##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  FORM 10-Q
  þ     QUARTERLY
    REPORT PURSUANT TO SECTION 13 OR
    15(d)      
           OF THE SECURITIES
    EXCHANGE ACT OF 1934For the Quarterly Period Ended
    March 31, 2008ORo     TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934  For
    the Transition Period From
    to
  Commission File Number: 000-30758
  Nortel Networks
    Limited
 (Exact name of registrant as
    specified in its charter)
  Canada

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

(I.R.S. Employer
    Identification No.)195 The West Mall
    Toronto, Ontario, Canada

M9C 5K1(Zip Code)(Address of Principal Executive
    Offices)   Registrants Telephone Number Including Area Code (905)
    863-7000
     þ o
   Rule 12b-2
  Large
    accelerated filer
    o
    Accelerated
    filer
    o
    Non-accelerated filer
    þ
    Smaller
    reporting company
    o    Rule 12b-2
  o þ
     1,460,978,638 shares of common stock without nominal or
    par value




---



##### 



TABLE OF
    CONTENTS
   
 PagePART I
    FINANCIAL INFORMATIONITEM 1.

Condensed Consolidated Financial Statements
    (unaudited)


1ITEM 2.

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


39ITEM 3.

Quantitative and Qualitative Disclosures About
    Market Risk


76ITEM 4.

Controls and Procedures


77PART II
    OTHER INFORMATIONITEM 1.

Legal Proceedings


78ITEM 1A.

Risk Factors


78ITEM 6.

Exhibits


78SIGNATURES


80EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-10.6EX-10.7EX-12EX-31.1EX-31.2EX-32    All dollar amounts in this document are in United States
    Dollars unless otherwise stated.
           i




---



##### Table of Contents



PART I
    FINANCIAL INFORMATION  ITEM 1.
    Condensed
    Consolidated Financial Statements (Unaudited)  NORTEL NETWORKS LIMITED
  Condensed Consolidated Statements of Operations
    (unaudited)
  Three Months Ended March 31,2008


2007(Millions of U.S. Dollars)Revenues:Products

$
2,471


$
2,169Services


287



314Total revenues


2,758



2,483Cost of revenues:Products


1,456



1,301Services


153



178Total cost of revenues


1,609



1,479Gross profit


1,149



1,004Selling, general and administrative expense


597



603Research and development expense


417



405Amortization of intangible assets


12



12Special charges


88



80Gain on sales of businesses and assets


(2
)


(1
)Other operating expense (income)  net (note 3)


13



(10
)Operating earnings (loss)


24



(85
)Other income  net (note 3)


(37
)


(76
)Interest expenseLong-term debt


59



64Other


6



5Loss from operations before income taxes, minority interests and
    equity in net earnings of associated companies


(4
)


(78
)Income tax expense


36



13(40
)


(91
)Minority interests  net of tax


67



12Equity in net earnings of associated companies  net
    of tax


(1
)


Net loss


(106
)


(103
)Dividends on preferred shares


11



10Net loss applicable to common shares

$
(117
)

$
(113
)   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 1




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Balance Sheets (unaudited)
  March 31,


December 31,2008


2007(Millions of U.S. Dollars,except for share amounts)ASSETSCurrent assetsCash and cash equivalents

$
3,215


$
3,526Restricted cash and cash equivalents


48



66Accounts receivable  net


3,482



3,705Inventories  net


1,818



2,002Deferred income taxes  net


535



487Other current assets


473



467Total current assets


9,571



10,253Investments


193



194Plant and equipment  net


1,508



1,530Goodwill


2,392



2,381Intangible assets  net


188



213Deferred income taxes  net


2,774



2,868Other assets


555



534Total assets

$
17,181


$
17,973LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
1,112


$
1,229Payroll and benefit-related liabilities


544



689Contractual liabilities


259



272Restructuring liabilities


143



100Other accrued liabilities (note 3)


3,471



3,799Long-term debt due within one year


21



23Total current liabilities


5,550



6,112Long-term debt


2,688



2,666Deferred income taxes  net


30



17Other liabilities (note 3)


2,706



2,874Total liabilities


10,974



11,669Minority interests in subsidiary companies


347



294Guarantees, commitments and contingencies (notes 9, 11
    and 15, respectively)SHAREHOLDERS EQUITYPreferred shares, without par value  Authorized
    shares: unlimited; Issued and outstanding shares:30,000,000 and 30,000,000 as of March 31, 2008 and
    December 31, 2007, respectively.


536



536Common shares, without par value  Authorized shares:
    unlimited; Issued and outstanding shares:1,460,978,638 and 1,460,978,638 as of March 31, 2008 and
    December 31, 2007, respectively.


1,211



1,211Additional paid-in capital


22,425



22,401Accumulated deficit


(18,537
)


(18,385
)Accumulated other comprehensive income


225



247Total shareholders equity


5,860



6,010Total liabilities and shareholders equity

$
17,181


$
17,973   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 2




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Cash Flows (unaudited)
  Three Months Ended March 31,2008


2007(Millions of U.S. Dollars)Cash flows from (used in) operating activitiesNet loss

$
(106
)

$
(103
)Adjustments to reconcile net loss to net cash from (used in)
    operating activities:Amortization and depreciation


81



79Non-cash portion of special charges


2



Equity in net earnings of associated companies


(1
)


Share-based compensation expense


21



25Deferred income taxes


12



5Pension and other accruals


32



92Loss (gains) on sales and write downs of investments, businesses
    and assets  net


6



(1
)Minority interests


67



12Other  net


(24
)


19Change in operating assets and liabilities


(352
)


1,030Net cash from (used in) operating activities


(262
)


1,158Cash flows used in investing activitiesExpenditures for plant and equipment


(51
)


(56
)Proceeds on disposals of plant and equipment






14Change in restricted cash and cash equivalents


18



10Acquisitions of investments and businesses  net of
    cash acquired


(29
)


(14
)Proceeds from the sales of investments and businesses and
    assets  net


18



(39
)Net cash used in investing activities


(44
)


(85
)Cash flows used in financing activitiesDividends paid, including paid by subsidiaries to minority
    interests


(11
)


(10
)Increase in notes payable


28



10Decrease in notes payable


(25
)


(12
)Repayments of capital leases payable


(6
)


(5
)Net cash used in financing activities


(14
)


(17
)Effect of foreign exchange rate changes on cash and cash
    equivalents


9



6Net increase (decrease) in cash and cash equivalents


(311
)


1,062Cash and cash equivalents at beginning of period


3,526



3,487Cash and cash equivalents at end of period

$
3,215


$
4,549   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 3




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited)
 (Millions
    of U.S. Dollars, except per share amounts, unless otherwise
    stated)
  1.
    Significant
    accounting policies  Basis
    of presentation
      Form 10-K
  Comparative
    figures
    (a)
    Recent
    accounting pronouncements  (i)
    In September 2006, the United States Financial Accounting
    Standards Board (FASB) issued Statement of Financial
    Accounting Standard (SFAS) No. 157, Fair
    Value Measurements (SFAS 157).
    SFAS 157 establishes a single definition of fair value, a
    framework for measuring fair value and requires expanded
    disclosures about fair value measurements. Nortel partially
    adopted the provisions of SFAS 157 effective
    January 1, 2008; see note 2. The effective date for
    SFAS 157 as it relates to fair value measurements for
    non-financial assets and liabilities that are not measured at
    fair value on a recurring basis has been deferred to fiscal
    years beginning after December 15, 2008 in accordance with
    FASB Staff Position (FSP),
    SFAS 157-2,
    Effective Date of FASB Statement No. 157.
    Nortel plans to adopt the deferred portion of SFAS 157 on
    January 1, 2009. Nortel does not currently expect the
    adoption of the deferred portion of SFAS 157 to have a
    material impact on its results of operations and financial
    condition, but will continue to assess the impact as the
    guidance evolves.(ii)
    In September 2007, the FASB Emerging Issues Task Force
    (EITF) reached a consensus on EITF Issue
    No. 07-1,
    Collaborative Arrangements
    (EITF 07-1).
    EITF 07-1
    addresses the accounting for arrangements in which two companies
    work together to achieve a common commercial objective, without
    forming a separate legal entity. The nature and purpose of a
    companys collaborative arrangements are required to be
    disclosed, along with the accounting policies applied and the
    classification and amounts for significant financial activities
    related to the 4




