##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, 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 June 30, 2007ORo     TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES
    EXCHANGE ACT OF 1934For
    the Transition Period From
    
    to   Commission file number:
    000-30758
   Nortel Networks
    Limited
 (Exact name of registrant as
    specified in its charter)
   Canada(State or Other
    Jurisdiction of
    Incorporation or Organization)

62-12-62580(I.R.S. EmployerIdentification No.)195 The West Mall
    Toronto, Ontario, Canada(Address of Principal
    Executive Offices)

M9C 5K1(Zip
    Code)    Registrants Telephone Number Including Area Code
    (905) 863-7000
     þ o
   Rule 12b-2
  o o þ
   Rule 12b-2
  o þ
     1,460,978,638 shares
    of common stock without nominal or par value




---



##### 



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


35ITEM
    3.

Quantitative and
    Qualitative Disclosures About Market Risk


74ITEM
    4.

Controls and
    Procedures


75PART II
    OTHER INFORMATIONITEM
    1.

Legal
    Proceedings


79ITEM
    1A.

Risk
    Factors


80ITEM
    6.

Exhibits


81SIGNATURES


82EX-10.4EX-10.5EX-12EX-31.1EX-31.2EX-32    All dollar amounts in this document are in United States
    dollars unless otherwise stated.
             i




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##### Table of Contents



PART I



FINANCIAL
    INFORMATION  ITEM 1.
    CONDENSED
    CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Operations (unaudited)
 (Millions
    of U.S. dollars)
  Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006As restated*





As restated*Revenues:Products

$
2,246


$
2,459


$
4,415


$
4,547Services


316



321



630



623Total revenues


2,562



2,780



5,045



5,170Cost of revenues:Products


1,341



1,535



2,642



2,830Services


173



177



351



346Total cost of revenues


1,514



1,712



2,993



3,176Gross profit


1,048



1,068



2,052



1,994Selling, general and
    administrative expense


593



607



1,196



1,216Research and development expense


419



493



824



968Amortization of intangibles


13



6



25



11In-process research and
    development expense






16







16Special charges


36



49



116



54Loss (gain) on sales of businesses
    and assets


(10
)


12



(11
)


(27
)Operating loss


(3
)


(115
)


(98
)


(244
)Other income  net


124



63



210



120Interest expenseLong-term debt


(64
)


(38
)


(128
)


(61
)Other


(6
)


(8
)


(11
)


(23
)Earnings (loss) from operations
    before income taxes, minority interests and equity in net
    earnings (loss) of associated companies


51



(98
)


(27
)


(208
)Income tax expense


(11
)


(29
)


(24
)


(54
)40



(127
)


(51
)


(262
)Minority interests  net
    of tax


(1
)


13



(13
)


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


1



(2
)


1



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


40



(116
)


(63
)


(238
)Cumulative effect of accounting
    change  net of tax (note 2)














9Net earnings (loss)


40



(116
)


(63
)


(229
)Dividends on preferred shares


10



9



20



17Net earnings (loss) applicable to
    common shares

$
30


$
(125
)

$
(83
)

$
(246
)     *
    See note 3  The accompanying notes are an integral part of these
    condensed consolidated financial statements
 1




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Balance Sheets (unaudited)
 (Millions
    of U.S. dollars, except for share amounts)
  June 30,


December 31,2007


2006ASSETSCurrent assetsCash and cash equivalents

$
4,465


$
3,487Restricted cash and cash
    equivalents


37



44Accounts receivable  net


2,540



3,709Inventories  net


2,119



1,989Deferred income taxes 
    net


432



276Other current assets


534



512Total current assets


10,127



10,017Investments


196



204Plant and equipment  net


1,509



1,526Goodwill


2,357



2,351Intangible assets  net


234



241Deferred income taxes 
    net


3,916



3,863Other assets


529



680Total assets

$
18,868


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

$
1,314


$
1,124Payroll and benefit-related
    liabilities


545



637Contractual liabilities


239



243Restructuring liabilities


105



97Other accrued liabilities


3,720



3,756Long-term debt due within one year


22



18Total current
    liabilities


5,945



5,875Long-term debt


2,630



2,646Deferred income taxes 
    net


53



97Other liabilities


3,988



4,128Total liabilities


12,616



12,746Minority interests in subsidiary
    companies


252



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


536



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


1,211



1,211Additional paid-in capital


22,352



22,298Accumulated deficit


(17,628
)


(17,544
)Accumulated other comprehensive
    loss


(471
)


(608
)Total shareholders
    equity


6,000



5,893Total liabilities and
    shareholders equity

$
18,868


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




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Cash Flows (unaudited)
 (Millions
    of U.S. dollars)
  Six Months Ended June 30,2007


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

$
(63
)

$
(229
)Adjustments to reconcile net loss
    to net cash from (used in) operating activities, net of effects
    from acquisitions and divestitures of businesses:Amortization and depreciation


152



135Non-cash portion of special charges


3



(9
)In-process research and
    development expense






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


(1
)


4Share-based compensation expense


55



53Deferred income taxes


3



52Cumulative effect of accounting
    change  net of tax






(9
)Pension and other accruals


135



185Gain on sales and writedowns of
    investments, businesses and assets  net


(6
)


(28
)Minority interests


13



(28
)Other  net


(70
)


59Changes in operating assets and
    liabilities


816



(993
)Net cash from (used in) operating
    activities


1,037



(792
)Cash flows from (used in)
    investing activitiesExpenditures for plant and
    equipment


(109
)


(177
)Proceeds on disposals of plant and
    equipment


84



89Change in restricted cash and cash
    equivalents


7



16Acquisitions of investments and
    businesses  net of cash acquired


(26
)


(125
)Proceeds from the sales of
    investments and businesses and assets


(18
)


108Net cash from (used in) investing
    activities


(62
)


(89
)Cash flows from (used in)
    financing activitiesDividends paid


(25
)


(31
)Increase in notes payable


24



27Decrease in notes payable


(27
)


(12
)Increase in loan payable






1,300Repayments of long-term debt






(1,425
)Decrease in capital leases payable


(11
)


(9
)Net cash from (used in) financing
    activities


(39
)


(150
)Effect of foreign exchange rate
    changes on cash and cash equivalents


42



53Net increase (decrease) in cash
    and cash equivalents


978



(978
)Cash and cash equivalents at
    beginning of period


3,487



2,876Cash and cash equivalents at
    end of period

$
4,465


$
1,898     *
    See note 3  The accompanying notes are an integral part of these
    condensed consolidated financial statements
 3




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited)
 (Millions
    of U.S. dollars, unless otherwise stated)
  1.
    Significant
    accounting policies  Basis
    of presentation
      Form 10-K
  Comparative
    figures
    Recent
    accounting pronouncements
  instrument-by-instrument
  No. 06-11, (EITF 06-11). EITF 06-11 EITF 06-11
 4




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##### Table of Contents



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




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    FIN 48-1, FIN 48-1 FIN 48-1 FIN 48-1
  (d)
    Accounting
    for Sabbatical Leave and Other Similar Benefits  No. 06-2, (EITF 06-2). EITF 06-2 EITF 06-2 EITF 06-2
  (e)
    How
    Taxes Collected from Customers and Remitted to Governmental
    Authorities Should Be Presented in the Income
    Statement  No. 06-3, (EITF 06-3). EITF 06-3 EITF 06-3 EITF 06-3
  (f)
    Share-Based
    Payment    3.
    Restatement
    of previously issued financial statements    
    Pension and post-retirement benefits errors;
    Revenue recognition errors; 6




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  
    A prior year tax error; and
    Other errors.    Condensed
    Consolidated Statements of Operations for the three and six
    months ended June 30, 2006
  Three Months Ended June 30, 2006


Six Months Ended June 30, 2006As Previously








As PreviouslyReported(a)


Adjustments


As Restated


Reported(a)


Adjustments


As RestatedRevenues:Products

$
2,421


$
38


$
2,459


$
4,501


$
46


$
4,547Services


323



(2
)


321



625



(2
)


623Total revenues


2,744



36



2,780



5,126



44



5,170Cost of revenues:Products


1,502



33



1,535



2,806



24



2,830Services


176



1



177



345



1



346Total cost of revenues


1,678



34



1,712



3,151



25



3,176Gross profit


1,066



2



1,068



1,975



19



1,994Selling, general and
    administrative expense


594



13



607



1,188



28



1,216Research and development expense


484



9



493



958



10



968Amortization of intangibles


6







6



11







11In-process research and
    development expense


16







16



16







16Special charges


45



4



49



50



4



54Loss (gain) on sales of businesses
    and assets


16



(4
)


12



(26
)


(1
)


(27
)Operating loss


(95
)


(20
)


(115
)


(222
)


(22
)


(244
)Other income  net


53



10



63



123



(3
)


120Interest expenseLong-term debt


(38
)






(38
)


(63
)


2



(61
)Other






(8
)


(8
)


(23
)






(23
)Loss from operations before income
    taxes, minority interests and equity in net loss of associated
    companies


(80
)


(18
)


(98
)


(185
)


(23
)


(208
)Income tax expense


(27
)


