##### 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 1934For the Quarterly Period Ended
    March 31, 2007ORo     TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES
    EXCHANGE ACT OF 1934   For
    the Transition Period From
    
    to
  Commission file number:
    000-30758
  Nortel Networks
    Limited
 (Exact name of registrant as
    specified in its charter)
  Canada

62-12-62580(State or Other Jurisdiction of
    
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)    195 The West Mall

M9C 5K1Toronto, Ontario, Canada(Address of Principal
    Executive Offices)

(Zip Code)   Registrants Telephone Number Including Area Code
    (905) 863-7000
    þ o
  Rule 12b-2
  Large
    accelerated filer o
    Accelerated
    filer o
    Non-accelerated
    filer
    þ  Rule 12b-2
  o þ
    1,460,978,638 shares of common stock without nominal or
    par value




---



##### 



TABLE OF
    CONTENTS
  PAGEPART I
    FINANCIAL INFORMATIONITEM
    1.

Condensed Consolidated Financial
    Statements (unaudited)


1ITEM
    2.

Managements Discussion and
    Analysis of Financial Condition and Results of Operations


34ITEM
    3.

Quantitative and Qualitative
    Disclosures About Market Risk


66ITEM
    4.

Controls and Procedures


67PART II
    OTHER INFORMATIONITEM
    1.

Legal Proceedings


71ITEM
    1A.

Risk Factors


72ITEM
    6.

Exhibits


73SIGNATURES




75EX-4.2EX-10.4EX-10.5EX-10.6EX-10.7EX-10.8EX-10.9EX-12EX-31.1EX-31.2EX-32                 i




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##### Table of Contents



PART I
    FINANCIAL INFORMATION ITEM 1.
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Operations (unaudited)
 (Millions
    of U.S. dollars)
  Three Months Ended March 31,2007


2006As restated*Revenues:Products

$
2,169


$
2,088Services


314



302Total revenues


2,483



2,390Cost of revenues:Products


1,301



1,295Services


178



169Total cost of revenues


1,479



1,464Gross profit


1,004



926Selling, general and
    administrative expense


603



609Research and development expense


405



475Amortization of intangibles


12



5Special charges


80



5Gain on sale of businesses and
    assets


(1
)


(39
)Operating loss


(95
)


(129
)Other income  net


86



57Interest expenseLong-term debt


(64
)


(23
)Other


(5
)


(15
)Loss from operations before income
    taxes, minority interests and equity in net loss of associated
    companies


(78
)


(110
)Income tax expense


(13
)


(25
)(91
)


(135
)Minority interests  net
    of tax


(12
)


15Equity in net loss of associated
    companies  net of tax






(2
)Net loss before cumulative effect
    of accounting change


(103
)


(122
)Cumulative effect of accounting
    change  net of tax (note 2)






9Net loss


(103
)


(113
)Dividends on preferred shares


10



8Net loss applicable to common
    shares

$
(113
)

$
(121
)     *
    
    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)
 (Millions of U.S. dollars, except for share amounts)
  March 31,


December 31,2007


2006ASSETSCurrent assetsCash and cash equivalents

$
4,549


$
3,487Restricted cash and cash
    equivalents


34



44Accounts receivable  net


2,471



3,709Inventories  net


2,048



1,989Deferred income taxes 
    net


367



276Other current assets


489



512Total current assets


9,958



10,017Investments


201



204Plant and equipment  net


1,513



1,526Goodwill


2,352



2,351Intangible assets  net


229



241Deferred income taxes 
    net


3,785



3,863Other assets


567



680Total assets

$
18,605


$
18,882LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
1,307


$
1,124Payroll and benefit-related
    liabilities


523



637Contractual liabilities


227



243Restructuring liabilities


135



97Other accrued liabilities


3,778



3,756Long-term debt due within one year


21



18Total current
    liabilities


5,991



5,875Long-term debt


2,641



2,646Deferred income taxes 
    net


48



97Other liabilities


3,836



4,128Total liabilities


12,516



12,746Minority interests in subsidiary
    companies


254



243Guarantees, commitments and
    contingencies (notes 11, 12 and 16)SHAREHOLDERS
    EQUITYPreferred shares, without par
    value  Authorized shares: unlimited; Issued and
    outstanding shares: 30,000,000 and 30,000,000 as of
    March 31, 2007 and December 31, 2006, respectively


536



536Common shares, without par
    value  Authorized shares: unlimited; Issued and
    outstanding shares: 1,460,978,638 and 1,460,978,638 as of
    March 31, 2007 and December 31, 2006, respectively


1,211



1,211Additional paid-in capital


22,322



22,298Accumulated deficit


(17,658
)


(17,544
)Accumulated other comprehensive
    loss


(576
)


(608
)Total shareholders
    equity


5,835



5,893Total liabilities and
    shareholders equity

$
18,605


$
18,882   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 2




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Cash Flows (unaudited)
    (Millions of U.S. dollars)
  Three Months Ended March 31,2007


2006As restated*Cash flows from (used in)
    operating activitiesNet loss

$
(103
)

$
(113
)Adjustments to reconcile net loss
    to net cash from (used in) operating activities, net of effects
    from acquisitions and divestitures of businesses:Amortization and depreciation


79



50Non-cash portion of special
    charges and related asset write downs






(11
)Equity in net loss of associated
    companies






2Share based compensation expense


25



25Deferred income taxes


5



15Cumulative effect of accounting
    change  net of tax






(9
)Pension and other accruals


92



101Gain on sale or write down of
    investments, businesses and assets  net


(1
)


(36
)Minority interests


12



(15
)Other  net


19



46Change in operating assets and
    liabilities


1,030



(190
)Net cash from (used in) operating
    activities


1,158



(135
)Cash flows from (used in)
    investing activitiesExpenditures for plant and
    equipment


(56
)


(99
)Proceeds on disposals of plant and
    equipment


14



87Change in restricted cash and cash
    equivalents


10



3Acquisitions of investments and
    businesses  net of cash acquired


(14
)


(121
)Proceeds from the sale of
    investments and businesses


(39
)


27Net cash from (used in) investing
    activities


(85
)


(103
)Cash flows from (used in)
    financing activitiesDividends paid


(10
)


(18
)Increase in notes payable


10



4Decrease in notes payable


(12
)


(3
)Proceeds from issuance of
    long-term debt






1,300Repayments of long-term debt






(1,275
)Decrease in capital leases payable


(5
)


(5
)Net cash from (used in) financing
    activities


(17
)


3Effect of foreign exchange rate
    changes on cash and cash equivalents


6



14Net increase (decrease) in cash
    and cash equivalents


1,062



(221
)Cash and cash equivalents at
    beginning of period


3,487



2,876Cash and cash equivalents at
    end of period

$
4,549


$
2,655     *
    
    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
      Form 10-K
  Comparative
    figures
    Recent
    accounting pronouncements
    No. 48-1, Settlement FIN 48-1 FIN 48-1 FIN 48-1 FIN 48-1
 4




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  2.
    Accounting
    changes  (a)
    Accounting
    for Certain Hybrid Financial Instruments    (b)
    Accounting
    for Servicing of Financial Assets    (c)
    Accounting
    for Uncertainty in Income Taxes    (d)
    Accounting
    for Sabbatical Leave and Other Similar Benefits  No. 06-2 06-2). 06-2 06-2 06-2
  (e)
    How
    Taxes Collected from Customers and Remitted to Governmental
    Authorities Should Be Presented in the Income
    Statement  No. 06-3 06-3). 06-3 06-3 06-3
 5




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  (f)
    Share-Based
    Payment    3.
    Restatement
    of previously issued financial statements    
    Pension and post-retirement benefits errors;
    Revenue recognition errors;
    A prior year tax error; and
    Other errors.   6




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Condensed
    Consolidated Statement of Operations for the three months ended
    March 31, 2006
  As PreviouslyReported(a)


Adjustments


As RestatedRevenues:Products

$
2,080


$
8


$
2,088Services


302







302Total revenues


2,382



8



2,390Cost of revenues:Products


1,304



(9
)


1,295Services


169







169Total cost of revenues


1,473



(9
)


1,464Gross profit


909



17



926Selling, general and
    administrative expense


594



15



609Research and development expense


474



1



475Amortization of intangibles


5







5Special charges


5







5Gain on sale of businesses and
    assets


(42
)


3



(39
)Operating loss


(127
)


(2
)


(129
)Other income  net


70



(13
)


57Interest expenseLong-term debt


(25
)


2



(23
)Other


(23
)


8



(15
)Loss before income taxes, minority
    interests and equity in net loss of associated companies


(105
)


(5
)


(110
)Income tax expense


(23
)


(2
)


(25
)(128
)


(7
)


(135
)Minority interests  net
    of tax


21



(6
)


15Equity in net loss of associated
    companies  net of tax


(2
)






(2
)Net loss before cumulative effect
    of accounting change


(109
)


(13
)


(122
)Cumulative effect of accounting
    change  net of tax


9







9Net loss


(100
)


(13
)


(113
)Dividends on preferred shares


12



(4
)


8Net loss applicable to common
    shares

$
(112
)

$
(9
)

$
(121
)     (a)
    
    In the third quarter of 2006, Nortel began disclosing revenues
    and cost of revenues from both its products and services.
    Previous quarters have been updated to reflect this presentation
    change. 7




