |     |  |  | 2.3  |     
|Interest expense                               |                                             |                            | 48    |     |          |  | 2.0                |           |  |   | 31       |     |  |  | 1.3  |     
|Income tax benefit (expense)                   |                                             |                            | (23   | )   |          |  | (1.0               | )         |  |   | (15      | )   |  |  | (0.6 | )   
|Net earnings (loss) from continuing operations |                                             |                            | (109  | )   |          |  | (4.6               | )         |  |   | (64      | )   |  |  | (2.7 | )   
|Net earnings (loss)                            |                                             | $                          | (100  | )   |          |  | (4.2               | )         |  | $ | (62      | )   |  |  | (2.6 | )   
|                                               |                                             |                            |       |     |          |  |                    |           |  |   |          |    







46



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Significant Business Developments




| |                                 
| | --------------------------------
| | Proposed Class Action Settlement







47



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##### Table of Contents









| |                              
| | -----------------------------
| | Credit and Support Facilities







| |             
| | ------------
| | Acquisitions





| |               
| | --------------
| | Joint Ventures





| |                                       
| | --------------------------------------
| | Evolution of Our Supply Chain Strategy









48



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Restatements; Material Weaknesses; Related Matters


First and Second Restatements, Independent Review and Revenue
Independent Review






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.                                                                                                                                                                                                                                                                                              



Third Restatement




49



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain complex arrangements with multiple deliverables were
    previously fully accounted for under the percentage of
    completion method of SOP 81-1, but elements outside of the
    scope of SOP 81-1 should have been examined for separation
    under the guidance in Emerging Issues Task Force, or EITF, Issue
    No. 00-21, Revenue Arrangements with Multiple
    Deliverables; and
| |  | Certain complex arrangements accounted for under the
    percentage-of-completion method did not meet the criteria for
    this treatment in SOP 81-1 and should instead have been
    accounted for using completed contract accounting under
    SOP 81-1.                                                                                                                                        





|                                                                          |  |                    |       |  
|------------------------------------------------------------------------- |  | ------------------ | ----- | -
|                                                                          |  | Three Months Ended
|                                                                          |  | March 31,         
|                                                                          |  | 2005              
|                                                                          |  |                   
|Revenues  as previously reported                                         |  | $                  | 2,536 |  
|Adjustments:                                                              |  |                    |       |  
|Application of SOP 81-1                                                   |  |                    | 82    |  
|Interaction between multiple revenue recognition accounting
    standards |  |                    | (183  | )
|Application of SAB 104 and SOP 97-2                                       |  |                    | (53   | )
|Other revenue recognition adjustments                                     |  |                    | 7     |  
|                                                                          |  |                    |       |  
|Revenues  as restated                                                    |  | $                  | 2,389 |  
|                                                                          |  |                    |       |  
|Net earnings (loss)  as previously reported                              |  | $                  | (7    | )
|Adjustments:                                                              |  |                    |       |  
|Application of SOP 81-1                                                   |  |                    | 9     |  
|Interaction between multiple revenue recognition accounting
    standards |  |                    | (26   | )
|Application of SAB 104 and SOP 97-2                                       |  |                    | (26   | )
|Other revenue recognition adjustments                                     |  |                    | (3    | )
|(Gain) loss on sale of businesses                                         |  |                    | (21   | )
|Foreign
    exchange(a)                                                   |  |                    | 2     |  
|Other                                                                     |  |                    | 10    |  
|                                                                          |  |                    |       |  
|Net earnings (loss)  as restated                                         |  | $                  | (62   | )
|                                                                          |  |                    |       |  






|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes the foreign exchange gains and losses resulting from
    the Third Restatement adjustments, and the correction of certain
    foreign exchange errors.



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Third Restatement Impacts




| |                              
| | -----------------------------
| | Credit and Support Facilities





| |                       
| | ----------------------
| | Public Debt Securities





| |                               
| | ------------------------------
| | Stock-based Compensation Plans





| |                             
| | ----------------------------
| | Annual Shareholders Meeting





| |                                            
| | -------------------------------------------
| | Regulatory Actions and Securities Exchanges





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Other Regulatory Actions and Pending Litigation










52



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Results of Operations  Continuing Operations


Consolidated Information


Revenues




| |                                        
| | ---------------------------------------
| | Demand Trends for Our Network Solutions



|                                         |          |                                               |       |    |      |   |       |          |     |   |          |    |     |   |    |     |     |  
|---------------------------------------- | -------- | --------------------------------------------- | ----- | -- | ---- | - | ----- | -------- | --- | - | -------- | -- | --- | - | -- | --- | --- | -
|                                         |          | For the                                       |       |    |      |   |      
|                                         |          | Three Months Ended                            |       |    |      |   |      
|                                         |          | March 31,                                     |       |    |      |   |      
|                                         |          |                                               |       |    |      |   |      
|                                         |          | 2006                                          |       |    | 2005 |   |       | $ Change |     |   | % Change |   
|                                         |          |                                               |       |    |      |   |       |          |     |   |          |   
|Mobility and Converged Core Networks     |          |                                               |       |    |      |   |       |          |     |   |          |    |     |   |    |    
|                                         |          | CDMA solutions                                |       | $  | 514  |   |       | $        | 534 |   |          | $  | (20 | ) |    |     | (4  | )
|                                         |          | GSM and UMTS solutions                        |       |    | 633  |   |       |          | 713 |   |          |    | (80 | ) |    |     | (11 | )
|                                         |          | Circuit and packet voice solutions            |       |    | 279  |   |       |          | 239 |   |          |    | 40  |   |    |     | 17  |  
|                                         |          |                                               |       |    |      |   |       |          |     |   |          |   
|                                         |          |                                               | 1,426 |    |      |   | 1,486 |          |     |   | (60      | )  |     |   | (4 | )  
|Enterprise Solutions and Packet Networks |          |                                               |       |    |      |   |       |          |     |   |          |    |     |   |    |    
|                                         |          | Circuit and packet voice solutions            |       |    | 339  |   |       |          | 322 |   |          |    | 17  |   |    |     | 5   |  
|                                         |          | Optical networking solutions                  |       |    | 250  |   |       |          | 237 |   |          |    | 13  |   |    |     | 5   |  
|                                         |          | Data networking and security
    solutions(a) |       |    | 282  |   |       |          | 319 |   |          |    | (37 | ) |    |     | (12 | )
|                                         |          |                                               |       |    |      |   |       |          |     |   |          |   
|                                         |          |                                               | 871   |    |      |   | 878   |          |     |   | (7       | )  |     |   | (1 | )  
|                                         | Other(b) |                                               |       | 85 |      |   |       | 25       |     |   |          | 60 |     |   |    | 240 |    
|                                         |          |                                               |       |    |      |   |       |          |     |   |          |   
|Total                                    |          | $                                             | 2,382 |    |      | $ | 2,389 |          |     | $ | (7       | )  |     |   | (0 | )  
|                                         |          |                                               |       |    |      |   |       |          |     |   |          |   






|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes $175 and $203 of revenue from our enterprise customers
    for the three months ended March 31, 2006 and 2005,
    respectively.                                      
|   
|(b) | Other includes our revenues from NGS which we acquired in June
    2005, and various other network solutions and miscellaneous
    business activities and corporate functions.





