UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  FORM 10-Q
  þ     QUARTERLY
    REPORT PURSUANT TO SECTION 13 OR
    15(d)      
           OF THE SECURITIES
    EXCHANGE ACT OF 1934For the Quarterly Period Ended
    June 30, 2008ORo     TRANSITION
    REPORT PURSUANT TO SECTION 13 OR
    15(d)      
           OF THE SECURITIES
    EXCHANGE ACT OF 1934   For
    the Transition Period From
    
    to
  Commission File Number:
    000-30758
  Nortel Networks
    Limited
 (Exact name of registrant as
    specified in its charter)
  Canada

62-12-62580(State or Other Jurisdiction
    of

(I.R.S. EmployerIncorporation or
    Organization)

Identification No.)195 The West Mall

M9C 5K1Toronto, Ontario, Canada

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




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##### 



TABLE OF
    CONTENTS
   PAGEPART I
    FINANCIAL INFORMATIONITEM 1.

Condensed Consolidated Financial Statements (unaudited)


1ITEM 2.

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


41ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk


84ITEM 4.

Controls and Procedures


85PART II
    OTHER INFORMATIONITEM 1.

Legal Proceedings


86ITEM 1A.

Risk Factors


86ITEM 6.

Exhibits


87SIGNATURES


88   All dollar amounts in this document are in United States
    Dollars unless otherwise stated.
           i




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##### 



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


Six Months EndedJune 30,


June 30,2008


2007


2008


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

$
2,288


$
2,246


$
4,759


$
4,415Services


334



316



621



630Total revenues


2,622



2,562



5,380



5,045Cost of revenues:Products


1,319



1,341



2,775



2,642Services


172



173



325



351Total cost of revenues


1,491



1,514



3,100



2,993Gross profit


1,131



1,048



2,280



2,052Selling, general and administrative expense


575



593



1,172



1,196Research and development expense


437



419



854



824Amortization of intangible assets


11



13



23



25Special charges


67



36



155



116Gain on sales of businesses and assets


(2
)


(10
)


(4
)


(11
)Other operating expense (income)  net (note 3)


(8
)


(12
)


5



(22
)Operating earnings (loss)


51



9



75



(76
)Other income  net (note 3)


(35
)


(112
)


(72
)


(188
)Interest expenseLong-term debt


59



64



118



128Other


3



6



9



11Earnings (loss) from operations before income taxes, minority
    interests and equity in net earnings of associated companies


24



51



20



(27
)Income tax expense


62



11



98



24(38
)


40



(78
)


(51
)Minority interests  net of tax


46



1



113



13Equity in net earnings of associated companies - net of tax


(1
)


(1
)


(2
)


(1
)Net earnings (loss)


(83
)


40



(189
)


(63
)Dividends on preferred shares


9



10



20



20Net earnings (loss) applicable to common shares

$
(92
)

$
30


$
(209
)

$
(83
)   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 1




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##### 



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Balance Sheets (unaudited)
   June 30,


December 31,2008


2007(Millions of U.S. Dollars)ASSETSCurrent assetsCash and cash equivalents

$
3,063


$
3,526Restricted cash and cash equivalents


57



66Accounts receivable  net


4,015



3,705Inventories  net


1,828



2,002Deferred income taxes  net


476



487Other current assets


528



467Total current assets


9,967



10,253Investments


177



194Plant and equipment  net


1,476



1,530Goodwill


2,391



2,381Intangible assets  net


169



213Deferred income taxes  net


2,809



2,868Other assets


527



534Total assets

$
17,516


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

$
1,160


$
1,229Payroll and benefit-related liabilities


620



689Contractual liabilities


243



272Restructuring liabilities


132



100Other accrued liabilities (note 3)


3,134



3,799Long-term debt due within one year


21



23Total current liabilities


5,310



6,112Long-term debt


3,326



2,666Deferred income taxes  net


31



17Other liabilities (note 3)