(2
)


(29
)


(50
)


(4
)


(54
)(107
)


(20
)


(127
)


(235
)


(27
)


(262
)Minority interests  net
    of tax


14



(1
)


13



35



(7
)


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


(2
)






(2
)


(4
)






(4
)Net loss before cumulative effect
    of accounting change


(95
)


(21
)


(116
)


(204
)


(34
)


(238
)Cumulative effect of accounting
    change  net of tax














9







9Net loss


(95
)


(21
)


(116
)


(195
)


(34
)


(229
)Dividends on preferred shares


13



(4
)


9



25



(8
)


17Net loss applicable to common
    shares

$
(108
)

$
(17
)

$
(125
)

$
(220
)

$
(26
)

$
(246
)     (a)
    
    In the third quarter of 2006,
    Nortel began disclosing revenues and cost of revenues from both
    its products and services. Previous quarters have been updated
    to reflect this presentation change. 7




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Adjustments
    Three Months Ended June 30, 2006


Six Months Ended June 30, 2006Cost of








Cost ofRevenues


Revenues


Net Loss


Revenues


Revenues


Net LossAs previously
    reported

$
2,744


$
1,678


$
(95
)

$
5,126


$
3,151


$
(195
)Adjustments:Pension and post-retirement
    benefits errors






3



(8
)






6



(16
)Revenue recognition errors


36



13



20



44



(2
)


39Other errors






18



(33
)






21



(57
)As restated

$
2,780


$
1,712


$
(116
)

$
5,170


$
3,176


$
(229
)   Pension
    and post-retirement benefits errors
  re-measurements
      Revenue
    recognition errors
    and/or
 8




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##### Table of Contents



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




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Statement
    of cash flows
    4.
    Consolidated
    financial statement details    Consolidated
    statements of operations
  Other
    income  net:
  Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Interest and dividend income

$
60


$
26


$
122


$
54Gain (loss) on sales and
    writedowns of investments


(5
)


2



(5
)


1Currency exchange
    gains  net


71



15



70



16Other  net


(2
)


20



23



49Other income  net

$
124


$
63


$
210


$
120     Consolidated
    balance sheets
  Accounts
    receivable  net:
  June 30,


December 31,2007


2006Trade receivables

$
2,101


$
2,464Notes receivable


10



7Notes receivable from NNC and its
    subsidiaries


147



924Contracts in process


369



4022,627



3,797Less: provisions for doubtful
    accounts


(87
)


(88
)Accounts receivable  net

$
2,540


$
3,709  10




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##### Table of Contents



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


December 31,2007


2006Raw materials

$
653


$
725Work in process


12



11Finished goods


735



727Deferred costs


1,911



1,9523,311



3,415Less: provision for inventories


(898
)


(1,007
)Inventories  net


2,413



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


(294
)


(419
)Current inventories  net

$
2,119


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


December 31,2007


2006Prepaid expenses

$
192


$
175Income taxes recoverable


65



63Current investments


52



51Other


225



223Other current assets

$
534


$
512   Plant and
    equipment  net:
  June 30,


December 31,2007


2006Cost:Land

$
36


$
35Buildings


1,086



1,185Machinery and equipment


2,069



2,038Assets under capital lease


216



215Sale lease-back assets


95



923,502



3,565Less accumulated depreciation:Buildings


(372
)


(444
)Machinery and equipment


(1,503
)


(1,482
)Assets under capital lease


(100
)


(96
)Sale lease-back assets


(18
)


(17
)(1,993
)


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

$
1,509


$
1,526     (a)
    
    Includes assets held for sale with
    a carrying value of nil and $52 as of June 30, 2007 and
    December 31, 2006, respectively, related to owned
    facilities that were being actively marketed for sale. These
    assets were written down in previous periods to their estimated
    fair values less estimated costs to sell. The writedowns were
    included in special charges. Nortel disposed of all the assets
    held for sale in the three months ended June 30, 2007, with
    no material impact on net earnings (loss). The assets held for
    sale had gross and net book values of approximately $168 and
    $56, respectively, as of the date of their disposition. 11




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##### 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,
    2006(a)

$
447


$
144


$
598


$
991


$
171


$
2,351Change:Additions






















Disposals






















Foreign exchange


1



1



1



3







6Other






















Balance  as of
    June 30, 2007

$
448


$
145


$
599


$
994


$
171


$
2,357     (a)
    
    Opening balances for Enterprise
    Solutions, Carrier Networks, and Metro Ethernet Networks have
    been decreased by $25, $21, and $103, respectively, and the
    opening balance for Global Services has been increased by $149,
    to reflect the reclassification of Nortels network
    implementation services to Global Services, as described in
    note 5.     Intangible
    assets  net:
  June 30,


December 31,2007


2006Cost

$
325


$
307Less: accumulated amortization


(91
)


(66
)Intangible assets  net

$
234


$
241   Other
    assets:
    Other accrued liabilities:
  June 30,


December 31,2007


2006Outsourcing and selling, general
    and administrative related provisions

$
278


$
399Customer deposits


68



78Product related provisions


79



93Warranty provisions (note 11)


194



214Deferred revenue


1,198



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


1,490



1,352Miscellaneous taxes


68



73Income taxes payable


47



71Tax uncertainties (note 7)


1



Interest payable


80



87Other


217



262Other accrued liabilities

$
3,720


$
3,756     (a)
    
    Includes amounts which may be
    recognized beyond one year due to the duration of certain
    contracts. 12




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Other
    liabilities:
  June 30,


December 31,2007


2006Pension benefit liabilities

$
1,894


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


845



794Restructuring liabilities
    (note 6)


185



177Deferred revenue


713



919Tax uncertainties (note 7)


66



Other long-term provisions


285



273Other liabilities

$
3,988


$
4,128   Consolidated
    statements of cash flows
  Change in
    operating assets and liabilities:
  Six Months Ended June 30,2007


2006Accounts receivable  net

$
1,169


$
(306
)Inventories  net


(46
)


(134
)Deferred costs


31



(141
)Income taxes


(17
)


(52
)Accounts payable


193



(138
)Payroll, accrued and contractual
    liabilities


(302
)


(223
)Deferred revenue


(132
)


132Advance billings in excess of
    revenues recognized to date on contracts


151



33Restructuring liabilities


8



2Other


(239
)


(166
)Change in operating assets and
    liabilities

$
816


$
(993
)   Interest
    and taxes paid:
  Cash interest paid

$
143


$
114Cash taxes paid

$
49


$
52   5.
    Segment
    information  General
    description
    
    CN provides mobility networking solutions using (i) Code
    Division Multiple Access (CDMA) solutions, Global
    System for Mobile Communication (GSM) and Universal
    Mobile Telecommunication System (UMTS), and
    Worldwide Interoperability for Microwave Access
    (WiMAX) solutions and (ii) carrier circuit and
    packet voice solutions. Mobility networking refers to
    communications networks that enable end users to be mobile while
    they send and receive voice and data communications using
    wireless devices, such as cellular telephones, personal digital
    assistants, laptops and other computing and communications
    devices. These networks use specialized network access equipment
    and specialized core networking equipment that enable an end
    user to be connected and 13




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##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  identified when not in a fixed location and to roam globally. In
    addition, Nortels carrier circuit and packet voice
    solutions provide a broad range of voice solutions to its
    service provider customers for business and residential
    subscribers, traditional, full featured voice services as well
    as internet-based voice and multimedia communications services
    using either circuit or packet-based switching technologies.
    These service provider customers include local and long distance
    telephone companies, wireless service providers, cable operators
    and other communication service providers. Increasingly, CN
    addresses customers who want to provide services across both
    wireless as well as wired devices.  
    ES provides solutions to enterprise customers using
    (i) enterprise circuit and packet voice solutions,
    (ii) data networking and security solutions, which supply
    data, voice and multi-media communications solutions to
    Nortels enterprise customers and (iii) software
    solutions for multi-media messaging, conferencing and call
    centers. Nortels solutions for enterprises are used to
    build new networks and transform their existing communications
    networks into packet-based networks supporting data, voice and
    multi-media communications. Nortels ES customers consist
    of a broad range of enterprises around the world, including
    large businesses at their headquarters, data centers, call
    centers and branch offices, small businesses and home offices,
    as well as government agencies, educational and other
    institutions and utility organizations.
    GS provides a broad range of services to address the
    requirements of Nortels carrier and enterprise customers
    throughout the entire lifecycle of their networks. The GS
    portfolio is organized into four main service product groups:
    (i) network implementation services, including network
    integration, planning, installation, optimization and security
    services, (ii) network support services, including
    technical support, hardware maintenance, equipment spares
    logistics and
    on-site
    engineers, (iii) network managed services, including
    services related to the monitoring and management of customer
    networks and providing a range of network managed service
    options and (iv) network application services, including
    applications development, integration and web services.
    Nortels GS market mirrors that of its carrier and
    enterprise markets along with a broad range of customers in all
    geographic regions where Nortel conducts business, including
    small and medium-sized businesses, large global enterprises and
    all levels of government.
    MEN combines Nortels optical networking solutions and the
    carrier portion of its data networking solutions, to transform
    its carrier and large enterprise customers networks to be
    more scalable and reliable for the high speed delivery of
    diverse multi-media communications services. By combining
    Nortels optical expertise and data knowledge, Nortel
    creates carrier ethernet solutions that help service providers
    and enterprises better manage increasing bandwidth demands.
    Nortel believes that carrier ethernet technology, created by
    integrating Nortels data ethernet capabilities with
    Nortels optical technology expertise is particularly
    suited to these solutions. In addition to increased capacity and
    lower cost per bit, Nortel differentiates its MEN solutions on
    the basis of being able to deliver carrier-grade reliability.
    The metropolitan, or metro, network is a key focus area as
    bandwidth demands are increasing as a result of the growth of
    network based broadcast and on-demand video delivery, wireless
    backhaul for a variety of data services including
    video, as well as traditional business, internet, and private
    line and voice services. MEN serves the long haul optical market
    using common products and technologies from the metro optical
    market. MEN also serves high performance, mission critical
    enterprise networks.     14




