##### 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
    September 30, 2007ORo     TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES
    EXCHANGE ACT OF 1934For 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

(Zip Code)(Address of Principal Executive
    Offices)    Registrants Telephone Number Including Area Code
    (905) 863-7000
    þ o
   Rule 12b-2
   o o þ
  Rule 12b-2
  o þ
     1,460,978,638 shares
    of common stock without nominal or par value




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##### 



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


46ITEM 3.

Quantitative and Qualitative Disclosures About
    Market Risk


86ITEM 4.

Controls and Procedures


87PART II
    OTHER INFORMATIONITEM 1.

Legal Proceedings


91ITEM 1A.

Risk Factors


92ITEM 6.

Exhibits


93SIGNATURES


94EX-10.1EX-10.2EX-10.3EX-12EX-31.1EX-31.2EX-32    All dollar amounts in this document are in United States
    Dollars unless otherwise stated.
             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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006As restated *





As restated *Revenues:Products

$
2,378


$
2,595


$
6,793


$
7,142Services


327



331



957



954Total revenues


2,705



2,926



7,750



8,096Cost of revenues:Products


1,371



1,622



4,013



4,452Services


158



189



509



535Total cost of revenues


1,529



1,811



4,522



4,987Gross profit


1,176



1,115



3,228



3,109Selling, general and administrative expense


613



588



1,809



1,804Research and development expense


412



470



1,236



1,438Amortization of intangible assets


12



8



37



19In-process research and development expense














16Special charges


56



21



172



75Loss (gain) on sales of businesses and assets


3



(15
)


(8
)


(42
)Operating earnings (loss)


80



43



(18
)


(201
)Other income  net


168



57



378



177Interest expenseLong-term debt


(70
)


(62
)


(198
)


(123
)Other


(8
)


(6
)


(19
)


(29
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies


170



32



143



(176
)Income tax expense


(49
)


(15
)


(73
)


(69
)121



17



70



(245
)Minority interests  net of tax


(33
)






(46
)


28Equity in net earnings (loss) of associated
    companies  net of tax


1







2



(4
)Net earnings (loss) before cumulative effect of accounting change


89



17



26



(221
)Cumulative effect of accounting change  net of tax
    (note 2)














9Net earnings (loss)


89



17



26



(212
)Dividends on preferred shares


10



12



30



29Net earnings (loss) applicable to common shares

$
79


$
5


$
(4
)

$
(241
)     *
    
    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)
  September 30,


December 31,2007


2006ASSETSCurrent assetsCash and cash equivalents

$
3,123


$
3,487Restricted cash and cash equivalents


54



44Accounts receivable  net


3,603



3,709Inventories  net


2,094



1,989Deferred income taxes  net


472



276Other current assets


599



512Total current assets


9,945



10,017Investments


200



204Plant and equipment  net


1,531



1,526Goodwill


2,359



2,351Intangible assets  net


224



241Deferred income taxes  net


3,982



3,863Other assets


523



680Total assets

$
18,764


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

$
1,100


$
1,124Payroll and benefit-related liabilities


561



637Contractual liabilities


266



243Restructuring liabilities


121



97Other accrued liabilities (note 4)


3,701



3,756Long-term debt due within one year


22



18Total current liabilities


5,771



5,875Long-term debt


2,649



2,646Deferred income taxes  net


16



97Other liabilities (note 4)


3,890



4,128Total liabilities


12,326



12,746Minority interests in subsidiary companies


286



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 as
    of September 30, 2007 and 30,000,000 as of
    December 31, 2006


536



536Common shares, without par value  Authorized shares:
    unlimited; Issued and outstanding shares: 1,460,978,638 as of
    September 30, 2007 and 1,460,978,638 as of
    December 31, 2006


1,211



1,211Additional paid-in capital


22,383



22,298Accumulated deficit


(17,549
)


(17,544
)Accumulated other comprehensive loss


(429
)


(608
)Total shareholders equity


6,152



5,893Total liabilities and shareholders equity

$
18,764


$
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)
  Nine Months Ended September 30,2007


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

$
26


$
(212
)Adjustments to reconcile net earnings (loss) to net cash from
    (used in) operating activities, net of effects from acquisitions
    and divestitures of businesses:Amortization and depreciation


231



221Non-cash portion of special charges


3



2In-process research and development expense






16Equity in net loss (earnings) of associated
    companies  net of tax


(2
)


4Share-based compensation expense


86



83Deferred income taxes


(8
)


73Cumulative effect of accounting change  net of tax






(9
)Pension and other accruals


199



268Gain on sales and write downs of investments, businesses and
    assets  net


(3
)


(36
)Minority interests


46



(28
)Other  net


(190
)


85Changes in operating assets and liabilities


(611
)


(1,261
)Net cash used in operating activities


(223
)


(794
)Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(140
)


(260
)Proceeds on disposals of plant and equipment


89



125Change in restricted cash and cash equivalents


(10
)


38Acquisitions of investments and businesses  net of
    cash acquired


(81
)


(134
)Proceeds from the sales of investments and businesses and assets


(29
)


196Net cash used in investing activities


(171
)


(35
)Cash flows from (used in) financing activitiesDividends paid


(35
)


(46
)Increase in notes payable


47



88Decrease in notes payable


(52
)


(75
)Increase in loan payable






3,300Repayments of long-term debt






(2,725
)Debt issuance costs






(42
)Decrease in capital leases payable


(18
)


(12
)Net cash from (used in) financing activities


(58
)


488Effect of foreign exchange rate changes on cash and cash
    equivalents


88



59Net decrease in cash and cash equivalents


(364
)


(282
)Cash and cash equivalents at beginning of period


3,487



2,876Cash and cash equivalents at end of period

$
3,123


$
2,594     *
    
    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
  instrument-by-instrument
  No. 06-11, (EITF 06-11). EITF 06-11 EITF 06-11
 4




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  EITF 06-11 EITF 06-11
  No. 07-3 (EITF 07-3). EITF 07-3 EITF 07-3 EITF 07-3
  39-1, FIN 39-1). FIN 39-1 FIN 39-1 FIN 39-1 FIN 39-1
  2.
    Accounting
    changes  (a)
    Accounting
    for Certain Hybrid Financial Instruments    (b)
    Accounting
    for Servicing of Financial Assets    (c)
    Accounting
    for Uncertainty in Income Taxes   5




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    FIN 48-1, FIN 48-1). FIN 48-1 FIN 48-1 FIN 48-1
  (d)
    Accounting
    for Sabbatical Leave and Other Similar Benefits  No. 06-2, (EITF 06-2). EITF 06-2 EITF 06-2 EITF 06-2
  (e)
    How
    Taxes Collected from Customers and Remitted to Governmental
    Authorities Should Be Presented in the Income
    Statement  No. 06-3, (EITF 06-3). EITF 06-3 EITF 06-3 EITF 06-3
  (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 Statements of Operations for the three and nine
    months ended September 30, 2006
  Three Months Ended


Nine Months EndedSeptember 30, 2006


September 30, 2006As Previously








As PreviouslyReported(a)


Adjustments


As Restated


Reported(a)


Adjustments


As RestatedRevenues:Products

$
2,640


$
(45
)

$
2,595


$
7,141


$
1


$
7,142Services


315



16



331



940



14



954Total revenues


2,955



(29
)


2,926



8,081



15



8,096Cost of revenues:Products


1,654



(32
)


1,622



4,460



(8
)


4,452Services


184



5



189



529



6



535Total cost of revenues


1,838



(27
)


1,811



4,989



(2
)


4,987Gross profit


1,117



(2
)


1,115



3,092



17



3,109Selling, general and administrative expense


603



(15
)


588



1,791



13



1,804Research and development expense


476



(6
)


470



1,434



4



1,438Amortization of intangible assets


8







8



19







19In-process research and development expense














16







16Special charges


24



(3
)


21



74



1



75Gain on sales of businesses and assets


(16
)


1



(15
)


(42
)






(42
)Operating earnings (loss)


22



21



43



(200
)


(1
)


(201
)Other income  net


46



11



57



169



8



177Interest expenseLong-term debt


(62
)






(62
)


(125
)


2



(123
)Other


(6
)






(6
)


(29
)






(29
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies






32



32



(185
)


9



(176
)Income tax expense


(9
)


(6
)


(15
)


(59
)


(10
)


(69
)(9
)


26



17



(244
)


(1
)


(245
)Minority interests  net of tax


(4
)


4







31



(3
)


28Equity in net loss of associated companies  net of tax


(1
)


1







(5
)


1



(4
)Net earnings (loss) before cumulative effect of accounting change


(14
)


31



17



(218
)


(3
)


(221
)Cumulative effect of accounting change  net of tax














9







9Net earnings (loss )

$
(14
)

$
31


$
17


$
(209
)

$
(3
)