2,688



2,874Total liabilities


11,355



11,669Minority interests in subsidiary companies


371



294Guarantees, commitments and contingencies (notes 10, 12
    and 16, respectively)SHAREHOLDERS EQUITYPreferred shares, without par value  Authorized
    shares: unlimited; Issued and outstanding shares: 30,000,000 and
    30,000,000 as of June 30, 2008 and December 31, 2007,
    respectively


536



536Common shares, without par value  Authorized shares:
    unlimited; Issued and outstanding shares: 1,460,978,638 and
    1,460,978,638 as of June 30, 2008 and December 31,
    2007, respectively


1,211



1,211Additional paid-in capital


22,445



22,401Accumulated deficit


(18,624
)


(18,385
)Accumulated other comprehensive income


222



247Total shareholders equity


5,790



6,010Total liabilities and shareholders equity

$
17,516


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




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##### 



NORTEL
    NETWORKS LIMITED
  Condensed
    Consolidated Statements of Cash Flows (unaudited)
  Six Months Ended June 30,2008


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

$
(189
)

$
(63
)Adjustments to reconcile net loss to net cash from (used in)
    operating activities,Amortization and depreciation


165



152Non-cash portion of special charges


11



3Equity in net earnings of associated companies  net
    of tax


(2
)


(1
)Share-based compensation expense


42



55Deferred income taxes


47



3Pension and other accruals


60



135Loss (gain) on sales and write downs of investments, businesses
    and assets  net


6



(6
)Minority interests  net of tax


113



13Other  net


(31
)


(70
)Changes in operating assets and liabilities


(1,233
)


816Net cash from (used in) operating activities


(1,011
)


1,037Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(87
)


(109
)Proceeds on disposals of plant and equipment






84Change in restricted cash and cash equivalents


9



7Acquisitions of investments and businesses  net of
    cash acquired


(32
)


(26
)Proceeds from the sales of investments and businesses and
    assets  net


26



(18
)Net cash used in investing activities


(84
)


(62
)Cash flows from (used in) financing activitiesDividends paid, including paid by subsidiaries to minority
    interests


(21
)


(25
)Increase in notes payable


78



24Decrease in notes payable


(70
)


(27
)Proceeds from issuance of long-term debt


668



Debt issuance costs


(13
)


Repayments of capital leases payable


(11
)


(11
)Net cash from (used in) financing activities


631



(39
)Effect of foreign exchange rate changes on cash and cash
    equivalents


1



42Net increase (decrease) in cash and cash equivalents


(463
)


978Cash and cash equivalents at beginning of period


3,526



3,487Cash and cash equivalents at end of period

$
3,063


$
4,465   The accompanying notes are an integral part of these
    condensed consolidated financial statements
 3