---



##### Table of Contents



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


Six MonthsEnded June 30,


Ended June 30,2007


2006


2007


2006RevenuesCarrier Networks

$
1,058


$
1,262


$
2,067


$
2,333Enterprise Solutions


590



478



1,187



933Global Services


494



545



942



1,051Metro Ethernet Networks


363



433



736



726Total reportable segments


2,505



2,718



4,932



5,043Other


57



62



113



127Total revenues


2,562



2,780



5,045



5,170Management EBTCarrier Networks


175



83



311



140Enterprise Solutions


6



(41
)


14



(64
)Global Services


76



98



153



189Metro Ethernet Networks


14



47



(3
)


30Total reportable segments


271



187



475



295Other


(181
)


(191
)


(384
)


(425
)Total Management
    EBT


90



(4
)


91



(130
)Amortization of intangibles


(13
)


(6
)


(25
)


(11
)In-process research and
    development expense






(16
)






(16
)Special charges


(36
)


(49
)


(116
)


(54
)Gain (loss) on sales of businesses
    and assets


10



(12
)


11



27Income tax expense


(11
)


(29
)


(24
)


(54
)Net earnings (loss) before
    cumulative effect of accounting change

$
40


$
(116
)

$
(63
)

$
(238
)     6.
    Special
    charges     15




---



##### Table of Contents



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








Special ChargesSettlement


Plant and





Three Months


Six MonthsWorkforce


and Lease


Equipment





Ended


EndedReduction


Costs


Writedowns


Total


June 30, 2007


June 30, 20072007 Restructuring
    PlanProvision balance as of
    December 31, 2006

$



$



$



$
Other special charges


79



27



3



109


$
34


$
109Revisions to prior accruals


(2
)


1







(1
)


(1
)


(1
)Cash drawdowns


(33
)


(2
)






(35
)Non-cash drawdowns


(4
)






(3
)


(7
)Foreign exchange and other
    adjustments


2











2Provision balance as of
    June 30, 2007

$
42


$
26


$



$
682006 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
38


$



$



$
38Other special charges


11











11







11Revisions to prior accruals


(6
)










(6
)






(6
)Cash drawdowns


(29
)










(29
)Non-cash drawdowns














Foreign exchange and other
    adjustments


1











1Provision balance as of
    June 30, 2007

$
15


$



$



$
152004 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
3


$
53


$



$
56Other special charges






















Revisions to prior accruals






1



1



2



2



2Cash drawdowns


(2
)


(6
)






(8
)Non-cash drawdowns










(1
)


(1
)Foreign exchange and other
    adjustments






1







1Provision balance as of
    June 30, 2007

$
1


$
49


$



$
502001 Restructuring
    PlanProvision balance as of
    December 31, 2006

$
2


$
178


$



$
180Other special charges






















Revisions to prior accruals


(2
)


2



1



1



1



1Cash drawdowns






(24
)






(24
)Non-cash drawdowns










(1
)


(1
)Foreign exchange and other
    adjustments






1







1Provision balance as of
    June 30, 2007

$



$
157


$



$
157Total provision balance as of
    June 30,
    2007(a)

$
58


$
232


$



$
290Total special charges

















$
36


$
116     (a)
    
    As of June 30, 2007 and
    December 31, 2006, the short-term provision balances were
    $105 and $97, respectively, and the long-term provision balances
    were $185 and $177, respectively. 16




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   2007
    Restructuring Plan
  Three and
    six months ended June 30, 2007
    2006
    Restructuring Plan
  Three and
    six months ended June 30, 2007
    2004
    and 2001 Restructuring Plans
  Three and
    six months ended June 30, 2007
   17




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##### Table of Contents



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


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


Total2007 Restructuring Plan

$
6


$
21


$
5


$
1


$



$
332006 Restructuring Plan






















2004 Restructuring Plan


1



1















22001 Restructuring Plan






1















1Total special charges for the
    three months endedJune 30, 2007

$
7


$
23


$
5


$
1


$



$
362007 Restructuring Plan

$
17


$
66


$
20


$
5


$



$
1082006 Restructuring Plan


1



3



1











52004 Restructuring Plan


1



1















22001 Restructuring Plan






1















1Total special charges for the six
    months endedJune 30, 2007

$
19


$
71


$
21


$
5


$



$
1162006 Restructuring Plan

$
7


$
23


$
16


$
1


$



$
472004 Restructuring Plan






1















12001 Restructuring Plan






1















1Total special charges for the
    three months endedJune 30, 2006

$
7


$
25


$
16


$
1


$



$
492006 Restructuring Plan

$
7


$
23


$
16


$
1


$



$
472004 Restructuring Plan


1



2



1











42001 Restructuring Plan






3















3Total special charges for the six
    months endedJune 30, 2006

$
8


$
28


$
17


$
1


$



$
54     7.
    Income
    taxes       18




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                 19




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        8.
    Employee
    benefit plans  and/or
        Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Pension expense:Service cost

$
30


$
36


$
60


$
71Interest cost


118



117



233



230Expected return on plan assets


(125
)


(113
)


(246
)


(222
)Amortization of prior service cost


1







2



1Amortization of net losses


26



36



52



70Curtailment, contractual and
    special termination losses






8



2



9Net pension expense

$
50


$
84


$
103


$
159  20




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##### Table of Contents



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


Six MonthsEnded June 30,


Ended June 30,2007


2006


2007


2006Post-retirement benefit
    cost:Service cost

$
1


$
2


$
2


$
4Interest cost


9



11



17



22Amortization of prior service cost


(2
)


(1
)


(4
)


(2
)Amortization of net losses














1Net post-retirement benefit cost

$
8


$
12


$
15


$
25     9.
    Acquisition
    and divestiture  Acquisition
  LG-Nortel
    Co. Ltd. business venture
    Divestiture
  Manufacturing
    operations
    10.
    Long-term
    debt  Convertible
    notes offering
   21




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                11.
    Guarantees    (a)  Business
    sale and business combination agreements
   22




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
          (b)  Intellectual
    property indemnification obligations
        (c)  Lease
    agreements
      (d)  Third
    party debt agreements
     23




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
      (e)  Other
    indemnification agreements
  sub-facility.
            and/or
 24




---



##### Table of Contents



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

$
214Payments


(81
)Warranties issued


107Revisions


(46
)Balance as of June 30, 2007

$
194   12.
    Commitments  Bid,
    performance-related and other bonds
        June 30,


December 31,2007


2006Bid and performance-related
    bonds(a)

$
187


$
231Other
    bonds(b)


35



30Total bid, performance related and
    other bonds

$
222


$
261     (a)
    
    Net of restricted cash and cash
    equivalent amounts of $5 and $7 as of June 30, 2007 and
    December 31, 2006, respectively.(b)
    
    Net of restricted cash and cash
    equivalent amounts of $30 and $33 as of June 30, 2007 and
    December 31, 2006, respectively. 25




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
   Venture
    capital financing
  start-up
  Nortel
    and Microsoft Corporation Alliance
      13.
    Shareholders
    equity    AccumulatedAdditional





OtherPreferred


Common


Paid-in


Accumulated


ComprehensiveShares


Shares


Capital


Deficit


Loss


TotalBalance as of December 31,
    2006

$
536


$
1,211


$
22,298


$
(17,544
)

$
(608
)

$
5,893Net loss














(63
)






(63
)Foreign currency translation
    adjustment


















82



82Unrealized loss on
    investments  net


















(3
)


(3
)Pension and post-retirement
    amortization items  net


















29



29Unrealized derivative gain on cash
    flow hedges  net


















29



29Share-based compensation










55











55Adoption of FIN 48
    (notes 2 and 7)














(1
)






(1
)Dividend














(20
)






(20
)Other










(1
)










(1
)Balance as of June 30, 2007

$
536


$
1,211


$
22,352


$
(17,628
)

$
(471
)

$
6,000    26




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
    Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Net earnings (loss)

$
40


$
(116
)

$
(63
)

$
(229
)Other comprehensive income (loss)
    adjustments:Change in foreign currency
    translation adjustment


70



113



82



135Unrealized gain (loss) on
    investments 
    net(a)