$
(212
)Dividends on preferred shares


15



(3
)


12



40



(11
)


29Net earnings (loss) applicable to common shares

$
(29
)

$
34


$
5


$
(249
)

$
8


$
(241
)     (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


Nine Months EndedSeptember 30, 2006


September 30, 2006Cost of


Net





Cost of


NetRevenues


Revenues


Earnings (Loss)


Revenues


Revenues


LossAs previously reported

$
2,955


$
1,838


$
(14
)

$
8,081


$
4,989


$
(209
)Adjustments:Pension and post-retirement benefits errors






1



(2
)






7



(18
)Revenue recognition errors


(29
)


(4
)


(22
)


15



(6
)


17Other errors






(24
)


55







(3
)


(2
)As restated

$
2,926


$
1,811


$
17


$
8,096


$
4,987


$
(212
)   Pension
    and post-retirement benefits errors
  re-measurements
      Revenue
    recognition errors
    and/or
 8




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      81-1,
  97-2,
  Other
    errors
         9




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      Statement
    of cash flows
    4.
    Consolidated
    financial statement details    Consolidated
    statements of operations
  Other
    income  net:
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Interest and dividend income

$
61


$
30


$
183


$
84Loss on sales and write downs of investments






(7
)


(5
)


(6
)Currency exchange gains  net


70







140



16Other  net


37



34



60



83Other income  net

$
168


$
57


$
378


$
177     Consolidated
    balance sheets
  Accounts
    receivable  net:
  September 30,


December 31,2007


2006Trade receivables

$
2,241


$
2,464Notes receivable


11



7Notes receivable from NNC and its subsidiaries


1,069



924Contracts in process


371



4023,692



3,797Less: provisions for doubtful accounts


(89
)


(88
)Accounts receivable  net

$
3,603


$
3,709  10




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Inventories 
    net:
  September 30,


December 31,2007


2006Raw materials

$
636


$
725Work in process


12



11Finished goods


760



727Deferred costs


1,817



1,9523,225



3,415Less: provision for inventories


(893
)


(1,007
)Inventories  net


2,332



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


(238
)


(419
)Current inventories  net

$
2,094


$
1,989     (a)
    
    Long-term portion of deferred costs
    is included in other assets.  Other
    current assets:
  September 30,


December 31,2007


2006Prepaid expenses

$
166


$
175Income taxes recoverable


73



63Current investments


103



51Other


257



223Other current assets

$
599


$
512   Investments:
   11




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Plant
    and equipment  net:
  September 30,


December 31,2007


2006Cost:Land

$
38


$
35Buildings


1,117



1,185Machinery and equipment


2,139



2,038Assets under capital lease


215



215Sale lease-back assets


94



923,603



3,565Less: accumulated depreciation:Buildings


(382
)


(444
)Machinery and equipment


(1,567
)


(1,482
)Assets under capital lease


(104
)


(96
)Sale lease-back assets


(19
)


(17
)(2,072
)


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

$
1,531


$
1,526     (a)
    
    Includes assets held for sale with
    a carrying value of $52 as of December 31, 2006, related to
    owned facilities that were being actively marketed for sale.
    These assets were written down in previous periods to their
    estimated fair values less estimated costs to sell. The write
    downs were included in special charges. Nortel disposed of all
    the assets held for sale in the second quarter of 2007, with
    such disposition having no material impact on net earnings
    (loss). The assets held for sale had gross and net book values
    of approximately $168 and $56, respectively, as of the date of
    their disposition. There are no material assets held for sale as
    of September 30, 2007.  Goodwill:
  MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


TotalBalance  as of December 31,
    2006(a)

$
447


$
144


$
598


$
991


$
171


$
2,351Change:Additions






















Disposals






















Foreign exchange


1



2



1



4







8Other






















Balance  as of September 30, 2007

$
448


$
146


$
599


$
995


$
171


$
2,359     (a)
    
    Opening balances for Enterprise
    Solutions, Carrier Networks, and Metro Ethernet Networks have
    been decreased by $25, $21, and $103, respectively, and the
    opening balance for Global Services has been increased by $149
    from the amounts previously presented to reflect the
    reclassification of Nortels network implementation
    services to Global Services, as described in note 5.   12




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Intangible
    assets  net:
  September 30,


December 31,2007


2006Cost


$331


$
307Less: accumulated amortization


(107
)


(66
)Intangible assets  net


$224


$
241   Other
    assets:
  September 30,


December 31,2007


2006Long-term deferred costs

$
238


$
419Long-term inventories


26



Debt issuance costs


42



48Hedge assets


54



37Financial assets


64



60Other


99



116Other assets

$
523


$
680   Other
    accrued liabilities:
  September 30,


December 31,2007


2006Outsourcing and selling, general
    and administrative related provisions

$
246


$
399Customer deposits


61



78Product related provisions


86



93Warranty provisions (note 11)


203



214Deferred revenue


1,268



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


1,450



1,352Miscellaneous taxes


23



73Income taxes payable


70



71Deferred income tax


17



Tax uncertainties (note 7)


20



Interest payable


52



87Other


205



262Other accrued liabilities

$
3,701


$
3,756     (a)
    
    Includes amounts which may be
    recognized beyond one year due to the duration of certain
    contracts.  Other
    liabilities:
  September 30,


December 31,2007


2006Pension benefit liabilities

$
1,883


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


878



794Restructuring liabilities
    (note 6)


182



177Deferred revenue


595



919Tax uncertainties (note 7)


71



Other long-term provisions


281



273Other liabilities

$
3,890


$
4,128  13




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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:
  Nine Months Ended September 30,2007


2006Accounts receivable  net

$
106


$
(415
)Inventories  net


(60
)


(44
)Deferred costs


104



(44
)Income taxes


(2
)


(50
)Accounts payable


(16
)


(243
)Payroll, accrued and contractual
    liabilities


(333
)


(361
)Deferred revenue


(180
)


1Advance billings in excess of
    revenues recognized to date on contracts


109



10Restructuring liabilities


24



(12
)Other


(363
)


(103
)Change in operating assets and
    liabilities

$
(611
)

$
(1,261
)   Interest
    and taxes paid:
  Cash interest paid

$
246


$
122Cash taxes paid

$
77


$
41   5.
    Segment
    information  Segment
    descriptions
    
    CN provides mobility networking solutions using (i) Code
    Division Multiple Access (CDMA) solutions, Global
    System for Mobile Communication (GSM) and Universal
    Mobile Telecommunication System (UMTS) solutions,
    and Worldwide Interoperability for Microwave Access
    (WiMAX) 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 services 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, 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 14




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  enterprises around the world, including large businesses at
    their headquarters, data centers, call centers and branch
    offices, small and medium-size businesses and home offices, as
    well as government agencies, educational and other institutions
    and utility organizations.  
    GS provides a broad range of services to address the
    requirements of Nortels carrier and enterprise customers
    throughout the entire lifecycle of their networks. The GS
    portfolio is organized into four main service product groups:
    (i) network implementation services, including network
    integration, planning, installation, optimization and security
    services, (ii) network support services, including
    technical support, hardware maintenance, equipment spares
    logistics and
    on-site
    engineers, (iii) network managed services, including
    services related to the monitoring and management of customer
    networks and providing a range of network managed service
    options, and (iv) network application services, including
    applications development, integration and 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-size businesses, large global enterprises and
    all levels of government.
    MEN combines Nortels optical networking solutions and the
    carrier portion of its data networking solutions to transform
    its carrier and large enterprise customers networks to be
    more scalable and reliable for the high speed delivery of
    diverse multi-media communications services. By combining
    Nortels optical expertise and data knowledge, Nortel
    creates carrier ethernet solutions that help service providers
    and enterprises better manage increasing bandwidth demands.
    Nortel believes that carrier ethernet technology, created by
    integrating Nortels data ethernet capabilities with
    Nortels optical technology expertise is particularly
    suited to these solutions. In addition to increased capacity and
    lower cost per bit, Nortel differentiates its MEN solutions 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, and 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.     15




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Segments
    Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2007


2006


2007


2006RevenuesCarrier Networks

$
1,080


$
1,337


$
3,147


$
3,670Enterprise Solutions


671



571



1,858



1,504Global Services


540



541



1,482



1,592Metro Ethernet Networks


360



416



1,096



1,142Total reportable segments


2,651



2,865



7,583



7,908Other


54



61



167



188Total revenues


2,705



2,926



7,750



8,096Management EBTCarrier Networks


145



107



456



247Enterprise Solutions


19



1



33



(63
)Global Services


101



89



254



278Metro Ethernet Networks


4



33



1



63Total reportable segments


269



230



744



525Other


(60
)


(184
)


(444
)


(609
)Total Management EBT


209



46



300



(84
)Amortization of intangible assets


(12
)


(8
)


(37
)


(19
)In-process research and development expense














(16
)Special charges


(56
)