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Adjustments
    Three Months Ended March 31, 2006Revenues


Cost of Revenues


Net LossAs previously
    reported

$
2,382


$
1,473


$
(100
)Adjustments:Pension and post-retirement
    benefits errors






3



(8
)Revenue recognition errors


8



(15
)


19Other errors






3



(24
)As restated

$
2,390


$
1,464


$
(113
)   Pension
    and post-retirement benefit errors:
        Revenue
    recognition errors:
       8




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    81-1,
  SOP 97-2,
  Statement
    of cash flows:
    4.
    Consolidated
    financial statement details    Consolidated
    statements of operations
  Other
    income  net:
  Three MonthsEnded March 31,2007


2006Interest and dividend income

$
62


$
28Loss on sale or write down of
    investments






(1
)Currency exchange gains (losses)


(1
)


1Other  net


25



29Other income  net

$
86


$
57      9




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Consolidated
    balance sheets
  Accounts
    receivable  net:
  March 31,


December 31,2007


2006Trade receivables

$
2,041


$
2,464Notes receivable


9



7Notes receivable from NNC and its
    subsidiaries


112



924Contracts in process


398



4022,560



3,797Less: provision for doubtful
    accounts


(89
)


(88
)Accounts receivable  net

$
2,471


$
3,709   Inventories 
    net:
  March 31,


December 31,2007


2006Raw materials

$
660


$
725Work in process


10



11Finished goods


688



727Deferred costs


1,921



1,9523,279



3,415Less: provision for inventory


(911
)


(1,007
)Inventories  net


2,368



2,408Less: long-term deferred
    costs(a)


(320
)


(419
)Current inventories  net

$
2,048


$
1,989     (a)
    
    Long-term portion of deferred costs
    is included in other assets. 10




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Other
    current assets:
  March 31,


December 31,2007


2006Prepaid expenses

$
190


$
175Income taxes recoverable


60



63Other


239



274Other current assets

$
489


$
512Plant
    and equipment  net:Cost:Land

$
35


$
35Buildings


1,188



1,185Machinery and equipment


2,000



2,038Capital lease assets


215



215Sale lease-back assets


92



923,530



3,565Less accumulated depreciation:Buildings


(451
)


(444
)Machinery and equipment


(1,450
)


(1,482
)Capital lease assets


(99
)


(96
)Sale lease-back assets


(17
)


(17
)(2,017
)


(2,039
)Plant and equipment 
    net(a)

$
1,513


$
1,526     (a)
    
    Includes assets held for sale with a carrying value of $53 and
    $52 as of March 31, 2007 and December 31, 2006,
    respectively, related to owned facilities that were being
    actively marketed for sale. These assets were written down in
    previous periods to their estimated fair values less estimated
    costs to sell. The write downs were included in special charges.
    Nortel expects to dispose of all these assets held for sale
    during 2007.  Goodwill:
  MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


TotalBalance  as of
    December 31,
    2006(a)

$
452


$
146


$
594


$
988


$
171


$
2,351Change:Additions






















Disposals






















Foreign exchange














1







1Other






















Balance  as of
    March 31, 2007

$
452


$
146


$
594


$
989


$
171


$
2,352     (a)
    
    Opening balances for Enterprise Solutions, Carrier Networks, and
    Metro Ethernet Networks have been decreased by $20, $19 and
    $107, respectively, and Global Services has been increased by
    $146, to reflect the reclassification of Nortels network
    implementation services to Global Services, as described in
    note 5. 11




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Intangible
    assets:
  March 31,


December 31,2007


2006Cost:Other intangible assets

$
307


$
307Less accumulated amortization:Other intangible assets


(78
)


(66
)Intangible assets  net

$
229


$
241Other accrued
    liabilities:Outsourcing and selling, general
    and administrative related provisions

$
273


$
399Customer deposits


99



78Product related provisions


85



93Warranty provisions (note 11)


202



214Deferred revenue


1,435



1,127Advance billings in excess of
    revenues recognized to date on
    contracts(a)


1,326



1,352Miscellaneous taxes


53



73Income taxes payable


38



71Tax uncertainties (note 7)


10



Interest payable


55



87Other


202



262Other accrued liabilities

$
3,778


$
3,756     (a)
    
    Includes amounts which may be recognized beyond one year due to
    the duration of certain contracts.  Other
    liabilities:
  March 31,


December 31,2007


2006Pension benefit liabilities

$
1,853


$
1,965Post-employment and
    post-retirement benefit liabilities


801



794Restructuring liabilities
    (note 6)


182



177Deferred revenue


669



919Tax uncertainties (note 7)


68



Other long-term provisions


263



273Other liabilities

$
3,836


$
4,128  12




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##### Table of Contents



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 31,2007


2006Accounts receivable  net

$
1,239


$
248Inventories  net


9



(63
)Deferred costs


31



(102
)Income taxes


(11
)


(26
)Accounts payable


185



(113
)Payroll, accrued and contractual
    liabilities


(349
)


(281
)Deferred revenue


42



64Advance billings in excess of
    revenues recognized to date on contracts


(13
)


78Restructuring liabilities


38



(19
)Other


(141
)


24Change in operating assets and
    liabilities

$
1,030


$
(190
)Interest
    and taxes paid (recovered):Cash interest paid

$
92


$
66Cash taxes paid

$
18


$
27   5.
    Segment
    information  General
    description
    
    CN provides mobility networking solutions using (i) CDMA
    solutions and GSM and UMTS solutions and (ii) carrier
    circuit and packet voice solutions. Mobility networking refers
    to communications networks that enable end-users to be mobile
    while they send and receive voice and data communications using
    wireless devices, such as cellular telephones, personal digital
    assistants, laptops and other computing and communications
    devices. These networks use specialized network access equipment
    and specialized core networking equipment that enable an
    end-user to be connected and identified when not in a fixed
    location and to roam globally. In addition, Nortels
    carrier circuit and packet voice solutions provide a broad range
    of voice solutions to its service provider customers for
    business and residential subscribers, traditional, full featured
    voice services as well as internet based voice and multimedia
    communications services using either circuit or packet-based
    switching technologies. These service provider customers include
    local and long distance telephone companies, wireless service
    providers, cable operators and other communication service
    providers. Increasingly, CN addresses customers who want to
    provide service across both wireless as well as wired devices.
    ES provides solutions to enterprise customers using
    (i) enterprise circuit and packet voice solutions,
    (ii) data networking and security solutions, which supply
    data, voice and multi-media communications solutions to
    Nortels enterprise customers, and (iii) software
    solutions for multi-media messaging, conferencing and call
    centers. Nortels solutions for enterprises are used to
    build new networks and transform their existing communications
    networks, into packet-based networks supporting data, voice and
    multi-media communications. Nortels ES customers consist
    of a broad range of enterprises around the world, including
    large businesses at their headquarters, data centers, call
    centers and their branch offices, small businesses and home
    offices, as well as government agencies, educational and other
    institutions and utility organizations. 13




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  
    GS provides a broad range of services to address the
    requirements of Nortels carrier and enterprise customers
    throughout the entire lifecycle of their networks. The GS
    portfolio is organized into four main service product groups:
    (i) network implementation services, including network
    integration, planning, installation, optimization and security
    services, (ii) network support services, including
    technical support, hardware maintenance, equipment spares
    logistics and
    on-site
    engineers, (iii) network managed services, including
    services related to the monitoring and management of customer
    networks and providing a range of network managed service
    options and (iv) network application services, including
    applications development, integration and web services.
    Nortels GS market mirrors that of its carrier and
    enterprise markets along with a broad range of customers in all
    geographic regions where Nortel conducts business, including
    small and medium-sized businesses, to large global enterprises
    and all levels of government.
    MEN combines Nortels optical networking solutions and the
    carrier portion of its data networking solutions, to transform
    its carrier and large enterprise customers networks to be
    more scalable and reliable for the high speed delivery of
    diverse multi-media communications services. By combining
    Nortels optical expertise and data knowledge, Nortel
    creates solutions that help service providers and enterprises
    better manage increasing bandwidth demands. Nortel believes that
    ethernet technology is particularly suited to these solutions
    and is integrating ethernet with Nortels optical
    technology. In addition to increased capacity and lower cost per
    bit, Nortel differentiates its MEN products on the basis of
    being able to deliver carrier-grade reliability. The
    metropolitan, or metro, network is a key focus area as bandwidth
    demands are increasing as a result of the growth of network
    based broadcast and on-demand video delivery, wireless
    backhaul for a variety of data services including
    video as well as traditional business, internet, private line
    and voice services. MEN serves the long haul optical market
    using common products and technologies from the metro optical
    market. MEN also serves high performance, mission critical
    enterprise networks.     14




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Segments
    Three Months Ended March 31,2007


2006RevenuesCarrier Networks

$
1,009


$
1,071Enterprise Solutions


597



455Global Services


448



506Metro Ethernet Networks


373



293Total reportable segments


2,427



2,325Other


56



65Total revenues

$
2,483


$
2,390Management EBTCarrier Networks

$
136


$
57Enterprise Solutions


8



(23
)Global Services


77



91Metro Ethernet Networks


(16
)


(17
)Total reportable segments


205



108Other


(204
)