(1
)


(34
)


(3
)


(20
)Pension and post-retirement
    amortization items  net


14







29



(1
)Unrealized derivative gain (loss)
    on cash flow hedges 
    net(b)


23



9



29



3Comprehensive income (loss)

$
146


$
(28
)

$
74


$
(112
)     (a)
    
    Certain securities deemed
    available-for-sale by Nortel were measured at fair value.
    Unrealized holding gains (losses) related to these securities
    were excluded from net earnings (loss) and are included in
    accumulated other comprehensive income until realized.
    Unrealized gain (loss) on investments was net of tax of nil for
    each of the three and six months ended June 30, 2007 and
    2006.(b)
    
    During the three and six months
    ended June 30, 2007 and 2006, nil and $5, $5 and $9 of net
    derivative gains were reclassified to other income 
    net, respectively. Nortel estimates that $19 of net derivative
    gains included in accumulated other comprehensive loss will be
    reclassified into net earnings (loss) within the next
    12 months.  14.
    Share-based
    compensation plans  Stock
    options
  1 3
   27




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
        Restricted
    stock units and performance stock units
       28




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
  Share-based
    compensation
    Three Months


Six MonthsEnded June 30,


Ended June 30,2007


2006


2007


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

$
21


$
27


$
41


$
41RSU expense


6



1



10



3PSU expense


3







4



Total share-based compensation
    reported

$
30


$
28


$
55


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

Six MonthsEnded June 30,

Ended June 30,2007

2006

2007

2006Black-Scholes-Merton
    weighted-average assumptionsExpected dividend yield

0.00%

0.00%

0.00%

0.00%Expected
    volatility(a)

53.11% - 53.23%

72.74%

53.11% - 53.56%

72.74%Risk-free interest
    rate(b)

4.54% - 4.77%

5.04%

4.43% - 4.77%

5.04%Expected option life in
    years(c)

4

4

4

4Weighted-average stock option
    fair value per NNC option granted

$11.39-$11.97

$12.26

$11.86 - $11.97

$12.26     (a)
    
    The expected volatility of
    NNCs stock is estimated using the daily historical stock
    prices over a period equal to the expected term.(b)
    
    Nortel used the five year
    government treasury bill rate to approximate the four year risk
    free rate.(c)
    
    The expected term of the stock
    options is estimated based on historical grants with similar
    vesting periods.    Three Months


Six MonthsEnded June 30,


Ended June 30,2007


2006


2007


2006(b)Monte Carlo
    assumptionsBeta


1.9



2.1



1.9



2.1Risk-free interest
    rate(a)


4.46
%


5.10
%


4.46
%


5.10
%     (a)
    
    The risk-free rate used was the
    three year government treasury bill rate.(b)
    
    Due to the restatement effected in
    the second quarter of 2006 and the suspension of trading under
    the plans, no awards were granted by NNC in the first quarter of
    2006. 29




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
       15.
    Related
    party transactions      Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Revenues:LG Electronics
    Inc.(a)

$
5


$
1


$
12


$
2Vertical Communications Systems
    Inc.
    (Vertical)(b)


3







7



1Other


2



2



4



2Total

$
10


$
3


$
23


$
5Purchases:LG Electronics
    Inc.(a)


103



58



182



111Sasken Communications Technology
    Ltd.
    (Sasken)(c)


7



9



12



17GNTEL Co., Ltd.
    (GNTEL)(d)


25



12



40



21Other


2



9



3



12Total

$
137


$
88


$
237


$
161     (a)
    
    LGE holds a minority interest in
    LG-Nortel. Nortels sales and purchases relate primarily to
    certain inventory related items. As of June 30, 2007,
    accounts payable to LGE was $98, compared to $76 as at
    December 31, 2006.(b)
    
    LG-Nortel currently owns a minority
    interest in Vertical. Vertical supports LG-Nortels efforts
    to distribute Nortels products to the North American
    market.(c)
    
    Nortel currently owns a minority
    interest in Sasken. Nortels purchases from Sasken relate
    primarily to software and other software development related
    purchases. Accounts payable to Sasken were $2 as at
    June 30, 2007 and December 31, 2006.(d)
    
    Nortel holds a minority interest in
    GNTEL through its business venture LG-Nortel. Nortels
    purchases from GNTEL relate primarily to installation and
    warranty services. As of June 30, 2007, accounts payable to
    GNTEL were $14, compared to $17 as at December 31, 2006.    June 30,


December 31,2007


2006Owing (to) from NNC  net

$
(227
)

$
847Owing from NNC
    subsidiaries  net


100



77Other related parties


(108
)


(84
)Related party receivables
    (payables)

$
(235
)

$
840   16.
    Contingencies   30




---



##### Table of Contents



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




---



##### Table of Contents



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements
    (unaudited)  (Continued)
                   32




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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


35Restatements;
    Remedial Measures and the Elimination of Material Weaknesses;
    Related Matters


40Results of
    Operations


42Segment
    Information


47Liquidity and
    Capital Resources


52Off-Balance Sheet
    Arrangements


58Application of
    Critical Accounting Policies and Estimates


59Accounting Changes
    and Recent Accounting Pronouncements


70Outstanding Share
    Data


72Market
    Risk


72Environmental
    Matters


72Legal
    Proceedings


72Cautionary Notice
    Regarding Forward-Looking Information


72   The following Managements Discussion and Analysis, or
    MD&A, is intended to help the reader understand the results
    of operations and financial condition of Nortel Networks
    Limited. The MD&A should be read in combination with our
    unaudited condensed consolidated financial statements and the
    accompanying notes. All dollar amounts in this MD&A are in
    millions of United States, or U.S., dollars except per share
    amounts or unless otherwise stated.
  Certain statements in this MD&A contain words such as
    could, expects, may,
    anticipates, believes,
    intends, estimates, plans,
    envisions, seeks and other similar
    language and are considered forward-looking statements or
    information under applicable securities laws. These statements
    are based on our current expectations, estimates, forecasts and
    projections about the operating environment, economies and
    markets in which we operate which we believe are reasonable but
    which are subject to important assumptions, risks and
    uncertainties and may prove to be inaccurate. Consequently, our
    actual results could differ materially from our expectations set
    out in this MD&A. In particular, see the Risk Factors
    section of this report, our Annual Report on
    Form 10-K
    for the year ended December 31, 2006, or 2006 Annual
    Report, and our Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2007, or 2007 First Quarter
    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
     35




---



##### Table of Contents



36




---



##### Table of Contents



How We
    Measure Business Performance
     37




---



##### Table of Contents



Second
    Quarter Financial Highlights
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenues

$
2,562


$
2,780


$
(218
)


(8
)

$
5,045


$
5,170


$
(125
)


(2
)Gross profit


1,048



1,068



(20
)


(2
)


2,052



1,994



58



3Gross margin%


40.9
%


38.4
%






2.5 points



40.7
%


38.6
%






2.1 pointsSelling, general and
    administrative expense


593



607



(14
)


(2
)


1,196



1,216



(20
)


(2
)Research and development expense


419



493



(74
)


(15
)


824



968



(144
)


(15
)Operating margin


36



(32
)


68







32



(190
)


222Operating margin %


1.4
%


−1.2
%






2.6 points



0.6
%


−3.7
%






4.3 pointsInterest expense


70



46



24



52



139



84



55



65Other income  net


(124
)


(63
)


(61
)






(210
)


(120
)


(90
)


Minority interests  net
    of tax


1



(13
)


14







13



(28
)


41



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


(1
)


2



(3
)


(150
)


(1
)


4



(5
)


(125
)Management EBT


90



(4
)


94







91



(130
)


221Amortization of intangibles


13



6



7



117



25



11



14



127In-process research and
    development expense






16



(16
)


(100
)






16



(16
)


(100
)Special charges


36



49



(13
)


(27
)


116



54



62



115Loss (gain) on sales of businesses
    and assets


(10
)


12



(22
)


(183
)


(11
)


(27
)


16Income tax expense


11



29



(18
)


(62
)


24



54



(30
)


(56
)Net earnings (loss) before
    cumulative effect of accounting change


40



(116
)


156







(63
)


(238
)


175     Q2 2007
    vs. Q2 2006
  
    Revenues decreased 8% to $2,562:  Revenues
    decreased in the second quarter of 2007 compared to the second
    quarter of 2006 in the CN, MEN and GS segments, partially offset
    by an increase in the ES segment. From a geographic perspective,
    the decrease was driven by the Europe, Middle East and Africa,
    or EMEA, and Asia regions, partially offset by increases in the
    U.S., Canada and Caribbean and Latin America, or CALA, regions.
    The revenue decline is primarily attributable to declines in the
    CN and GS segments related to the divestiture of certain assets
    and liabilities of our Universal Mobile Telecommunication
    System, or UMTS, Access business and decline in Global System
    for Mobile communication , or GSM, Core and UMTS Core, or
    collectively GU Core, and traditional Time
    Division Multiplexing, or TDM, based solutions, partially
    offset by increases in ES due to deferred revenues recognized in
    the second quarter of 2007 due to our completion or elimination
    of customer deliverable obligations and increased demand in GSM
    Access.
    Gross margin increased 2.5 percentage points to
    40.9%:  The increase was predominantly due to the
    shift in geographic and product mix in the second quarter of
    2007 as compared to the second quarter of 2006, most
    significantly in the CN segment. The increase in CN segment is
    primarily due to better product mix in Code
    Division Multiple Access, or CDMA, business, improved GSM
    Access and Converged Multimedia Networks voice over internet
    protocol, or CMN  VOIP, technology margins.
    Operating margin increased by $68 to $36:  The
    increase was predominately due to increased gross profit as a
    result of the increased gross margins and decreased R&D and
    SG&A expenses in the second quarter of 2007 38