| |                                     
| | ------------------------------------
| | Mobility and Converged Core Networks



| |               
| | --------------
| | CDMA Solutions





| |                       
| | ----------------------
| | GSM and UMTS Solutions



53



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| |                                           
| | ------------------------------------------
| | Carrier Circuit and Packet Voice Solutions





| |                                         
| | ----------------------------------------
| | Enterprise Solutions and Packet Networks



| |                                              
| | ---------------------------------------------
| | Enterprise Circuit and Packet Voice Solutions





| |                             
| | ----------------------------
| | Optical Networking Solutions





| |                                       
| | --------------------------------------
| | Data Networking and Security Solutions







| |                    
| | -------------------
| | Geographic Revenues



|              |  |                    |       |  |      |   |       |          |  |   |          |   |  |  |    |  
|------------- |  | ------------------ | ----- |  | ---- | - | ----- | -------- |  | - | -------- | - |  |  | -- | -
|              |  | For the            |       |  |      |   |      
|              |  | Three Months Ended |       |  |      |   |      
|              |  | March 31,          |       |  |      |   |      
|              |  |                    |       |  |      |   |      
|              |  | 2006               |       |  | 2005 |   |       | $ Change |  |   | % Change |  
|              |  |                    |       |  |      |   |       |          |  |   |          |  
|United States |  | $                  | 1,132 |  |      | $ | 1,219 |          |  | $ | (87      | ) |  |  | (7 | )
|EMEA(a)       |  |                    | 631   |  |      |   | 673   |          |  |   | (42      | ) |  |  | (6 | )
|Canada        |  |                    | 159   |  |      |   | 112   |          |  |   | 47       |   |  |  | 42 |  
|Asia Pacific  |  |                    | 301   |  |      |   | 264   |          |  |   | 37       |   |  |  | 14 |  
|CALA(b)       |  |                    | 159   |  |      |   | 121   |          |  |   | 38       |   |  |  | 31 |  
|              |  |                    |       |  |      |   |       |          |  |   |          |  
|Consolidated  |  | $                  | 2,382 |  |      | $ | 2,389 |          |  | $ | (7       | ) |  |  | (0 | )
|              |  |                    |       |  |      |   |       |          |  |   |          |  






|    |                                                 
|--- | ------------------------------------------------
|(a) | Europe, Middle East and Africa, or EMEA, region.
|   
|(b) | Caribbean and Latin America, or CALA, region.   





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 7% decrease in revenues in the U.S. primarily due to
    substantially lower revenues from GSM and UMTS solutions as a
    result of industry consolidation of our service provider
    customers and lower revenues from our CDMA solutions due to
    reduced customer spending on next-generation products. These
    decreases were partially offset by an increase in revenues due
    to the impact of our acquisition of NGS in the second quarter of
    2005 and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | a significant increase in packet voice solutions supplied to our
    service provider customers and optical networking solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 6% decrease in revenues in EMEA primarily due to a substantial
    decline in Data networking and security solutions primarily due
    to increased competition and lower GSM and UMTS solutions
    revenues with UMTS growth almost offsetting GSM decline.
    Revenues in EMEA were negatively impacted by the unfavorable
    impacts due to the strengthening of the U.S. dollar against
    the Euro. These decreases were partially offset by a substantial
    increase in optical networking solutions and a substantial
    increase in packet voice solutions included in our Mobility and
    Converged Core Networks segment.
| |  | 42% increase in revenues in Canada primarily due to a
    substantial increase in optical networking revenues primarily
    due to the negative impact of shipping delays on our optical
    solutions revenues in the first quarter of 2005 not repeated in
    the first quarter of 2006 and a substantial increase in our CDMA
    revenues primarily due to network expansions and circuit and
    packet voice solutions revenues.                                                                                                                                                                                                    
| |  | 14% increase in revenues in Asia Pacific primarily due to
    substantial increases in all network solutions with the
    exception of our optical networking solutions, which had a
    substantial decrease due to network completions in the first
    quarter of 2005. Revenues in Asia Pacific were positively
    impacted by our LG-Nortel joint venture across CDMA solutions
    and Circuit and packet voice solutions included in our
    Enterprise Solutions and Packet Networks segment.                                                                                                                                     
| |  | 31% increase in revenues in CALA primarily due to substantial
    increases in GSM solutions and optical networking solutions due
    to new customer contracts and existing customer network
    expansion and a substantial increase in circuit and packet voice
    solutions included in our Mobility and Converged Core Networks
    segment; partially offset by a substantial decrease in CDMA
    solutions.                                                                                                                                                                                                                       

Gross Profit and Gross Margin


|             |  |                    |      |   |      |   |       |        |  |   |          |   |  |  |     |  
|------------ |  | ------------------ | ---- | - | ---- | - | ----- | ------ |  | - | -------- | - |  |  | --- | -
|             |  | For The            |      |   |      |   |      
|             |  | Three Months Ended |      |   |      |   |      
|             |  | March 31,          |      |   |      |   |      
|             |  |                    |      |   |      |   |      
|             |  | 2006               |      |   | 2005 |   |       | Change |  |   | % Change |  
|             |  |                    |      |   |      |   |       |        |  |   |          |  
|Gross profit |  | $                  | 909  |   |      | $ | 1,014 |        |  | $ | (105     | ) |  |  | (10 | )
|Gross margin |  |                    | 38.2 | % |      |   | 42.4  | %      |  |   | (4.2pts  | ) |  |  |     |  
|             |  |                    |      |   |      |   |       |        |  |   |          |   |  |  |     |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease of approximately $100 primarily as a result of
    (i) pricing pressures on certain of our products due to
    increased competition for service provider and enterprise
    customers; (ii) unfavorable product mix associated with
    increased sales of our next generation products which typically
    have lower gross margins in the early stages of product
    evolution; and (iii) increased costs associated with
    European Union Environmental Directive compliance or EUED; and
| |  | a decrease of approximately $40 primarily due to recoveries in
    inventory provisions due to sale of inventory in the first
    quarter of 2005 not repeated in the first quarter of 2006;
    partially offset by                                                                                                                                                                                                                                                                                       
| |  | an increase of approximately $35 due to continued improvements
    in our cost structure primarily as a result of lower material
    pricing.                                                                                                                                                                                                                                                                                                                                                              

Operating Expenses




| |                                            
| | -------------------------------------------
| | Selling, General and Administrative Expense

|             |                  |                    |     |      |      |   |     |          |   |   |          |        |  |  |   |  | 
|------------ | ---------------- | ------------------ | --- | ---- | ---- | - | --- | -------- | - | - | -------- | ------ |  |  | - |  | 
|             |                  | For The            |     |      |      |   |    
|             |                  | Three Months Ended |     |      |      |   |    
|             |                  | March 31,          |     |      |      |   |    
|             |                  |                    |     |      |      |   |    
|             |                  | 2006               |     |      | 2005 |   |     | $ Change |   |   | % Change |       
|             |                  |                    |     |      |      |   |     |          |   |   |          |       
|SG&A expense |                  | $                  | 594 |      |      | $ | 574 |          |   | $ | 20       |        |  |  | 3 | 
|             | As % of revenues |                    |     | 24.9 | %    |   |     | 24.0     | % |   |          | 0.9pts |  |  |   |  | 
|             |                  |                    |     |      |      |   |     |          |   |   |          |        |  |  |   | 