(234
)Total Management EBT


1



(126
)Amortization of intangibles


(12
)


(5
)Special charges


(80
)


(5
)Gain on sale of businesses and
    assets


1



39Income tax expense


(13
)


(25
)Net loss before cumulative
    effect of accounting change

$
(103
)

$
(122
)     6.
    Special
    charges     15




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
         Contract


Plant andWorkforce


Settlement and


EquipmentReduction


Lease Costs


Write Downs


Total2007 Restructuring
    PlanProvision balance as of
    December 31, 2006

$



$



$



$
Other special charges


57



18







75Revisions to prior accruals














Cash drawdowns


(6
)










(6
)Non-cash drawdowns


(2
)










(2
)Provision balance as of
    March 31, 2007

$
49


$
18


$



$
672006 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
38


$



$



$
38Other special charges


11











11Revisions to prior accruals


(6
)










(6
)Cash drawdowns


(15
)










(15
)Non-cash drawdowns














Provision balance as of
    March 31, 2007

$
28


$



$



$
282004 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
3


$
53


$



$
56Other special charges














Revisions to prior accruals














Cash drawdowns


(1
)


(3
)






(4
)Non-cash drawdowns














Provision balance as of
    March 31, 2007

$
2


$
50


$



$
522001 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
2


$
178


$



$
180Other special charges














Revisions to prior accruals


(1
)


1







Cash drawdowns






(10
)






(10
)Non-cash drawdowns














Provision balance as of
    March 31, 2007

$
1


$
169


$



$
170Total provision balance as of
    March 31,
    2007(a)

$
80


$
237


$



$
317     (a)
    
    As of March 31, 2007 and
    December 31, 2006, the short-term provision balances were
    $135 and $97, respectively, and the long-term provision balances
    were $182 and $177, respectively. 16




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   2007
    Restructuring Plan
  Three
    months ended March 31, 2007
    2006
    Restructuring Plan
  Three
    months ended March 31, 2007
    2004
    Restructuring Plan
  Three
    months ended March 31, 2007
    2001
    Restructuring Plan
  Three
    months ended March 31, 2007
    Segments
    MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


Total2007 Restructuring Plan

$
11


$
45


$
15


$
4


$



$
752006 Restructuring Plan


1



3



1











52004 Restructuring Plan






















2001 Restructuring Plan






















Total special charges for the
    three months ended March 31, 2007

$
12


$
48


$
16


$
4


$



$
802006 Restructuring Plan

$



$



$



$



$



$
2004 Restructuring Plan


1



1



1











32001 Restructuring Plan






2















2Total special charges for the
    three months ended March 31, 2006

$
1


$
3


$
1


$



$



$
5  17




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    7.
    Income
    taxes                     18




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
          8.
    Employee
    benefit plans    and/or
     19




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
     Three Months Ended March 31,2007


2006Pension expense:Service cost

$
30


$
35Interest cost


115



113Expected return on plan assets


(121
)


(109
)Amortization of prior service cost


1



1Amortization of net losses


26



34Curtailment, contractual and
    special termination losses


2



1Net pension expense

$
53


$
75     Three Months Ended March 31,2007


2006Post-retirement benefit
    cost:Service cost

$
1


$
2Interest cost


8



11Amortization of prior service cost


(2
)


(1
)Amortization of net losses






1Net post-retirement benefit cost

$
7


$
13     9.
    Acquisitions,
    divestitures and closures  Acquisitions
  LG-Nortel
    Co. Ltd. Business Venture
    Divestitures
  Manufacturing
    operations
   20




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  and/or
  10.
    Long-term
    debt  Convertible
    notes offering
                Support
    facility
   21




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    sub-facility.
  11.
    Guarantees    (a)
    Business
    sale and business combination agreements  In connection with agreements for the sale of portions of its
    business, including certain discontinued operations, Nortel has
    typically retained the liabilities of a business which relate to
    events occurring prior to its sale, such as tax, environmental,
    litigation and employment matters. Nortel generally indemnifies
    the purchaser of a Nortel business in the event that a third
    party asserts a claim against the purchaser that relates to a
    liability retained by Nortel. Some of these types of guarantees
    have indefinite terms while others have specific terms extending
    to June 2008.Nortel also entered into guarantees related to the escrow of
    shares in business combinations in prior periods. These types of
    agreements generally include indemnities that require Nortel to
    indemnify counterparties for losses incurred from litigation
    that may be suffered by counterparties arising under such
    agreements. These types of indemnities apply over a specified
    period of time from the date of the business combinations and do
    not provide for any limit on the maximum potential amount.Nortel is unable to estimate the maximum potential liability for
    these types of indemnification guarantees as the business sale
    agreements generally do not specify a maximum amount and the
    amounts are dependent upon the outcome of future contingent
    events, the nature and likelihood of which cannot be determined.Historically, Nortel has not made any significant
    indemnification payments under such agreements and no
    significant liability has been accrued in the consolidated
    financial statements with respect to the obligations associated
    with these guarantees.In conjunction with the sale of a subsidiary to a third party,
    Nortel guaranteed to the purchaser that specified annual sales
    volume levels would be achieved by the business sold over a ten
    year period ending December 31, 2007. The maximum amount
    that Nortel may be required to pay under the volume guarantee as
    of March 31, 2007 is $10. A liability of $8 has been
    accrued in the consolidated financial statements as of
    March 31, 2007 with respect to the obligation associated
    with this guarantee.  (b)
    Intellectual
    property indemnification obligations  Nortel has periodically entered into agreements with customers
    and suppliers which include intellectual property
    indemnification obligations that are customary in the industry.
    These types of guarantees typically have indefinite terms and
    generally require Nortel to compensate the other party for
    certain damages and costs incurred as a result of third party
    intellectual property claims arising from these transactions.The nature of the intellectual property indemnification
    obligations generally prevents Nortel from making a reasonable
    estimate of the maximum potential amount it could be required to
    pay to its customers and suppliers. 22




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Historically, Nortel has not made any significant
    indemnification payments under such agreements. As of
    March 31, 2007, no liability has been accrued in the
    consolidated financial statements with respect to Nortels
    intellectual property indemnification obligations.  (c)
    Lease
    agreements  Nortel has entered into agreements with its lessors that
    guarantee the lease payments of certain assignees of its
    facilities to lessors. Generally, these lease agreements relate
    to facilities Nortel vacated prior to the end of the term of its
    lease. These lease agreements require Nortel to make lease
    payments throughout the lease term if the assignee fails to make
    scheduled payments. Most of these lease agreements also require
    Nortel to pay for facility restoration costs at the end of the
    lease term if the assignee fails to do so. These lease
    agreements have expiration dates through June 2015. The maximum
    amount that Nortel may be required to pay under these types of
    agreements is $37 as of March 31, 2007. Nortel generally
    has the ability to attempt to recover such lease payments from
    the defaulting party through rights of subrogation.Historically, Nortel has not made any significant payments under
    these types of guarantees and no significant liability has been
    accrued in the consolidated financial statements with respect to
    the obligations associated with these guarantees.  (d)
    Debt
    agreements  From time to time, Nortel guarantees the debt of certain
    customers. These third party debt agreements require Nortel to
    make debt payments throughout the term of the related debt
    instrument if the customer fails to make scheduled debt
    payments. Under most such arrangements, Nortels guarantee
    is secured, usually by the assets being purchased or financed.
    As of March 31, 2007, Nortel had no third party debt
    agreements that would require it to make any debt payments for
    its customers.Nortel is a full and unconditional guarantor of NNCs
    $1,800 4.25% convertible senior notes due September 1,
    2008, in the event that NNC does not make payments for the
    principal, premium, if any, interest and other amounts, if any,
    as they are due. The maximum amount that Nortel may be required
    to pay under this guarantee is $1,800 plus the premium, if any,
    and accrued and unpaid interest. No amount has been accrued in
    the consolidated financial statements with respect to the
    obligation associated with this guarantee.Nortel is a full and unconditional guarantor of NNCs 2012
    Convertible Notes and 2014 Convertible Notes, in the event that
    NNC does not make payments for the principal, premium, if any,
    interest and other amounts, if any, as they are due. The maximum
    amount that Nortel may be required to pay under these guarantees
    is $1,150 plus the premium, if any, and accrued and unpaid
    interest. No amount has been accrued in the consolidated
    financial statements with respect to the obligation associated
    with this guarantee.  (e)
    Indemnification
    of lenders and agents under credit facilities and EDC Support
    Facility  Nortel has agreed to indemnify the banks and their agents under
    its credit facilities against costs or losses resulting from
    changes in laws and regulations which would increase the
    banks costs or reduce their return and from any legal
    action brought against the banks or their agents related to the
    use of loan proceeds. Nortel has also agreed to indemnify EDC
    under the EDC Support Facility against any legal action brought
    against EDC that relates to the provision of support under the
    EDC Support Facility. This indemnification generally applies to
    issues that arise during the term of the EDC Support Facility.Nortel is unable to estimate the maximum potential liability for
    these types of indemnification guarantees as the agreements
    typically do not specify a maximum amount and the amounts are
    dependent upon the outcome of future contingent events, the
    nature and likelihood of which cannot be determined at this time.Historically, Nortel has not made any significant
    indemnification payments under such agreements and no
    significant liability has been accrued in the consolidated
    financial statements with respect to the obligations associated
    with these indemnification guarantees. 23