---



##### Table of Contents



compared to the second quarter of 2006 as a result of continued
    momentum of our business transformation cost reduction
    initiatives and headcount reductions as a result of the UMTS
    Access divestiture.  
    Management EBT increased by $94 to $90:  The
    increase in Management EBT was driven primarily by increases in
    the CN and ES segments, partially offset by decreases in the MEN
    and GS segments. The CN and GS segments continued to be
    significantly more profitable than ES and MEN.
    Net earnings (loss) before cumulative effect of accounting
    change increased $156 to net earnings of $40 from a net loss of
    $116:  The increase in net earnings was driven
    primarily by decreases in SG&A and R&D and an increase
    in operating margin.
    Cash and cash equivalents decreased $84 from March 31,
    2007 to $4,465 at June 30, 2007:  The
    decrease in cash was primarily driven by net cash used in
    operating activities of $121 and net cash used in financing
    activities of $22, partially offset by cash from investing
    activities of $23 and net positive impacts from foreign exchange
    of $36.  First
    half of 2007 vs. first half of 2006
  
    Revenues decreased 2% to $5,045:  Revenues
    decreased in the first half of 2007 compared to the first half
    of 2006 in the CN and GS segments, partially offset by increases
    in the ES and MEN segments. From a geographic perspective, the
    decrease was driven by the EMEA and Asia regions, partially
    offset by increases in the U.S., Canada and CALA regions. The
    revenue decline is primarily attributable to declines in the CN
    and GS segments. The decline in the CN segment was related to
    the UMTS Access divestiture and declines in GU Core business and
    traditional TDM based solutions offset by increases in CDMA. The
    decline in GS was related to the UMTS Access divestiture. These
    decreases were partially offset by increases in ES and MEN as a
    result of deferred revenues recognized in the first half of 2007
    due to our ongoing completion or elimination of customer
    deliverable obligations.
    Gross margin increased 2.1 percentage points to
    40.7%:  The increase was predominantly due to the
    shift in geographic and product mix in the first half of 2007 as
    compared to the first half of 2006, most significantly in the CN
    and GS segments primarily due to reduced UMTS Access revenues,
    which were traditionally lower margin products and solutions, as
    a result of the divestiture of our UMTS Access business. The
    increase in CN segments is primarily due to better product mix
    in CDMA and improved GSM Access and GU Voice Core margins.
    Operating margin increased by $222 to $32:  The
    increase was predominately due to increased gross profit as a
    result of the increased gross margins and decreased R&D and
    SG&A expenses in the first half of 2007 compared to the
    first half of 2006 as a result of continued momentum of our
    business transformation cost reduction initiatives and headcount
    reductions as a result of the UMTS Access divestiture.
    Management EBT increased by $221 to earnings of
    $91:  The increase in Management EBT was driven
    primarily by increases in the CN and ES segments, partially
    offset by decreases in the GS and MEN segments. The CN and GS
    segments continued to be significantly more profitable than ES
    and MEN.
    Net earnings (loss) before cumulative effect of accounting
    change increased $175 to a net loss of $63 from a net loss of
    $238:  The decrease in net loss was driven
    primarily by decreases in SG&A and R&D and an increase
    in operating margin.
    Cash and cash equivalents increased $978 from
    December 31, 2006 to $4,465 at June 30,
    2007:  The increase in cash was primarily driven
    by net cash from operating activities of $1,037 and net positive
    impacts from foreign exchange of $42, partially offset by net
    cash used in investing activities of $62 and net cash used in
    financing activities of $39.  Significant
    Business Developments
  Convertible
    Notes Offering
   39




---



##### Table of Contents



Business
    Transformation Initiatives
    Global
    Class Action Settlement
    Appointment
    of KPMG LLP
   Restatements;
    Remedial Measures and the Elimination of Material Weaknesses;
    Related Matters  Restatements
    Form 10-K
  Form 10-K.
    
    lack of sufficient cross-functional communication and
    coordination, including further definition of roles and
    responsibilities, with respect to the scope and timing of
    customer arrangements, insufficient segregation of duties in
    certain areas, delayed implementation of Nortel review processes
    and personnel for our business venture with LG Electronics,
    Inc., or LG-Nortel, and insufficient controls over certain end
    user computing applications, all of which impact upon the
    appropriate application of U.S. GAAP to revenue generating
    transactions. 40




---



##### Table of Contents



For the Six Months EndedFor the Three Months Ended June 30, 2006


June 30, 2006Cost of








Cost ofRevenues


Revenues


Net Loss


Revenues


Revenues


Net LossAs previously
    reported

$
2,744


$
1,678


$
(95
)

$
5,126


$
3,151


$
(195
)Adjustments:Pension and post-retirement
    benefits errors






3



(8
)






6



(16
)Revenue recognition errors


36



13



20



44



(2
)


39Other errors






18



(33
)






21



(57
)As restated

$
2,780


$
1,712


$
(116
)

$
5,170


$
3,176


$
(229
)   Regulatory
    Actions
       41




---



##### Table of Contents



Results
    of Operations  Revenues
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeUnited States

$
1,171


$
1,145


$
26



2


$
2,387


$
2,273


$
114



5EMEA


678



887



(209
)


(24
)


1,256



1,520



(264
)


(17
)Canada


178



145



33



23



351



307



44



14Asia


336



455



(119
)


(26
)


718



760



(42
)


(6
)CALA


199



148



51



34



333



310



23



7Consolidated

$
2,562


$
2,780


$
(218
)


(8
)

$
5,045


$
5,170


$
(125
)


(2
)   Q2 2007
    vs. Q2 2006
           42




---



##### Table of Contents



First
    half of 2007 vs. first half of 2006
           43




---



##### Table of Contents



Gross
    Margin
  For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeGross profit

$
1,048


$
1,068


$
(20
)


(2
)

$
2,052


$
1,994


$
58



3Gross margin


40.9
%


38.4
%






2.5 points



40.7
%


38.6
%






2.1 points   Q2 2007
    vs. Q2 2006
    First
    half of 2007 vs. first half of 2006
    Operating
    Margin
  For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeOperating margin

$
36


$
(32
)

$
68






$
32


$
(190
)

$
222



Operating margin as a percentage
    of revenue


1.4
%


−1.2
%






2.6 points



0.6
%


−3.7
%






4.3 points   Q2 2007
    vs. Q2 2006
    First
    half of 2007 vs. first half of 2006
   44




---



##### Table of Contents



Special
    Charges
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% Change2007 Restructuring Plan

$
33


$



$
33






$
108


$



$
108



2006 Restructuring Plan






47



(47
)


(100
)


5



47



(42
)


(89
)2004 Restructuring Plan


2



1



1



100



2



4



(2
)


(50
)2001 Restructuring Plan


1



1











1



3



(2
)


(67
)Total special charges

$
36


$
49


$
(13
)


(27
)

$
116


$
54


$
62



115   2007
    Restructuring Plan
    2006
    Restructuring Plan
    2004 and
    2001 Restructuring Plans
   45




---



##### Table of Contents



2007RestructuringPlan


2006 Restructuring Plan


2004 Restructuring Plan


2001 Restructuring Plan


Total2007


2007


2006


2007


2006


2007


2006


2007


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

$
45


$
3


$



$



$
1


$



$
2


$
48


$
3Three months ended June 30


21







29



1



1



1



1



23



31EnterpriseThree months ended March 31


11



1











1











12



1Three months ended June 30


6











1















7



Metro Ethernet NetworksThree months ended March 31


15



1











1











16



1Three months ended June 30


5







18



















5



18Global ServicesThree months ended March 31


4



























4



Three months ended June 30


1



























1



Total special charges

$
108


$
5


$
47


$
2


$
4


$
1


$
3


$
116


$
54   Loss
    (Gain) on Sales of Businesses and Assets
    Other
    Income  Net
    For the


For theThree Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Interest and dividend
    income(a)

$
60


$
26


$
122


$
54Gain (loss) on sales and
    writedowns of investments


(5
)


2



(5
)


1Currency exchange
    gains  net(b)


71



15



70



16Other  net


(2
)


20



23



49Other income  net

$
124


$
63


$
210


$
120     (a)
    
    Interest and dividend income on our
    short-term investments.(b)
    
    Currency exchange gains and losses
    were primarily related to day-to-day transactional activities.     46




---



##### Table of Contents



Interest
    Expense
    Income
    Tax Expense
       Segment
    Information  Carrier
    Networks
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueCDMA solutions