55



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| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs of approximately $38 related to our acquisition of NGS and
    the LG-Nortel joint venture;                                                                                                                                                                                                                 
| |  | higher costs of approximately $34 related to our internal
    control remedial measures, investment in our finance processes
    and business transformation initiatives; and                                                                                                                                     
| |  | unfavorable foreign exchange impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar (partially offset by favorable foreign exchange
    impacts associated with the strengthening of the
    U.S. dollar against the Euro and the British pound;
    partially offset by
| |  | lower costs related to our restatement related activities; and                                                                                                                                                                                                                                                    
| |  | cost savings associated with the 2004 Restructuring Plan and
    cost containment initiatives.                                                                                                                                                                                                                    





| |                                 
| | --------------------------------
| | Research and Development Expense

|            |                  |                    |     |      |      |   |     |          |   |   |          |        |  |  |   |  | 
|----------- | ---------------- | ------------------ | --- | ---- | ---- | - | --- | -------- | - | - | -------- | ------ |  |  | - |  | 
|            |                  | For The            |     |      |      |   |    
|            |                  | Three Months Ended |     |      |      |   |    
|            |                  | March 31,          |     |      |      |   |    
|            |                  |                    |     |      |      |   |    
|            |                  | 2006               |     |      | 2005 |   |     | $ Change |   |   | % Change |       
|            |                  |                    |     |      |      |   |     |          |   |   |          |       
|R&D expense |                  | $                  | 474 |      |      | $ | 471 |          |   | $ | 3        |        |  |  | 1 | 
|            | As % of revenues |                    |     | 19.9 | %    |   |     | 19.7     | % |   |          | 0.2pts |  |  |   |  | 
|            |                  |                    |     |      |      |   |     |          |   |   |          |        |  |  |   | 





| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased investments in targeted product areas, primarily in
    the Enterprise Solutions and Packet Networks segment; and                           
| |  | unfavorable foreign exchange impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar; substantially offset by
| |  | cost savings associated with our 2004 Restructuring Plan.                                                                                             







| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | network applications (VoIP and multimedia solutions) for
    enterprise and service provider customers;                                                          
| |  | services edge capability to realize simplification of customer
    network operations and broadband access technologies, including
    wireless and wireline; and
| |  | next-generation packet transport for converged networks.                                                                                                         



| |                
| | ---------------
| | Special Charges





56



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|                                                    |                             |           |    |            |           |   |           |             |   |       |   |   |  |   |     |     |  
|--------------------------------------------------- | --------------------------- | --------- | -- | ---------- | --------- | - | --------- | ----------- | - | ----- | - | - |  | - | --- | --- | -
|                                                    |                             |           |    | Contract   |           |   |           |             |  
|                                                    |                             |           |    | settlement |           |   | Plant and |             |  
|                                                    |                             | Workforce |    |            | and lease |   |           | equipment   |   |      
|                                                    |                             | reduction |    |            | costs     |   |           | write downs |   | Total |  
|                                                    |                             |           |    |            |           |   |           |             |   |       |  
|2004 Restructuring Plan                             |                             |           |    |            |           |   |           |             |   |       |   |   |  |   |     |    
|Provision balance as of December 31, 2005           |                             | $         | 21 |            |           | $ | 61        |             |   | $     |  |   |  | $ | 82  |    
|                                                    | Revisions to prior accruals |           |    | 2          |           |   |           | 4           |   |       |   |  |  |   |     | 6   |  
|                                                    | Cash drawdowns              |           |    | (13        | )         |   |           | (5          | ) |       |   |  |  |   |     | (18 | )
|                                                    |                             |           |    |            |           |   |           |             |   |       |   |  
|Provision balance as of March 31, 2006              |                             | $         | 10 |            |           | $ | 60        |             |   | $     |  |   |  | $ | 70  |    
|                                                    |                             |           |    |            |           |   |           |             |   |       |   |  
|2001 Restructuring Plan                             |                             |           |    |            |           |   |           |             |   |       |   |   |  |   |     |    
|Provision balance as of December 31, 2005           |                             | $         | 3  |            |           | $ | 213       |             |   | $     |  |   |  | $ | 216 |    
|                                                    | Revisions to prior accruals |           |    | 1          |           |   |           | (2          | ) |       |   |  |  |   |     | (1  | )
|                                                    | Cash drawdowns              |           |    | (1         | )         |   |           | (16         | ) |       |   |  |  |   |     | (17 | )
|                                                    |                             |           |    |            |           |   |           |             |   |       |   |  
|Provision balance as of March 31, 2006              |                             | $         | 3  |            |           | $ | 195       |             |   | $     |  |   |  | $ | 198 |    
|                                                    |                             |           |    |            |           |   |           |             |   |       |   |  
|Total provision balance as of March 31,
    2006(a) |                             | $         | 13 |            |           | $ | 255       |             |   | $     |  |   |  | $ | 268 |    
|                                                    |                             |           |    |            |           |   |           |             |   |       |   |  






|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of March 31, 2006 and December 31, 2005, the
    short-term provision balance was $84 and $95, respectively, and
    the long-term provision balance was $184 and $203, respectively.





|                            |                                          |                    |   |   |                    |   |    |                 |  |   |      |    |   |      |     |     |      |   |   |   |  |   |    |    | 
|--------------------------- | ---------------------------------------- | ------------------ | - | - | ------------------ | - | -- | --------------- |  | - | ---- | -- | - | ---- | --- | --- | ---- | - | - | - |  | - | -- | -- | 
|                            |                                          | 2004               |   |   | 2001               |   |    | Total           | 
|                            |                                          | Restructuring Plan |   |   | Restructuring Plan |   |    | Special Charges | 
|                            |                                          |                    |   |   |                    |   |    |                 | 
|                            |                                          | 2006               |   |   | 2005               |   |    | 2006            |  |   | 2005 |    |   | 2006 |     |     | 2005 |  
|                            |                                          |                    |   |   |                    |   |    |                 |  |   |      |    |   |      |     |     |      |  
|Special charges by segment: |                                          |                    |   |   |                    |   |    |                 |  |   |      |    |   |      |     |     |      |   |   |   |  |   |    |   
|                            | Mobility and Converged Core Networks     |                    | $ | 3 |                    |   | $  | 13              |  |   | $    |   |   |      | $   | (1  | )    |   | $ | 3 |  |   | $  | 12 | 
|                            | Enterprise Solutions and Packet Networks |                    |   | 3 |                    |   |    | 12              |  |   |      | (1 | ) |      |     | (10 | )    |   |   | 2 |  |   |    | 2  | 
|                            |                                          |                    |   |   |                    |   |    |                 |  |   |      |    |   |      |     |     |      |  
|Total special charges       |                                          | $                  | 6 |   |                    | $ | 25 |                 |  | $ | (1   | )  |   | $    | (11 | )   |      | $ | 5 |   |  | $ | 14 |   
|                            |                                          |                    |   |   |                    |   |    |                 |  |   |      |    |   |      |     |     |      |  



57



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(Gain) Loss on Sale of Businesses and Assets








Other Income  Net




|                                                 |  |                    |    |   |      |   |    |  
|------------------------------------------------ |  | ------------------ | -- | - | ---- | - | -- | -
|                                                 |  | For The            |   
|                                                 |  | Three Months Ended |   
|                                                 |  | March 31,          |   
|                                                 |  |                    |   
|                                                 |  | 2006               |    |   | 2005 |  
|                                                 |  |                    |    |   |      |  
|Interest
    income(a)                           |  | $                  | 15 |   |      | $ | 14 |  
|Gain (loss) on sale or write down of investments |  |                    | (1 | ) |      |   | (5 | )
|Currency exchange
    gains(b)                   |  |                    | 9  |   |      |   | 29 |  
|Other  net                                      |  |                    | 47 |   |      |   | 17 |  
|                                                 |  |                    |    |   |      |  
|Other income  net                               |  | $                  | 70 |   |      | $ | 55 |  
|                                                 |  |                    |    |   |      |  






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





| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | dividend income of $13 on our short-term investments;                             
| |  | a gain of $26 related to the sale of a note receivable from
    Bookham, Inc.; and
| |  | income of $4 related to the sub-lease of facilities.                              





| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | a gain of $10 resulting from a restructured customer financing
    arrangement;                                                               
| |  | dividend income of $9 on our short-term investments; and                                                                                      
| |  | income of $5 related to the sub-lease of facilities; partially
    offset by                                                                  
| |  | losses of $5 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting.