(21
)


(172
)


(75
)Gain (loss) on sales of businesses and assets


(3
)


15



8



42Income tax expense


(49
)


(15
)


(73
)


(69
)Net earnings (loss) before cumulative effect of accounting
    change

$
89


$
17


$
26


$
(221
)    16




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  6.
    Special
    charges       17




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##### Table of Contents



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








Three Months


Nine MonthsSettlement


Plant and





Ended


EndedWorkforce


and Lease


Equipment





September 30,


September 30,Reduction


Costs


Write Downs


Total


2007


20072007 Restructuring PlanProvision balance as of December 31, 2006

$



$



$



$
Other special charges


116



30



4



150


$
41


$
150Revisions to prior accruals


(4
)


(2
)






(6
)


(5
)


(6
)Cash drawdowns


(58
)


(4
)






(62
)Non-cash drawdowns


(2
)






(4
)


(6
)Foreign exchange and other adjustments


3











3Provision balance as of September 30, 2007

$
55


$
24


$



$
792006 Restructuring PlanProvision balance as of December 31, 2006

$
38


$



$



$
38Other special charges


25











25



14



25Revisions to prior accruals


(7
)










(7
)


(1
)


(7
)Cash drawdowns


(36
)










(36
)Non-cash drawdowns


(1
)










(1
)Foreign exchange and other adjustments


1











1Provision balance as of September 30, 2007

$
20


$



$



$
202004 Restructuring PlanProvision balance as of December 31, 2006

$
3


$
53


$



$
56Other special charges






















Revisions to prior accruals






4



1



5



3



5Cash drawdowns


(2
)


(8
)






(10
)Non-cash drawdowns










(1
)


(1
)Foreign exchange and other adjustments






1







1Provision balance as of September 30, 2007

$
1


$
50


$



$
512001 Restructuring PlanProvision balance as of December 31, 2006

$
2


$
178


$



$
180Other special charges






















Revisions to prior accruals


(2
)


6



1



5



4



5Cash drawdowns






(33
)






(33
)Non-cash drawdowns










(1
)


(1
)Foreign exchange and other adjustments






2







2Provision balance as of September 30, 2007

$



$
153


$



$
153Total provision balance as of September 30,
    2007(a)

$
76


$
227


$



$
303Total special charges

















$
56


$
172     (a)
    
    As of September 30, 2007 and
    December 31, 2006, the short-term provision balances were
    $121 and $97, respectively, and the long-term provision balances
    were $182 and $177, respectively. 18




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  2007
    Restructuring Plan
  Three and
    nine months ended September 30, 2007
    2006
    Restructuring Plan
  Three and
    nine months ended September 30, 2007
    2004
    and 2001 Restructuring Plans
  Three and
    nine months ended September 30, 2007
   19




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##### Table of Contents



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


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


Total2007 Restructuring Plan

$
5


$
20


$
4


$
7


$



$
362006 Restructuring Plan


2



3



1



7







132004 Restructuring Plan


1



2















32001 Restructuring Plan


1



3















4Total special charges for the three months ended
    September 30, 2007

$
9


$
28


$
5


$
14


$



$
562007 Restructuring Plan

$
22


$
86


$
24


$
12


$



$
1442006 Restructuring Plan


3



6



2



7







182004 Restructuring Plan


2



3















52001 Restructuring Plan


1



4















5Total special charges for the nine months ended
    September 30, 2007

$
28


$
99


$
26


$
19


$



$
1722006 Restructuring Plan

$



$
3


$
1


$



$



$
42004 Restructuring Plan


2



5



5











122001 Restructuring Plan


1



4















5Total special charges for the three months ended
    September 30, 2006

$
3


$
12


$
6


$



$



$
212006 Restructuring Plan

$
7


$
25


$
17


$
1


$



$
502004 Restructuring Plan


3



7



6











162001 Restructuring Plan


1



8















9Total special charges for the nine months ended
    September 30, 2006

$
11


$
40


$
23


$
1


$



$
75     7.
    Income
    taxes     20




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                 21




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        8.
    Employee
    benefit plans  and/or
     22




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Pension expense:Service cost

$
28


$
31


$
88


$
102Interest cost


121



116



354



346Expected return on plan assets


(127
)


(115
)


(373
)


(337
)Amortization of prior service cost


1



1



3



2Amortization of net losses


27



33



79



103Curtailment, contractual and special termination losses






(5
)


2



4Net pension expense

$
50


$
61


$
153


$
220     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Post-retirement benefits cost:Service cost

$
1


$
2


$
3


$
6Interest cost


10



11



27



33Amortization of prior service cost


(6
)


(1
)


(10
)


(3
)Amortization of net losses


(1
)






(1
)


1Curtailment gains






(29
)






(29
)Net post-retirement benefits cost (recovery)

$
4


$
(17
)

$
19


$
8     9.
    Acquisitions
    and divestitures  Acquisition
  LG-Nortel
    Co. Ltd. business venture
   23




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Divestiture
  Manufacturing
    operations
    10.
    Long-term
    debt  Convertible
    notes offering
             24




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Form S-3
    11.
    Guarantees    (a)
    Business
    sale and business combination agreements            (b)
    Intellectual
    property indemnification obligations   25




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      (c)
    Lease
    agreements      (d)
    Third
    party debt agreements        (e)
    Other
    indemnification agreements  (i)
    Nortel has agreed to indemnify the banks and their agents under
    its credit facilities against costs or losses resulting from
    changes in laws and regulations which would increase the
    banks costs or reduce their return and from any legal
    action brought against the banks or their agents related to the
    use of loan proceeds.On February 14, 2003, Nortel entered into an agreement with
    Export Development Canada (EDC) regarding
    arrangements to provide support for certain performance-related
    obligations arising out of normal course business (the EDC
    Support Facility). Nortel has also agreed to indemnify EDC
    under the EDC Support Facility against any legal action brought
    against EDC that relates to the provision of support under the
    EDC Support Facility. This indemnification generally applies to
    issues that arise during the term of the EDC Support Facility.
    As of September 30, 2007, there was approximately $137 of
    outstanding support utilized under the EDC Support Facility,
    approximately $97 of which was outstanding under the revolving
    small bond sub-facility, with the remaining balance outstanding
    under the revolving large bond sub-facility. 26




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   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.(ii)
    Nortel has agreed to indemnify certain of its counterparties in
    certain receivables securitization transactions. The
    indemnifications provided to counterparties in these types of
    transactions may require Nortel to compensate counterparties for
    costs incurred as a result of changes in laws and regulations
    (including tax legislation) or in the interpretations of such
    laws and regulations, or as a result of regulatory penalties
    that may be suffered by the counterparty as a consequence of the
    transaction. Certain receivables securitization transactions
    include indemnifications requiring the repurchase of the
    receivables, under certain conditions if the receivable is not
    paid by the obligor. As of September 30, 2007, Nortel had
    approximately $65 of securitized receivables which were subject
    to repurchase, in which case Nortel would assume from the
    purchaser of the receivables all rights to collect such
    receivables. The indemnification provisions generally expire
    upon expiration of the securitization agreements, which extend
    through 2007, or collection of the receivable amounts by the
    purchaser.Nortel is not able 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.Nortel has made indemnification payments of $39 and $26 as at
    September 30, 2007 and December 31, 2006,
    respectively, under such agreements relating to the repurchase
    of certain receivables.(iii)
    Nortel has also entered into other agreements that provide
    indemnifications to counterparties in certain transactions
    including investment banking agreements, guarantees related to
    the administration of capital trust accounts, guarantees related
    to the administration of employee benefit plans, indentures for
    its outstanding public debt and asset sale agreements (in
    addition to the business sale agreements noted above). These
    indemnification agreements generally require Nortel to indemnify
    the counterparties for costs incurred as a result of changes in
    laws and regulations (including tax legislation) or in the
    interpretations of such laws and regulations
    and/or as a
    result of losses from litigation that may be suffered by the
    counterparties arising from the transactions. These types of
    indemnification agreements normally extend over an unspecified
    period of time from the date of the transaction and do not
    typically provide for any limit on the maximum potential payment
    amount. In addition, Nortel has entered into indemnification
    agreements with certain of its directors and officers for the
    costs reasonably incurred in any proceeding in which they become
    involved by reason of their position as directors or officers to
    the extent permitted under applicable law.The nature of such agreements prevents Nortel from making a
    reasonable estimate of the maximum potential amount it could be
    required to pay to its counterparties and directors and
    officers. The difficulties in assessing the amount of liability
    result primarily from the unpredictability of future changes in
    laws, the inability to determine how laws apply to
    counterparties and the lack of limitations on the potential
    liability.Historically, Nortel has not made any significant
    indemnification payments under such agreements.(iv)
    Nortel has identified specified price trade-in rights in certain
    customer arrangements that qualify as guarantees. As of
    September 30, 2007, Nortel had accrued $18 with respect to
    these guarantee obligations.(v)
    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 its insurers
    to certain indemnification obligations. NNC believes that these
    indemnification obligations would be unlikely to materially
    increase its total cash payment obligations under the Global
    Class Action Settlement. NNC is aware of three claims made
    to the insurers by former officers, but information is not
    available at this time to make a reasonable estimate of the
    amount for which Nortel may be liable. As a result, NNC has not
    recorded a contingent liability as at September 30, 2007.
    The insurers payments would not reduce the amounts payable
    by NNC as disclosed in note 16. 27