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  arrangements. Nortel will adopt the provisions of
    EITF 07-1
    on January 1, 2009. The adoption of
    EITF 07-1
    is not expected to have a material impact on Nortels
    results of operations and financial condition.  (iii)
    In December 2007, the FASB issued SFAS No. 141R,
    Business Combinations (SFAS 141R),
    replacing SFAS No. 141, Business
    Combinations. SFAS 141R revises existing accounting
    guidance for how an acquirer recognizes and measures in its
    financial statements the identifiable assets, liabilities, any
    noncontrolling interests, and goodwill acquired on acquisition
    of businesses. SFAS 141R is effective for fiscal years
    beginning after December 15, 2008. Nortel plans to adopt
    the provisions of SFAS 141R on January 1, 2009. The
    adoption of SFAS 141R will impact the accounting for
    business combinations completed by Nortel on or after
    January 1, 2009.(iv)
    In December 2007, the FASB issued SFAS No. 160,
    Noncontrolling Interests in Consolidated Financial
    Statements  An Amendment of ARB 51
    (SFAS 160). SFAS 160 establishes
    accounting and reporting standards for the treatment of
    noncontrolling interests in a subsidiary. Noncontrolling
    interests in a subsidiary will be reported as a component of
    equity in the consolidated financial statements and any retained
    noncontrolling equity investment upon deconsolidation of a
    subsidiary is initially measured at fair value. SFAS 160 is
    effective for fiscal years beginning after December 15,
    2008. Nortel plans to adopt the provisions of SFAS 160 on
    January 1, 2009. The adoption of SFAS 160 will result in
    the reclassification of minority interests to shareholders
    equity. Nortel is currently assessing any further impacts of
    SFAS 160 on its results of operations and financial
    condition.(v)
    In February 2008, the FASB issued FSP
    SFAS 140-3,
    Accounting for Transfers of Financial Assets and
    Repurchase Financing Transactions (FSP
    SFAS 140-3).
    FSP
    SFAS 140-3
    provides implementation guidance on accounting for a transfer of
    a financial asset and repurchase financing. The new guidance
    presumes that the initial transfer of a financial asset and a
    repurchase financing should be considered part of the same
    arrangement (i.e., a linked transaction) under
    SFAS No. 140, Accounting for Transfers and
    Servicing of Financial Assets and Extinguishment of
    Liabilities (SFAS 140). If certain
    criteria are met, however, then the transfer and repurchase
    should be separately evaluated under SFAS 140 and not considered
    a linked transaction. FSP
    SFAS 140-3
    is effective for fiscal years and interim periods beginning
    after November 15, 2008. Nortel plans to adopt the
    provisions of FSP
    SFAS 140-3
    on January 1, 2009. Nortel does not currently expect the
    adoption to have a material impact on its results of operations
    and financial condition.(vi)
    In March 2008, the FASB issued SFAS No. 161,
    Disclosures about Derivative Instruments and Hedging
    Activities  An Amendment of FASB Statement 133
    (SFAS 161). SFAS 161 requires expanded and
    enhanced disclosure for derivative instruments, including those
    used in hedging activities. SFAS 161 is effective for
    fiscal years and interim periods beginning after
    November 15, 2008. Nortel plans to adopt the provisions of
    SFAS 161 on January 1, 2009. Nortel is currently assessing
    the impact of the adoption of SFAS 161 on its consolidated
    financial statement disclosures.(vii)
    In April 2008, the FASB issued FSP
    SFAS 142-3,
    Determination of the Useful Life of Intangible
    Assets (FSP
    SFAS 142-3).
    FSP
    SFAS 142-3
    provides guidance with respect to estimating the useful lives of
    recognized intangible assets acquired on or after the effective
    date and requires additional disclosure related to the renewal
    or extension of the terms of recognized intangible assets. FSP
    SFAS 142-3
    is effective for fiscal years and interim periods beginning
    after December 15, 2008. Nortel plans to adopt the
    provisions of FSP
    SFAS 142-3
    on January 1, 2009. Nortel is currently assessing the
    impact of the adoption of FSP
    SFAS 142-3
    on its results of operations and financial condition.  2.
    Accounting
    changes  (a)
    The
    Fair Value Option for Financial Assets and Financial
    Liabilities  instrument-by-instrument
 5




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    (b)
    Fair
    Value Measurements    (c)
    Employers
    Accounting for Defined Benefit Pension and Other Postretirement
    Plans  an Amendment of FASB Statements No. 87,
    88, 106, and 132(R)        3.
    Condensed
    consolidated financial statement details    Condensed
    consolidated statements of operations
  Other
    operating expense (income)  net:
  Three Months Ended March 31,2008


2007(a)Royalty license income  net

$
(8
)

$
(10
)Litigation charges


12



Other  net


9



Other operating expense (income)  net

$
13


$
(10
)     (a)
    Includes items that were previously
    reported as non-operating and that have been reclassified from
    Other income  net to conform to current
    presentation. 6




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Other
    income  net:
  Three Months Ended March 31,2008


2007Interest and dividend income

$
(38
)

$
(62
)Currency exchange losses  net


20



1Other  net


(19
)


(15
)Other income  net

$
(37
)

$
(76
)     Condensed
    consolidated balance sheets
  Accounts
    receivable  net:
  March 31,


December 31,2008


2007Trade receivables

$
2,079


$
2,271Notes receivable


4



12Notes receivable from NNC and its subsidiaries


1,149



1,127Contracts in process


307



3573,539



3,767Less: provision for doubtful accounts


(57
)


(62
)Accounts receivable  net

$
3,482


$
3,705   Inventories 
    net:
  March 31,


December 31,2008


2007Raw materials

$
578


$
610Work in process


11



10Finished goods


779



800Deferred costs


1,488



1,6982,856



3,118Less: provision for inventories


(845
)


(907
)Inventories  net


2,011



2,211Less: long-term deferred
    costs(a)


(193
)


(209
)Current inventories  net

$
1,818


$
2,002     (a)
    Long-term portion of deferred costs
    is included in other assets. 7




---



##### Table of Contents



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


December 31,2008


2007Prepaid expenses

$
181


$
152Income taxes recoverable


74



77Current investments


2



15Other


216



223Other current assets

$
473


$
467   Investments:
    Plant and
    equipment  net:
  March 31,


December 31,2008


2007Cost:Land

$
38


$
38Buildings


1,130



1,137Machinery and equipment


2,180



2,167Assets under capital lease


215



215Sale lease-back assets


96



973,659



3,654Less accumulated depreciation:Buildings


(404
)


(395
)Machinery and equipment


(1,616
)


(1,601
)Assets under capital lease


(110
)


(107
)Sale lease-back assets


(21
)


(21
)(2,151
)


(2,124
)Plant and equipment 
    net(a)

$
1,508


$
1,530     (a)
    Includes assets held for sale with
    a carrying value of $4 and nil as of March 31, 2008 and
    December 31, 2007, respectively, related to owned
    facilities that were being actively marketed for sale. 8




---



##### Table of Contents



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


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


TotalBalance  as of December 31, 2007

$
450


$
152


$
603


$
1,005


$
171


$
2,381Change:Additions






















Disposals






















Foreign exchange


1



1



2



3



1



8Other


1







1



1







3Balance  as of March 31, 2008

$
452


$
153


$
606


$
1,009


$
172


$
2,392   Intangible
    assets  net:
  March 31,


December 31,2008


2007Cost

$
327


$
338Less accumulated amortization


(139
)


(125
)Intangible assets  net

$
188


$
213   Other
    assets:
  March 31,


December 31,2008


2007Long-term deferred costs

$
193


$
209Long-term inventories


27



27Debt issuance costs


37



41Derivative assets


112



77Financial assets


54



62Other


132



118Other assets

$
555


$
534  9




---



##### Table of Contents



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


December 31,2008


2007Outsourcing and selling, general and administrative related
    provisions

$
274


$
306Customer deposits


42



52Product related provisions


114



126Warranty provisions (note 9)


199



206Deferred revenue


1,237



1,219Advance billings in excess of revenues recognized to date on
    contracts(a)


1,240



1,490Miscellaneous taxes


46



30Income taxes payable


98



93Deferred income taxes


14



15Tax uncertainties (note 6)


7



21Interest payable


47



77Other


153



164Other accrued liabilities

$
3,471


$
3,799     (a)
    Includes amounts that may be
    recognized beyond one year due to the duration of certain
    contracts.  Other
    liabilities:
  March 31,


December 31,2008


2007Pension benefit liabilities

$
1,022


$
1,109Post-employment and post-retirement benefit liabilities


878



893Restructuring liabilities (note 5)


173



180Deferred revenue


366



400Tax uncertainties


73



71Derivative liabilities


15



33Other long-term provisions


179



188Other liabilities

$
2,706


$
2,874  10




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Condensed
    consolidated statements of cash flows
  Change in
    operating assets and liabilities:
  Three Months Ended March 31,2008