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##### 



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




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##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
  EITF 07-1 EITF 07-1
  (iii)
    In December 2007, the FASB issued SFAS No. 141R,
    Business Combinations (SFAS 141R),
    replacing SFAS No. 141, Business
    Combinations. SFAS 141R revises existing accounting
    guidance for how an acquirer recognizes and measures in its
    financial statements the identifiable assets, liabilities, any
    noncontrolling interests and goodwill acquired on the
    acquisition of a business. SFAS 141R is effective for fiscal
    years beginning after December 15, 2008. Nortel plans to
    adopt the provisions of SFAS 141R on January 1, 2009.
    The adoption of SFAS 141R will impact the accounting for
    business combinations completed by Nortel on or after
    January 1, 2009.(iv)
    In December 2007, the FASB issued SFAS No. 160,
    Noncontrolling Interests in Consolidated Financial
    Statements  An Amendment of ARB 51
    (SFAS 160). SFAS 160 establishes
    accounting and reporting standards for the treatment of
    noncontrolling interests in a subsidiary. Noncontrolling
    interests in a subsidiary will be reported as a component of
    equity in the consolidated financial statements and any retained
    noncontrolling equity investment upon deconsolidation of a
    subsidiary is initially measured at fair value. SFAS 160 is
    effective for fiscal years beginning after December 15,
    2008. Nortel plans to adopt the provisions of SFAS 160 on
    January 1, 2009. The adoption of SFAS 160 will result
    in the reclassification of minority interests to
    shareholders equity. Nortel is currently assessing any
    further impacts of SFAS 160 on its results of operations
    and financial condition.(v)
    In March 2008, the FASB issued SFAS No. 161,
    Disclosures about Derivative Instruments and Hedging
    Activities  An Amendment of FASB Statement 133
    (SFAS 161). SFAS 161 requires expanded and
    enhanced disclosure for derivative instruments, including those
    used in hedging activities. SFAS 161 is effective for
    fiscal years and interim periods beginning after
    November 15, 2008. Nortel plans to adopt the provisions of
    SFAS 161 on January 1, 2009. Nortel is currently
    assessing the impact, if any, of the adoption of SFAS 161
    on its consolidated financial statement disclosures.(vi)
    In April 2008, the FASB issued FSP
    SFAS 142-3,
    Determination of the Useful Life of Intangible
    Assets (FSP
    SFAS 142-3).
    FSP
    SFAS 142-3
    provides guidance with respect to estimating the useful lives of
    recognized intangible assets acquired on or after the effective
    date and requires additional disclosure related to the renewal
    or extension of the terms of recognized intangible assets. FSP
    SFAS 142-3
    is effective for fiscal years and interim periods beginning
    after December 15, 2008. Nortel plans to adopt the
    provisions of FSP
    SFAS 142-3
    on January 1, 2009. Nortel is currently assessing the
    impact, if any, of the adoption of FSP
    SFAS 142-3
    on its results of operations and financial condition.(vii)
    In June 2008, the FASB EITF reached a consensus on EITF Issue
    No. 07-5, Determining Whether an Instrument (or Embedded
    Feature) Is Indexed to an Entitys Own Stock
    (EITF 07-5).
    EITF 07-5
    addresses the determination of whether an equity linked
    financial instrument (or embedded feature) that has all of the
    characteristics of a derivative under other authoritative U.S.
    GAAP accounting literature is indexed to an entitys own
    stock and would thus meet the first part of a scope exception
    from classification and recognition as a derivative instrument.
    Nortel plans to adopt the provisions of
    EITF 07-5
    on January 1, 2009. Nortel is currently assessing the
    impact, if any, of the adoption of
    EITF 07-5
    on its results of operations and financial condition.  2.
    Accounting
    changes  The
    Fair Value Option for Financial Assets and Financial
    Liabilities
  instrument-by-instrument
 5




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##### 



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


Six MonthsEnded June 30,


Ended June 30,2008


2007(a)


2008


2007(a)Royalty license income  net

$
(8
)

$
(4
)

$
(16
)

$
(14
)Litigation charges (recovery)  net


(1
)


(8
)


11



(8
)Other  net


1







10



Other operating expense (income)  net

$
(8
)

$
(12
)

$
5


$
(22
)     (a)
    Includes items that were previously
    reported as non-operating and that have been reclassified from
    Other income  net to conform to current
    presentation. 6




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##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
   Other
    income  net:
  Three MonthsEnded June 30,


Six Months Ended June 30,2008


2007


2008


2007Interest and dividend income

$
(34
)

$
(60
)

$
(72
)

$
(122
)Loss on sale and write downs of investments


2



5



2



5Currency exchange gains  net


(34
)


(71
)


(14
)


(70
)Other  net


31



14



12



(1
)Other income  net

$
(35
)

$
(112
)

$
(72
)

$
(188
)     Condensed
    consolidated balance sheets
  Accounts
    receivable  net:
  June 30,


December 31,2008


2007Trade receivables

$
1,869


$
2,271Notes receivable


4



12Notes receivable from NNC and its subsidiaries


1,856



1,127Contracts in process


333



3574,062



3,767Less: provisions for doubtful accounts


(47
)