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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


(130
)Warranties issued


182Revisions


(63
)Balance as of September 30, 2007

$
203   12.
    Commitments  Bid,
    performance-related and other bonds
      September 30,


December 31,2007


2006Bid and performance-related
    bonds(a)

$
154


$
231Other
    bonds(b)


40



30Total bid, performance related and other bonds

$
194


$
261     (a)
    
    Net of restricted cash and cash
    equivalent amounts of $5 and $7 as of September 30, 2007
    and December 31, 2006, respectively.(b)
    
    Net of restricted cash and cash
    equivalent amounts of $27 and $33 as of September 30, 2007
    and December 31, 2006, respectively.  Venture
    capital financing
  start-up
  Nortel
    and Microsoft Corporation Alliance
     28




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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














26







26Foreign currency translation adjustment


















118



118Unrealized loss on investments  net


















(9
)


(9
)Pension and post-retirement amortization items  net


















42



42Unrealized derivative gain on cash flow hedges  net


















28



28Share-based compensation










86











86Adoption of FIN 48 (notes 2 and 7)














(1
)






(1
)Dividend














(30
)






(30
)Other










(1
)










(1
)Balance as of September 30, 2007

$
536


$
1,211


$
22,383


$
(17,549
)

$
(429
)

$
6,152       Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Net earnings (loss)

$
89


$
17


$
26


$
(212
)Other comprehensive income (loss) adjustments:Change in foreign currency translation adjustment


36



66



118



201Unrealized gain (loss) on investments 
    net(a)


(6
)


18



(9
)


(2
)Pension and post-retirement amortization items  net


13



146



42



145Unrealized derivative gain (loss) on cash flow
    hedges 
    net(b)


(1
)


(7
)


28



(4
)Comprehensive income

$
131


$
240


$
205


$
128     (a)
    
    Certain securities deemed
    available-for-sale by Nortel were measured at fair value.
    Unrealized holding losses related to these securities were
    excluded from net earnings (loss) and were included in
    accumulated other comprehensive income until realized.
    Unrealized gain (loss) on investments was net of tax of nil for
    each of the three and nine months ended September 30, 2007
    and 2006.(b)
    
    During the three and nine months
    ended September 30, 2007 and 2006, $9 and $4, and $4 and
    $13 of net derivative gains were reclassified to other
    income  net, respectively. Nortel estimates that $18
    of net derivative gains included in accumulated other
    comprehensive income will be reclassified into net earnings
    (loss) within the next 12 months. 29




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   14.
    Share-based
    compensation plans  Stock
    options
  1 3
       30




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Restricted
    stock units and performance stock units
        Share-based
    compensation
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


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

$
23


$
26


$
64


$
67RSU expense


7



3



17



6PSU expense


1



1



5



1Total share-based compensation reported

$
31


$
30


$
86


$
74     (a)
    
    Includes a reduction of share-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.   31




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Black-Scholes-Merton assumptionsExpected dividend yield


0.00%



0.00%



0.00%



0.00%Expected
    volatility(a)


51.07% - 52.33%



52.33% - 69.40%



51.07% - 53.56%



52.33% - 72.74%Risk-free interest
    rate(b)


4.25% - 4.72%



4.76% - 4.86%



4.25% - 4.72%



4.76% - 5.04%Expected option life in
    years(c)


3.65 - 4.00



4.00



3.65 - 4.00



4.00Range of stock option fair values per option granted

$
4.94 - $8.74


$
11.22 - 11.47


$
4.94 - $11.86


$
11.22 - $12.26     (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 and NNC used the five-year
    U.S. government treasury bill rate to approximate the
    four-year
    risk free rate.(c)
    
    The expected term of the stock
    options is estimated based on historical grants with similar
    vesting periods.    Three Months Ended

Nine Months EndedSeptember 30,

September 30,2007


2006

2007


2006Monte Carlo assumptionsBeta


1.53 - 1.58


2.00


1.53 - 1.88



2.00 - 2.10Risk-free interest
    rate(a)


4.15% - 4.66%


4.79% - 4.87%


4.15% - 4.66%



4.79% - 5.07%     (a)
    
    The risk-free rate used was the
    three-year U.S. government treasury bill rate.      15.
    Related
    party transactions   32




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues:LGE(a)

$
5


$
21


$
17


$
22Vertical Communications, Inc.
    (Vertical)(b)


4







10



4Other


1



3



6



4Total

$
10


$
24


$
33


$
30Purchases:LG Electronics
    Inc.(a)

$
63


$
61


$
245


$
172Sasken Communications Technology Ltd.
    (Sasken)(c)


7



7



20



25GNTEL Co., Ltd.
    (GNTEL)(d)


29



32



69



53Other


5



13



12



31Total

$
104


$
113


$
346


$
281     (a)
    
    LGE holds a minority interest in
    LG-Nortel. Nortels sales and purchases relate primarily to
    certain inventory-related items. As of September 30, 2007,
    accounts payable to LGE was net $51, compared to net $76 as at
    December 31, 2006.(b)
    
    LG-Nortel currently owns a minority
    interest in Vertical. Vertical supports LG-Nortels efforts
    to distribute Nortels products to the North American
    market.(c)
    
    Nortel currently owns a minority
    interest in Sasken. Nortels purchases from Sasken relate
    primarily to software and other software development-related
    purchases. Accounts payable to Sasken were $4 and $2 as at
    September 30, 2007 and December 31, 2006, respectively.(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. Accounts payable to GNTEL were $17 as at
    September 30, 2007 and December 31, 2006.    September 30,


December 31,2007


2006Owing from NNC  net

$
940


$
847Owing from NNC subsidiaries  net


102



77Other related parties


(69
)


(84
)Related party receivables

$
973


$
840   16.
    Contingencies     33




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
               34




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      Form 10-Q
             35




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        Environmental
    matters
          de minimis de minimis
 36




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  de
    minimis
    17.
    Subsequent
    events    18.
    Supplemental
    condensed consolidated financial information        Rule 3-10 Regulation S-X Form 10-Q
   37




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalRevenues

$
880


$
1,116


$
1,515


$
(806
)

$
2,705Cost of revenues


459



802



1,074



(806
)


1,529Gross profit


421



314



441







1,176Selling, general and administrative expense


113



219



281







613Research and development expense


204



174



34







412Amortization of intangible assets






2



10







12Special charges


3



1



52







56Gain on sale of businesses and assets


1



1



1







3Operating earnings (loss)


100



(83
)


63







80Other income  net


136



3



28



1



168Interest expenseLong-term debt


(58
)


(3
)


(9
)






(70
)Other


(7
)


(19
)


18







(8
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies


171



(102
)


100



1



170Income tax benefit (expense)


(5
)


1



(45
)






(49
)166



(101
)


55



1



121Minority interests  net of tax










(33
)






(33
)Equity in net earnings (loss) of associated
    companies  net of tax


(77
)


50



1



27



1Net earnings (loss) before cumulative effect of accounting change


89



(51
)


23



28



89Cumulative effect of accounting change  net of tax


















Net earnings (loss)


89



(51
)


23



28



89Dividends on preferred shares


10















10Net earnings (loss) applicable to common shares

$
79


$
(51
)

$
23


$
28


$
79  38




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalRevenues

$
915


$
1,329


$
1,436


$
(754
)

$
2,926Cost of revenues


542



1,083



940



(754
)


1,811Gross profit


373



246



496







1,115Selling, general and administrative expense


147



217



224







588Research and development expense


231



161



78







470Amortization of intangible assets






1



7







8Special charges


10



4



7







21Loss (gain) on sale of businesses and assets


1



1



(17
)






(15
)Operating earnings (loss)


(16
)


(138
)


197







43Other income (expense)  net


43



9



16



(11
)


57Interest expenseLong-term debt


(53
)


(4
)


(5
)






(62
)Other


6



(31
)


17



2



(6
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies


(20
)


(164
)


225



(9
)


32Income tax benefit (expense)


3



(3
)


(15
)






(15
)(17
)


(167
)


210



(9
)


17Minority interests  net of tax


















Equity in net earnings (loss) of associated
    companies  net of tax


34



2



(1
)


(35
)


Net earnings (loss) before cumulative effect of accounting change


17



(165
)


209



(44
)