Interest Expense




Income Tax Benefit (Expense)






58



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##### Table of Contents





Segment Information






|                                               |  |                    |       |   |      |   |       |          |  |   |          |   |  |  |      |  
|---------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -------- |  | - | -------- | - |  |  | ---- | -
|                                               |  | For The            |       |   |      |   |      
|                                               |  | Three Months Ended |       |   |      |   |      
|                                               |  | March 31,          |       |   |      |   |      
|                                               |  |                    |       |   |      |   |      
|Revenues                                       |  | 2006               |       |   | 2005 |   |       | $ Change |  |   | % Change |  
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Mobility and Converged Core Networks           |  | $                  | 1,426 |   |      | $ | 1,486 |          |  | $ | (60      | ) |  |  | (4   | )
|Enterprise Solutions and Packet Networks       |  |                    | 871   |   |      |   | 878   |          |  |   | (7       | ) |  |  | (1   | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Total reportable segments                      |  |                    | 2,297 |   |      |   | 2,364 |          |  |   | (67      | ) |  |  | (3   | )
|Other(a)                                       |  |                    | 85    |   |      |   | 25    |          |  |   | 60       |   |  |  | 240  |  
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Total revenues                                 |  | $                  | 2,382 |   |      | $ | 2,389 |          |  | $ | (7       | ) |  |  | (0   | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Management EBT                                 |  |                    |       |   |      |   |       |          |  |   |          |   |  |  |      |  
|Mobility and Converged Core Networks           |  | $                  | 118   |   |      | $ | 190   |          |  | $ | (72      | ) |  |  | (38  | )
|Enterprise Solutions and Packet Networks       |  |                    | (43   | ) |      |   | (24   | )        |  |   | (19      | ) |  |  | (79  | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Total reportable segments                      |  |                    | 75    |   |      |   | 166   |          |  |   | (91      | ) |  |  | (55  | )
|Other(a)                                       |  |                    | (193  | ) |      |   | (177  | )        |  |   | (16      | ) |  |  | (9   | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Total management EBT                           |  | $                  | (118  | ) |      | $ | (11   | )        |  | $ | (107     | ) |  |  | (973 | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Amortization of intangibles                    |  | $                  | (5    | ) |      | $ | (2    | )        |  | $ | (3       | ) |  |  | (150 | )
|Special charges                                |  |                    | (5    | ) |      |   | (14   | )        |  |   | 9        |   |  |  | 64   |  
|Gain (loss) on sale of businesses and assets   |  |                    | 42    |   |      |   | (22   | )        |  |   | 64       |   |  |  | 291  |  
|Income tax benefit                             |  |                    | (23   | ) |      |   | (15   | )        |  |   | (8       | ) |  |  | (53  | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  
|Net earnings (loss) from continuing operations |  | $                  | (109  | ) |      | $ | (64   | )        |  | $ | (45      | ) |  |  | (70  | )
|                                               |  |                    |       |   |      |   |       |          |  |   |          |  






|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(a) | Other represents results from NGS and miscellaneous
    business activities and corporate functions.



|                                         |  |                                           |      |   |      |   |     |     |  |   |                |   |  |                |    |   |  |   |      |  
|---------------------------------------- |  | ----------------------------------------- | ---- | - | ---- | - | --- | --- |  | - | -------------- | - |  | -------------- | -- | - |  | - | ---- | -
|                                         |  | For The Three Months Ended March 31, 2006 |     
|                                         |  | Compared to March 31, 2005                |     
|                                         |  |                                           |     
|                                         |  | Gross Profit                              |      |   | SG&A |   |     | R&D |  |   | Other items(a) |   |  | Total $ change |   
|                                         |  |                                           |      |   |      |   |     |     |  |   |                |   |  |                |   
|Mobility and Converged Core Networks     |  | $                                         | (93  | ) |      | $ |    |     |  | $ | 3              |   |  | $              | 18 |   |  | $ | (72  | )
|Enterprise Solutions and Packet Networks |  |                                           | (27  | ) |      |   | 5   |     |  |   | (6             | ) |  |                | 9  |   |  |   | (19  | )
|                                         |  |                                           |      |   |      |   |     |     |  |   |                |   |  |                |   
|Total reportable segments                |  |                                           | (120 | ) |      |   | 5   |     |  |   | (3             | ) |  |                | 27 |   |  |   | (91  | )
|Other                                    |  |                                           | 15   |   |      |   | (25 | )   |  |   |               |   |  |                | (6 | ) |  |   | (16  | )
|                                         |  |                                           |      |   |      |   |     |     |  |   |                |   |  |                |   
|Total change                             |  | $                                         | (105 | ) |      | $ | (20 | )   |  | $ | (3             | ) |  | $              | 21 |   |  | $ | (107 | )
|                                         |  |                                           |      |   |      |   |     |     |  |   |                |   |  |                |   

59



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|    |                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other items is comprised of interest expense, other
    income (expense)  net, minority interests 
    net of tax and equity in net loss of associated
    companies  net of tax. Interest attributable to
    long-term debt has not been allocated to a reportable segment
    and is included in Other.



Mobility
and Converged Core Networks


Revenues







Q1
2006 vs. Q1 2005






Management
EBT








| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfavorable product mix associated with increased sales of our
    next generation packet voice and UMTS solutions which typically
    have lower gross margins in the early stages of product
    evolution than our traditional circuit voice and GSM solutions;
    and
| |  | continued pricing pressures and customer mix primarily in the
    U.S. and Asia Pacific due to increased competition;
    partially offset by                                                                                                                             
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing.                                                                                                                                                                         





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased sales and marketing expenses as a result of the
    LG-Nortel joint venture; offset by                                            
| |  | the continued impact of on going spending actions and cost
    savings due to our workforce reduction under the 2004
    Restructuring Plan.





| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued impact of our workforce reductions that targeted a
    level of R&D expense that was more representative of the
    volume of our business; partially offset by

60



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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | investment in targeted next-generation wireless programs to
    increase the feature content in our portfolio solutions; and
| |  | increased expenses as a result of the LG-Nortel joint venture.                                                              