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Nortel has agreed to indemnify certain of its counterparties in
    certain receivables securitization transactions. The
    indemnifications provided to counterparties in these types of
    transactions may require Nortel to compensate counterparties for
    costs incurred as a result of changes in laws and regulations
    (including tax legislation) or in the interpretations of such
    laws and regulations, or as a result of regulatory penalties
    that may be suffered by the counterparty as a consequence of the
    transaction. Certain receivables securitization transactions
    include indemnifications requiring the repurchase of the
    receivables, if the particular transaction becomes invalid. As
    of March 31, 2007, Nortel had approximately $206 of
    securitized receivables which were subject to repurchase under
    this provision, in which case Nortel would assume all rights to
    collect such receivables. The indemnification provisions
    generally expire upon expiration of the securitization
    agreements, which extend through 2007, or collection of the
    receivable amounts by the counterparty.Nortel is generally unable to estimate the maximum potential
    liability for these types of indemnification guarantees as
    certain agreements do not specify a maximum amount and the
    amounts are dependent upon the outcome of future contingent
    events, the nature and likelihood of which cannot be determined
    at this time.Historically, Nortel has not made any significant
    indemnification payments under such agreements and no
    significant liability has been accrued in the consolidated
    financial statements with respect to the obligations associated
    with these guarantees.  (f)
    Other
    indemnification agreements  Nortel has also entered into other agreements that provide
    indemnifications to counterparties in certain transactions
    including investment banking agreements, guarantees related to
    the administration of capital trust accounts, guarantees related
    to the administration of employee benefit plans, indentures for
    its outstanding public debt and asset sale agreements (other
    than the business sale agreements noted above). These
    indemnification agreements generally require Nortel to indemnify
    the counterparties for costs incurred as a result of changes in
    laws and regulations (including tax legislation) or in the
    interpretations of such laws and regulations
    and/or as a
    result of losses from litigation that may be suffered by the
    counterparties arising from the transactions. These types of
    indemnification agreements normally extend over an unspecified
    period of time from the date of the transaction and do not
    typically provide for any limit on the maximum potential payment
    amount. In addition, Nortel has entered into indemnification
    agreements with certain of its directors and officers for the
    costs reasonably incurred in any proceeding in which they become
    involved by reason of their position as directors or officers to
    the extent permitted under applicable law.The nature of such agreements prevents Nortel from making a
    reasonable estimate of the maximum potential amount it could be
    required to pay to its counterparties and directors and
    officers. The difficulties in assessing the amount of liability
    result primarily from the unpredictability of future changes in
    laws, the inability to determine how laws apply to
    counterparties and the lack of limitations on the potential
    liability.Nortel has included specified price trade-in rights in certain
    customer arrangements that qualify as guarantees. As of
    March 31, 2007, Nortel had accrued $18 with respect to
    these indemnification obligations.On March 17, 2006, in connection with the Global
    Class Action Settlement (as defined in note 16), NNC
    announced that it had reached an agreement with the lead
    plaintiffs on the related insurance and corporate governance
    matters including NNCs insurers agreeing to pay $229 in
    cash towards the settlement and NNC agreeing with their insurers
    to certain indemnification obligations. NNC believes that these
    indemnification obligations would be unlikely to materially
    increase its total cash payment obligations under the Global
    Class Action Settlement. NNC is aware of one claim made to
    the insurers by a former officer, but information is not
    available at this time to make a reasonable estimate of the
    amount for which NNC may be liable. As a result, NNC has not
    recorded a contingent liability as at March 31, 2007. The
    insurers payments would not reduce the amounts payable by
    NNC as disclosed in note 16. 24




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Product
    warranties
    Balance as of December 31,
    2006

$
214Payments


(38
)Warranties issued


52Revisions


(26
)Balance as of March 31, 2007

$
202   12.
    Commitments  Bid,
    performance related and other bonds
      March 31,


December 31,2007


2006Bid and performance related
    bonds(a)

$
201


$
231Other
    bonds(b)


19



30Total bid, performance related and
    other bonds

$
220


$
261     (a)
    Net of restricted cash and cash
    equivalent amounts of $3 and $7 as of March 31, 2007 and
    December 31, 2006, respectively.(b)
    Net of restricted cash and cash
    equivalent amounts of $31 and $33 as of March 31, 2007 and
    December 31, 2006, respectively.  Venture
    capital financing
  start-ups
  Nortel
    and Microsoft Corporation Alliance
  go-to-market
   25




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    13.
    Shareholders
    equity    AccumulatedAdditional





OtherPreferred


Common


Paid-In


Accumulated


ComprehensiveShares


Shares


Capital


Deficit


Loss


TotalBalance  as of
    December 31, 2006

$
536


$
1,211


$
22,298


$
(17,544
)

$
(608
)

$
5,893Net loss














(103
)






(103
)Foreign currency translation
    adjustment


















13



13Unrealized loss on
    investments  net


















(2
)


(2
)Pension liability
    adjustment  net


















15



15Unrealized derivative gain on cash
    flow hedges  net


















6



6Stock-based compensation










24











24Adoption of FIN 48
    (notes 2 and 7)














(1
)






(1
)Dividend














(10
)






(10
)Other






















Balance  as of
    March 31, 2007

$
536


$
1,211


$
22,322


$
(17,658
)

$
(576
)

$
5,835     Three Months Ended March 31,2007


2006Net loss

$
(103
)

$
(113
)Other comprehensive income (loss)
    adjustments:Change in foreign currency
    translation adjustment


13



(23
)Unrealized gain (loss) on
    investments 
    net(a)


(2
)


1Pension liability
    adjustment  net


15



6Unrealized derivative earnings
    (loss) on cash flow hedges 
    net(b)


6



(14
)Comprehensive loss

$
(71
)

$
(143
)     (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 loss
    and were included in accumulated other comprehensive loss until
    realized. Unrealized gain (loss) on investments was net of tax
    of nil and nil for the three months ended March 31, 2007
    and 2006, respectively.(b)
    During the three months ended
    March 31, 2007 and 2006, $5 and $5 of net derivative gains
    (losses) were reclassified to other income  net,
    respectively. Nortel estimates that $4 of net derivative losses
    included in accumulated other comprehensive loss will be
    reclassified into net earnings (loss) within the next
    12 months. 26




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  14.
    Stock-based
    compensation plans  Stock
    options
  1 3
         27




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Restricted
    stock units and performance stock units
        Stock-based
    compensation
    Three MonthsEnded March 31,2007


2006(a)Stock-based
    compensation:Stock option expense

$
20


$
14RSU expense


4



2PSU expense


1



Total stock-based compensation
    reported

$
25


$
16     (a)
    
    Includes a reduction of stock-based
    compensation expense of approximately $9 recognized in the
    first quarter of 2006 to align Nortels recognition of
    stock option forfeitures with the adoption of SFAS 123R.   28




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
     Three Months Ended March 31,2007


2006(d)Black-Scholes weighted-average
    assumptionsExpected dividend yield


0.00
%


Expected
    volatility(a)


53.56
%


Risk-free interest
    rate(b)


4.43
%


Expected option life in
    years(c)


4



Weighted-average stock option
    fair value per option granted

$
11.86



     (a)
    The expected volatility of
    NNCs stock is estimated using the daily historical stock
    prices over a period equal to the expected term.(b)
    Nortel used the five year
    government treasury bill rate to approximate the four year risk
    free rate.(c)
    The expected term of the stock
    options is estimated based on historical grants with similar
    vesting periods.(d)
    Due to the restatement effected in
    the second quarter of 2006 and the suspension of trading under
    the plans, no awards were granted by NNC in the first quarter of
    2006.    Three MonthsEnded March 31,2007


2006(b)Monte Carlo
    assumptionsBeta


1.9



Risk-free interest
    rate(a)


4.46
%


     (a)
    The risk-free rate used was the
    three year government treasury bill rate.(b)
    Due to the restatement effected in
    the second quarter of 2006 and the suspension of trading under
    the plans, no awards were granted by NNC in the first quarter of
    2006.      15.
    Related
    party transactions   29




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
     Three MonthsEnded March 31,2007


2006Revenues:LG Electronics
    Inc.(a)

$
7


$
1Vertical Communications Systems
    Inc.(b)


4



Other


2



1Total

$
13


$
2Purchases:LG Electronics
    Inc.(a)


79



53Sasken Communications Technology
    Ltd.
    (Sasken)(c)


5



8GNTEL Co., Ltd
    (GNTEL)(d)


15



9Other


1



Total

$
100


$
70     (a)
    
    LGE holds a minority interest in
    LG-Nortel. Nortels sales and purchases relate primarily to
    certain inventory related items. As of March 31, 2007,
    accounts payable to LGE was $89, compared to $76 as at
    December 31, 2006.(b)
    
    LG-Nortel currently owns a minority
    interest in Vertical Communications Ltd. (Vertical),
    which on December 1, 2006 acquired Vodavi. Vertical
    supports LG-Nortels efforts to distribute Nortels
    products to the North American market.(c)
    
    Nortel currently owns a minority
    interest in Sasken. Nortels purchases from Sasken relate
    primarily to software and other software development related
    purchases. As of March 31, 2007, accounts payable to Sasken
    was $2, compared to $2 as at December 31, 2006.(d)
    