17Cumulative effect of accounting change  net of tax


















Net earnings (loss)


17



(165
)


209



(44
)


17Dividends on preferred shares


12















12Net earnings (loss) applicable to common shares

$
5


$
(165
)

$
209


$
(44
)

$
5  39




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalRevenues

$
2,334


$
3,489


$
3,694


$
(1,767
)

$
7,750Cost of revenues


1,380



2,414



2,495



(1,767
)


4,522Gross profit


954



1,075



1,199







3,228Selling, general and administrative expense


413



621



775







1,809Research and development expense


619



495



122







1,236Amortization of intangible assets






6



31







37Special charges


15



61



96







172Loss (gain) on sale of businesses and assets


3



2



(13
)






(8
)Operating earnings (loss)


(96
)


(110
)


188







(18
)Other income (expense)  net


298



(100
)


182



(2
)


378Interest expenseLong-term debt


(168
)


(8
)


(22
)






(198
)Other


3



(59
)


51



(14
)


(19
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies


37



(277
)


399



(16
)


143Income tax benefit (expense)


4







(77
)






(73
)41



(277
)


322



(16
)


70Minority interests  net of tax










(46
)






(46
)Equity in net earnings (loss) of associated
    companies  net of tax


(15
)


100



3



(86
)


2Net earnings (loss) before cumulative effect of accounting change


26



(177
)


279



(102
)


26Cumulative effect of accounting change  net of tax


















Net earnings (loss)


26



(177
)


279



(102
)


26Dividends on preferred shares


30















30Net earnings (loss) applicable to common shares

$
(4
)

$
(177
)

$
279


$
(102
)

$
(4
)  40




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalRevenues

$
2,221


$
3,723


$
4,155


$
(2,003
)

$
8,096Cost of revenues


1,464



2,608



2,918



(2,003
)


4,987Gross profit


757



1,115



1,237







3,109Selling, general and administrative expense


382



674



748







1,804Research and development expense


653



502



283







1,438Amortization of intangible assets






2



17







19In-process research and development expense






16











16Special charges


22



35



18







75Gain on sale of businesses and assets


(5
)


(13
)


(24
)






(42
)Operating earnings (loss)


(295
)


(101
)


195







(201
)Other income (expense)  net


114



32



32



(1
)


177Interest expenseLong-term debt


(70
)


(34
)


(19
)






(123
)Other


(31
)


(56
)


53



5



(29
)Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings (loss) of associated
    companies


(282
)


(159
)


261



4



(176
)Income tax benefit (expense)


9



(5
)


(73
)






(69
)(273
)


(164
)


188



4



(245
)Minority interests  net of tax










28







28Equity in net earnings (loss) of associated
    companies  net of tax


60



(16
)


(2
)


(46
)


(4
)Net earnings (loss) before cumulative effect of accounting change


(213
)


(180
)


214



(42
)


(221
)Cumulative effect of accounting change  net of tax


1



5



3







9Net earnings (loss)


(212
)


(175
)


217



(42
)


(212
)Dividends on preferred shares


29















29Net earnings (loss) applicable to common shares

$
(241
)

$
(175
)

$
217


$
(42
)

$
(241
)  41




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalASSETSCurrent assetsCash and cash equivalents

$
312


$
846


$
1,965


$



$
3,123Restricted cash and cash equivalents


30



6



18







54Accounts receivable  net


2,463



1,857



5,430



(6,147
)


3,603Inventories  net


97



555



1,442







2,094Deferred income taxes  net


53



321



98







472Other current assets


126



122



358



(7
)


599Total current assets


3,081



3,707



9,311



(6,154
)


9,945Investments


6,787



4,909



2,779



(14,275
)


200Plant and equipment  net


518



416



597







1,531Goodwill






1,877



482







2,359Intangible assets  net


13



35



176







224Deferred income taxes  net


2,149



1,242



591







3,982Other assets


132



138



269



(16
)


523Total assets

$
12,680


$
12,324


$
14,205


$
(20,445
)

$
18,764LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
2,323


$
2,532


$
2,392


$
(6,147
)

$
1,100Payroll and benefit-related liabilities


110



206



245







561Contractual liabilities


13



49



204







266Restructuring liabilities


8



49



64







121Other accrued liabilities


429



1,242



2,037



(7
)


3,701Long-term debt due within one year


1



12



9







22Total current liabilities


2,884



4,090



4,951



(6,154
)


5,771Long-term debt


2,225



96



328







2,649Deferred income taxes  net










16







16Other liabilities


1,419



929



1,558



(16
)


3,890Total liabilities


6,528



5,115



6,853



(6,170
)


12,326Minority interests in subsidiary companies










286







286Shareholders equity


6,152



7,209



7,066



(14,275
)


6,152Total liabilities and shareholders equity

$
12,680


$
12,324


$
14,205


$
(20,445
)

$
18,764  42




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalASSETSCurrent assetsCash and cash equivalents

$
626


$
1,145


$
1,716


$



$
3,487Restricted cash and cash equivalents


18



19



50



(43
)


44Accounts receivable  net






3,081



12,225



(11,597
)


3,709Inventories  net


145



547



1,311



(14
)


1,989Deferred income taxes  net


45



225



6







276Other current assets


128



110



274







512Total current assets


962



5,127



15,582



(11,654
)


10,017Investments


6,629



5,239



3,266



(14,930
)


204Plant and equipment  net


490



446



590







1,526Goodwill






1,878



473







2,351Intangible assets  net






45



196







241Deferred income taxes  net


1,847



1,338



678







3,863Other assets


246



364



725



(655
)


680Total assets

$
10,174


$
14,437


$
21,510


$
(27,239
)

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

$
8


$
3,763


$
8,950


$
(11,597
)

$
1,124Payroll and benefit-related liabilities


114



259



264







637Contractual liabilities


11



59



173







243Restructuring liabilities


10



52



35







97Other accrued liabilities


529



1,312



1,915







3,756Long-term debt due within one year


1



9



8







18Total current liabilities


673



5,454



11,345



(11,597
)


5,875Long-term debt


2,218



102



326







2,646Deferred income taxes  net










97







97Other liabilities


1,390



1,219



2,174



(655
)


4,128Total liabilities


4,281



6,775



13,942



(12,252
)


12,746Minority interests in subsidiary companies










243







243Shareholders equity


5,893



7,662



7,325



(14,987
)


5,893Total liabilities and shareholders equity

$
10,174


$
14,437


$
21,510


$
(27,239
)

$
18,882  43




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalCash flows from (used in) operating activitiesNet earnings (loss)

$
26


$
(177
)

$
279


$
(102
)

$
26Adjustment to reconcile to net earnings (loss)


(304
)


(86
)


39



102



(249
)Net cash from (used in) operating activities


(278
)


(263
)


318







(223
)Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(44
)


(37
)


(59
)






(140
)Proceeds on disposals of plant and equipment


58



5



26







89Change in restricted cash and cash equivalents


4



(4
)


(10
)






(10
)Acquisitions of investments and businesses  net of
    cash acquired


(4
)


(4
)


(73
)






(81
)Proceeds on sale of investments and businesses and assets


(66
)


10



27







(29
)Net cash used in investing activities


(52
)


(30
)


(89
)






(171
)Cash flows used in financing activitiesDividends paid


(35
)














(35
)Increase in notes payable










47







47Decrease in notes payable










(52
)






(52
)Decrease in capital leases payable


(3
)


(6
)


(9
)






(18
)Net cash used in financing activities


(38
)


(6
)


(14
)






(58
)Effect of foreign exchange rate changes on cash and cash
    equivalents


54







34







88Net increase (decrease) in cash and cash equivalents


(314
)


(299
)


249







(364
)Cash and cash equivalents at beginning of period


626



1,145



1,716







3,487Cash and cash equivalents at end of period

$
312


$
846


$
1,965


$



$
3,123  44




---



##### Table of Contents



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





Non-Networks


Guarantor


Guarantor(Millions of U.S. Dollars)

Limited


Subsidiary


Subsidiaries


Eliminations


TotalCash flows from (used in) operating activitiesNet earnings (loss)

$
(212
)

$
(175
)

$
217


$
(42
)

$
(212
)Adjustment to reconcile to net earnings (loss)


(758
)


82



52



42



(582
)Net cash from (used in) operating activities


(970
)


(93
)


269







(794
)Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(71
)


(86
)


(103
)






(260
)Proceeds on disposals of plant and equipment


88







37







125Change in restricted cash and cash equivalents


36



(2
)


4







38Acquisitions of investments and businesses  net of
    cash acquired






(103
)


(31
)






(134
)Proceeds on sale of investments and businesses and assets


162



14



20







196Net cash from (used in) investing activities


215



(177
)


(73
)






(35
)Cash flows from (used in) financing activitiesDividends paid


(46
)














(46
)Increase in notes payable










88







88Decrease in notes payable










(75
)