(62
)Accounts receivable  net

$
4,015


$
3,705   Inventories 
    net:
  June 30,


December 31,2008


2007Raw materials

$
544


$
610Work in process


10



10Finished goods


827



800Deferred costs


1,437



1,6982,818



3,118Less: provision for inventories


(812
)


(907
)Inventories  net


2,006



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


(178
)


(209
)Inventories  net

$
1,828


$
2,002     (a) Long-term portion of
    deferred costs is included in other assets.
  Other
    current assets:
  June 30,


December 31,2008


2007Prepaid expenses

$
167


$
152Income taxes recoverable


83



77Current investments


10



15Other


268



223Other current assets

$
528


$
467  7




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##### 



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


December 31,2008


2007Cost:Land

$
38


$
38Buildings


1,142



1,137Machinery and equipment


1,960



2,167Assets under capital lease


197



215Sale lease-back assets


97



973,434



3,654Less accumulated depreciation:Buildings


(419
)


(395
)Machinery and equipment


(1,420
)


(1,601
)Assets under capital lease


(97
)


(107
)Sale lease-back assets


(22
)


(21
)(1,958
)


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

$
1,476


$
1,530     (a)
    Includes assets held for sale with
    a carrying value of $64 and nil as of June 30, 2008 and
    December 31, 2007, respectively, related to owned
    facilities that are being actively marketed for sale.  Goodwill:
    MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Other


TotalBalance  as of December 31, 2007

$
450


$
152


$
603


$
1,005


$
171


$
2,381Change:Additions






















Disposals






















Foreign exchange


1



1



2



2







6Other


1







1



1



1



4Balance  as of June 30, 2008

$
452


$
153


$
606


$
1,008


$
172


$
2,391   Intangible
    assets  net:
  June 30,


December 31,2008


2007Cost

$
303


$
338Less: accumulated amortization


(134
)


(125
)Intangible assets  net

$
169


$
213  8




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##### 



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


December 31,2008


2007Long-term deferred costs

$
178


$
209Long-term inventories


24



27Debt issuance costs


49



41Derivative assets


79



77Financial assets


55



62Other


142



118Other assets

$
527


$
534   Other
    accrued liabilities:
  June 30,


December 31,2008


2007Outsourcing and selling, general and administrative related
    provisions

$
263


$
306Customer deposits


28



52Product-related provisions


114



126Warranty provisions (note 10)


197



206Deferred revenue


1,109



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


1,071



1,490Miscellaneous taxes


22



30Income taxes payable


70



93Deferred income taxes


10



15Tax uncertainties (note 6)


16



21Interest payable


76



77Other


158



164Other accrued liabilities

$
3,134


$
3,799     (a)
    Includes amounts that may be
    recognized beyond one year due to the duration of certain
    contracts.  Other
    liabilities:
  June 30,


December 31,2008


2007Pension benefit liabilities

$
1,012


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


880



893Restructuring liabilities (note 5)


183



180Deferred revenue


349



400Tax uncertainties (note 6)


76



71Derivative liabilities


14



33Other long-term provisions


174



188Other liabilities

$
2,688


$
2,874  9




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##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
  Condensed
    consolidated statements of cash flows
  Change in
    operating assets and liabilities:
  Six Months Ended June 30,2008


2007Accounts receivable  net

$
(310
)

$
1,169Inventories  net


(82
)


(46
)Deferred costs


261



31Income taxes


(28
)


(17
)Accounts payable


(77
)


193Payroll, accrued and contractual liabilities


(257
)


(302
)Deferred revenue


(160
)


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


(419
)


151Restructuring liabilities


32



8Other


(193
)


(239
)Change in operating assets and liabilities

$
(1,233
)