    Nortel holds a minority interest in
    GNTEL through its business venture LG-Nortel. Nortels
    purchases from GNTEL relate primarily to installation and
    warranty services. As of March 31, 2007, accounts payable
    to GNTEL was $15, compared to $17 as at December 31, 2006.    March 31,


December 31,2007


2006Consolidated balance
    sheetsOwing (to) from NNC  net

$
(228
)

$
847Owing from NNC
    subsidiaries  net


83



77Other related parties


(90
)


(84
)Related party receivables
    (payables)

$
(235
)

$
840   16.
    Contingencies     30




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                 31




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
            out-of-pocket
       32




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
     Environmental
    matters
          de minimis de minimis de
    minimis
   33




---



##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  TABLE OF
    CONTENTS
  Executive
    Overview


34Restatements;
    Remedial Measures and the Elimination of Material Weaknesses;
    Related Matters


38Results of
    Operations


39Segment
    Information


43Liquidity and
    Capital Resources


46Off-Balance Sheet
    Arrangements


51Application of
    Critical Accounting Policies and Estimates


52Accounting Changes
    and Recent Accounting Pronouncements


63Outstanding Share
    Data


64Market
    Risk


64Environmental
    Matters


64Legal
    Proceedings


65Cautionary Notice
    Regarding Forward-Looking Information


65   The following Managements Discussion and Analysis, or
    MD&A, is intended to help the reader understand the results
    of operations and financial condition of Nortel. The MD&A
    should be read in combination with our unaudited condensed
    consolidated financial statements and the accompanying notes.
    All dollar amounts in this MD&A are in millions of United
    States, or U.S., dollars except per share amounts or unless
    otherwise stated.
  Certain statements in this MD&A contain words such as
    could, expects, may,
    anticipates, believes,
    intends, estimates, plans,
    envisions, seeks and other similar
    language and are considered forward-looking statements or
    information under applicable securities laws. These statements
    are based on our current expectations, estimates, forecasts and
    projections about the operating environment, economies and
    markets in which we operate which we believe are reasonable but
    which are subject to important assumptions, risks and
    uncertainties and may prove to be inaccurate. Consequently our
    actual results could differ materially from our expectations set
    out in this MD&A. In particular, see the Risk Factors
    section of this report and our Annual Report on
    Form 10-K
    for the year ended December 31, 2006, or 2006 Annual
    Report, for factors that could cause actual results or events to
    differ materially from those contemplated in forward-looking
    statements. Unless required by applicable securities laws, we
    disclaim any intention or obligation to publicly update or
    revise any forward-looking statements, whether as a result of
    new information, future events or otherwise. We are the
    principal direct operating subsidiary of Nortel Networks
    Corporation, or NNC. NNC holds all of our outstanding common
    shares but none of our outstanding preferred shares.
 Executive
    Overview  Our
    Business and Strategy
     34




---



##### Table of Contents



peer-to-peer
          end-to-end
   35




---



##### Table of Contents



How We
    Measure Business Performance
      First
    Quarter Financial Highlights
    For the Three Months EndedMarch 31,


March 31,2007


2006


$ Change


% ChangeRevenues

$
2,483


$
2,390


$
93



4Gross Profit


1,004



926



78



8Gross Margin %


40.4
%


38.7
%






1.7 ptsSelling, General and
    Administrative Expense


603



609



(6
)


(1
)Research and Development Expense


405



475



(70
)


(15
)Operating Margin


(4
)


(158
)


154Operating Margin %


-0.2
%


-6.6
%






6.4 ptsInterest Expense


(69
)


(38
)


(31
)Other Income  Net


86



57



29



51Minority Interest


(12
)


15



(27
)


(180
)Equity in Net Loss of Associated
    Companies  Net of Tax






(2
)


2Management EBT


1



(126
)


127Amortization of Intangibles


12



5



7



140Special Charges


80



5



75



1,400Gain on Sale of Businesses and
    Assets


(1
)


(39
)


38Income Tax Expense


(13
)


(25
)


12Net Loss Before Cumulative Effect
    of Accounting Change

$
(103
)

$
(122
)


19    36




---



##### Table of Contents




    Revenues increased 4% to $2,483:  Revenues
    increased in the first quarter of 2007 compared to the first
    quarter of 2006 in the ES and MEN segments, partially offset by
    declines in the CN and GS segments. From a geographic
    perspective, the increase was driven by the Asia and
    U.S. regions, partially offset by declines in the Caribbean
    and Latin America, or CALA, and Europe, Middle East and Africa,
    or EMEA, regions. The revenue growth is primarily attributable
    to deferred revenues recognized in the first quarter of 2007 due
    to our ongoing completion or elimination of customer deliverable
    obligations and CDMA growth, partially offset by declines in the
    CN and GS segments related to the divestiture of certain assets
    and liabilities related to our UMTS Access business, which was
    completed in the fourth quarter of 2006 and impacted the CN and
    GS segments.
    Gross margin increased 1.7 percentage points to
    40.4%:  The increase was predominantly due to the
    shift in product mix in the first quarter of 2007 as compared to
    the first quarter of 2006, most significantly in the CN and GS
    segments primarily due to the UMTS Access divestiture.
    Operating margin increased by $154 to a loss of
    $4:  The increase was predominately due to
    increased gross profit as a result of the increase in revenues
    and gross margins, and decreased R&D expenses in the first
    quarter of 2007 compared to the first quarter of 2006 as a
    result of continued momentum related to our business
    transformation initiatives and the UMTS Access divestiture.
    Management EBT increased by $127 to an income of
    $1:  The increase in Management EBT was driven
    primarily by increases in the CN and ES segments. The CN and GS
    segments continued to be significantly more profitable than ES
    and MEN.
    Net loss decreased $19 to a net loss of $103 from a net loss
    of $122:  The decrease in net loss was driven
    primarily by decreases in operating expenses and an increase in
    operating margin.
    Cash and cash equivalents increased $1,062 from
    December 31, 2006 to $4,549 at March 31,
    2007:  The increase in cash was primarily driven
    by net cash from operating activities of $1,158 and net positive
    impacts from foreign exchange of $6, partially offset by net
    cash used in investing activities of $85 and net cash used in
    financing activities of $17.  Significant Business Developments
  Convertible
    Notes Offering
    Business
    Transformation Initiatives
    Global
    Class Action Settlement
   37




---



##### Table of Contents



Appointment
    of KPMG LLP
   Restatements;
    Remedial Measures and the Elimination of Material Weaknesses;
    Related Matters  Restatements
    Form 10-K
  Form 10-K.
    
    lack of sufficient cross-functional communication and
    coordination, including further definition of roles and
    responsibilities, with respect to the scope and timing of
    customer arrangements, insufficient segregation of duties in
    certain areas, delayed implementation of Nortel review processes
    and personnel for our business venture with LG Electronics,
    Inc., or LG-Nortel, and insufficient controls over certain end
    user computing applications, all of which impact upon the
    appropriate application of U.S. GAAP to revenue generating
    transactions.   38




---



##### Table of Contents



Three Months Ended March 31, 2006Cost of


Net EarningsRevenues


Revenues


(Loss)As previously
    reported

$
2,382


$
1,473


$
(100
)Adjustments:Pension and post-retirement errors






3



(8
)Revenue recognition errors


8



(15
)


19Other errors






3



(24
)As restated

$
2,390


$
1,464


$
(113
)   Regulatory
    Actions
   Results
    of Operations  Revenues
    For the Three Months Ended March 31,2007


2006


$ Change


% ChangeUnited States

$
1,216


$
1,128


$
88



8EMEA


578



633



(55
)


(9
)Canada


173



162



11



7Asia


382



305



77



25CALA


134



162



(28
)


(17
)Consolidated

$
2,483


$
2,390


$
93



4      39




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##### Table of Contents



Gross
    Margin
  For the Three Months Ended March 31,2007


2006


$ Change


% ChangeGross Profit

$
1,004


$
926


$
78



8Gross Margin


40.4
%


38.7
%






1.7 pts     Operating
    Margin
  For the Three Months Ended March 31,2007


2006


$ Change


% ChangeOperating Margin

$
(4
)

$
(158
)

$
154



97Operating Margin as a Percentage
    of Revenue


(0.2
)%


(6.6
)%






6.4 pts    40




---



##### Table of Contents



Special
    Charges
    For the Three Months Ended March 31,2007


2006


$ Change


% Change2007 Restructuring Plan

$
75


$



$
752006 Restructuring Plan


5







52004 Restructuring Plan






3



(3
)


(100
)2001 Restructuring Plan






2



(2
)


(100
)Total Special Charges

$
80


$
5


$
75



1,500   2007
    Restructuring Plan
    2006
    Restructuring Plan
    2004
    Restructuring Plan
    2001
    Restructuring Plan
   41




---



##### Table of Contents



2007Restructuring


2006 Restructuring


2004 Restructuring


2001 Restructuring


Total SpecialPlan


Plan


Plan


Plan


Charges2007


2007


2006


2007


2006


2007


2006


2007


2006Special charges by
    segment:Carrier Networks

$
45


$
3


$



$



$
1


$



$
2


$
48


$
3Enterprise Solutions


11



1











1











12



1Metro Ethernet Networks


15



1











1











16



1Global Services


4



























4



Other


































Total special charges

$
75


$
5


$



$




3


$



$
2


$
80


$
5   Gain on
    Sale of Businesses and Assets
    Other
    Income  Net
    For the Three Months Ended March 31,2007