$
494


$
496


$
(2
)


(0
)

$
1,062


$
935


$
127



14GSM and UMTS solutions


402



559



(157
)


(28
)


673



995



(322
)


(32
)Circuit and packet voice solutions


162



207



(45
)


(22
)


332



403



(71
)


(18
)Total Revenue

$
1,058


$
1,262


$
(204
)


(16
)

$
2,067


$
2,333


$
(266
)


(11
)Management EBT

$
175


$
83


$
92



111


$
311


$
140


$
171



122   Q2 2007
    vs. Q2 2006
   47




---



##### Table of Contents



First
    half of 2007 vs. first half of 2006
         48




---



##### Table of Contents



Enterprise
    Solutions
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueCircuit and packet voice solutions

$
393


$
336


$
57



17


$
768


$
663


$
105



16Data networking and security
    solutions


197



142



55



39



419



270



149



55Total Revenue

$
590


$
478


$
112



23


$
1,187


$
933


$
254



27Management EBT

$
6


$
(41
)

$
47






$
14


$
(64
)

$
78     Q2 2007
    vs. Q2 2006
         49




---



##### Table of Contents



First
    half of 2007 vs. first half of 2006
          Global
    Services
    For the Three Months Ended June 30


For the Six Months Ended June 302007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenue

$
494


$
545


$
(51
)


(9
)

$
942


$
1,051


$
(109
)


(10
)Management EBT

$
76


$
98


$
(22
)


(22
)

$
153


$
189


$
(36
)


(19
)   Q2 2007
    vs. Q2 2006
        First
    half of 2007 vs. first half of 2006
     50




---



##### Table of Contents



Metro
    Ethernet Networks
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenueOptical networking solutions

$
270


$
278


$
(8
)


(3
)

$
533


$
490


$
43



9Data networking and security
    solutions


93



155



(62
)


(40
)


203



236



(33
)


(14
)Total Revenue

$
363


$
433


$
(70
)


(16
)

$
736


$
726


$
10



1Management EBT

$
14


$
47


$
(33
)


(70
)

$
(3
)

$
30


$
(33
)


(110
)   Q2 2007
    vs. Q2 2006
            First
    half of 2007 vs. first half of 2006
     51




---



##### Table of Contents



Other
  For the Three Months Ended June 30,


For the Six Months Ended June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% ChangeRevenue

$
57


$
62


$
(5
)


(8
)

$
113


$
127


$
(14
)


(11
)Management EBT

$
(181
)

$
(191
)

$
10



5


$
(384
)

$
(425
)

$
41



10   Q2 2007
    vs. Q2 2006
      First
    half of 2007 vs. first half of 2006
     Liquidity
    and Capital Resources  Cash
    Flow
   52




---



##### Table of Contents



For the Six Months Ended June 30,2007


2006


ChangeNet earnings (loss)

$
(63
)

$
(229
)

$
166Non-cash items


284



430



(146
)Changes in operating assets and
    liabilities:Accounts receivable  net


1,169


$
(306
)


1,475Inventories  net


(46
)


(134
)


88Accounts payable


193



(138
)


3311,316



(578
)


1,894Deferred costs


31



(141
)


172Income taxes


(17
)


(52
)


35Payroll, accrued and contractual
    liabilities


(302
)


(223
)


(79
)Deferred revenue


(132
)


132



(264
)Advanced billings in excess of
    revenues recognized to date on contracts


151



33



118Restructuring liabilities


8



2



6Other


(239
)


(166
)


(73
)Changes in other operating assets
    and liabilities


(500
)


(415
)


(85
)Net cash from (used in) operating
    activities


1,037



(792
)


1,829Net cash from (used in) investing
    activities


(62
)


(89
)


27Net cash from (used in) financing
    activities


(39
)


(150
)


111Effect of foreign exchange rate
    changes on cash and cash equivalents


42



53



(11
)Net increase (decrease) in cash
    and cash equivalents


978



(978
)


1,956Cash and cash equivalents at
    beginning of period


3,487



2,876



611Cash and cash equivalents at end
    of period

$
4,465


$
1,898


$
2,567   Operating
    Activities
      Accounts
    Receivable
 June 30,


December 31,2007


2006


$ Change


% ChangeAccounts Receivable

$
2,393


$
2,785


$
(392
)


(14
)Days sales outstanding in accounts
    receivable
    (DSO)(a)


84



75     (a)
    
    DSO is the average number of days
    our receivables are outstanding based on a 90 day cycle.
    DSO is a metric that approximates the measure of the average
    number of days from when we recognize revenue until we collect
    cash from our customers. DSO for each quarter is calculated by
    dividing the quarter end accounts
    receivable-net
    balance by revenues for the quarter, in each case as determined
    in accordance with U.S. GAAP, and multiplying by 90 days. 53




---



##### Table of Contents



Inventory
  June 30,


December 31,2007


2006


$ Change


% ChangeInventory  net
    (excluding deferred costs)

$
502


$
456


$
46



10Net inventory days
    (NID)(a)


28



22     (a)
    
    NID is the average number of days
    from procurement to sale of our product based on a 90 day
    cycle. NID for each quarter is calculated by dividing the
    average of the current quarter and prior quarter
    inventories  net (excluding deferred costs) by the
    cost of revenues for the quarter and multiplying by 90 days.    Accounts
    Payable
  June 30,


December 31,2007


2006


$ Change


% ChangeTrade accounts payable

$
946


$
1,085


$
(139
)


(13
)Days of purchasing outstanding in
    accounts payable
    (DPO)(a)


56



49     (a)
    
    DPO is the average number of days
    from when we receive purchased goods and services until we pay
    our suppliers based on a 90 day cycle. DPO for each quarter
    is calculated by dividing the quarter end trade and other
    accounts payable by the cost of revenues for the quarter, in
    each case as determined in accordance with U.S. GAAP, and
    multiplying by 90 days.    Investing
    Activities
      Financing
    Activities
     54




---



##### Table of Contents



Other
    Items
      Convertible
    Notes Offering
              Future
    Uses and Sources of Liquidity
   55




---



##### Table of Contents




    We expect our ability to increase revenue and generate positive
    cash from operating activities to be a primary uncertainty
    regarding our liquidity. In prior years, our operating results
    have produced negative cash flow from operations due in large
    part to our inability to reduce operating expenses as a
    percentage of revenue and the continued negative impact on gross
    margin due to competitive pressures, product mix and other
    factors discussed in this report. If capital spending by our
    customers changes or pricing and margins change from what we
    currently expect, our revenues and cash flows may be materially
    lower and we may be required to further reduce our investments
    or take other measures in order to meet our cash requirements;
    We are under continuing regulatory and criminal investigations
    and subject to litigation proceedings and, as a result, any
    fines or other penalties or judgments or settlements in
    connection with our pending civil litigation not encompassed by
    the Global Class Action Settlement, or regulatory or
    criminal investigations related to the restatements, could have
    a material adverse effect on our business, results of
    operations, financial condition and liquidity, other than
    anticipated professional fees and expenses; and
    Our ability and willingness to access the capital markets is
    based on many factors including market conditions and our
    overall financial objectives. Currently, our ability is limited
    by the covenant restrictions in our indentures and by our and
    NNCs credit ratings and which have, in part, contributed
    to our increased interest and borrowing costs. We cannot provide
    any assurance that our net cash requirements will be as we
    currently expect, that we will be able to refinance any maturing
    debt as it comes due or that financings will be available to us
    on acceptable terms, or at all.  Future
    Uses of Liquidity
      
    expected redemption at par value in September 2007 of
    approximately $1,127 principal amount (plus accrued and unpaid
    interest) of 4.25% convertible senior notes which are currently
    due in 2008;
    cash contributions for pension, post retirement and post
    employment funding of approximately $335.
    capital expenditures of approximately $300;
    costs related to workforce reductions and real estate actions in
    connection with the 2007 Restructuring Plan of approximately
    $220;
    costs related to workforce reductions and other restructuring
    activities for all other restructuring plans of approximately
    $90;
    costs associated with the completion of the divestiture of our
    manufacturing operations to Flextronics and the divestiture of
    certain assets and liabilities related to our UMTS access
    business to Alcatel-Lucent of approximately $60 and $25,
    respectively;
    costs related to our finance transformation project which will
    include, among other things, implementing SAP to provide an
    integrated global financial system, of approximately $35;
    costs related to our regulatory and other legal proceedings; and
    settlement of approximately $46 repaid on July 25, 2007 to
    certain creditors of a customer in bankruptcy proceedings.  and/or
  Contractual
    cash obligations
   56




---



##### Table of Contents



Future
    Sources of Liquidity
      Available
    support facility
    
    $300 of committed revolving support for performance bonds or
    similar instruments with individual amounts of up to $10, of
    which $114 was outstanding; and
    $450 of uncommitted support for performance bonds or similar
    instruments
    and/or
    receivables sales
    and/or
    securitizations, of which $40 was outstanding.    and/or
     57




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Short-form
    registration of securities
    Credit
    Ratings
  Moodys