$
816   Interest
    and taxes paid:
  Six Months Ended June 30,2008


2007Cash interest paid

$
135


$
143Cash taxes paid

$
70


$
49   4.
    Segment
    information  Segment
    descriptions
    
    CN provides mobility networking solutions using (i) Code
    Division Multiple Access (CDMA), Global System
    for Mobile Communication (GSM), and Universal Mobile
    Telecommunication System (UMTS) radio access
    technologies, and fixed and mobile networking solutions using
    Worldwide Interoperability for Microwave Access
    (WiMAX) radio access technology, and
    (ii) carrier circuit and packet voice solutions. Mobility
    networking refers to communications networks that enable end
    users to be mobile while they send and receive voice and data
    communications using wireless devices such as cellular
    telephones, personal digital assistants, laptops and other
    computing and communications devices. These networks use
    specialized network access equipment and specialized core
    networking equipment that enable an end user to be connected and
    identified when not in a fixed location and to roam globally. In
    addition, Nortels carrier circuit and packet voice
    solutions provide a broad range of voice solutions to its
    service provider customers for business and residential
    subscribers, traditional, full featured voice services as well
    as internet-based voice and multimedia communications services
    using either circuit or packet-based switching technologies.
    These service provider customers include local and long distance
    telephone companies, wireless service providers, cable operators
    and other communication service providers. Increasingly, CN
    addresses customers who want to provide services across both
    wireless as well as wired devices.
    ES provides Unified Communications (UC) solutions to
    enterprise customers using (i) Business Optimized
    Communications and (ii) Business Optimized Networking.
    Business Optimized Communications is comprised of enterprise
    circuit and packet voice solutions, software solutions for
    multi-media messaging, conferencing and contact centers and
    Service Oriented Architecture based communications enabled
    applications. Business Optimized Networking solutions are
    inclusive of data networking, wireless LAN, data centers, and
    security. Nortels UC solutions transform an
    enterprises existing communications to deliver a unified,
    real time, multi-media experience including voice, video, email
    and instant messaging. Nortels ES customers consist of a
    broad range of enterprises around the world, including large
    businesses at their headquarters, data centers, call centers and
    branch offices, 10




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##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
  small and medium-size businesses and home offices, as well as
    government agencies, educational and other institutions and
    utility organizations.  
    GS provides a broad range of services to address the
    requirements of Nortels carrier and enterprise customers
    throughout the entire lifecycle of their networks. The GS
    portfolio is organized into four main service product groups:
    (i) network implementation services, including network
    integration, planning, installation, optimization and security
    services, (ii) network support services, including
    technical support, hardware maintenance, equipment spares
    logistics and
    on-site
    engineers, (iii) network managed services, including
    services related to the monitoring and management of customer
    networks and providing a range of network managed
    services/hosted solutions options, and (iv) network
    application services, including applications development,
    integration and communications-enabled application solutions.
    Nortels GS market mirrors that of its carrier and
    enterprise markets along with a broad range of customers in all
    geographic regions where Nortel conducts business, including
    wireline and wireless carriers, cable operators, small and
    medium-size businesses, large global enterprises and all levels
    of government.
    MEN combines Nortels optical networking solutions and the
    carrier portion of its data networking solutions to transform
    its carrier and large enterprise customers networks to be
    more scalable and reliable for the high speed delivery of
    diverse multi-media communications services. By combining
    Nortels optical expertise and data knowledge, Nortel
    creates carrier Ethernet solutions that help service providers
    and enterprises better manage increasing bandwidth demands.
    Nortel differentiates its MEN solutions by using technology
    innovation such as Provider Backbone Bridges, Provider Backbone
    Transport, and 40G Dual Polarization Quadrature Phase Shift
    Keying to deliver increased network capacity at lower cost per
    bit and with a simpler operations paradigm. Both metropolitan,
    or metro, and long haul networks are key focus areas as
    bandwidth demands are increasing as a result of the growth of
    network-based broadcast and on-demand video delivery, wireless
    backhaul for a variety of data services including
    video, as well as traditional business, internet and private
    line and voice services.
    Other miscellaneous business activities and corporate functions,
    including the operating results of Nortel Government Solutions
    Incorporated, do not meet the quantitative criteria to be
    disclosed separately as reportable segments and have been
    reported in Other. Costs associated with shared
    services, such as general corporate functions, that are managed
    on a common basis are allocated to Nortels reportable
    segments based on usage determined generally by headcount. A
    portion of other general and miscellaneous corporate costs and
    expenses are allocated based on a fixed charge established
    annually. Costs not allocated to the reportable segments include
    employee share-based compensation, differences between actual
    and budgeted employee benefit costs, interest attributable to
    its long-term debt and other non-operational activities, and are
    included in Other.  Form 10-Q
 11