Enterprise
Solutions and Packet Networks


Revenues







Q1
2006 vs. Q1 2005






Management
EBT








| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | recovery in inventory provisions in the first quarter of 2005
    not repeated in the first quarter 2006 primarily due to sale of
    optical inventory that was previously fully provided for;
| |  | pricing pressures on our data products due to increased
    competition for enterprise customers; and                                                                                          
| |  | increased costs due to the effect of EUED compliance activities;
    partially offset by                                                                                                       
| |  | continued improvements in our cost structure including lower
    material pricing.                                                                                                             





| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | favorable foreign exchange rate impacts associated with the
    weakening of the Euro and British pound partially offset by
    strengthening of the Canadian dollar against the
    U.S. dollar; and
| |  | continued improvements in our cost structure and cost savings
    due to our workforce reduction under the 2004 Restructuring
    Plan; partially offset by                                          
| |  | increase in sales and marketing expenses primarily related to
    the LG-Nortel joint venture.                                                                                                       





| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | increased spending on R&D programs related to IP
    technologies and the LG-Nortel joint venture; partially offset by
| |  | more effectively prioritizing investment in data products.                                                            

61



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Other


Management
EBT








| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar partially offset by favorable foreign exchange
    rate impacts associated with the strengthening of the
    U.S. dollar against Euro and British pound;
| |  | increase in sales and marketing expenses primarily related to
    Nortels acquisition of NGS; and                                                                                                                                                                                         
| |  | increased costs associated with our business transformation
    initiatives, internal control remedial measures and investment
    in our finance process; partially offset by                                                                                                             
| |  | lower costs related to our restatement related activities; and                                                                                                                                                                                                                             
| |  | cost savings associated with our 2004 Restructuring Plan and
    cost containment initiatives.                                                                                                                                                                                             







| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase in interest expense primarily due to securitization
    charges relating to BSNL receivables and higher borrowing costs;
    and
| |  | lower net foreign exchange transactional and translation gains;
    partially offset by                                                     
| |  | a gain related to the sale of our note receivable from Bookham;
    and                                                                     
| |  | gains related to changes in fair value of derivative financial
    instruments that do not meet the criteria for hedge accounting.          

Liquidity and Capital Resources


Cash Flow






|                                                                            |  |                    |       |   |      |   |       |  
|--------------------------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                                            |  | For The            |      
|                                                                            |  | Three Months Ended |      
|                                                                            |  | March 31,          |      
|                                                                            |  |                    |      
|                                                                            |  | 2006               |       |   | 2005 |  
|                                                                            |  |                    |       |   |      |  
|Net cash from (used in) operating activities of continuing
    operations   |  | $                  | (135  | ) |      | $ | (225  | )
|Net cash from (used in) investing activities of continuing
    operations   |  |                    | (103  | ) |      |   | 28    |  
|Net cash from (used in) financing activities of continuing
    operations   |  |                    | 3     |   |      |   | (21   | )
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |  |                    | 14    |   |      |   | (35   | )
|                                                                            |  |                    |       |   |      |  
|Net cash from (used in) continuing operations                               |  |                    | (221  | ) |      |   | (253  | )
|Net cash from (used in) operating activities of discontinued
    operations |  |                    |      |   |      |   | 36    |  
|Net increase (decrease) in cash and cash equivalents                        |  |                    | (221  | ) |      |   | (217  | )
|Cash and cash equivalents at beginning of period                            |  |                    | 2,876 |   |      |   | 3,606 |  
|                                                                            |  |                    |       |   |      |  
|Cash and cash equivalents at end of period                                  |  | $                  | 2,655 |   |      | $ | 3,389 |  
|                                                                            |  |                    |       |   |      |  

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Operating
activities












Changes
in Operating Assets and Liabilities








| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | income tax payments of $26 in the first quarter of 2006 compared
    to $14 in the first quarter of 2005 primarily due to an increase
    in taxable income in certain taxable jurisdictions; and
| |  | a decrease of $92 from other changes in operating assets and
    liabilities primarily due to deferred costs and other assets,
    partially offset by an increase in deferred revenue.          





63



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Working
capital metrics




|                                                  |  |         |     |  |         |  |     | 
|------------------------------------------------- |  | ------- | --- |  | ------- |  | --- | 
|                                                  |  | Q1 2006 |     |  | Q4 2005 | 
|                                                  |  |         |     |  |         | 
|Days sales outstanding in accounts receivable     |  |         | 99  |  |         |  | 86  | 
|Net inventory days                                |  |         | 165 |  |         |  | 132 | 
|Days of purchases outstanding in accounts payable |  |         | 64  |  |         |  | 58  | 
|                                                  |  |         |     |  |         | 













Investing
activities






64



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Financing
activities










Credit
facilities








65



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Future Uses and Sources of Liquidity




Future Uses of Liquidity






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | repayment of the 2006 Credit Facility of $1,300 due in February
    2007;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | costs in relation to the restatement and remedial measure
    activities, regulatory and other legal proceedings, including
    the proposed $575 (plus accrued interest of $5) cash payment
    payable by NNC related to the Proposed Class Action
    Settlement. The cash amount bears interest commencing
    March 23, 2006 at a prescribed rate and is held in escrow
    on June 1, 2006 pending satisfactory completion of all
    conditions to the Proposed Class Action Settlement. In
    addition, the resolution of other matters not encompassed by the
    Proposed Class Action Settlement, including regulatory and
    criminal investigations, is uncertain and NNC may be subject to
    substantial additional payments, judgments, settlements, fines
    or penalties;
| |  | pension and post-retirement and post-employment benefit funding
    of approximately $425;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | capital expenditures of approximately $280;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | repayment of $150 of notes due on June 15, 2006;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | costs related to workforce reduction and other restructuring
    activities of approximately $110; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | our finance transformation project which will include, among
    other things, implementing SAP to provide an integrated global
    financial system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



Contractual
cash obligations




Customer
financing




Future Sources of Liquidity




66



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Available
support facility






| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $300 of committed revolving support for performance bonds or
    similar instruments, of which $143 was outstanding; and                                       
| |  | $450 of uncommitted support for performance bonds or similar
    instruments and/or receivables sales and/or securitizations, of
    which $20 was outstanding.





67



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Shelf
registration statement and base shelf prospectus




Credit Ratings


|                                  |  |                          |    |  |                  |  |      |             |  |                 
|--------------------------------- |  | ------------------------ | -- |  | ---------------- |  | ---- | ----------- |  | ----------------
|                                  |  | Rating on long-term debt |    |  | Rating on        |  |      |            
|                                  |  | issued or guaranteed by  |    |  | preferred shares |  |      |            
|                                  |  | Nortel Networks          |    |  | issued by Nortel |  |      |            
|                                  |  | Limited/ Nortel Networks |    |  | Networks         |  |      |            
|Rating agency                     |  | Corporation              |    |  | Limited          |  |      | Last update
|                                  |  |                          |    |  |                  |  |      |            
|Standard & Poors Ratings Service |  |                          | B- |  |                  |  | CCC- |             |  | February 8, 2006
|Moodys Investors Service, Inc.   |  |                          | B3 |  |                  |  | Caa3 |             |  | February 8, 2006



Off-Balance Sheet Arrangements


Bid, Performance Related and Other Bonds




68



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|                                               |  |           |     |  |              |   |     | 
|---------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | 
|                                               |  | March 31, |     |  | December 31, |  
|                                               |  | 2006      |     |  | 2005         |  
|                                               |  |           |     |  |              |  
|Bid and performance related
    bonds(a)       |  | $         | 221 |  |              | $ | 222 | 
|Other
    bonds(b)                             |  |           | 42  |  |              |   | 44  | 
|                                               |  |           |     |  |              |  
|Total bid, performance related and other bonds |  | $         | 263 |  |              | $ | 266 | 
|                                               |  |           |     |  |              |  






|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(a) | Net of restricted cash and cash equivalents amounts of $36 and
    $36 as of March 31, 2006 and December 31, 2005,
    respectively.
|   
|(b) | Net of restricted cash and cash equivalents amounts of $28 and
    $31 as of March 31, 2006 and December 31, 2005,
    respectively.