2007Accounts receivable  net

$
223


$
1,239Inventories  net


(24
)


9Deferred costs


209



31Income taxes


(6
)


(11
)Accounts payable


(121
)


185Payroll, accrued and contractual liabilities


(263
)


(349
)Deferred revenue


(16
)


42Advance billings in excess of revenues recognized to date on
    contracts


(250
)


(13
)Restructuring liabilities


43



38Other


(147
)


(141
)Change in operating assets and liabilities

$
(352
)

$
1,030   Interest
    and taxes paid:
  Three Months Ended March 31,2008


2007Cash interest paid

$
96


$
92Cash taxes paid

$
30


$
18   4.
    Segment
    information  Segment
    descriptions
    
    CN provides mobility networking solutions using (i) Code
    Division Multiple Access (CDMA), Global System
    for Mobile Communication (GSM), and Universal Mobile
    Telecommunication System (UMTS) radio access
    technologies, and fixed and mobile networking solutions using
    Worldwide Interoperability for Microwave Access
    (WiMAX) radio access technology, 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 Unified Communications (UC) solutions to
    enterprise customers using (i) Business Optimized
    Communications and (ii) Business Optimized Networking.
    Business Optimized Communications is comprised of enterprise
    circuit and packet voice solutions, software solutions for
    multi-media messaging, conferencing and contact centers and
    Service Oriented Architecture based communications enabled
    applications. Business Optimized Networking solutions are
    inclusive of data networking, wireless LAN, data centers, and
    security. Nortels UC 11




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  solutions transform an enterprises existing communications
    to deliver a unified, real time, multi-media experience
    including voice, video, email and instant messaging.
    Nortels ES customers consist of a broad range of
    enterprises around the world, including large businesses at
    their headquarters, data centers, call centers and 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 communications-enabled
    application solutions and hosted multimedia 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
    wireline and wireless carriers, cable operators, 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 differentiates its MEN solutions by using technology
    innovation such as Provider Backbone Bridges, Provider Backbone
    Transport, and 40G Dual Polarization Quadrature Phase Shift
    Keying to deliver increased network capacity at lower cost per
    bit and with a simpler operations paradigm. Both metropolitan,
    or metro, and long haul networks are key focus areas 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.
    Other miscellaneous business activities and corporate functions,
    including the operating results of Nortel Government Solutions
    Incorporated, do not meet the quantitative criteria to be
    disclosed separately as reportable segments and have been
    reported in Other. Costs associated with shared
    services, such as general corporate functions, that are managed
    on a common basis are allocated to Nortels reportable
    segments based on usage determined generally by headcount. A
    portion of other general and miscellaneous corporate costs and
    expenses are allocated based on a fixed charge established
    annually. Costs not allocated to the reportable segments include
    employee share-based compensation, differences between actual
    and budgeted employee benefit costs, interest attributable to
    its long-term debt and other non-operational activities, and are
    included in Other.   12




---



##### Table of Contents



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


March 31,2008


2007RevenuesCarrier Networks

$
1,218


$
1,009Enterprise Solutions


641



597Metro Ethernet Networks


327



373Global Services


516



448Total reportable segments


2,702



2,427Other


56



56Total revenues

$
2,758


$
2,483Operating marginCarrier Networks

$
260


$
154Enterprise Solutions


(19
)


(2
)Metro Ethernet Networks


(25
)


(20
)Global Services


72



75Total reportable segments


288



207Other


(153
)


(211
)Total operating margin


135



(4
)Amortization of intangible assets


12



12Special charges


88



80Gain on sales of businesses and assets


(2
)


(1
)Other operating expense (income)  net


13



(10
)Other income  net


(37
)


(76
)Interest expense


65



69Income tax expense


36



13Minority interests  net of tax


67



12Equity in net earnings of associated companies  net
    of tax


(1
)


Net loss

$
(106
)

$
(103
)     5.
    Special
    charges   13




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
         14




---



##### Table of Contents



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








Three Monthssettlement


Plant and





EndedWorkforce


and lease


equipment





March 31,reduction


costs


write downs


Total


20082008 Restructuring PlanProvision balance as of December 31, 2007

$



$



$



$



$
Other special charges


63



4







67



67Revisions to prior accruals


















Cash drawdowns


(2
)










(2
)Non-cash drawdowns














Foreign exchange and other adjustments


(1
)










(1
)Provision balance as of March 31, 2008

$
60


$
4


$



$
642007 Restructuring PlanProvision balance as of December 31, 2007

$
43


$
25


$



$
68Other special charges


18



4







22



22Revisions to prior accruals






2







2



2Cash drawdowns


(28
)


(5
)






(33
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of March 31, 2008

$
33


$
26


$



$
592006 Restructuring PlanProvision balance as of December 31, 2007

$
8


$



$



$
8Other special charges


















Revisions to prior accruals


















Cash drawdowns


(5
)










(5
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of March 31, 2008

$
3


$



$



$
32004 Restructuring PlanProvision balance as of December 31, 2007

$



$
51


$



$
51Other special charges


















Revisions to prior accruals


















Cash drawdowns






(3
)






(3
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of March 31, 2008

$



$
48


$



$
48 15




---



##### Table of Contents



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








Three Monthssettlement


Plant and





EndedWorkforce


and lease


equipment





March 31,reduction


costs


write downs


Total


20082001 Restructuring PlanProvision balance as of December 31, 2007

$



$
153


$



$
153Other special charges


















Revisions to prior accruals






(3
)






(3
)


(3
)Cash drawdowns






(8
)






(8
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of March 31, 2008

$



$
142


$



$
142Total provision balance as of March 31,
    2008(a)

$
96


$
220


$



$
316Total special charges

















$
88     (a)
    As of March 31, 2008 and
    December 31, 2007, the short-term provision balances were
    $143 and $100, respectively, and the long-term provision
    balances were $173 and $180, respectively.  2008
    Restructuring Plan
  Three
    months ended March 31, 2008
    2007
    Restructuring Plan
  Three
    months ended March 31, 2008
    2006
    Restructuring Plan
  Three
    months ended March 31, 2008
   16




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  2004
    Restructuring Plan
  Three
    months ended March 31, 2008
    2001
    Restructuring Plan
  Three
    months ended March 31, 2008
    Segments
    MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


Total2008 Restructuring Plan

$
26


$
21


$
9


$
11


$



$
672007 Restructuring Plan


3



12



8



1







242006 Restructuring Plan






















2004 Restructuring Plan






















2001 Restructuring Plan


(1
)


(1
)


(1
)










(3
)Total special charges for the three months ended
    March 31, 2008

$
28


$
32


$
16


$
12


$



$
882007 Restructuring Plan

$
11


$
45


$
15


$
4


$



$
752006 Restructuring Plan


1



3



1











52004 Restructuring Plan






















2001 Restructuring Plan






















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

$
12


$
48


$
16


$
4


$



$
80     6.
    Income
    taxes   17




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                 18




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        7.
    Employee
    benefit plans    and/or
  and/or and/or
   19




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Three Months EndedMarch 31,2008


2007Pension expense:Service cost

$
13


$
30Interest cost


128



115Expected return on plan assets


(135
)


(121
)Amortization of prior service cost


1



1Amortization of net losses (gains)


10



26Curtailment, contractual and special termination losses (gains)


2



2Net pension expense

$
19


$
53     Three Months EndedMarch 31,2008


2007Post-retirement benefit cost:Service cost

$
1


$
1Interest cost


10



8Amortization of prior service cost


(2
)


(2
)Net post-retirement benefit cost

$
9


$
7     8.
    Acquisitions,
    divestitures and closures  Acquisition
  LG-Nortel
    Co. Ltd. business venture
    9.
    Guarantees   20




---



##### Table of Contents



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


MaximumAmount of


PotentialLiability


Liability(k)Business sale and business combination agreementsThird party
    claims(a)

$



$
Sales volume
    guarantee(b)


10



11Intellectual property indemnification
    obligations(c)






Lease
    agreements(d)






40Receivable
    securitizations(e)






34Other indemnification agreementsEDC Support
    Facility(f)






Specified price trade-in
    rights(g)


1



Sale
    lease-back(h)






4Real estate
    indemnification(i)






Bankruptcy(j)