2006Interest and dividend
    income(a)

$
62


$
28Loss on sale or write down of
    investments






(1
)Currency exchange
    gains(b)


(1
)


1Other  net


25



29Other income  net

$
86


$
57     (a)
    Interest and dividend income on our short-term investments.(b)
    Currency exchange gains and losses were primarily related to
    day-to-day
    transactional activities.  sub-lease mark-to-market
    Interest
    Expense
   42




---



##### Table of Contents



Income
    Tax Expense
       Segment
    Information  Carrier
    Networks
    For the Three Months Ended March 31,2007


2006


$ Change


% ChangeRevenueCDMA solutions

$
568


$
439


$
129



29GSM and UMTS solutions


271



436



(165
)


(38
)Circuit and packet voice solutions


170



196



(26
)


(13
)Total Revenue

$
1,009


$
1,071


$
(62
)


(6
)Management EBT

$
136


$
57


$
79



139          43




---



##### Table of Contents



Enterprise
    Solutions
    For the Three Months Ended March 31,2007


2006


$ Change


% ChangeRevenueCircuit and packet voice solutions

$
375


$
327


$
48



15Data networking and security
    solutions


222



128



94



73Total Revenue

$
597


$
455


$
142



31Management EBT

$
8


$
(23
)

$
31



             Global
    Services
    For the Three Months Ended March 31,2007


2006


$ Change


% ChangeRevenue

$
448


$
506


$
(58
)


(11
)Management EBT

$
77


$
91


$
(14
)


(15
)  44




---



##### Table of Contents



Metro
    Ethernet Networks
    For the Three Months Ended March 31,2007


2006


$ Change


% ChangeRevenueOptical Networking Solutions

$
263


$
212


$
51



24Data Networking and Security
    Solutions


110



81



29



36Total Revenue

$
373


$
293


$
80



27Management EBT

$
(16
)

$
(17
)

$
1



         Other
  For the Three Months Ended March 31,2007


2006


$ Change


% ChangeRevenue

$
56


$
65


$
(9
)


(14
)Management EBT

$
(204
)

$
(234
)

$
30



    45




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##### Table of Contents



Liquidity
    and Capital Resources  Cash
    Flow
      For the Three Months Ended March 31,2007


2006


ChangeNet Loss

$
(103
)

$
(113
)

$
10Non-Cash Items


231



168



63Accounts receivable  net

$
1,239


$
248


$
991Inventories  net


9



(63
)


72Accounts payable


185



(113
)


2981,433



72



1,361Deferred costs


31



(102
)


133Income taxes


(11
)


(26
)


15Payroll accrued and contractual
    liabilities


(349
)


(281
)


(68
)Deferred revenue


42



64



(22
)Advanced billings in excess of
    revenues recognized to date on contracts


(13
)


78



(91
)Restructuring liabilities


38



(19
)


57Other


(141
)


24



(165
)Changes in operating assets and
    liabilities


1,030



(190
)


1,220Net cash from (used in) operating
    activities


1,158



(135
)


1,293Net cash from (used in) investing
    activities


(85
)


(103
)


18Net cash from (used in) financing
    activities


(17
)


3



(20
)Effect of foreign exchange rate
    changes on cash and cash equivalents


6



14



(8
)Net increase (decrease) in cash
    and cash equivalents


1,062



(221
)


1,283Cash and cash equivalents at
    beginning of period


3,487



2,876



611Cash and cash equivalents at end
    of period

$
4,549


$
2,655


$
1,894   Operating
    Activities
   46




---



##### Table of Contents



Accounts
    Receivable
  March 31, 2007


December 31, 2006


$ Change


% ChangeAccounts Receivable

$
2,359


$
2,785


$
(426
)


(15
)Days sales outstanding in accounts
    receivable (DSO)(a)


86



75     (a)
    
    DSO is the average number of days
    our receivables are outstanding based on a 90 day cycle.
    DSO is a metric that approximates the measure of the average
    number of days from when we recognize revenue until we collect
    cash from our customers. DSO for each quarter is calculated by
    dividing the quarter end accounts
    receivable-net
    balance by revenues for the quarter, in each case as determined
    in accordance with U.S. GAAP, and multiplying by
    90 days.    Inventory
  March 31, 2007


December 31, 2006


$ Change


% ChangeInventory (excluding deferred
    costs)

$
447


$
456


$
(9
)


(2
)Net inventory days
    (NID)(a)


27



22     (a)
    
    NID is the average number of days
    from procurement to sale of our product based on a 90 day
    cycle. NID for each quarter is calculated by dividing the
    average of the current quarter and prior quarter
    inventories  net (excluding deferred costs) by the
    cost of revenues for the quarter and multiplying by 90 days.    Accounts
    Payable
  March 31, 2007


December 31, 2006


$ Change


% ChangeTrade Accounts Payable

$
1,014


$
1,085


$
(71
)


(7
)Days of purchases outstanding in
    accounts
    payable (DPO)(a)


62



49     (a)
    
    DPO is the average number of days
    from when we receive purchased goods and services until we pay
    our suppliers based on a 90 day cycle. DPO for each quarter
    is calculated by dividing the quarter end trade and other
    accounts payable by the cost of revenues for the quarter, in
    each case as determined in accordance with U.S. GAAP, and
    multiplying by 90 days.    Investing
    Activities
   47




---



##### Table of Contents



Financing
    Activities
      Other
    Items
      Convertible
    Notes Offering
             48




---



##### Table of Contents



Future
    Uses and Sources of Liquidity
    
    We expect our ability to increase revenue and generate positive
    cash from operating activities to be a primary uncertainty
    regarding our liquidity. In prior years, our operating results
    have produced negative cash flow from operations due in large
    part to our inability to reduce operating expenses as a
    percentage of revenue and the continued negative impact on gross
    margin due to competitive pressures, product mix and other
    factors discussed in this report. If capital spending by our
    customers changes or pricing and margins change from what we
    currently expect, our revenues and cash flows may be materially
    lower and we may be required to further reduce our investments
    or take other measures in order to meet our cash requirements;
    We are under continuing regulatory and criminal investigations
    and subject to litigation proceedings and, as a result, any
    fines or other penalties or judgments or settlements in
    connection with our pending civil litigation not encompassed by
    the Global Class Action Settlement, or regulatory or
    criminal investigations related to the restatements, could have
    a material adverse effect on our business, results of
    operations, financial condition and liquidity, other than
    anticipated professional fees and expenses; and
    Our ability and willingness to access the capital markets is
    based on many factors including market conditions and our
    overall financial objectives. Currently, our ability is limited
    by the covenant restrictions in our indentures and by our and
    NNCs credit ratings and which have, in part, contributed
    to our increased interest and borrowing costs. We cannot provide
    any assurance that our net cash requirements will be as we
    currently expect, that we will be able to refinance any maturing
    debt as it comes due or that financings will be available to us
    on acceptable terms, or at all.  Future
    Uses of Liquidity
    
    cash contributions for pension, post retirement and post
    employment funding of approximately $365;
    capital expenditures of approximately $300;
    costs related to workforce reductions and real estate actions in
    connection with the 2007 Restructuring Plan of approximately
    $210;
    costs related to workforce reduction and other restructuring
    activities for all other restructuring plans of approximately
    $100;
    costs associated with the completion of the divestiture of our
    manufacturing operations to Flextronics and the divestiture of
    certain assets and liabilities related to our UMTS Access
    business to Alcatel-Lucent of approximately $40 and $45,
    respectively;
    costs related to our finance transformation project which will
    include, among other things, implementing SAP to provide an
    integrated global financial system, of approximately $35; and
    costs related to our regulatory and other legal proceedings.  and/or
 49




---



##### Table of Contents



Contractual
    cash obligations
    Future
    Sources of Liquidity
      Available
    support facility
    
    $300 of committed revolving support for performance bonds or
    similar instruments with individual amounts of up to $10, of
    which $97 was outstanding; and
    $450 of uncommitted support for performance bonds or similar
    instruments
    and/or
    receivables sales
    and/or
    securitizations, of which $38 was outstanding.    and/or
       50




---



##### Table of Contents



Shelf
    registration statement and base shelf prospectus
  Form 10-K, Form 10-K/A
  Credit
    Ratings
  Moodys


S&PNNLs Corporate Family Rating


B3



NNLs Long-term Corporate
    Credit Rating






B−NNLs $2,000 High-Yield Notes


B3



B−NNCs $1,800 Convertible
    Notes due 2008


B3



B−NNCs $1,150 Convertible
    Notes due 2012 and 2014


B3



B−NNLs $200 Notes due 2023


B3



CCCNNCCs $150 Notes due 2026


B3



CCCNNL Preferred Shares:Series 5


Caa3



CCC−Series 7


Caa3



CCC−   and/or
 Off-Balance
    Sheet Arrangements  Bid,
    Performance Related and Other Bonds
   51




---



##### Table of Contents



March 31,


December 31,2007


2006Bid and performance related
    bonds(a)

$
201


$
231Other
    bonds(b)