S&PNNLs Corporate Family Rating


B3



NNLs Long-term Corporate
    Credit Rating






B−NNLs $2,000 High-Yield Notes


B3



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


B3



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


B3



B−NNLs $200 Notes due 2023


B3



CCCNNCCs $150 Notes due 2026


B3



CCCNNL Preferred Shares:Series 5


Caa3



CCC−Series 7


Caa3



CCC−   and/or
  Off-Balance
    Sheet Arrangements  Bid,
    Performance-Related and Other Bonds
      June 30,


December 31,2007


2006Bid and performance related
    bonds(a)

$
187


$
231Other
    bonds(b)


35



30Total bid, performance related and
    other bonds

$
222


$
261     (a)
    
    Net of restricted cash and cash
    equivalents amounts of $5 and $7 as of June 30, 2007 and
    December 31, 2006, respectively.(b)
    
    Net of restricted cash and cash
    equivalents amounts of $30 and $33 as of June 30, 2007 and
    December 31, 2006, respectively.   58




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Application
    of Critical Accounting Policies and Estimates          Revenue
    Recognition
      
    whether the delivered item has value to the customer on a
    stand-alone basis;
    whether there is objective and reliable evidence of the fair
    value of the undelivered item(s); and
    if the contract includes a general right of return relative to
    the delivered item, delivery or performance of the undelivered
    item(s) is considered probable and is substantially in our
    control.  and/or and/or
   59




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




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
    Complex arrangements that involve multiple deliverables such as
    future software deliverables,
    and/or post
    contractual support which remain undelivered generally result in
    the deferral of revenue because, in most cases, we have not
    established fair value for the undelivered elements. We estimate
    that these arrangements account for approximately 56% of our
    deferred revenue balance and will be recognized upon delivery of
    the final undelivered elements and over time.
    In many instances our contractual billing arrangements do not
    match the timing of the recognition of revenue. Often this
    occurs in contracts accounted for under
    SOP 81-1
    where we generally recognize the revenue based on a measure of
    the percentage of costs incurred to date relative to the
    estimated total expected contract costs. We estimate that
    approximately 18% of our deferred revenue balance relates to
    contractual arrangements where billing milestones preceded
    revenue recognition.    June 30,


December 31,2007


2006


$ Change


% ChangeDeferred revenue

$
1,911


$
2,046


$
(135
)


(7
)Advance billings


1,490



1,352



138



10Total deferred revenue

$
3,401


$
3,398


$
3



0     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




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##### Table of Contents



June 30,


December 31,2007


2006Gross accounts receivable

$
2,627


$
3,797Provision for doubtful accounts


(87
)


(88
)Accounts receivable  net

$
2,540


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


3
%


2
%Gross long-term receivables

$
36


$
39Provision for doubtful accounts


(33
)


(34
)Net long-term receivables

$
3


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


92
%


87
%   Provisions
    for Inventory
          June 30,


December 31,2007


2006Gross inventory

$
3,311


$
3,415Inventory provisions


(898
)


(1,007
)Inventories 
    net(a)

$
2,413


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


27
%


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


64
%


69
%     (a)
    
    Includes the long-term portion of
    inventory related to deferred costs of $294 and $419 as of
    June 30, 2007 and December 31, 2006, respectively,
    which is included in other assets.(b)
    
    Calculated excluding deferred costs
    of $1,911 and $1,952 as of June 30, 2007 and
    December 31, 2006, respectively.  and/or
 62




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Provisions
    for Product Warranties
        December 31, 2006

$
214Payments


(81
)Warranties issued


107Revisions


(46
)June 30, 2007

$
194     Income
    Taxes
  Tax
    Asset Valuation
         63




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##### Table of Contents



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




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Future
    Projections of Profitability
             65




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OtherTax Benefit


Net Investment


Temporary


Gross Deferred


Valuation


Net Deferredof Losses


Tax Credits


Differences


Tax Asset


Allowance


Tax AssetCanada

$
1,069


$
985


$
594


$
2,648


$
(541
)

$
2,107United States


806



376



910



2,092



(530
)


1,562United Kingdom


457







327



784



(337
)


447France


442



44



55



541



(465
)


76Other


265







172



437



(334
)


103Total

$
3,039


$
1,405


$
2,058


$
6,502


$
(2,207
)

$
4,295     Canada
    1994-1996
    U.S.
      U.K.
   66




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France
    Transfer
    Pricing
        Valuation
    Allowance
      Tax
    Contingencies
   67




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Goodwill
    Valuation
    
    a significant adverse change in the business climate or legal
    factors;
    an adverse action or assessment by a regulator;
    unanticipated competition;
    loss of key personnel;
    the likelihood that a reporting unit or a significant portion of
    a reporting unit will be sold or disposed of;
    a change in reportable segments;
    results of testing for recoverability of a significant asset
    group within a reporting unit; and/or
    recognition of a goodwill impairment loss in the financial
    statements of a subsidiary that is a component of a reporting
    unit.     68




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
    DCF model: assumptions regarding revenue growth rates,
    gross margin percentages, discount rates and terminal growth
    rates;
    Revenue Multiple model: estimates of 2007 revenue growth
    and the selection of comparable companies to determine an
    appropriate multiple; and
    EBITDA Multiple model: 2007 projected EBITDA and the
    selection of comparable companies to determine an appropriate
    multiple.          Pension
    and Post-retirement Benefits
    Special
    Charges
     69




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Accounting
    Changes and Recent Accounting Pronouncements  Accounting
    Changes
    
    Accounting for Certain Hybrid Financial Instruments In February 2006, the FASB issued
    SFAS No. 155, Accounting for Certain Hybrid
    Financial Instruments  an amendment to FASB
    Statements No. 133 and 140, or SFAS 155.
    SFAS 155 simplifies the accounting for certain hybrid
    financial instruments containing embedded derivatives.
    SFAS 155 allows fair value measurement for any hybrid
    financial instrument that contains an embedded derivative that
    otherwise would require bifurcation under SFAS 133. In
    addition, it amends SFAS No. 140, Accounting for
    Transfers and Servicing of Financial Assets and Extinguishments
    of Liabilities, or SFAS 140, to eliminate certain
    restrictions on passive derivative financial instruments that a
    qualifying special-purpose entity can hold. SFAS 155 is
    effective for all financial instruments acquired, issued or
    subject to a re-measurement event occurring after the beginning
    of an entitys first fiscal year that begins after
    September 15, 2006. Pursuant to SFAS 155, we have not
    elected to measure our hybrid instruments at fair value.
    Accounting for Servicing of Financial Assets In March 2006, the FASB issued
    SFAS No. 156, Accounting for Servicing of
    Financial Assets  an amendment of FASB Statement
    No. 140, or SFAS 156. SFAS 156 simplifies
    the accounting for assets and liabilities arising from loan
    servicing contracts. SFAS 156 requires that servicing
    rights be valued initially at fair value and subsequently either
    (i) accounted for at fair value or (ii) amortized over
    the period of estimated net servicing income (loss), with an
    assessment for impairment or increased obligation each reporting
    period. The adoption of SFAS 156 did not have a material
    impact on our results of operations and financial condition.
    Accounting for Uncertainty In Income Taxes In
    June 2006, the FASB issued FIN 48, Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109. FIN 48 clarifies the
    accounting for uncertainty in income taxes recognized in an
    enterprises financial statements in accordance with FASB
    Statement No. 109, Accounting for Income Taxes,
    or SFAS 109. The interpretation prescribes a recognition
    threshold and measurement attribute for the financial statement
    recognition and measurement of a tax position taken or expected
    to be taken in a tax return. FIN 48 also provides
    accounting guidance on de-recognition, classification, interest
    and penalties, accounting in interim periods, disclosure and
    transition. The evaluation of tax positions under FIN 48 is
    a two-step process, whereby (1) Nortel determines whether
    it is more likely than not that the tax positions will be
    sustained based on the technical merits of the position and
    (2) for those tax positions that meet the more-likely-than-
    not recognition threshold, Nortel would recognize the largest
    amount of tax benefit that is greater than fifty percent likely
    of being realized upon ultimate settlement with the related tax
    authority. The adoption of FIN 48 resulted in an increase
    of $1 to opening accumulated deficit. For additional
    information, see note 7, Income taxes to the
    accompanying unaudited condensed consolidated financial
    statements.
    Accounting for Sabbatical leave and Other Similar Benefits In June 2006, the FASB Emerging Issues Task
    Force, or EITF, reached a consensus on EITF Issue
    No. 06-2
    Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB Statement No. 43, Accounting for
    Compensated Absences, or
    EITF 06-2.
    EITF 06-2
    provides clarification surrounding the accounting for benefits
    in the form of compensated absences, whereby an employee is
    entitled to paid time off after working for a specified period
    of time.
    EITF 06-2
    is effective for fiscal years beginning after December 15,
    2006. The adoption of
    EITF 06-2
    did not have a material impact on our results of operations and
    financial condition.
    How Taxes Collected from Customers and Remitted to Government
    Authorities Should be Presented in the Income Statement In June 2006, the EITF reached a consensus on
    EITF Issue
    No. 06-3
    How Taxes Collected from Customers and Remitted to
    Governmental Authorities Should Be Presented in the Income
    Statement (That Is, Gross Versus Net Presentation), or
    EITF 06-3.
    EITF 06-3
    provides guidance on how taxes directly imposed on revenue
    producing transactions between a seller and customer that are
    remitted to governmental authorities should be presented in the
    income statement (i.e. gross versus net presentation). The
    adoption of
    EITF 06-3
    did not have a material impact on the presentation of our
    results of operations and financial condition.
    Share-Based Payment On January 1, 2006,
    Nortel adopted SFAS No. 123 (Revised 2004),
    Share-Based Payment, or SFAS 123R. We
    previously elected to account for employee stock-based
    compensation using the fair 70