1Total

$
11


$
90      (a)
    Includes guarantees in connection
    with agreements for the sale of portions of its business,
    including certain discontinued operations and guarantees related
    to the escrow of shares in business combinations in prior
    periods. Nortel indemnifies the purchaser of a Nortel business
    in the event that a third party asserts a claim against the
    purchaser that relates to a liability retained by Nortel
    relating to business events occurring prior to the sale, such as
    tax, environmental, litigation and employment matters. Nortel
    also indemnifies counterparties for losses incurred from
    litigation that may be suffered by counterparties arising under
    guarantees related to the escrow of shares in business
    combinations. Some of these types of guarantees have indefinite
    terms while others have specific terms extending to 2012.(b)
    In conjunction with the sale of a
    subsidiary to a third party, Nortel guaranteed to the purchaser
    that specified annual sales volume levels would be achieved by
    the business sold over a ten-year period ended December 31,
    2007. Nortels guarantee to the purchaser was governed by
    the laws of the purchasers jurisdiction. As such, the
    purchaser has the right to claim such payments under the volume
    guarantee until January 31, 2018, under the statute of
    limitations of such jurisdiction.(c)
    Nortel has periodically entered
    into agreements with customers and suppliers that include
    intellectual property indemnification obligations that are
    customary in the industry. These agreements generally require
    Nortel to compensate the other party for certain damages and
    costs incurred as a result of third party intellectual property
    claims arising from these transactions. These types of
    guarantees typically have indefinite terms; however, under some
    agreements, Nortel has provided specific terms extending to
    February 2011.(d)
    Nortel has entered into agreements
    with its lessors to guarantee the lease payments of certain
    assignees of its facilities. Generally, these lease agreements
    relate to facilities Nortel vacated prior to the end of the term
    of its lease. These lease agreements require Nortel to make
    lease payments throughout the lease term if the assignee fails
    to make scheduled payments. Most of these lease agreements also
    require Nortel to pay for facility restoration costs at the end
    of the lease term if the assignee fails to do so. These lease
    agreements have expiration dates through June 2015.(e)
    Nortel has agreed to indemnify
    certain of its counterparties in certain receivables
    securitization transactions. Certain receivables securitization
    transactions include indemnifications requiring the repurchase
    of the receivables, under certain conditions, if the receivable
    is not paid by the obligor. The indemnification provisions
    generally expire upon the earlier of either expiration of the
    securitization agreements, which extend through 2008, or
    collection of the receivable amounts by the purchaser. (f)
    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. Effective
    December 14, 2007, Nortel and EDC amended and restated the
    EDC Support Facility, among other things, to extend the maturity
    date to December 31, 2011 and to provide for automatic
    renewal each subsequent year, unless either party provides
    written notice to the other of its intent to terminate. As of
    March 31, 2008, there was approximately $152 of outstanding
    support utilized under the EDC Support Facility, approximately
    $122 of which was outstanding under the revolving small bond
    sub-facility,
    with the remaining balance under the revolving large bond
    sub-facility. (g)
    Nortel has identified specified
    price trade-in rights in certain customer arrangements that
    qualify as guarantees. These types of guarantees generally apply
    over a specified period of time and extend through to June 2010. (h)
    On June 27, 2007, Nortel
    entered into a sale lease-back agreement where it agreed to
    provide an indemnity to the purchaser with respect to union and
    employee termination matters. The sale agreement requires Nortel
    to compensate the purchaser for any costs in the event that
    Nortel fails to effectively satisfy termination obligations to
    union employees; if a reinstatement application is brought by
    the union or non-union employees; or if the purchaser is
    required to re-hire selected union employees. The
    indemnification provision expires upon the 21




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  retirement of the last former
    employee. The nature of the indemnification prevents Nortel from
    making a reasonable estimate of the maximum term of the
    indemnification. (i)
    On February 14, 2008, Nortel
    Networks Inc. (NNI) entered into an agreement
    whereby it indemnified the landlord of a property against
    certain claims that the
    sub-tenant
    may assert against the landlord. The nature of the
    indemnification prevents Nortel from making a reasonable
    estimate of the maximum term of the indemnification.(j)
    On February 28, 2008, Nortel
    entered into a guarantee agreement in which it agreed to repay
    to the bankruptcy estate of a certain debtor for any interim
    dividends paid from the bankruptcy estate that Nortel is not
    entitled to in the event that a creditor steps forward with a
    claim that requires a re-distribution of funds between the
    creditors. The nature of the indemnification prevents Nortel
    from making a reasonable estimate of the maximum term of the
    indemnification. (k)
    The nature of some guarantees and
    indemnification arrangements generally prevents Nortel from
    making a reasonable estimate of the maximum potential amount it
    could be required to pay under such agreements. For this reason,
    no amount has been included in the disclosure in these
    circumstances.  Product
    warranties
    Balance as of December 31, 2007

$
206Payments


(49
)Warranties issued


62Revisions


(20
)Balance as of March 31, 2008

$
199   10.
    Fair
    value    Fair
    value hierarchy
    Level 1:
  Level 2:
  Level 3:
    Determination
    of fair value
   22




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Investments
        Derivatives
    Long-term
    debt
    Market
    valuation adjustments
      Fair Value


Level 1


Level 2


Level 3AssetsStock investments

$
8


$
8


$



$
Employee benefit trust


93



93







Derivatives


112







111



1Auction rate securities


28











28Total assets

$
241


$
101


$
111


$
29LiabilitiesLong-term debt due within one year

$



$



$



$
Long-term debt


2,009



2,009







Derivatives


15







10



5Total liabilities

$
2,024


$
2,009


$
10


$
5  23




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Purchases, Sales,


Transfers inJanuary 1,


Net Realized/Unrealized Gains (Losses) included in


Issuances and


and/or (out)


March 31,2008


Earnings


Other


(Settlements)


of Level 3


2008AssetsDerivatives

$
1


















$
1Auction rate securities

$












28






$
28LiabilitiesDerivatives

$
5


















$
5   11.
    Commitments  Bid,
    performance-related and other bonds
      March 31,


December 31,2008


2007Bid and performance-related
    bonds(a)

$
152


$
155Other
    bonds(b)


63



54Total bid, performance-related and other bonds

$
215


$
209      (a)
    Net of restricted cash and cash
    equivalent amounts of $3 and $5 as of March 31, 2008 and
    December 31, 2007, respectively.(b)
    Net of restricted cash and cash
    equivalent amounts of $11 and $27 as of March 31, 2008 and
    December 31, 2007, respectively.  Venture
    capital financing
  start-up
  Concentrations
    of risk
   24




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        12.
    Shareholders
    equity    AccumulatedAdditional





OtherPreferred


Common


Paid-in


Accumulated


ComprehensiveShares


Shares


Capital


Deficit


Income (Loss)


TotalBalance as of December 31, 2007

$
536


$
1,211


$
22,401


$
(18,385
)

$
247


$
6,010Adoption of SFAS 158 (notes 2 and 7)














(36
)


5



(31
)Net loss














(106
)






(106
)Foreign currency translation adjustment


















(7
)


(7
)Unrealized loss on investments  net


















(8
)


(8
)Unamortized pension and post-retirement actuarial losses and
    prior service cost  net


















(12
)


(12
)Share-based compensation










21











21Dividend














(11
)






(11
)Other










3



1







4Balance as of March 31, 2008

$
536


$
1,211


$
22,425


$
(18,537
)

$
225


$
5,860       March 31,


March 31,2008


2007Net loss

$
(106
)

$
(103
)Other comprehensive loss adjustments:Change in foreign currency translation adjustment


(7
)


13Unrealized loss on investments 
    net(a)


(8
)


(2
)Unamortized pension and post-retirement actuarial losses and
    prior service cost  net


(12
)


15Unrealized derivative gain on cash flow hedges 
    net(b)






6Comprehensive loss

$
(133
)

$
(71
)      (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 loss and are
    included in accumulated other comprehensive income until
    realized. Unrealized loss on investments was net of tax of nil
    and nil for the three months ended March 31, 2008 and 2007,
    respectively.(b)
    During the three months ended
    March 31, 2008 and 2007, nil and $5 of net derivative gains
    were reclassified to other income (expense)  net,
    respectively. Nortel estimates that no net derivative gains
    included in accumulated other comprehensive income will be
    reclassified into net loss within the next 12 months. 25




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   13.
    Share-based
    compensation plans  Stock
    options
    Performance
    Stock Units (PSUs)
  Relative
    Shareholder Return Metric Awards
    (PSU-rTSRs)
  36-month 36-month 30-day
  Operating
    Margin Metric Awards (PSU-OMs)
  24-month 36-month
  Share-based
    compensation
    Three Months EndedMarch 31,2008


2007Share-based compensation expense:Stock options

$
11


$
20Restricted stock unit (RSU)


8



4PSU


2



1Total share-based compensation expense reported  net
    of tax

$
21


$
25    26




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Three Months Ended March 31,2008

2007Black-Scholes-Merton assumptionsExpected dividend yield

0.00%

0.00%Expected
    volatility(a)