(75
)Increase in loan payable


2,000



1,300











3,300Repayments of long-term debt


(1,275
)


(1,300
)


(150
)






(2,725
)Debt issuance costs


(42
)














(42
)Decrease in capital leases payable


(4
)


(6
)


(2
)






(12
)Net cash from (used in) financing activities


633



(6
)


(139
)






488Effect of foreign exchange rate changes on cash and cash
    equivalents










59







59Net increase (decrease) in cash and cash equivalents


(122
)


(276
)


116







(282
)Cash and cash equivalents at beginning of period


245



1,201



1,430







2,876Cash and cash equivalents at end of period

$
123


$
925


$
1,546


$



$
2,594  45




---



##### Table of Contents



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

46Restatements; Remedial Measures and the
    Elimination of Material Weaknesses; Related Matters

51Results of Operations

53Segment Information

59Liquidity and Capital Resources

64Off-Balance Sheet Arrangements

70Application of Critical Accounting Policies and
    Estimates

70Accounting Changes and Recent Accounting
    Pronouncements

82Outstanding Share Data

84Market Risk

84Environmental Matters

84Legal Proceedings

85Cautionary Notice Regarding Forward-Looking
    Information

85   The following Managements Discussion and Analysis, or
    MD&A, is intended to help the reader understand the results
    of operations and financial condition of Nortel Networks
    Limited. 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, our Annual Report on
    Form 10-K
    for the year ended December 31, 2006, or 2006 Annual
    Report, and our Quarterly Reports on
    Form 10-Q
    for the quarters ended March 31, 2007 and June 30,
    2007, or the 2007 First Quarter Report and 2007 Second Quarter
    Report, respectively, 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
     46




---



##### Table of Contents



47




---



##### Table of Contents



How We
    Measure Business Performance
     48




---



##### Table of Contents



Third
    Quarter Financial Highlights
    For the Three Months Ended September 30,

For the Nine Months Ended September 30,2007


2006


$ Change


% Change

2007


2006


$ Change


% ChangeRevenues

$
2,705


$
2,926


$
(221
)

(8)

$
7,750


$
8,096


$
(346
)

(4)Gross profit


1,176



1,115



61


5


3,228



3,109



119


4Gross margin %


43.4
%


38.1
%





5.3 points


41.6
%


38.4
%





3.2 pointsSelling, general and administrative expense


613



588



25


4


1,809



1,804



5


0Research and development expense


412



470



(58
)

(12)


1,236



1,438



(202
)

(14)Operating margin


151



57



94


165


183



(133
)


316Operating margin %


5.6
%


1.9
%





3.7 points


2.4
%


(1.6
%)





4.0 pointsInterest expense


78



68



10


15


217



152



65


43Other income  net


(168
)


(57
)


(111
)




(378
)


(177
)


(201
)Minority interest  net of tax


33







33





46



(28
)


74Equity in net earnings (loss) of associated
    companies  net of tax


(1
)






(1
)




(2
)


4



(6
)

(150)Management EBT


209



46



163


350


300



(84
)


384Amortization of intangibles


12



8



4


50


37



19



18


95In-process research and development expense




















16



(16
)

(100)Special charges


56



21



35


167


172



75



97


129Loss (gain) on sales of businesses and assets


3



(15
)


18





(8
)


(42
)


34Income tax expense


49



15



34


227


73



69



4


6Net earnings (loss) before cumulative effect of accounting
    change

$
89


$
17



72




$
26


$
(221
)


247     Q3 2007
    vs. Q3 2006
  
    Revenues decreased 8% to $2,705:  Revenues
    decreased in the third quarter of 2007 compared to the third
    quarter of 2006 in the CN and MEN segments, partially offset by
    an increase in the ES segment. From a geographic perspective,
    the decrease was driven by Europe, Middle East and Africa, or
    EMEA, the U.S. and Canada, partially offset by increases in
    Asia, and Caribbean and Latin America, or CALA, regions. The
    revenue decline was primarily attributable to declines in CN
    related to the divestiture of certain assets and liabilities of
    our Universal Mobile Telecommunications System, or UMTS, Access
    business in the fourth quarter of 2006, lower revenues related
    to our Evolution-Data Optimized Revision A, or EV-DO Rev A,
    solutions and shipment delays. The decrease in revenue from the
    MEN segment was primarily due to lower deferred revenues
    recognized in 2007 compared to the amount recognized in the
    third quarter of 2006. The decline in GS was attributable to the
    lost revenues due to the UMTS Access divestiture. These
    decreases were partially offset by increases in ES due to the
    recognition of previously deferred revenues, as a result of the
    completion or elimination of customer deliverable obligations
    for certain products.
    Gross margin increased 5.3 percentage points to
    43.4%:  The increase was primarily driven by
    continued improvements in our cost structure, most significantly
    in the CN segment. The increase in the CN segment was primarily
    due to improved product mix primarily related to Code
    Division Multiple Access, or CDMA, and Global System for
    Mobile Communication, or GSM, Access. 49




---



##### Table of Contents




    Operating margin increased by $94 to $151:  The
    increase was primarily due to increased gross profit and
    decreased R&D expenses resulting from the continued
    momentum of our business transformation cost reduction
    initiatives, and a decrease in employee-related expenses as a
    result of the UMTS Access divestiture. The impact of foreign
    exchange on operating margin was minimal, as favorable impact on
    revenues was largely offset by unfavorable impact on cost of
    revenues, SG&A and R&D.
    Management EBT increased by $163 to $209:  The
    increase in Management EBT was driven primarily by increases in
    the CN, ES, GS and Other segments, partially offset by a
    decrease in the MEN segment.
    Net earnings (loss) before cumulative effect of accounting
    change increased $72 to earnings of $89 from earnings of
    $17:  The increase was driven by higher gross
    profit and lower R&D expense, partially offset by higher
    SG&A expense and special charges.
    Cash and cash equivalents decreased from $4,465 at
    June 30, 2007 to $3,123 at September 30,
    2007:  The decrease in cash and cash equivalents
    was primarily driven by repayment of debt to NNC for redemption
    of NNCs 4.25% $1,800 convertible notes due 2008, or 4.25%
    Notes due 2008, net cash used in investing activities was $109
    and net cash used in financing activities was $19. This decrease
    was partially offset by a net positive impact from foreign
    exchange of $46.  First
    nine months of 2007 vs. first nine months of 2006
  
    Revenues decreased 4% to $7,750:  Revenues
    decreased in the first nine months of 2007 compared to the first
    nine months of 2006 in the CN, GS and MEN segments, partially
    offset by an increase in the ES segment. From a geographic
    perspective, the decrease was driven by the EMEA and
    U.S. regions, partially offset by increases in the Asia,
    CALA, and Canada regions. The revenue decline was primarily
    attributable to declines in CN related to the divestiture of our
    UMTS Access business. Revenue declines in the GS segment were
    also attributable to the UMTS Access divestiture, while declines
    in MEN were primarily driven by recognition of less deferred
    revenues in the first nine months of 2007 compared to the first
    nine months of 2006. These decreases were partially offset by
    increases in ES due to the recognition of previously deferred
    revenues, as a result of the completion or elimination of
    customer deliverable obligations for certain products.
    Gross margin increased 3.2 percentage points to
    41.6%:  The increase was primarily due to a change
    in geographical mix resulting in a greater proportion of our
    revenues from the U.S. and Canada regions, while the EMEA
    region saw a decline as a result of the divestiture of our UMTS
    Access business. Additionally, an improved cost structure,
    particularly in the CN segment and primarily related to CDMA,
    GSM Access and Converged Multimedia Networks Voice over Internet
    Protocol, or CMN  VoIP, contributed to the gross
    margin increase.
    Operating margin increased by $316 to
    $183:  The increase was primarily due to increased
    gross profit as a result of increased gross margin and decreased
    R&D expenses as a result of the continued momentum of our
    business transformation cost reduction initiatives, and
    headcount reductions as a result of the UMTS Access divestiture.
    These cost reductions were partially offset by an increase in
    special charges. The impact of foreign exchange on operating
    margin was minimal, as the favorable impact on revenues was
    largely offset by the unfavorable impact on cost of revenues,
    SG&A and R&D.
    Management EBT increased by $384 to earnings of
    $300:  The increase in Management EBT was driven
    primarily by increases in the CN, ES and Other segments,
    partially offset by decreases in the MEN and GS segments. The CN
    and GS segments continued to be significantly more profitable
    than ES and MEN.
    Net earnings (loss) before cumulative effect of accounting
    change increased $247 to a net earnings of $26 from loss of
    $221:  The increase was driven by higher gross
    profit and lower R&D expense, partially offset by special
    charges.
    Cash and cash equivalents decreased from $3,487 at
    December 31, 2006 to $3,123 at September 30,
    2007:  The decrease in cash was primarily due to
    cash used in operating activities of $223, cash used in
    investing activities of $171 and cash used in financing
    activities of $58, partially offset by net positive impacts from
    foreign exchange of $88. 50