19



30Total bid, performance related and
    other bonds

$
220


$
261     (a)
    
    Net of restricted cash and cash
    equivalents amounts of $3 and $7 as of March 31, 2007 and
    December 31, 2006, respectively.(b)
    
    Net of restricted cash and cash
    equivalents amounts of $31 and $33 as of March 31, 2007 and
    December 31, 2006, respectively.    Application
    of Critical Accounting Policies and Estimates          Revenue
    Recognition
      
    whether the delivered item has value to the customer on a
    stand-alone basis;
    whether there is objective and reliable evidence of the fair
    value of the undelivered item(s); and
    if the contract includes a general right of return relative to
    the delivered item, delivery or performance of the undelivered
    item(s) is considered probable and is substantially in our
    control. 52




---



##### Table of Contents



and/or and/or
    97-2 SOP 97-2,
  SOP 81-1, SOP 81-1, percentage-of-completion percentage-of-completion
      SOP 97-2. SOP 97-2
 53




---



##### Table of Contents



when-and-if
  SOP 97-2 00-21, 00-21,
            
    Complex arrangements that involve multiple deliverables such as
    future software deliverables,
    and/or post
    contractual support which remain undelivered generally result in
    the deferral of revenue because, in most cases, we have not
    established fair value for the undelivered elements. We estimate
    that these arrangements account for approximately 56% of
    our deferred revenue balance and will be recognized upon
    delivery of the final undelivered elements and over time.
    In many instances our contractual billing arrangements do not
    match the timing of the recognition of revenue. Often this
    occurs in contracts accounted for under
    SOP 81-1
    where we generally recognize the revenue based on a measure of
    the percentage of costs incurred to date relative to the
    estimated total expected contract costs. We estimate that
    approximately 19% of our deferred revenue balance relates
    to contractual arrangements where billing milestones preceded
    revenue recognition.    As atMarch 31,


December 31,2007


2006


$ Change


% ChangeDeferred Revenue

$
2,104


$
2,046


$
58



3Advance Billings


1,326



1,352



(26
)


(2
)Total Deferred Revenue

$
3,430


$
3,398


$
32



1  54




---



##### Table of Contents



Provisions
    for Doubtful Accounts
    
    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 31,2007


2006Gross accounts receivable

$
2,560


$
3,797Provision for doubtful accounts


(89
)


(88
)Accounts receivable  net

$
2,471


$
3,709Accounts receivable provision as a
    percentage of gross accounts receivables


3
%


2
%Gross long-term receivables

$
37


$
39Provision for doubtful accounts


(33
)


(34
)Net long-term receivables

$
4


$
5Long-term receivable provision as
    a percentage of gross long-term receivables


89
%


87
%   Provisions
    for Inventory
       55




---



##### Table of Contents



March 31,


December 31,2007


2006Gross inventory

$
3,279


$
3,415Inventory provisions


(911
)


(1,007
)Inventories 
    net(a)

$
2,368


$
2,408Inventory provisions as a
    percentage of gross inventory


28
%


29
%Inventory provisions as a
    percentage of gross inventory excluding deferred
    costs(b)


67
%


69
%      (b)
    Calculated excluding deferred costs
    of $1,921 and $1,952 as of March 31, 2007 and
    December 31, 2006, respectively.  and/or
  Provisions
    for Product Warranties
        Balance at December 31, 2006

$
214Payments


(38
)Warranties issued


52Revisions


(26
)Balance as of March 31, 2007

$
202     Income
    Taxes
  Tax
    Asset Valuation
   56




---



##### Table of Contents




    the amount of, and trends related to, cumulative earnings or
    losses realized over the most recent 12 quarters;
    our current period net earnings (loss) and its impact on our
    strong history of earnings prior to 2001;
    future earnings projections as determined through the use of
    internal forecasts, including the impact of sales backlog and
    existing contracts;
    our ability to carry forward our tax losses and investment tax
    credits, including tax planning strategies to accelerate
    utilization of such assets;
    industry, business, or other circumstances that may adversely
    affect future operations; and
    the nature of the future income required to realize our deferred
    tax assets.               57




---



##### Table of Contents



Future
    Projections of Profitability
             58




---



##### Table of Contents



Net


Other


GrossTax Benefit


Investment


Temporary


Deferred Tax


Valuation


Net Deferredof Losses


Tax Credits


Differences


Asset


Allowance


Tax AssetCanada

$
925


$
906


$
563


$
2,394


$
(470
)

$
1,924United States


961



373



828



2,162



(600
)


1,562United Kingdom


973







355



1,328



(872
)


456France


488



43



20



551



(478
)


73Other


243







165



408



(319
)


89Total

$
3,590


$
1,322


$
1,931


$
6,843


$
(2,739
)

$
4,104     Canada
        U.S.
      U.K.
   59




---



##### Table of Contents



France
    Transfer
    Pricing
        Valuation
    Allowance
      Tax
    Contingencies
   60




---



##### Table of Contents



Goodwill
    Valuation
    
    a significant adverse change in the business climate or legal
    factors;
    an adverse action or assessment by a regulator;
    unanticipated competition;
    loss of key personnel;
    the likelihood that a reporting unit or a significant portion of
    a reporting unit will be sold or disposed of;
    a change in reportable segments;
    results of testing for recoverability of a significant asset
    group within a reporting unit; and/or
    recognition of a goodwill impairment loss in the financial
    statements of a subsidiary that is a component of a reporting
    unit.     61




---



##### Table of Contents




    DCF model: assumptions regarding revenue growth rates, gross
    margin percentages, discount rates and terminal growth rates;
    Revenue Multiple model: estimates of 2007 revenue growth and the
    selection of comparable companies to determine an appropriate
    multiple; and
    EBITDA Multiple model: 2007 projected EBITDA and the selection
    of comparable companies to determine an appropriate multiple.        Pension
    and Post-retirement Benefits
    Special
    Charges
     62




---



##### Table of Contents



Accounting
    Changes and Recent Accounting Pronouncements  Accounting
    Changes
    
    Accounting for Certain Hybrid Financial
    Instruments  In February 2006, the FASB issued
    SFAS No. 155, Accounting for Certain Hybrid
    Financial Instruments  an amendment to FASB
    Statements No. 133 and 140, or SFAS 155.
    SFAS 155 simplifies the accounting for certain hybrid
    financial instruments containing embedded derivatives.
    SFAS 155 allows fair value measurement for any hybrid
    financial instrument that contains an embedded derivative that
    otherwise would require bifurcation under SFAS 133. In
    addition, it amends SFAS No. 140, Accounting for
    Transfers and Servicing of Financial Assets and Extinguishments
    of Liabilities, or SFAS 140, to eliminate certain
    restrictions on passive derivative financial instruments that a
    qualifying special-purpose entity can hold. SFAS 155 is
    effective for all financial instruments acquired, issued or
    subject to a re-measurement event occurring after the beginning
    of an entitys first fiscal year that begins after
    September 15, 2006. Pursuant to SFAS 155, we did not
    elect to measure our hybrid instruments at fair value.
    Accounting for Servicing of Financial Assets 
    In March 2006, the FASB issued SFAS No. 156,
    Accounting for Servicing of Financial Assets 
    an amendment of FASB Statement No. 140, or
    SFAS 156. SFAS 156 simplifies the accounting for
    assets and liabilities arising from loan servicing contracts.
    SFAS 156 requires that servicing rights be valued initially
    at fair value and subsequently either (i) accounted for at
    fair value or (ii) amortized over the period of estimated
    net servicing income (loss), with an assessment for impairment
    or increased obligation each reporting period. The adoption of
    SFAS 156 did not have a material impact on our results of
    operations and financial condition.
    Accounting for Uncertainty In Income Taxes  In
    June 2006, the FASB issued FIN 48, Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109. FIN 48 clarifies the
    accounting for uncertainty in income taxes recognized in an
    enterprises financial statements in accordance with FASB
    Statement No. 109, Accounting for Income Taxes,
    or SFAS 109. The interpretation prescribes a recognition
    threshold and measurement attribute for the financial statement
    recognition and measurement of a tax position taken or expected
    to be taken in a tax return. FIN 48 also provides
    accounting guidance on de-recognition, classification, interest
    and penalties, accounting in interim periods, disclosure and
    transition. The evaluation of tax positions under FIN 48 is
    a two-step process, whereby (1) Nortel determines whether
    it is more likely than not that the tax positions will be
    sustained based on the technical merits of the position and
    (2) for those tax positions that meet the
    more-likely-than-not recognition threshold, Nortel would
    recognize the largest amount of tax benefit that is greater than
    fifty percent likely of being realized upon ultimate settlement
    with the related tax authority. The adoption of FIN 48
    resulted in an increase of $1 to opening accumulated deficit.
    For additional information, see note 7, Income
    taxes to the accompanying unaudited condensed consolidated
    financial statements.
    Accounting for Sabbatical leave and Other Similar
    Benefits  In June 2006, the FASB Emerging Issues
    Task Force, or EITF, reached a consensus on EITF Issue
    No. 06-2
    Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB Statement No. 43, Accounting for
    Compensated Absences, or EITF
    06-2. EITF
    06-2
    provides clarification surrounding the accounting for benefits
    in the form of compensated absences, whereby an employee is
    entitled to paid time off after working for a specified period
    of time. EITF
    06-2 is
    effective for fiscal years beginning after December 15,
    2006. The adoption of EITF
    06-2 did not
    have a material impact on our results of operations and
    financial condition.
    How Taxes Collected from Customers and Remitted to Government
    Authorities Should be Presented in the Income
    Statement  In June 2006, the EITF reached a
    consensus on EITF Issue
    No. 06-3
    How Taxes Collected from Customers and Remitted to
    Governmental Authorities Should Be Presented in the Income
    Statement (That Is, Gross Versus Net Presentation), or
    EITF 06-3.
    EITF 06-3
    provides guidance on how taxes directly imposed on revenue
    producing transactions between a seller and customer that are
    remitted to governmental authorities should be presented in the
    income statement (i.e. gross versus net presentation). The
    adoption of EITF
    06-3 did not
    have a material impact on the presentation of our results of
    operations and financial condition. 63