44.21%-52.26%

53.56%Risk-free interest
    rate(b)

2.44%-2.51%

4.43%Expected life in
    years(c)

3.15-4.50

4.00Range of fair value per stock option granted

$3.07-$3.76

$11.86Range of fair value per SAR granted

$0.20-$2.30

     (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)
    NNC used the five year U.S.
    government Treasury Note rate to approximate the risk-free rate.(c)
    The expected term of the stock
    options of four and a half years is estimated based on
    historical grants with similar vesting periods.    Three Months EndedMarch 31,2008


2007Monte Carlo assumptionsBeta(a)






1.9Historical
    volatility(a)


43.96
%


Risk-free interest
    rate(b)


1.64
%


4.46
%     (a)
    Commencing in the first quarter of
    2008, NNC employed a three-year historical volatility as an
    input in to the Monte Carlo simulation model to match the life
    expectancy of PSU-rTSRs. Previously, NNC had used Beta as an
    input into the model.(b)
    The risk-free rate used was based
    on the yield of the two-year U.S. government Treasury Note rate.    14.
    Related
    party transactions   27




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Three Months Ended March 31,2008


2007Revenues:LGE(a)

$
11


$
7Vertical Communications, Inc.
    (Vertical)(b)


4



4Other


2



2Total

$
17


$
13Purchases:LGE(a)


52



79Sasken Communications Technology Ltd.
    (Sasken)(c)


5



5GNTEL Co., Ltd
    (GNTEL)(d)


24



15Other


6



2Total

$
87


$
101     (a)
    LGE holds a minority interest in
    LG-Nortel. Nortels sales and purchases relate primarily to
    certain inventory-related items. As of March 31, 2008,
    accounts payable to LGE was net $42, compared to net $31 as of
    December 31, 2007.(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 was $1 as of
    March 31, 2008 and December 31, 2007.(d)
    Nortel holds a minority interest in
    GNTEL through its business venture LG-Nortel. Nortels
    purchases from GNTEL relate primarily to installation and
    warranty services. As of March 31, 2008, accounts payable
    to GNTEL was net $21, compared to net $31 as of
    December 31, 2007.      March 31,


December 31,2008


2007Consolidated balance sheetsOwing from NNC

$
1,006


$
990Owing from NNC subsidiaries


96



90Other related parties


(1
)


(61
)Related party receivables

$
1,101


$
1,019   15.
    Contingencies   28




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
             29




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
            out-of-pocket
       30




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      Environmental
    matters
          de minimis de minimis
   31




---



##### Table of Contents



NORTEL NETWORKS LIMITED
  Notes to Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  16.
    Supplemental
    condensed consolidating financial information        Rule 3-10 Regulation S-X
   32




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
659


$
1,128


$
1,580


$
(609
)

$
2,758Cost of revenues


387



758



1,073



(609
)


1,609Gross profit


272



370



507







1,149Selling, general and administrative expense


82



248



267







597Research and development expense


221



158



38







417Amortization of intangible assets






2



10







12Special charges


28



32



28







88Loss (gain) on sales of businesses and assets










(2
)






(2
)Other operating expense (income)  net


(5
)


9



9







13Operating earnings (loss)


(54
)


(79
)


157







24Other expense (income)  net






(26
)


(32
)


21



(37
)Interest expenseLong-term debt


50



3



6







59Other


2



1



3







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


(106
)


(57
)


180



(21
)


(4
)Income tax expense (benefit)


4



(3
)


35







36(110
)


(54
)


145



(21
)


(40
)Minority interests  net of tax










67







67Equity in net earnings (loss) of associated
    companies  net of tax


(4
)


(10
)


(1
)


14



(1
)Net earnings (loss)


(106
)


(44
)


79



(35
)


(106
)Dividends on preferred shares


11















11Net earnings (loss) applicable to common shares

$
(117
)

$
(44
)

$
79


$
(35
)

$
(117
)  33




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
540


$
1,260


$
1,125


$
(442
)

$
2,483Cost of revenues


438



691



792



(442
)


1,479Gross profit


102



569



333







1,004Selling, general and administrative expense


164



187



252







603Research and development expense


172



165



68







405Amortization of intangible assets






2



10







12Special charges


10



48



22







80Loss (gain) on sales of businesses and assets


1







(2
)






(1
)Other operating expense (income)  net


(7
)


(2
)


(1
)






(10
)Operating earnings (loss)


(238
)


169



(16
)






(85
)Other expense (income)  net


(33
)


(15
)


(28
)






(76
)Interest expenseLong-term debt


55



3



6







64Other


(15
)


20



(16
)


16



5Earnings (loss) before income taxes, minority interests and
    equity in net earnings (loss) of associated companies


(245
)


161



22



(16
)


(78
)Income tax benefit (expense)


2



(1
)


(14
)






(13
)(243
)


160



8



(16
)


(91
)Minority interests  net of tax










12







12Equity in net earnings (loss) of associated
    companies  net of tax


140



(29
)






(111
)


Net earnings (loss)


(103
)


131



(4
)


(127
)


(103
)Dividends on preferred shares


10















10Net earnings (loss) applicable to common shares

$
(113
)

$
131


$
(4
)

$
(127
)

$
(113
)  34




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)ASSETSCurrent assetsCash and cash equivalents

$
280


$
869


$
2,066


$



$
3,215Restricted cash and cash equivalents


26



9



13







48Accounts receivable  net


2,341



1,914



2,957



(3,730
)


3,482Inventories  net


103



479



1,237



(1
)


1,818Deferred income taxes  net


31



357



147







535Other current assets


83



117



278



(5
)


473Total current assets


2,864



3,745



6,698



(3,736
)


9,571Investments


6,601



3,582



(393
)


(9,597
)


193Plant and equipment  net


504



401



603







1,508Goodwill






1,877



515







2,392Intangible assets  net


12



28



148







188Deferred income taxes  net


1,086



1,205



483







2,774Other assets


210



99



259



(13
)


555Total assets

$
11,277


$
10,937


$
8,313


$
(13,346
)

$
17,181LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
1,548


$
902


$
2,394


$
(3,732
)

$
1,112Payroll and benefit-related liabilities


116



193



235







544Contractual liabilities


7



41



211







259Restructuring liabilities


29



65



49







143Other accrued liabilities


432



1,242



1,801



(4
)


3,471Long-term debt due within one year


1



10



10







21Total current liabilities


2,133



2,453



4,700



(3,736
)


5,550Long-term debt


2,263



92



333







2,688Deferred income taxes  net










30







30Other liabilities


1,021



697



1,001



(13
)


2,706Total liabilities


5,417



3,242



6,064



(3,749
)


10,974Minority interests in subsidiary companies










347







347Shareholders equity


5,860



7,695



1,902



(9,597
)


5,860Total liabilities and shareholders equity

$
11,277


$
10,937


$
8,313


$
(13,346
)

$
17,181  35




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)ASSETSCurrent assetsCash and cash equivalents

$
329


$
1,128


$
2,069


$



$
3,526Restricted cash and cash equivalents


34



8



24







66Accounts receivable  net


2,394



1,828



3,120



(3,637
)


3,705Inventories  net


100



505



1,397







2,002Deferred income taxes  net


32



318



137







487Other current assets


86



120



262



(1
)


467Total current assets


2,975



3,907



7,009



(3,638
)


10,253Investments


6,616



3,563



(88
)


(9,897
)


194Plant and equipment  net


528



406



596







1,530Goodwill






1,877



504







2,381Intangible assets  net


18



34



161







213Deferred income taxes  net


1,128



1,245



495







2,868Other assets


171



118



260



(15
)


534Total assets

$
11,436


$
11,150


$
8,937


$
(13,550
)

$
17,973LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
1,486


$
998


$
2,382


$
(3,637
)

$
1,229Payroll and benefit-related liabilities


134



259



296







689Contractual liabilities


17



47



208







272Restructuring liabilities


11



46



43







100Other accrued liabilities


463



1,246



2,091



(1
)


3,799Long-term debt due within one year


1



12



10







23Total current liabilities


2,112



2,608



5,030



(3,638
)


6,112Long-term debt


2,243



94



329







2,666Deferred income taxes  net










17







17Other liabilities


1,071



716



1,102



(15
)


2,874Total liabilities


5,426



3,418



6,478



(3,653
)


11,669Minority interests in subsidiary companies










294







294Shareholders equity


6,010



7,732



2,165



(9,897
)


6,010Total liabilities and shareholders equity

$
11,436


$
11,150


$
8,937


$
(13,550
)

$
17,973  36




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Cash flows from (used in) operating activitiesNet earnings (loss)