---



##### Table of Contents



Significant
    Business Developments
  Business
    Transformation Initiatives
    Global
    Class Action Settlement
    Convertible
    Notes Offering
    Appointment
    of KPMG LLP
    Appointment
    of Paviter Binning as Executive Vice-President and Chief
    Financial Officer
    Restatements;
    Remedial Measures and the Elimination of Material Weaknesses;
    Related Matters
    Form 10-K
  Form 10-K.
 51




---



##### Table of Contents




    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.      For the Three Months Ended


For the Nine Months EndedSeptember 30, 2006


September 30, 2006Cost of








Cost ofRevenues


Revenues


Net Earnings (Loss)


Revenues


Revenues


Net LossAs previously reported

$
2,955


$
1,838


$
(14
)

$
8,081


$
4,989


$
(209
)Adjustments:Pension and post-retirement errors






1



(2
)






7



(18
)Revenue recognition errors


(29
)


(4
)


(22
)


15



(6
)


17Other errors






(24
)


55







(3
)


(2
)As restated

$
2,926


$
1,811


$
17


$
8,096


$
4,987


$
(212
)   Regulatory
    Actions
       52




---



##### Table of Contents



Results
    of Operations
  Revenues
    For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeUnited States

$
1,159


$
1,304


$
(145
)


(11
)

$
3,546


$
3,577


$
(31
)


(1
)EMEA


665



825



(160
)


(19
)


1,921



2,345



(424
)


(18
)Canada


204



228



(24
)


(11
)


555



535



20



4Asia


537



432



105



24



1,255



1,192



63



5CALA


140



137



3



2



473



447



26



6Consolidated

$
2,705


$
2,926


$
(221
)


(8
)

$
7,750


$
8,096


$
(346
)


(4
)   Q3 2007
    vs. Q3 2006
           53




---



##### Table of Contents



First
    nine months of 2007 vs. first nine months of 2006
         54




---



##### Table of Contents



Gross
    Margin
  For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeGross profit

$
1,176


$
1,115


$
61



5


$
3,228


$
3,109


$
119



4Gross margin


43.4
%


38.1
%






5.3 points



41.6
%


38.4
%






3.2 points   Q3 2007
    vs. Q3 2006
    First
    nine months of 2007 vs. first nine months of 2006
    Operating
    Margin
  For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeOperating margin

$
151


$
57


$
94



165


$
183


$
(133
)

$
316Operating margin as a percentage of revenue


5.6
%


1.9
%






3.7 points



2.4
%


(1.6
%)






4.0 points   Q3 2007
    vs. Q3 2006
   55




---



##### Table of Contents



First
    nine months of 2007 vs. first nine months of 2006
    Special
    Charges
    For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% Change2007 Restructuring Plan

$
36


$



$
36






$
144


$



$
1442006 Restructuring Plan


13



4



9



225



18



50



(32
)


(64
)2004 Restructuring Plan


3



12



(9
)


(75
)


5



16



(11
)


(69
)2001 Restructuring Plan


4



5



(1
)


(20
)


5



9



(4
)


(44
)Total special charges

$
56


$
21


$
35



167


$
172


$
75


$
97



129   2007
    Restructuring Plan
    2006
    Restructuring Plan
   56




---



##### Table of Contents



2004 and
    2001 Restructuring Plans
      2007


2006


2004


2001Restructuring


Restructuring


Restructuring


RestructuringPlan


Plan


Plan


Plan


Total2007


2007


2006


2007


2006


2007


2006


2007


2006Special charges by segment:Carrier NetworksThree months ended March 31

$
45


$
3


$



$



$
1


$



$
2


$
48


$
3Three months ended June 30


21







22



1



1



1



2



23



25Three months ended September 30


20



3



3



2



5



3



4



28



1286



6



25



3



7



4



8



99



40EnterpriseThree months ended March 31


11



1











1











12



1Three months ended June 30


6







7



1















7



7Three months ended September 30


5



2







1



2



1



1



9



322



3



7



2



3



1



1



28



11Metro Ethernet NetworksThree months ended March 31


15



1











1











16



1Three months ended June 30


5







16



















5



16Three months ended September 30


4



1



1







5











5



624



2



17







6











26



23Global ServicesThree months ended March 31


4



























4



Three months ended June 30


1







1



















1



1Three months ended September 30


7



7























14



12



7



1



















19



1OtherThree months ended March 31


































Three months ended June 30


































Three months ended September 30


































































Total special charges

$
144


$
18


$
50


$
5


$
16


$
5


$
9


$
172


$
75   Loss
    (Gain) on Sales of Businesses and Assets
   57




---



##### Table of Contents



Other
    Income  Net
    For the Three Months Ended


For the Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Interest and dividend income

$
61


$
30


$
183


$
84Loss on sales and write downs of investments






(7
)


(5
)


(6
)Currency exchange gains  net


70







140



16Other  net


37



34



60



83Other income  net

$
168


$
57


$
378


$
177       Interest
    Expense
    Income
    Tax Expense
       58




---



##### Table of Contents



Segment
    Information
  Carrier
    Networks
    For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueCDMA solutions

$
592


$
645


$
(53
)


(8
)

$
1,654


$
1,580


$
74



5GSM and UMTS solutions


341



477



(136
)


(29
)


1,014



1,472



(458
)


(31
)Circuit and packet voice solutions


147



215



(68
)


(32
)


479



618



(139
)


(22
)Total Revenue

$
1,080


$
1,337


$
(257
)


(19
)

$
3,147


$
3,670


$
(523
)


(14
)Management EBT

$
145


$
107


$
38



36


$
456


$
247


$
209



85   Q3 2007
    vs. Q3 2006
             59




---



##### Table of Contents



First
    nine months of 2007 vs. first nine months of 2006
              Enterprise
    Solutions
    For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueCircuit and packet voice solutions

$
426


$
388


$
38



10


$
1,194


$
1,051


$
143



14Data networking and security solutions


245



183



62



34



664



453



211



47Total Revenue

$
671


$
571


$
100



18


$
1,858


$
1,504


$
354



24Management EBT

$
19


$
1


$
18



1,800


$
33


$
(63
)

$
96



(152
)  60




---



##### Table of Contents



Q3 2007
    vs. Q3 2006
            First
    nine months of 2007 vs. First nine months of 2006
           61




---



##### Table of Contents



Global
    Services
    For the Three Months Ended September 30


For the Nine Months Ended September 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenue

$
540


$
541


$
(1
)


(0
)

$
1,482


$
1,592


$
(110
)


(7
)Management EBT

$
101


$
89


$
12



13


$
254


$
278


$
(24
)


(9
)   Q3 2007
    vs. Q3 2006
          First
    nine months of 2007 vs. first nine months of 2006
         62




---



##### Table of Contents



Metro
    Ethernet Networks
    For the Three Months Ended September 30,


For the Nine Months Ended September 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueOptical networking solutions

$
305


$
309


$
(4
)


(1
)

$
853


$
799


$
54



7Data networking and security solutions


55



107



(52
)


(49
)


243



343



(100
)


(29
)Total Revenue

$
360


$
416


$
(56
)


(13
)

$
1,096


$
1,142


$
(46
)


(4
)Management EBT

$
4


$
33


$
(29
)


(88
)

$
1


$
63


$
(62
)


(98
)   Q3 2007
    vs. Q3 2006
            First
    nine months of 2007 vs. first nine months of 2006
       63




---



##### Table of Contents



Other
  For the Three Months Ended September 30,


For the Nine Months Ended September 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenue

$
54


$
61


$
(7
)


(11
)

$
167


$
188


$
(21
)


(11
)Management EBT

$
(60
)

$
(184
)

$
124






$
(444
)

$
(609
)

$
165   Q3 2007
    vs. Q3 2006
      First
    nine months of 2007 vs. first nine months of 2006
      Liquidity
    and Capital Resources
  Cash
    Flow
   64




---



##### Table of Contents



For the Nine Months Ended September 30,2007


2006


ChangeNet earnings (loss)

$
26


$
(212
)

$
238Non-cash items


362



679



(317
)Changes in operating assets and liabilities:Accounts receivable  net


106



(415
)


521Inventories  net


(60
)


(44
)


(16
)Accounts payable


(16
)


(243
)


22730



(702
)


732Deferred costs


104



(44
)


148Income taxes


(2
)


(50
)


48Payroll, accrued and contractual liabilities


(333
)


(361
)


28Deferred revenue


(180
)


1



(181
)Advanced billings in excess of revenues recognized to date on
    contracts


109



10



99Restructuring liabilities


24



(12
)


36Other


(363
)


(103
)