---



##### 



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


Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007RevenuesCarrier Networks

$
1,038


$
1,058


$
2,256


$
2,067Enterprise Solutions


610



590



1,251



1,187Global Services


536



494



1,052



942Metro Ethernet Networks


378



363



705



736Total reportable segments


2,562



2,505



5,264



4,932Other


60



57



116



113Total revenues


2,622



2,562



5,380



5,045Management Operating MarginCarrier Networks


185



177



445



331Enterprise Solutions


(19
)


(6
)


(38
)


(8
)Global Services


83



76



155



151Metro Ethernet Networks


17



11



(8
)


(9
)Total reportable segments


266



258



554



465Other


(147
)


(222
)


(300
)


(433
)Total Management Operating Margin


119



36



254



32Amortization of intangible assets


11



13



23



25Special charges


67



36



155



116Gain on sales of businesses and assets


(2
)


(10
)


(4
)


(11
)Other operating expense (income)  net


(8
)


(12
)


5



(22
)Other income  net


(35
)


(112
)


(72
)


(188
)Interest expense


62



70



127



139Income tax expense


62



11



98



24Minority interests  net of tax


46



1



113



13Equity in net earnings of associated companies  net
    of tax


(1
)


(1
)


(2
)


(1
)Net earnings (loss)

$
(83
)

$
40


$
(189
)

$
(63
)     5.
    Special
    charges   12




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
       13




---



##### 



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








Three Months


Six MonthsTotal


settlement


Plant and





Ended


EndedWorkforce


and lease


equipment





June 30,


June 30,reduction


costs


write downs


Total


2008


20082008 Restructuring PlanProvision balance as of December 31, 2007

$



$



$



$
Other special charges


93



5



8



106


$
39


$
106Revisions to prior accruals


(4
)


1







(3
)


(3
)


(3
)Cash drawdowns


(21
)


(1
)






(22
)Non-cash drawdowns










(8
)


(8
)Foreign exchange and other adjustments


(1
)










(1
)Provision balance as of June 30, 2008

$
67


$
5


$



$
722007 Restructuring PlanProvision balance as of December 31, 2007

$
43


$
25


$



$
68Other special charges


31



14







45



23



45Revisions to prior accruals


(1
)


4







3



1



3Cash drawdowns


(49
)


(10
)






(59
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of June 30, 2008

$
24


$
33


$



$
572006 Restructuring PlanProvision balance as of December 31, 2007

$
8


$



$



$
8Other special charges






















Revisions to prior accruals


(1
)










(1
)


(1
)


(1
)Cash drawdowns


(7
)










(7
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of June 30, 2008

$



$



$



$
2004 Restructuring PlanProvision balance as of December 31, 2007

$



$
51


$



$
51Other special charges






















Revisions to prior accruals






5







5



5



5Cash drawdowns






(7
)






(7
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of June 30, 2008

$



$
49


$



$
492001 Restructuring PlanProvision balance as of December 31, 2007

$



$
153


$



$
153Other special charges






















Revisions to prior accruals


















3



Cash drawdowns






(16
)






(16
)Non-cash drawdowns














Foreign exchange and other adjustments














Provision balance as of June 30, 2008

$



$
137


$



$
137Total provision balance as of June 30,
    2008(a)