$
(106
)

$
(44
)

$
79


$
(35
)

$
(106
)Adjustment to reconcile to net earnings (loss)


66



(164
)


(93
)


35



(156
)Net cash from (used in) operating activities


(40
)


(208
)


(14
)






(262
)Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(12
)


(20
)


(19
)






(51
)Proceeds on disposals of plant and equipment


















Change in restricted cash and cash equivalents


9







9







18Acquisitions of investments and businesses  net of
    cash acquired






(29
)










(29
)Proceeds from the sales of investments andbusinesses and assets  net


4



1



13







18Net cash from (used in) investing activities


1



(48
)


3







(44
)Cash flows from (used in) financing activitiesDividends paid, including paid by subsidiaries to minority
    interests


(11
)














(11
)Increase in notes payable










28







28Decrease in notes payable










(25
)






(25
)Repayments of capital leases payable






(3
)


(3
)






(6
)Net cash from (used in) financing activities


(11
)


(3
)










(14
)Effect of foreign exchange rate changes on cash and cash
    equivalents


1







8







9Net increase (decrease) in cash and cash equivalents


(49
)


(259
)


(3
)






(311
)Cash and cash equivalents at beginning of period


329



1,128



2,069







3,526Cash and cash equivalents at end of period

$
280


$
869


$
2,066


$



$
3,215  37




---



##### Table of Contents



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Cash flows from (used in) operating activitiesNet earnings (loss)

$
(103
)

$
131


$
(4
)

$
(127
)

$
(103
)Adjustment to reconcile to net earnings (loss)


899



63



172



127



1,261Net cash from (used in) operating activities


796



194



168







1,158Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(17
)


(17
)


(22
)






(56
)Proceeds on disposals of plant and equipment






1



13







14Change in restricted cash and cash equivalents


6



(1
)


5







10Acquisitions of investments and businesses  net of
    cash acquired






(1
)


(13
)






(14
)Proceeds from the sales of investments and businesses and
    assets  net


(55
)


3



13







(39
)Net cash from (used in) investing activities


(66
)


(15
)


(4
)






(85
)Cash flows from (used in) financing activitiesDividends paid, including paid by subsidiaries to minority
    interests


(10
)














(10
)Increase in notes payable










10







10Decrease in notes payable










(12
)






(12
)Repayments of capital leases payable


(1
)


(2
)


(2
)






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


(11
)


(2
)


(4
)






(17
)Effect of foreign exchange rate changes on cash and cash
    equivalents


2







4







6Net increase (decrease) in cash and cash equivalents


721



177



164







1,062Cash and cash equivalents at beginning of period


626



1,145



1,716







3,487Cash and cash equivalents at end of period

$
1,347


$
1,322


$
1,880


$



$
4,549  38




---



##### 



ITEM 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  TABLE OF
    CONTENTS
   
 Executive Overview


39Results of Operations


43Segment Information


49Liquidity and Capital Resources


53Off-Balance Sheet Arrangements


58Application of Critical Accounting Policies and
    Estimates


58Accounting Changes and Recent Accounting
    Pronouncements


72Outstanding Share Data


73Market Risk


73Environmental Matters


74Legal Proceedings


74Cautionary Notice Regarding Forward-Looking
    Information


74    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, or Nortel. The MD&A should be read in combination
    with our unaudited condensed consolidated financial statements
    and the accompanying notes. All Dollar amounts in this MD&A
    are in millions of United States, or U.S., Dollars except per
    share amounts or unless otherwise stated.
  Certain statements in this MD&A contain words such as
    could, expects, may,
    anticipates, believes,
    intends, estimates, plans,
    envisions, seeks and other similar
    language and are considered forward-looking statements or
    information under applicable securities laws. These statements
    are based on our current expectations, estimates, forecasts and
    projections about the operating environment, economies and
    markets in which we operate which we believe are reasonable but
    which are subject to important assumptions, risks and
    uncertainties and may prove to be inaccurate. Consequently, our
    actual results could differ materially from our expectations set
    out in this MD&A. In particular, see the Risk Factors
    section of this report and our Annual Report on
    Form 10-K
    for the year ended December 31, 2007, or 2007 Annual
    Report, for factors that could cause actual results or events to
    differ materially from those contemplated in forward-looking
    statements. Unless required by applicable securities laws, we
    disclaim any intention or obligation to publicly update or
    revise any forward-looking statements, whether as a result of
    new information, future events or otherwise. We are the
    principal direct operating subsidiary of Nortel Networks
    Corporation, or NNC. NNC holds all of our outstanding common
    shares but none of our outstanding preferred shares.
 Executive
    Overview  Our
    Business and Strategy
     39




---



##### Table of Contents



40




---



##### Table of Contents



end-to-end
    How We
    Measure Business Performance
   41




---



##### Table of Contents



Financial
    Highlights
    For the Three Months Ended March 31,2008


2007


$ Change


% ChangeRevenues

$
2,758


$
2,483


$
275



11Gross profit


1,149



1,004



145



14Gross margin %


41.7
%


40.4
%






1.3Selling, general and administrative expense


597



603



(6
)


(1
)Research and development expense


417



405



12



3Operating margin


135



(4
)


139Operating margin %


4.9
%


(0.2
%)






5.1Net earnings (loss)


(106
)


(103
)


(3
)   
    Revenues increased 11% to $2,758:  Revenues
    increased in the first quarter of 2008 compared to the first
    quarter of 2007 in the CN, GS and ES segments, partially offset
    by a decrease in the MEN segment. From a geographic perspective,
    the increase was driven by the Asia and Europe, Middle East, and
    Africa, or EMEA regions, partially offset by decreases in the
    U.S., Canada and Caribbean and Latin American, or CALA, regions.
    The revenue increase in the CN and GS segments was primarily
    attributable to the completion of a significant customer
    deliverable obligation in our business venture with LGE, or
    LG-Nortel, resulting in recognition of higher previously
    deferred revenues in the first quarter of 2008 compared to the
    first quarter of 2007. The increase in ES was mainly due to an
    increase in the recognition of previously deferred revenues in
    the first quarter of 2008 compared to the first quarter of 2007
    as well as volume growth in the U.S., Canada, Asia and CALA,
    partially offset by volume declines in legacy products.
    Gross margin increased by 1.3 percentage points to
    41.7%:  The increase was due to an increase in the
    MEN segment, partially offset by lower gross margins in the CN,
    ES and GS segments. The increase was primarily due to the impact
    of region and product mix, partially offset by price erosion,
    resulting in an increase in gross margin of 2.0 percentage
    points, while an increase in inventory provisioning and
    revaluation resulted in a partially offsetting decrease of
    0.9 percentage points.
    Operating margin increased by $139 to earnings of
    $135:  The increase in operating margin was
    primarily due to the increase in gross profit and decrease in
    SG&A expense partially offset by higher R&D expense.
    Operating margin was impacted favorably by a decrease in
    employee-related expenses and savings due to lower expenses in
    relation to our internal control remediation plans and finance
    transformation activities, partially offset by unfavorable
    foreign exchange impacts and an increase in charges related to
    our employee compensation plans.
    Net loss increased from a net loss of $103 to a net loss of
    $106:  The increase in net loss was mainly due to
    higher minority interest expense, shareholder litigation
    settlement recovery in the first quarter of 2007 that was not
    repeated in the first quarter of 2008, lower other income,
    higher income taxes and higher special charges, partially offset
    by higher operating margin and lower interest expense.
    Cash and cash equivalents decreased from $3,526 at
    December 31, 2007 to $3,215 at March 31,
    2008:  The decrease in cash and cash equivalents
    of $311 was due to cash used in operating activities of $262,
    cash used in investing activities of $44 and cash used in
    financing activities of $14, partially offset by the favorable
    impact of foreign exchange on cash and cash equivalents of $9.  Significant
    Business Developments
  2008
    Restructuring Plan
   42




---



##### Table of Contents



Global
    Class Action Settlement
   Results
    of Operations  For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeUnited States

$
1,081


$
1,216


$
(135
)


(11
)EMEA


591



578



13



2Canada


166



173



(7
)


(4
)Asia


787



382



405



106CALA


133



134



(1
)


(1
)Consolidated

$
2,758


$
2,483


$
275



11      43




---



##### Table of Contents



44




---



##### Table of Contents



Gross
    Margin
  For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeGross profit

$
1,149


$
1,004


$
145


14Gross margin


41.7
%


40.4
%





1.3 points     Operating
    Margin
  For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeOperating margin

$
135


$
(4
)

$
139Operating margin as a percentage of revenue


4.9
%


(0.2
%)