(260
)Changes in other operating assets and liabilities


(641
)


(559
)


(82
)Net cash from (used in) operating activities


(223
)


(794
)


571Net cash from (used in) investing activities


(171
)


(35
)


(136
)Net cash from (used in) financing activities


(58
)


488



(546
)Effect of foreign exchange rate changes on cash and cash
    equivalents


88



59



29Net increase (decrease) in cash and cash equivalents


(364
)


(282
)


(82
)Cash and cash equivalents at beginning of period


3,487



2,876



611Cash and cash equivalents at end of period

$
3,123


$
2,594


$
529   Operating
    Activities
     65




---



##### Table of Contents



Accounts
    Receivable
  September 30,


December 31,2007


2006


$ Change


% ChangeAccounts Receivable

$
2,534


$
2,785


$

(251)


(9
)Days sales outstanding in accounts receivable
    (DSO)(a)


84



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
  December 31,September 30, 2007


2006


$ Change


% ChangeInventory  net (excluding deferred costs)

$
515


$
456


$
59



13Net inventory days
    (NID)(a)


30



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.  build-up
  Accounts
    Payable
  December 31,September 30, 2007


2006


$ Change


% ChangeTrade accounts payable

$
1,044


$
1,086


$

(42)


(4
)Days of purchasing outstanding in accounts payable
    (DPO)(a)


61



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
     66




---



##### Table of Contents



Financing
    Activities
      Other
    Items
      Deferred
    revenues
    Convertible
    Notes Offering
           67




---



##### Table of Contents



Form S-3
  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 subject to litigation proceedings and, as a result, any
    judgments or settlements in connection with our pending civil
    litigation not encompassed by the Global Class Action
    Settlement, or criminal investigations related to the
    restatements, could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, other than anticipated professional fees; 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 $330;
    capital expenditures of approximately $300;
    costs related to workforce reductions and real estate actions in
    connection with the 2007 Restructuring Plan of approximately
    $165;
    costs related to workforce reductions and other restructuring
    activities for all other restructuring plans of approximately
    $65;
    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 $60 and $2,
    respectively; and
    costs related to our finance transformation project which will
    include, among other things, continuing implementation of SAP to
    provide an integrated global financial system, of approximately
    $12.  and/or
  Contractual
    cash obligations
   68




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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 $40 was outstanding.    and/or
      Short-form
    registration of securities
   69




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Credit
    Ratings
  Moodys


S&PNNLs Corporate Family Rating


B3



NNLs Long-term Corporate Credit Rating






BNNLs $2.0B High-Yield Notes


B3



BNNCs $1.80B Convertible Notes due 2008


B3



BNNCs $1.15B Convertible Notes due 2012 and 2014


B3



BNNLs $200 Notes due 2023


B3



CCCNortel Networks Capital Corporation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
      September 30


December 312007


2006Bid and performance related
    bonds(a)

$
154


$
231Other
    bonds(b)


40



30Total bid, performance related and other bonds

$
194


$
261      (a) Net of restricted cash and
    cash equivalents amounts of $5 and $7 as of September 30,
    2007 and December 31, 2006, respectively.
  (b) Net of restricted cash and
    cash equivalents amounts of $27 and $33 as of September 30,
    2007 and December 31, 2006, respectively.
    Application
    of Critical Accounting Policies and Estimates
   70




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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.  and/or and/or
     71




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97-2, SOP 97-2,
  SOP 81-1, SOP 81-1,
      SOP 97-2. SOP 97-2 when-and-if
  SOP 97-2 00-21, EITF 00-21,
     72




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##### Table of Contents




    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 9% of our deferred revenue balance relates to
    contractual arrangements where billing milestones preceded
    revenue recognition.      As atSeptember 30,


December 31,2007


2006


$ Change


% ChangeDeferred revenue

$
1,863


$
2,046


$
(183
)


(9
)Advance billings


1,450



1,352



98



7Total deferred revenue

$
3,313


$
3,398


$
(85
)


(2
)     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.   73




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LG-Nortel)
    September 30,


December 31,2007


2006Gross accounts receivable

$
3,692


$
3,797Provision for doubtful accounts


(89
)


(88
)Accounts receivable  net

$
3,603


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


2
%


2
%Gross long-term receivables

$
37


$
39Provision for doubtful accounts


(34
)


(34
)Net long-term receivables

$
3


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


92
%


87
%   Provisions
    for Inventory
          September 30,


December 31,2007


2006Gross inventory


3,225


$
3,415Inventory provisions


(893
)


(1,007
)Inventories 
    net(a)

$
2,332


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


28
%


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


63
%


69
%     (a)
    
    Includes the long-term portion of
    inventory related to deferred costs of $238 and $419 as of
    September 30, 2007 and December 31, 2006,
    respectively, which is included in other assets.(b)
    
    Calculated excluding deferred costs
    of $1,817 and $1,952 as of September 30, 2007 and
    December 31, 2006, respectively.  and/or
 74




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Provisions
    for Product Warranties
        Balance at December 31, 2006

$
214Payments


(130
)Warranties issued


182Revisions


(63
)Balance at September 30, 2007

$
203     Income
    Taxes
  Tax
    Asset Valuation
         75




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
    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 asset.                   76




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Future
    Projections of Profitability
             77




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Tax


Net


Other


Gross





NetBenefit of


Investment


Temporary


Deferred


Valuation


DeferredLosses


Tax Credits


Differences


Tax Asset


Allowance


Tax AssetCanada

$
1,025


$
1,131


$
513


$
2,669


$
(448
)

$
2,221United States


833



376



893



2,102



(540
)


1,562United Kingdom


478







302



780



(341
)


439France


406



37



137



580



(508
)


72Other


481







164



645



(518
)


127Total

$
3,223


$
1,544


$
2,009


$
6,776


$
(2,355
)

$
4,421     Canada
    1994-1996
    U.S.
     78




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U.K.
    France
    Transfer
    Pricing
          Valuation
    Allowance
   79




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Tax
    Contingencies
              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; 80




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
    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.        
    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
   81




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Special
    Charges
      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 have not
    elected to measure our hybrid instruments at fair value.
    Accounting for Servicing of Financial Assets In
    March 2006, the FASB issued SFAS No. 156,
    Accounting for Servicing of Financial Assets 
    an amendment of FASB Statement No. 140, or
    SFAS 156. SFAS 156 simplifies the accounting for
    assets and liabilities arising from loan servicing contracts.
    SFAS 156 requires that servicing rights be valued initially
    at fair value and subsequently either (i) accounted for at
    fair value or (ii) amortized over the period of estimated
    net servicing income (loss), with an assessment for impairment
    or increased obligation each reporting period. 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 82




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No. 48-1, 48-1. FIN 48-1 FIN 48-1 FIN 48-1
  
    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.
    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, or 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, Share-based compensation
    plans to the accompanying unaudited condensed consolidated
    financial statements.  Recent
    Accounting Pronouncements
  instrument-by-instrument
  No. 06-11 EITF 06-11. EITF 06-11 EITF 06-11 EITF 06-11 EITF 06-11 EITF 06-11
 83




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No. 07-3 EITF 07-3. EITF 07-3 EITF 07-3 EITF 07-3 EITF 07-3
  39-1, FIN 39-1. FIN 39-1 FIN 39-1 FIN 39-1 FIN 39-1
  Outstanding
    Share Data
    Market
    Risk
    Environmental
    Matters
      de minimis de minimis de minimis
   84




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Legal
    Proceedings
    Cautionary
    Notice Regarding Forward-Looking Information
  and/or Form 10-K,
 85




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ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  value-at-risk
         86




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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 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,
    March 31, 2007 and June 30, 2007 were not effective,
    included in our 2006 Annual Report, 2007 First Quarter Report
    and 2007 Second Quarter Report, respectively; 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.   87




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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; 88




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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.
         89




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Changes
    in Internal Control Over Financial Reporting
   90




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PART II
    OTHER INFORMATION
  ITEM 1.
    LEGAL
    PROCEEDINGS     91




---



##### Table of Contents



ITEM 1A.
    RISK
    FACTORS  Form 10-Q
  and/or
 92




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##### Table of Contents



ITEM 6.
    EXHIBITS  Form 10-Q.
   ExhibitNo.

Description10
.1

Dion Joannou letter agreement dated July 27, 2007
    concerning the cessation of Mr. Joannous
    responsibilities as President, North America of Nortel Networks
    Corporation and Nortel Networks Limited effective
    August 31, 2007.10
.2

Compensation and Human Resources Committee Policy on Company
    Aircraft dated July 31, 2007.10
.3

Paviter Binning, Executive Vice-President and Chief Financial
    Officer of Nortel Networks Corporation and Nortel Networks
    Limited, Employment Letter dated September 28, 2007.12


Computation of Ratios.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 2002.31
.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.  93




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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    Date:
    November 6, 2007
 94