Receivables Securitization and Certain Variable Interest
Transactions












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Application of Critical Accounting Policies and Estimates










Provisions for Doubtful Accounts




70



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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | 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                                                                 







|                                                                                  |  |           |       |   |              |   |       |  
|--------------------------------------------------------------------------------- |  | --------- | ----- | - | ------------ | - | ----- | -
|                                                                                  |  | March 31, |       |   | December 31, |  
|                                                                                  |  | 2006      |       |   | 2005         |  
|                                                                                  |  |           |       |   |              |  
|Gross accounts receivable                                                         |  | $         | 3,023 |   |              | $ | 3,303 |  
|Provision for doubtful accounts                                                   |  |           | (93   | ) |              |   | (137  | )
|                                                                                  |  |           |       |   |              |  
|Accounts receivable  net                                                         |  | $         | 2,930 |   |              | $ | 3,166 |  
|                                                                                  |  |           |       |   |              |  
|Accounts receivable provision as a percentage of gross accounts
    receivables   |  |           | 3     | % |              |   | 4     | %
|Gross long-term receivables                                                       |  | $         | 60    |   |              | $ | 57    |  
|Provision for doubtful accounts                                                   |  |           | (34   | ) |              |   | (33   | )
|                                                                                  |  |           |       |   |              |  
|Net long-term receivables                                                         |  | $         | 26    |   |              | $ | 24    |  
|                                                                                  |  |           |       |   |              |  
|Long-term receivable provision as a percentage of gross
    long-term receivables |  |           | 57    | % |              |   | 58    | %

Provisions for Inventory








71



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|                                                        |  |           |        |   |              |   |        |  
|------------------------------------------------------- |  | --------- | ------ | - | ------------ | - | ------ | -
|                                                        |  | March 31, |        |   | December 31, |  
|                                                        |  | 2006      |        |   | 2005         |  
|                                                        |  |           |        |   |              |  
|Gross inventory                                         |  | $         | 3,803  |   |              | $ | 3,660  |  
|Inventory provisions                                    |  |           | (1,033 | ) |              |   | (1,039 | )
|                                                        |  |           |        |   |              |  
|Inventories 
    net(a)                                |  | $         | 2,770  |   |              | $ | 2,621  |  
|                                                        |  |           |        |   |              |  
|Inventory provisions as a percentage of gross inventory |  |           | 27     | % |              |   | 28     | %






|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(a) | Includes long-term portion of inventory related to the deferred
    costs, which is included in other assets.



Provisions for Product Warranties








|                                |                   |   |     |     |  
|------------------------------- | ----------------- | - | --- | --- | -
|Balance as of December 31, 2005 |                   | $ | 206 |    
|                                | Payments          |   |     | (64 | )
|                                | Warranties issued |   |     | 56  |  
|                                |                   |   |    
|Balance as of March 31, 2006    |                   | $ | 198 |    
|                                |                   |   |    



Tax Asset Valuation




72



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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | cumulative losses in recent years;                                               
| |  | history of loss carryforwards and other tax assets expiring;                     
| |  | the carryforward period associated with the deferred tax assets;                 
| |  | the nature of the income that can be used to realize the
    deferred tax assets;
| |  | our net earnings (loss); and                                                     
| |  | future earnings potential determined through the use of internal
    forecasts.  







Goodwill Valuation






Special Charges




73



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##### Table of Contents



Accounting Changes and Recent Accounting Pronouncements


Accounting Changes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Meaning of Other-than-Temporary Impairment and its
    Application to Certain Investments  As of
    January 1, 2006, we adopted EITF Issue No. 03-1,
    The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments, or EITF 03-1,
    re-titled FASB Staff Position, or FSP, FAS 115-1 and FAS 124-1,
    The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments, or 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 our results of operations and
    financial condition.                                                                                 
| |  | Inventory Costs  As of January 1, 2006, we
    adopted FASB SFAS No. 151, Inventory
    Costs, or SFAS 151. The adoption of SFAS 151 did
    not have a material impact on our results of operations and
    financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Share-Based Payment  SFAS No. 123 (Revised
    2004), Share-Based Payment, or SFAS 123R, is
    effective 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 accordance with SFAS 148.
    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,
    we recorded a gain of $9 as the cumulative effect of this
    accounting change.                                                                            
| |  | Accounting Changes and Error Corrections 
    SFAS No. 154, Accounting Changes and Error
    Corrections, or SFAS 154, 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, is required to be adopted by us as of
    January 1, 2006. The impact that the adoption of
    SFAS 154 will have on our consolidated results of
    operations and financial condition will depend on the nature of
    future accounting changes adopted by us and the nature of
    transitional guidance provided in future accounting
    pronouncements.

Recent Accounting Pronouncements






74



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Outstanding Share Data




Market Risk












Equity Price Risk




Environmental Matters






75



---



##### Table of Contents







Legal Proceedings




Cautionary Notice Regarding Forward Looking Information




76



---



##### Table of Contents





77



---



##### Table of Contents






ITEM 3.     Quantitative and
Qualitative Disclosures About Market Risk




78



---



##### Table of Contents






ITEM 4.     Controls and
Procedures


Management Conclusions Concerning Disclosure Controls and
Procedures








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our successive restatements of our financial statements,
    including the Third Restatement;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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, or the Independent Review Summary, included in
    Item 9A of our 2003 Annual Report;                                                                                                                                                                                                                                     
| |  | the material weaknesses 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 assessment of our internal control over
    financial reporting and conclusion that our internal control
    over financial reporting was not effective as at
    December 31, 2005 (including the matters disclosed under
    Managements Assessment and Observations
    included in Item 9A of our 2005 Annual Report), 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, or SOX 404,
    included in Item 9A of our 2005 Annual Report;
| |  | the conclusion of the CEO and CFO that our disclosure controls
    and procedures, as at December 31, 2005 were not effective,
    included in Item 9A of our 2005 Annual Report;                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | the findings of the Revenue Independent Review included in
    Item 9A of our 2005 Annual Report;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | the findings of the Internal Audit Review described more fully
    below; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | the remedial measures we have identified, developed and begun to
    implement to address these issues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    





Material Weaknesses in Internal Control Over Financial
Reporting






| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;                                                                                                                                                   
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with U.S. GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.                                                                                             



79



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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                    





Internal Audit Review of Facts and Circumstances Surrounding
Third Restatement




Conduct




| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | no evidence was found of intent to improperly record revenues
    associated with the contracts included in the Third Restatement
    nor was any evidence of misconduct found other than what was
    previously reported by WilmerHale in connection with the
    Independent Review and Revenue Independent Review;