5.1 points    45




---



##### Table of Contents



Special
    Charges
    For the Three Months EndedMarch 31,


March 31,2008


20072008 Restructuring Plan

$
67


$
2007 Restructuring Plan


24



752006 Restructuring Plan






52004 Restructuring Plan






2001 Restructuring Plan


(3
)


Total special charges

$
88


$
80   2008
    Restructuring Plan
    2007
    Restructuring Plan
    2006
    Restructuring Plan
   46




---



##### Table of Contents



2004 and
    2001 Restructuring Plans
      MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


Total2008 Restructuring Plan

$
26


$
21


$
9


$
11


$



$
672007 Restructuring Plan


3



12



8



1







242006 Restructuring Plan






















2004 Restructuring Plan






















2001 Restructuring Plan


(1
)


(1
)


(1
)










(3
)Total special charges for the three months ended March 31,
    2008

$
28


$
32


$
16


$
12


$



$
882007 Restructuring Plan

$
11


$
45


$
15


$
4


$



$
752006 Restructuring Plan


1



3



1











52004 Restructuring Plan






















2001 Restructuring Plan






















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

$
12


$
48


$
16


$
4


$



$
80   Gain on
    Sales of Businesses and Assets
    Other
    Operating Expense (Income)  Net
    For the Three Months EndedMarch 31,2008


2007(a)Royalty license income  net

$
(8
)

$
(10
)Litigation charges


12



Other  net


9



Other operating expense (income)  net

$
13


$
(10
)     (a)
    Includes items that were previously
    reported as non-operating and have been reclassified from
    Other income  net accordingly.     47




---



##### Table of Contents



Other
    Income  Net
    For the Three MonthsEnded March 31,2008


2007Interest and dividend income

$
(38
)

$
(62
)Currency exchange losses  net


20



1Other  net


(19
)


(15
)Other income  net

$
(37
)

$
(76
)   mark-to-market
  sub-lease mark-to-market
  Interest
    Expense
    Income
    Tax Expense
         48




---



##### Table of Contents



Segment
    Information  Carrier
    Networks
    For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeRevenuesCDMA solutions

$
555


$
568


$
(13
)


(2
)GSM and UMTS solutions


536



271



265



98Circuit and packet voice solutions


127



170



(43
)


(25
)Total Revenues

$
1,218


$
1,009


$
209



21Operating Margin

$
260


$
154


$
106



69              49




---



##### Table of Contents



Enterprise
    Solutions
    For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeRevenuesCircuit and packet voice solutions

$
458


$
375


$
83



22Data networking and security solutions


183



222



(39
)


(18
)Total Revenues

$
641


$
597


$
44



7Operating Margin

$
(19
)

$
(2
)

$
(17
)


850             Global
    Services
    For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeRevenues

$
516


$
448


$
68



15Operating Margin

$
72


$
75


$
(3
)


(4
)    50




---



##### Table of Contents



Metro
    Ethernet Networks
    For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeRevenuesOptical networking solutions

$
247


$
263


$
(16
)


(6
)Data networking and security solutions


80



110



(30
)


(27
)Total Revenues

$
327


$
373


$
(46
)


(12
)Operating Margin

$
(25
)

$
(20
)

$
(5
)


25        51




---



##### Table of Contents



Other
    For the Three Months EndedMarch 31,


March 31,2008


2007


$ Change


% ChangeRevenues

$
56


$
56


$




Operating Margin

$
(153
)

$
(211
)

$
58



27      52




---



##### Table of Contents



Liquidity
    and Capital Resources  Cash
    Flow
      For the Three Months Ended March 312008


2007


ChangeNet earnings (loss)

$
(106
)

$
(103
)

$
(3
)Non-cash items


196



231



(35
)Changes in operating assets and liabilities:Accounts receivable  net


223



1,239



(1,016
)Inventories  net


(24
)


9



(33
)Accounts payable


(121
)


185



(306
)78



1,433



(1,355
)Deferred costs


209



31



178Income taxes


(6
)


(11
)


5Payroll, accrued and contractual liabilities


(263
)


(349
)


86Deferred revenue


(16
)


42



(58
)Advanced billings in excess of revenues recognized to date on
    contracts


(250
)


(13
)


(237
)Restructuring liabilities


43



38



5Other


(147
)


(141
)


(6
)Changes in other operating assets and liabilities:


(352
)


1,030



(1,382
)Net cash from (used in) operating activities


(262
)


1,158



(1,420
)Net cash from (used in) investing activities


(44
)


(85
)


41Net cash from (used in) financing activities


(14
)


(17
)


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


9



6



3Net increase (decrease) in cash and cash equivalents


(311
)


1,062Cash and cash equivalents at beginning of period


3,526



3,487Cash and cash equivalents at end of period

$
3,215


$
4,549   Operating
    Activities
     53




---



##### Table of Contents



Accounts
    Receivable
  March 31,


December 31,2008


2007


$ Change


% ChangeAccounts Receivable

$
2,333


$
2,578


$
(254
)


(10
)Days sales outstanding in accounts receivable
    (DSO)(a)


76



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


December 31,2008


2007


$ Change


% ChangeInventory  net (excluding deferred costs)

$
523


$
513


$
10



2Net inventory days
    (NID)(a)


29



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


December 31,2008


2007


$ Change


% ChangeTrade accounts payable

$
1,024


$
1,145


$
(121
)


(11
)Days of purchasing outstanding in accounts payable
    (DPO)(a)


57



57      (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 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.    Deferred
    Revenue
   54




---



##### Table of Contents



Investing
    Activities
      Financing
    Activities
      Other
    Items
      Fair
    Value Measurement
    available-for-sale
   55




---



##### Table of Contents



Future
    Uses and Sources of Liquidity
    
    We expect our ability to increase revenue and generate positive
    cash from operating activities to be a primary uncertainty
    regarding our liquidity. In prior years, our operating results
    have generally 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, due to current economic uncertainties in North
    America or elsewhere raising concerns about decreases in
    projected spending rates by both carrier and enterprise
    customers, or for other reasons, 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;
    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 both of 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; and
    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 certain
    restatements of our and NNCs financial statements, could
    have a material adverse effect on our business, results of
    operations, financial condition and liquidity, other than
    anticipated professional fees.  Future
    Uses of Liquidity
    
    cash contributions for pension, post retirement and post
    employment funding of approximately $295;
    capital expenditures of approximately $250;
    costs related to workforce reductions and real estate actions in
    connection with our active restructuring plans of approximately
    $287;
    costs associated with contractual commitments related to the
    divestiture of our manufacturing operations to Flextronics of
    approximately $75;
    the outstanding principal amount of 4.25% Notes due
    September 1, 2008 of up to $675, if not refinanced in whole
    or in part; and
    an earn-out payment to LGE of approximately $51 based on the
    2007 performance of LG-Nortel, expected to be paid in the second
    quarter of 2008.  and/or
  Contractual
    cash obligations
    Future
    Sources of Liquidity
   56




---



##### Table of Contents



Available
    support facility
    
    $300 of committed revolving support for performance bonds or
    similar instruments with individual amounts of up to $25, of
    which $122 was outstanding; and
    $450 of uncommitted revolving support for performance bonds or
    similar instruments
    and/or
    receivables sales
    and/or
    securitizations, of which $30 was outstanding.        Short-form
    registration of securities
    Credit
    Ratings
  Moodys


S&PNNLs Corporate Family Rating / Corporate Credit Rating


B3



B−NNLs $2.0B High-Yield Notes


B3



B−NNCs $1.8B 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−    57




---



##### Table of Contents



and/or
 Off-Balance
    Sheet Arrangements  Bid,
    Performance-Related and Other Bonds
      March 31,


December 31,2008


2007Bid and performance-related
    bonds(a)

$
152


$
155Other
    bonds(b)


63



54Total bid, performance-related and other bonds

$
215


$
209      (a)
    Net of restricted cash and cash
    equivalents amounts of $3 and $5 as of March 31, 2008 and
    December 31, 2007, respectively.(b)
    Net of restricted cash and cash
    equivalents amounts of $11 and $27 as of March 31, 2008 and
    December 31, 2007, respectively.   Application
    of Critical Accounting Policies and Estimates       58




---



##### Table of Contents



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
    97-2, SOP 97-2,
   59




---



##### Table of Contents



SOP 81-1, SOP 81-1 percentage-of-completion percentage-of-completion SOP 81-1 SOP 81-1 EITF 00-21 SOP 81-1 SOP 81-1
      SOP 97-2. SOP 97-2 when-and-if
  SOP 97-2 00-21, EITF 00-21,
     60




---



##### 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 62% 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 ofMarch 31,