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value method prospectively for all awards granted or modified on
    or after January 1, 2003 in accordance with
    SFAS No. 148, Accounting for Stock Based
    Compensation  Transition and Disclosure, or
    SFAS 148. SEC Staff Accounting Bulletin, or SAB, 107,
    Share-Based Payment, was issued by the SEC in March
    2005 and provides supplemental SFAS 123R application
    guidance based on the views of the SEC. As a result of the
    adoption of SFAS 123R in the first quarter of 2006, we
    recorded a gain of $9 as a cumulative effect of an accounting
    change. There were no other material impacts on our results of
    operations and financial condition as a result of the adoption
    of SFAS 123R. For additional disclosure related to
    SFAS 123R, see note 15, Common shares and
    stock-based compensation plans to the accompanying
    unaudited condensed consolidated financial statements.  
    Accounting for Uncertainty in Income Taxes Definition of Settlement On
    May 2, 2007, the FASB issued FASB Interpretation FIN
    No. 48-1,
    Definition of Settlement in FASB Interpretation 48,
    or FIN 48-1.
    FIN 48-1
    amends FIN 48 to provide guidance on how an enterprise
    should determine whether a tax position is effectively settled
    for the purpose of recognizing previously unrecognized tax
    benefits. We applied the provisions of
    FIN 48-1
    effective January 1, 2007. The adoption of
    FIN 48-1
    did not have a material impact on our results of operations and
    financial condition.  Recent
    Accounting Pronouncements
    instrument-by-instrument
  No. 06-11 EITF 06-11. EITF 06-11 EITF 06-11 EITF 06-11 EITF 06-11 EITF 06-11
  No. 07-3 EITF 07-3. EITF 07-3 EITF 07-3 EITF 07-3 EITF 07-3
  39-1, FIN 39-1. FIN 39-1 FIN 39-1 FIN 39-1 FIN 39-1
 71




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Outstanding
    Share Data   Market
    Risk   Environmental
    Matters            Legal
    Proceedings   Cautionary
    Notice Regarding Forward-Looking Information   72




---



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and/or Form 10-K,
 73




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ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  value-at-risk
         74




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ITEM 4.
    CONTROLS
    AND PROCEDURES  Management
    Conclusions Concerning Disclosure Controls and
    Procedures
  All
    dollar amounts in this Item 4 are in millions of United
    States (U.S.) dollars unless otherwise
    stated.
  Rule 13a-15
    
    the material weakness in our internal control over financial
    reporting that we and our independent registered chartered
    accountants as at December 31, 2006, Deloitte &
    Touche LLP identified (as more fully described below);
    managements conclusion that our internal control over
    financial reporting was not effective as at December 31,
    2006, and Deloittes attestation report with respect to
    that assessment and conclusion, each pursuant to the
    requirements of Section 404 of the Sarbanes-Oxley Act of
    2002, included in our 2006 Annual Report;
    the conclusion of the CEO and CFO that our disclosure controls
    and procedures as at the end of December 31, 2006 and
    March 31, 2007 were not effective, included in our 2006
    Annual Report and First Quarter 2007 Quarterly Report on
    Form 10-Q,
    respectively; and
    our successive restatements of our financial statements, the
    findings of the Independent Review summarized in the
    Summary of Findings and of Recommended Remedial Measures
    of the Independent Review, submitted to the Audit
    Committee in January 2005 by WilmerHale and Huron Consulting
    Services LLC, (the Independent Review Summary),
    included in Item 9A of our 2003 Annual Report, the findings
    of the Revenue Independent Review included in Item 9A of
    the 2005 Annual Report, and the findings of the Internal Audit
    Review included in Item 4 of our 2006 First Quarterly
    Report on
    Form 10-Q.    Material
    Weakness in Internal Control Over Financial Reporting
  Rules 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with applicable GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.   75




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Lack of sufficient cross-functional communication and
    coordination, including further definition of roles and
    responsibilities, with respect to the scope and timing of
    customer arrangements, insufficient segregation of duties in
    certain areas, delayed implementation of Nortel review processes
    and personnel for the LG-Nortel joint venture, and insufficient
    controls over certain end user computing applications, all of
    which impact upon the appropriate application of U.S. GAAP
    to revenue generating transactions.
        Remedial
    Measures
    
    establishing standards of conduct to be enforced through
    appropriate discipline;
    infusing strong technical skills and experience into the Finance
    organization; 76




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##### Table of Contents




    requiring comprehensive, ongoing training on increasingly
    complex accounting standards;
    strengthening and improving internal controls and processes;
    establishing a compliance program throughout the Company that is
    appropriately staffed and funded;
    requiring management to provide clear and concise information,
    in a timely manner, to the Board of Directors to facilitate its
    decision-making; and
    implementing an information technology platform that improves
    the reliability of financial reporting and reduces the
    opportunities for manipulation of results.      
    lack of compliance with written Nortel procedures for monitoring
    and adjusting balances related to certain accruals and
    provisions, including restructuring charges and contract and
    customer accruals;
    lack of compliance with Nortel procedures for appropriately
    applying applicable GAAP to the initial recording of certain
    liabilities, including those described in SFAS No. 5,
    and to foreign currency translation as described in
    SFAS No. 52;
    lack of sufficient personnel with appropriate knowledge,
    experience and training in U.S. GAAP and lack of sufficient
    analysis and documentation of the application of U.S. GAAP
    to transactions, including, but not limited to, revenue
    transactions;
    lack of a clear organization and accountability structure within
    the accounting function, including insufficient review and
    supervision, combined with financial reporting systems that are
    not integrated and which require extensive manual interventions;
    and
    lack of sufficient awareness of, and timely and appropriate
    remediation of, internal control issues by Nortel personnel.  Form 10-K.
         77




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Changes
    in Internal Control Over Financial Reporting
   78




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PART II



OTHER
    INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS       79




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##### Table of Contents



ITEM 1A.
    RISK
    FACTORS  Form 10-Q
  and/or
  Risks
    Relating to Our Business
  Negative
    developments associated with our suppliers and contract
    manufacturers, including our reliance on certain suppliers for
    key optical networking solutions components, our reliance on a
    sole supplier for the majority of our manufacturing and design
    functions and consolidation in the industries in which our
    suppliers operate, may materially and adversely affect our
    business, results of operations, financial condition and
    customer relationships.
      and/or
   80




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##### Table of Contents



ITEM 6.
    EXHIBITS  Form 10-Q.
  ExhibitNo.

Description10
.1*

Amended and Restated Master
    Contract Manufacturing Services Agreement dated June 29,
    2004 between Nortel Networks Limited and Flextronics Telecom
    Systems, Ltd. (filed as Exhibit 99.1 to Nortel Networks
    Limiteds current report on
    Form 8-K
    dated June 4, 2007).10
.2*

Master Repair Services Agreement
    dated June 29, 2004 between Nortel Networks Limited and
    Flextronics Telecom Systems, Ltd. (filed as Exhibit 99.2 to
    Nortel Networks Limiteds current report on
    Form 8-K
    dated June 4, 2007).10
.3*

Master Contract Logistics Services
    Agreement dated June 29, 2004 between Nortel Networks
    Limited and Flextronics Telecom Systems, Ltd. (filed as
    Exhibit 99.3 to Nortel Networks Limiteds current
    report on
    Form 8-K
    dated June 4, 2007).10
.4

Nortel Networks Corporation
    Executive Retention and Termination Plan as amended and restated
    with effect from June 1, 2007 including the name change to
    Nortel Networks Corporation Change in Control Plan.10
.5

Second Amendment to the Share and
    Asset Sale Agreement between Nortel Networks Limited and Alcatel
    Lucent dated June 28, 2007.12


Computation of Ratios.31
.1

Certification of the President and
    Chief Executive Officer pursuant to 18 U.S.C.
    Section 1350 as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32


Certification of the President and
    Chief Executive Officer and Chief Financial Officer pursuant to
    18 U.S.C. Section 1350 as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Incorporated by reference. Certain
    portions of this Exhibit have been omitted based upon a request
    for confidential treatment. These portions have been filed
    separately with the United States Securities and Exchange
    Commission. 81




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SIGNATURES    NORTEL NETWORKS LIMITED
 (Registrant)
  Chief Financial Officer

Chief Accounting Officer/s/  David
    W. Drinkwater

/s/  Paul
    W. KarrDavid W.
    Drinkwater

Paul W.
    KarrChief Financial Officer

Controller    Date:
    August 2, 2007
 82