Why
items in the Third Restatement were not discovered in the Second
Restatement




| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a Global Revenue Governance, or GRG, group was formed in the
    second quarter of 2004 and the Company planned to implement a
    top-down contract review independent of the Second Restatement
    process to improve documentation for contract terms and
    conditions;
| |  | later in that same quarter, concerns were raised in the
    restatement process regarding possible revenue recognition
    issues;                                                                                                                                           
| |  | the Company addressed the concerns by initiating a review of a
    sampling of contracts focused on the specific revenue
    recognition issues identified, rather than an extensive top-down
    review of contracts;                                                       
| |  | resources available to the revenue review process in 2004 were
    limited due to other restatement and 2004 reporting activities;                                                                                                                                           
| |  | constraints in resources were dealt with by the GRG group
    requesting regional finance employees to conduct contract
    reviews which resulted in some inconsistency in reviews and
    interpretations of contracts;                                                    
| |  | notwithstanding the foregoing, the employees involved in the
    Second Restatement process believed that all material issues had
    been satisfactorily addressed;                                                                                                         
| |  | a top-down extensive contract review was implemented in 2005 and
    continued into 2006 leading to the identification of items
    contained in the Third Restatement; and                                                                                                  

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| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | additionally, no evidence was found that the scope of the
    activities associated with completing the Third Restatement was
    limited.

Remedial Measures








| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishing standards of conduct to be enforced through
    appropriate discipline;                                                                                   
| |  | infusing strong technical skills and experience into the finance
    organization;                                                                                     
| |  | requiring comprehensive, on-going training on increasingly
    complex accounting standards;                                                                           
| |  | strengthening and improving internal controls and processes;                                                                                                           
| |  | establishing a compliance program throughout the Company which
    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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Changes in Internal Control Over Financial Reporting






| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The appointment of Dennis J. Carey as our Executive
    Vice-President, Corporate Operations, which includes human
    resources, ethics and information services;                                                                                                                                                                               
| |  | The completion of the reorganization of the finance organization
    to separate the control and financial planning and analysis
    functions, with the Control group having had exclusive authority
    to initiate, approve and post general ledger entries commencing
    with the closing of the books and records as of March 31,
    2006;
| |  | In the first quarter of 2006, as part of the remediation efforts
    discussed above, we conducted a review process for new contracts
    and amendments to existing contracts entered into during the
    quarter that have a total revenue impact in excess of
    $5 million; and                                                             
| |  | The repatriation of certain company-wide information technology
    functions, services and processes, which had previously been
    outsourced to Computer Science Corporation.                                                                                                                                                                 



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PART II


OTHER INFORMATION





ITEM 1.     Legal Proceedings






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ITEM 1A.     Risk Factors






Risks Relating to Our Restatements and Related Matters




| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our three restatements of our consolidated financial
    statements and related events have had, and will continue to
    have, a material adverse effect on us.











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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and we cannot predict the
    timing of developments in these matters.                                                                                                                                                                                                                                                           
| |  | It is uncertain at this time if and when the Proposed
    Class Action Settlement will be finalized and approved. If
    the Proposed Class Action Settlement is finalized and
    approved, it would require NNC to pay $575 million in cash
    (which has already been placed into an escrow account pending
    finalization of the Proposed Class Action Settlement) and
    would result in a significant dilution of its existing equity
    positions.                                       
| |  | NNC is subject to additional significant pending civil
    litigation actions, which are not encompassed by the Proposed
    Class Action Settlement and which, if decided against it or
    as a result of settlement, could require it to pay substantial
    judgments, settlements, fines or other penalties and could
    result in the dilution of its existing equity positions, and we
    cannot predict the timing of developments in these matters.                                       
| |  | Material adverse legal judgments, fines, penalties or
    settlements, including the Proposed Class Action
    Settlement, could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.                                                                                                                                                                                                                  
| |  | We and our independent registered chartered accountants have
    identified a number of material weaknesses related to our
    internal control over financial reporting and we have concluded
    that our internal control over financial reporting was
    ineffective as of December 31, 2005. These material
    weaknesses remain unremedied, which could continue to impact our
    ability to report our results of operations and financial
    condition accurately and in a timely manner.
| |  | Full implementation of the governing principles of the
    Independent Review as they relate to remedial measures and the
    full remediation of our material weaknesses, internal control
    over financial reporting and disclosure controls and procedures
    will continue to take significant time and effort.                                                                                                                                                                               
| |  | Our credit ratings are below investment grade, and we are
    currently unable to access, in its current form, our shelf
    registration statement filed with the SEC, each of which may
    adversely affect our liquidity.                                                                                                                                                                                                                                                                        
| |  | Continuing negative publicity has adversely affected and may
    continue to adversely affect our business and the market price
    of our publicly traded securities.                                                                                                                                                                                                                                                                                                                               
| |  | We may not be able to attract or retain the personnel necessary
    to achieve our business objectives.                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Any future delays in filing our periodic reports could cause us
    to breach our public debt indentures and our obligations under
    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 or that EDC or
    the lenders would not grant us further waivers.                                                                                                      
| |  | Any future breach of the continued listing requirements of the
    NYSE and/or TSX could cause the NYSE and/or the TSX to commence
    suspension or delisting procedures.                                                                                                                                                                                                                                                                                                                           



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Material adverse legal judgments, fines, penalties or
    settlements, including the Proposed Class Action
    Settlement, could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.



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| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring us to dedicate a substantial portion of our cash
    and/or cash flow from operations to payments of such judgments,
    fines, penalties or settlements, thereby reducing the
    availability of our cash and/or cash flow to fund working
    capital, capital expenditures, R&D efforts and other general
    corporate purposes, including debt reduction;
| |  | making it more difficult for us to satisfy our payment
    obligations with respect to our outstanding indebtedness;                                                                                                                                                                                                                                                     
| |  | increasing the difficulty and/or cost to us of refinancing our
    indebtedness;                                                                                                                                                                                                                                                                                         
| |  | adversely affecting our credit ratings;                                                                                                                                                                                                                                                                                                                                  
| |  | increasing our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                                                                                                                                                    
| |  | limiting our flexibility in planning for, or reacting to,
    changes in our businesses and the industries in which we operate;                                                                                                                                                                                                                                          
| |  | making it more difficult or more costly for us to make
    acquisitions and investments;                                                                                                                                                                                                                                                                                 
| |  | limiting our ability to obtain, and/or increasing the cost of
    obtaining, directors and officers liability
    insurance and/or other types of insurance; and                                                                                                                                                                                                       
| |  | restricting our ability to introduce new technologies and
    products and/or exploit business opportunities.                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any future delays in filing our periodic reports could
    cause us to breach our public debt indentures and our
    obligations under 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 or that EDC or the lenders would not grant us further
    waivers.





| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any future breach of the continued listing requirements of
    the NYSE and TSX could cause the NYSE and/or the TSX to commence
    suspension or delisting procedures.





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Risks Relating to Our Business




| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Negative developments associated with our supply contracts
    and contract manufacturing agreements including as a result of
    using a sole supplier for key optical networking solutions
    components may materially and adversely affect our business,
    results of operations, financial condition and supply
    relationships.