December 31,2008


2007


$ Change


% ChangeDeferred revenue

$
1,603


$
1,619


$
(16
)


(1
)Advance billings


1,240



1,490



(250
)


(17
)Total deferred revenue

$
2,843


$
3,109


$
(266
)


(9
)     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.   61




---



##### Table of Contents



As ofMarch 31,


December 31,2008


2007Gross accounts receivable

$
3,539


$
3,767Provision for doubtful accounts


(57
)


(62
)Accounts receivable  net

$
3,482


$
3,705Accounts receivable provision as a percentage of gross accounts
    receivable


2
%


2
%Gross long-term receivables

$
54


$
44Provision for doubtful accounts


(41
)


(35
)Net long-term receivables

$
13


$
9Long-term receivables provision as a percentage of gross
    long-term receivables


76
%


80
%   Provisions
    for Inventories
          As ofMarch 31,


December 31,2008


2007Gross inventory

$
2,856


$
3,118Inventory provisions


(845
)


(907
)Inventories 
    net(a)

$
2,011


$
2,211Inventory provisions as a percentage of gross inventory


30
%


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


62
%


64
%      (a)
    Includes the long-term portion of
    inventory related to deferred costs of $193 and $209 as of
    March 31, 2008 and December 31, 2007, respectively,
    which is included in other assets.(b)
    Calculated excluding deferred costs
    of $1,488 and $1,698 as of March 31, 2008 and
    December 31, 2007, respectively.   62




---



##### Table of Contents



and/or
  Provisions
    for Product Warranties
        March 31,2008Balance at the beginning of the period

$
206Payments


(49
)Warranties issued


62Revisions


(20
)Balance at the end of the period

$
199       Income
    Taxes
  Tax
    Asset Valuation
     63




---



##### Table of Contents




    the amount of, and trends related to, cumulative earnings or
    losses realized over the most recent 12 quarters;
    our current period net earnings (loss) and its impact on our
    strong history of earnings prior to 2001;
    future earnings projections as determined through the use of
    internal forecasts, including the impact of sales backlog and
    existing contracts;
    our ability to carry forward our tax losses and investment tax
    credits, including tax planning strategies to accelerate
    utilization of such assets;
    industry, business, or other circumstances that may adversely
    affect future operations, and the nature of the future income
    required to realize our deferred tax asset.                 64




---



##### Table of Contents



Future
    Projections of Profitability
              Tax


Net


Other


Gross





NetBenefit of


Investment


Temporary


Deferred


Valuation


DeferredLosses


Tax Credits


Differences


Tax Asset


Allowance


Tax AssetCanada

$
846


$
1,028


$
528


$
2,402


$
(1,271
)

$
1,131United States


802



364



898



2,064



(501
)


1,563United Kingdom


452







193



645



(321
)


324France


479



50



128



657



(572
)


85Other


442







268



710



(548
)


162Total

$
3,021


$
1,442


$
2,015


$
6,478


$
(3,213
)

$
3,265    65




---



##### Table of Contents



Canada
             66




---



##### Table of Contents



U.S.
      U.K.
    France
    Transfer
    Pricing
       67




---



##### Table of Contents



Valuation
    Allowance
      Tax
    Contingencies
             68




---



##### Table of Contents



2001-2005
  and/or
  Goodwill
    Valuation
    
    a significant adverse change in the business climate or legal
    factors;
    an adverse action or assessment by a regulator;
    unanticipated competition;
    loss of key personnel;
    the likelihood that a reporting unit or a significant portion of
    a reporting unit will be sold or disposed of;
    a change in reportable segments;
    results of testing for recoverability of a significant asset
    group within a reporting unit; and
    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.   69




---



##### Table of Contents



Pension
    and Post-retirement Benefits
                Special
    Charges
   70




---



##### Table of Contents



71




---



##### Table of Contents



Accounting
    Changes and Recent Accounting Pronouncements  Accounting
    Changes
    
    The Fair Value Option for Financial Assets and Financial
    Liabilities: In February 2007, the Financial Accounting
    Standards Board, or FASB, issued SFAS No. 159,
    The Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115, or SFAS 159. SFAS 159 allows the
    irrevocable election of fair value as the initial and subsequent
    measurement attribute for certain financial assets and
    liabilities and other items on an
    instrument-by-instrument
    basis. Changes in fair value would be reflected in earnings as
    they occur. The objective of SFAS 159 is to improve
    financial reporting by providing entities with the opportunity
    to mitigate volatility in reported earnings caused by measuring
    related assets and liabilities differently without having to
    apply complex hedge accounting provisions. For us, SFAS 159
    is effective as of January 1, 2008. We have elected not to
    apply the fair value option for any of our eligible financial
    instruments and other items in the current period.
    Fair Value Measurements: In September 2006, the FASB
    issued SFAS No. 157 Fair Value
    Measurements, or SFAS 157, which establishes a single
    definition of fair value and a framework for measuring fair
    value and requires expanded disclosures about fair value
    measurements. SFAS 157 is effective for financial
    statements issued for fiscal years beginning after
    November 15, 2007. We partially adopted the provisions of
    SFAS 157 effective January 1, 2008. For disclosure
    related to SFAS 157, see note 10, Fair
    Value, to the accompanying unaudited condensed
    consolidated financial statements.
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an Amendment of FASB
    Statements No. 87, 88, 106, and 132(R): In September
    2006, the FASB issued SFAS No. 158,
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an Amendment of FASB
    Statements No. 87, 88, 106, and 132(R)
    (SFAS 158). Effective for fiscal years ending
    after December 15, 2006, SFAS 158 requires an employer
    to recognize the overfunded or underfunded status of a defined
    benefit pension and post-retirement plan (other than a
    multiemployer plan) as an asset or liability in its statement of
    financial position and to recognize changes in that funded
    status in the year in which the changes occur through
    comprehensive income. We adopted these requirements in fiscal
    2006.      Recent
    Accounting Pronouncements
  SFAS 157-2,
 72




---



##### Table of Contents



SFAS 157-2.
  No. 07-1 EITF 07-1. EITF 07-1 EITF 07-1 EITF 07-1
      No. 140-3, SFAS 140-3. SFAS 140-3 SFAS 140-3 SFAS 140-3
    No. 142-3, SFAS 142-3. SFAS 142-3 SFAS 142-3 SFAS 142-3 SFAS 142-3
 Outstanding
    Share Data   Market
    Risk   73




---



##### Table of Contents



Environmental
    Matters      de minimis de minimis de minimis
   Legal
    Proceedings   Cautionary
    Notice Regarding Forward-Looking Information   74




---



##### Table of Contents



Form 10-K,
 75




---



##### Table of Contents



ITEM 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Market
    Risk
  value-at-risk
          Equity
    Price Risk
   76




---



##### Table of Contents



ITEM 4.
    Controls
    and Procedures  Management
    Conclusions Concerning Disclosure Controls and
    Procedures
  Rule 13a-15
  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 U.S. GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.    Changes
    in Internal Control Over Financial Reporting
   77




---



##### Table of Contents



PART II
    OTHER INFORMATION  ITEM 1.
    Legal
    Proceedings  Global Class Action Settlement
  Ipernica
    ITEM 1A.
    Risk
    Factors  Form 10-Q
  and/or
  ITEM 6.
    Exhibits  Form 10-Q.
  78




---



##### Table of Contents



ExhibitNo.

Description10
.1

Nortel 2005 Stock Incentive Plan, As Amended and Restated on
    February 22, 2008.10
.2

Nortel Networks Limited Annual Incentive Plan (AIP) as amended
    on February 22, 2008 with effect from January 1, 2008.10
.3

Nortel Networks Corporation Change in Control Plan as amended
    and restated with effect from January 18, 2008.10
.4

Nortel U.S. Stock Purchase Plan, As Amended and Restated amended
    as of January 18, 2008, effective January 1, 2008 and
    amended and restated as of February 22, 2008.10
.5

Nortel Global Stock Purchase Plan, As Amended and Restated
    amended as of January 18, 2008, effective January 1,
    2008 and amended and restated as of February 22, 2008.10
.6

Nortel Stock Purchase Plan for Members of the Savings and
    Retirement Program, As Amended on February 22, 2008.10
.7

Nortel Networks U.S. Deferred Compensation Plan, as amended by
    Resolutions dated January 18, 2008.12


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.  79




---



##### Table of Contents



SIGNATURES    NORTEL
    NETWORKS LIMITED
 (Registrant)
  Chief Financial Officer

Chief Accounting Officer/s/  Paviter
    S. BinningPaviter
    S. BinningExecutive Vice-President and Chief Financial Officer

/s/  Paul
    W. KarrPaul
    W. KarrController    80