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
    Share-Based Payment  On January 1, 2006,
    Nortel adopted SFAS No. 123 (Revised 2004),
    Share-Based Payment, or SFAS 123R. We
    previously elected to account for employee stock-based
    compensation using the fair value method prospectively for all
    awards granted or modified on or after January 1, 2003 in
    accordance with SFAS No. 148, Accounting for
    Stock Based Compensation  Transition and
    Disclosure, or SFAS 148. SEC Staff Accounting
    Bulletin (SAB) 107, Share-Based Payment,
    was issued by the SEC in March 2005 and provides supplemental
    SFAS 123R application guidance based on the views of the
    SEC. As a result of the adoption of SFAS 123R in the first
    quarter of 2006, we recorded a gain of $9 as a cumulative effect
    of an accounting change. There were no other material impacts on
    our results of operations and financial condition as a result of
    the adoption of SFAS 123R. For additional disclosure
    related to SFAS 123R, see note 14, Stock-based
    compensation plans to the accompanying condensed
    consolidated financial statements.  Recent
    Accounting Pronouncements
      No. 48-1, Settlement FIN 48-1 FIN 48-1 FIN 48-1 FIN 48-1
  Outstanding
    Share Data   Market
    Risk    Environmental
    Matters       64




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Legal
    Proceedings   Cautionary
    Notice Regarding Forward-Looking Information  and/or Form 10-K
 65




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ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  value-at-risk
         66




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ITEM 4.
    CONTROLS
    AND PROCEDURES  Management
    Conclusions Concerning Disclosure Controls and
    Procedures
  All
    dollar amounts in this Item 4 are in millions of United
    States (U.S.) dollars unless otherwise
    stated.
  Rule 13a-15
    
    the material weakness in our internal control over financial
    reporting that we and our independent registered chartered
    accountants as at December 31, 2006, Deloitte &
    Touche LLP identified (as more fully described below);
    managements conclusion that our internal control over
    financial reporting was not effective as at December 31,
    2006, and Deloittes attestation report with respect to
    that assessment and conclusion, each pursuant to the
    requirements of Section 404 of the Sarbanes-Oxley Act of
    2002, included in our 2006 Annual Report;
    the conclusion of the CEO and CFO that our disclosure controls
    and procedures as at the end of December 31, 2006 were not
    effective, included in our 2006 Annual Report; and
    our successive restatements of our financial statements, the
    findings of the Independent Review summarized in the
    Summary of Findings and of Recommended Remedial Measures
    of the Independent Review, submitted to the Audit
    Committee in January 2005 by WilmerHale and Huron Consulting
    Services LLC, (the Independent Review Summary),
    included in Item 9A of our 2003 Annual Report, the findings
    of the Revenue Independent Review included in Item 9A of
    the 2005 Annual Report, and the findings of the Internal Audit
    Review included in Item 4 of our 2006 First Quarterly
    Report on
    Form 10-Q.    Material
    Weakness in Internal Control Over Financial Reporting
  Rules 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with applicable GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.   67




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Lack of sufficient cross-functional communication and
    coordination, including further definition of roles and
    responsibilities, with respect to the scope and timing of
    customer arrangements, insufficient segregation of duties in
    certain areas, delayed implementation of Nortel review processes
    and personnel for the LG-Nortel joint venture, and insufficient
    controls over certain end user computing applications, all of
    which impact upon the appropriate application of U.S. GAAP
    to revenue generating transactions.
        Remedial
    Measures
    
    establishing standards of conduct to be enforced through
    appropriate discipline;
    infusing strong technical skills and experience into the Finance
    organization; 68




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
    requiring comprehensive, ongoing training on increasingly
    complex accounting standards;
    strengthening and improving internal controls and processes;
    establishing a compliance program throughout the Company that is
    appropriately staffed and funded;
    requiring management to provide clear and concise information,
    in a timely manner, to the Board of Directors to facilitate its
    decision-making; and
    implementing an information technology platform that improves
    the reliability of financial reporting and reduces the
    opportunities for manipulation of results.      
    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.  Form 10-K.
         69




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Changes
    in Internal Control Over Financial Reporting
   70




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PART II
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS     71




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ITEM 1A.  RISK FACTORS  Form 10-Q
  and/or
 72




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ITEM 6.
    EXHIBITS  Form 10-Q.
  Exhibit No.

Description4
.1*

Indenture dated as of
    March 28, 2007 among Nortel Networks Corporation, Nortel
    Networks Limited, Nortel Networks Inc. and The Bank of New York,
    as trustee (filed as Exhibit 4.1 to Nortel Networks
    Corporations current report on
    Form 8-K
    dated March 28, 2007).4
.2

Second Supplemental Indenture
    dated May 1, 2007 to Indenture dated as of July 5,
    2006 among Nortel Networks Limited, Nortel Networks Corporation,
    Nortel Networks Inc. and The Bank of New York, as trustee.10
.1*

Waiver dated March 9, 2007
    between Nortel Networks Limited and Export Development Canada
    (filed as Exhibit 10.1 to Nortel Networks
    Corporations current report on
    Form 8-K
    dated March 9, 2007).10
.2*

Purchase Agreement dated
    March 22, 2007 among Nortel Networks Corporation, Nortel
    Networks Limited, Nortel Networks Inc. and the representatives
    of the initial purchasers (filed as Exhibit 10.1 to Nortel
    Networks Corporations current report on
    Form 8-K
    dated March 28, 2007).10
.3*

Registration Rights Agreement
    dated March 28, 2007 among Nortel Networks Corporation,
    Nortel Networks Limited, Nortel Networks Inc. and the
    representatives of the initial purchasers (filed as
    Exhibit 10.2 to Nortel Networks Corporations current
    report on
    Form 8-K
    dated March 28, 2007).10
.4

Peter W. Currie, Executive
    Vice-President and Chief Financial Officer, Letter Agreement
    dated February 5, 2007.10
.5

Nortel Networks Limited SUCCESS
    Plan approved on July 25, 2002, as amended and restated on
    July 28, 2003 with effect from January 1, 2003, as
    amended on July 28, 2003 with effect from January 1,
    2003, as amended on February 26, 2004 with effect from
    January 1, 2004, as amended March 9, 2006 with effect
    from January 1, 2006, as amended March 15, 2007 with
    effect from January 1, 2007 including the name change of
    the Plan to Nortel Networks Limited Annual Incentive Plan.10
.6

Forms of Instruments of Award as
    amended on April 11, 2007 generally provided to recipients
    of Restricted Stock Units and Performance Stock Units granted
    under the Nortel 2005 Stock Incentive Plan, As Amended and
    Restated and Forms of Instrument of Grant as amended on
    April 4, 2007 generally provided to recipients of stock
    options granted under the Nortel 2005 Stock Incentive Plan, As
    Amended and Restated.10
.7**

Amended and Restated Master
    Contract Manufacturing Services Agreement dated June 29,
    2004 between Nortel Networks Limited and Flextronics Telecom
    Systems, Ltd.10
.8**

Master Repair Services Agreement
    dated June 29, 2004 between Nortel Networks Limited and
    Flextronics Telecom Systems, Ltd.10
.9**

Master Contract Logistics Services
    Agreement dated June 29, 2004 between Nortel Networks
    Limited and Flextronics Telecom Systems, Ltd.12


Computation of Ratios.16
.1*

Letter, dated March 16, 2007,
    from Deloitte & Touche LLP to the Securities and
    Exchange Commission (filed as Exhibit 16.1 to Nortel
    Networks Limiteds current report on
    Form 8-K
    dated March 16, 2007).16
.2*

Letter, dated March 16, 2007,
    from KPMG LLP to the Securities and Exchange Commission (filed
    as Exhibit 16.2 to Nortel Networks Limiteds current
    report on
    Form 8-K
    dated March 16, 2007).31
.1

Certification of the President 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. 73




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Exhibit No.

Description31
.2

Certification of the 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 President and
    Chief Executive Officer 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.**
    
    Certain portions of this Exhibit have been omitted based upon a
    request for confidential treatment. These portions have been
    filed separately with the United States Securities and Exchange
    Commission. 74




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SIGNATURES    NORTEL
    NETWORKS LIMITED
    (Registrant)
  Chief Financial Officer

Chief Accounting Officer/s/  David
    W. Drinkwater

/s/  Paul
    W. KarrDavid W.
    Drinkwater

Paul W.
    KarrChief Financial Officer

Controller    75