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Risks Relating to Our Liquidity, Financing Arrangements and
Capital




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







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a greater than expected slowdown in capital spending by service
    providers and other customers or other changes to our business
    model could result in materially lower revenues and cash flows;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | costs incurred in connection with restructuring efforts may be
    higher than originally planned and may not lead to the
    anticipated cost savings;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | changes in market demand for networking products, which may
    require increased expenditures to develop and market different
    technologies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | we may need to make larger contributions to our defined benefit
    plans in North America and the U.K. and retirement plans in
    other countries;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | an increased portion of our cash and cash equivalents may be
    restricted as cash collateral for customer performance bonds and
    contracts if the industry or our current condition deteriorates;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | an inability of our subsidiaries to provide us with funding in
    sufficient amounts could adversely affect our ability to meet
    our obligations; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 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 the EDC Support Facility when and as needed. Our
    inability to manage cash flow fluctuations resulting from the
    above factors and the potential reduction, expiry 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. These
    circumstances could, for example:

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| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our obligations under
    our outstanding debt and other obligations and to pay any
    judgments, fines, penalties or settlements in connection with
    our pending civil litigation and investigations;
| |  | require us to delay or reduce capital expenditures or the
    introduction of new products, sell assets and/or forego business
    opportunities such as acquisitions, R&D projects or product
    design enhancements;                            
| |  | increase our vulnerability to economic downturns, adverse
    industry conditions and adverse developments in our business,
    and limit our flexibility in planning for or reacting to such
    changes; and                                     
| |  | place us at a competitive disadvantage compared to competitors
    that have greater liquidity.                                                                                                                                                    



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Covenants under the 2006 Credit Facility and the EDC
    Support Facility impose operating and financial restrictions on
    us, which may prevent us from capitalizing on business
    opportunities.





| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit our ability to create liens on our assets and the assets
    of substantially all of our subsidiaries in excess of certain
    baskets and permitted amounts;    
| |  | limit our ability and the ability of substantially all of our
    subsidiaries to merge, consolidate, amalgamate with another
    person;                              
| |  | require us to maintain at least $1,250 million of
    unrestricted cash at all times and $1,500 million as of the
    last day of each fiscal quarter; and             
| |  | restrict the ability of our subsidiaries to incur funded debt in
    excess of certain amounts without guaranteeing our obligations
    under the EDC Support Facility.



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ITEM 6.     Exhibits




|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .1*         |  | Commitment Letter dated February 1, 2006 among Nortel
    Networks Corporation, Nortel Networks Inc., J.P. Morgan
    Securities Inc., JPMorgan Chase Bank, N.A. and Citigroup Global
    Markets Inc. (filed as Exhibit 10.1 to Nortel Networks
    Limiteds Current Report on Form 8-K dated
    February 2, 2006).                                                              
|        | 10 | .2*         |  | Commitment Advice Letter Agreement dated February 1, 2006
    among Nortel Networks Corporation, Nortel Networks Inc., Royal
    Bank of Canada and J.P. Morgan Securities Inc. (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Current
    Report on Form 8-K dated February 2, 2006).                                                                                     
|        | 10 | .3*         |  | Commitment Advice Letter Agreement dated February 1, 2006
    among Nortel Networks Corporation, Nortel Networks Inc., Export
    Development Canada and J.P. Morgan Securities Inc. (filed as
    Exhibit 10.3 to Nortel Networks Limiteds Current
    Report on Form 8-K dated February 2, 2006).                                                                                
|        | 10 | .4*         |  | Securities Demand Letter dated February 1, 2006 among
    Nortel Networks Corporation, Nortel Networks Inc., J.P. Morgan
    Securities Inc. and JPMorgan Chase Bank, N.A. (filed as
    Exhibit 10.4 to Nortel Networks Limiteds Current
    Report on Form 8-K dated February 2, 2006).                                                                                          
|        | 10 | .5*         |  | 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 (filed as
    Exhibit 10.1 to Nortel Networks Limiteds Current
    Report on Form 8-K dated February 21, 2006).                       
|        | 10 | .6*         |  | Guarantee Agreement dated February 14, 2006 among Nortel
    Networks Inc., Nortel Networks Limited, Nortel Networks
    Corporation, JPMorgan Chase Bank, N.A., and Export Development
    Canada. (filed as Exhibit 10.2 to Nortel Networks
    Limiteds Current Report on Form 8-K dated
    February 21, 2006).                                                                
|        | 10 | .7*         |  | U.S. Security Agreement dated February 14, 2006 among
    Nortel Networks Inc., the subsidiary lien grantors from time to
    time party thereto, JPMorgan Chase Bank and Export Development
    Canada. (filed as Exhibit 10.3 to Nortel Networks
    Limiteds Current Report on Form 8-K dated
    February 21, 2006).                                                           
|        | 10 | .8*         |  | Canadian Security Agreement dated February 14, 2006 among
    Nortel Networks Limited, Nortel Networks Corporation, the
    subsidiary lien grantors from time to time party thereto,
    JPMorgan Chase Bank and Export Development Canada (filed as
    Exhibit 10.4 to Nortel Networks Limiteds Current
    Report on Form 8-K dated February 21, 2006).                        
|        | 10 | .9*         |  | Pascal Debon Letter Agreement dated February 21, 2006,
    concerning the cessation of Mr. Debons
    responsibilities as Senior Advisor of Nortel Networks
    Corporation and Nortel Networks Limited effective
    December 23, 2005 (filed as Exhibit 10.67 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2005).             
|        | 10 | .10*        |  | Brian McFadden letter agreement dated February 21, 2006,
    concerning the cessation of Mr. McFaddens
    responsibilities as Chief Research Officer of Nortel Networks
    Corporation and Nortel Networks Limited effective
    December 23, 2005 (filed as Exhibit 10.68 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2005).
|        | 10 | .11*        |  | 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 | .12*        |  | Amendment No. 1 and Waiver dated May 9, 2006 among
    Nortel Networks Inc., JPMorgan Chase Bank, N.A., as
    Administrative Agent and Lender, and Citicorp USA, Inc., Royal
    Bank of Canada and Export Development Canada, as Lenders (filed
    as Exhibit 10.1 to Nortel Networks Limiteds Current
    Report on Form 8-K dated May 11, 2006).                              
|        | 10 | .13*        |  | Amendment No. 1 and Waiver dated May 9, 2006 between
    Nortel Networks Limited and Export Development Canada (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Current
    Report on Form 8-K dated May 11, 2006).                                                                                                                                                          
|        | 10 | .14*        |  | Amendment No. 2 dated as of May 19, 2006 among Nortel
    Networks Inc., Nortel Networks Corporation, Nortel Networks
    Limited, JPMorgan Chase Bank, N.A., as Administrative Agent, and
    the Lenders party thereto (filed as Exhibit 10.1 to Nortel
    Networks Limiteds Current Report on Form 8-K dated
    May 19, 2006).                                                

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .15         |  | 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.
|        | 31 | .1          |  | Certification of the Vice-Chairman and Chief Executive Officer
    pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              
|        | 31 | .2          |  | Certification of the Executive Vice-President and Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350 as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                               
|        | 32 |             |  | Certification of the Vice-Chairman 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.

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SIGNATURES




NORTEL NETWORKS LIMITED


(Registrant)


|                            |  |                         
|--------------------------- |  | ------------------------
|Chief Financial Officer     |  | Chief Accounting Officer
|                           
|                           
|/s/ Peter W. Currie         |  | /s/ Paul W. Karr        
|                            |  |                         
|Peter W. Currie             |  | Paul W. Karr            
|Executive Vice-President    |  | Controller              
|and Chief Financial Officer |  |                         



92