$
91


$
224


$



$
315Total special charges

















$
67


$
155     (a)
    As of June 30, 2008 and
    December 31, 2007, the short-term provision balances were
    $132 and $100, respectively, and the long-term provision
    balances were $183 and $180, respectively. 14




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
   2008
    Restructuring Plan
  Three and
    six months ended June 30, 2008
    2007
    Restructuring Plan
  Three and
    six months ended June 30, 2008
    2006
    Restructuring Plan
  Three and
    six months ended June 30, 2008
    2004
    Restructuring Plan
  Three and
    six months ended June 30, 2008
    2001
    Restructuring Plan
  Three and
    six months ended June 30, 2008
   15




---



##### 



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


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Total2008 Restructuring Plan

$
11


$
14


$
6


$
5


$
362007 Restructuring Plan


1



22



1







242006 Restructuring Plan






(1
)










(1
)2004 Restructuring Plan


1



2



1



1



52001 Restructuring Plan


1



1



1







3Total special charges for the three months ended June 30,
    2008

$
14


$
38


$
9


$
6


$
672008 Restructuring Plan

$
37


$
35


$
15


$
16


$
1032007 Restructuring Plan


4



34



9



1



482006 Restructuring Plan






(1
)










(1
)2004 Restructuring Plan


1



2



1



1



52001 Restructuring Plan


















Total special charges for the six months ended June 30, 2008

$
42


$
70


$
25


$
18


$
1552007 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 ended June 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 ended June 30, 2007

$
19


$
71


$
21


$
5


$
116     6.
    Income
    taxes       16




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
               17




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
        7.
    Employee
    benefit plans    and/or
  and/or and/or
   18




---



##### 



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


Six Months Ended June 30,2008


2007


2008


2007Pension expense:Service cost

$
12


$
30


$
25


$
60Interest cost


128



118



256



233Expected return on plan assets


(134
)


(125
)


(269
)


(246
)Amortization of prior service cost


1



1



2



2Amortization of net losses


10



26



20



52Curtailment, contractual and special termination losses


1







3



2Net pension expense

$
18


$
50


$
37


$
103     Three Months


Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007Post-retirement benefits cost:Service cost

$
1


$
1


$
2


$
2Interest cost


10



9



20



17Amortization of prior service cost


(3
)


(2
)


(5
)


(4
)Net post-retirement benefits cost

$
8


$
8


$
17


$
15     8.
    Acquisitions
    and divestitures  Acquisition
  LG-Nortel
    Co. Ltd. business venture
    9.
    Long-term
    debt  Senior
    notes offering
     19




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
      10.
    Guarantees      Carrying


MaximumAmount of


PotentialLiability


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

$



$
Sales volume
    guarantee(b)


10



10Intellectual property indemnification
    obligations(c)






Lease
    agreements(d)






39Receivable
    securitizations(e)






1Other indemnification agreementsEDC Support
    Facility(f)






Specified price trade-in
    rights(g)






1Sale
    lease-back(h)






4Real estate
    indemnification(i)






Bankruptcy(j)






1Total

$
10


$
56     (a)
    Includes guarantees in connection
    with agreements for the sale of portions of its business,
    including certain discontinued operations and guarantees related
    to the escrow of shares in business combinations in prior
    periods. Nortel indemnifies the purchaser of a Nortel business
    in the event that a third party asserts a claim against the
    purchaser that relates to a liability retained by Nortel
    relating to business events occurring prior to the sale, such as
    tax, environmental, litigation and employment matters. Nortel
    also indemnifies counterparties for losses incurred from
    litigation that may be suffered by counterparties arising under
    guarantees related to the escrow of shares in business
    combinations. Some of these types of guarantees have indefinite
    terms while others have specific terms extending to 2012.(b)
    In conjunction with the sale of a
    subsidiary to a third party, Nortel guaranteed to the purchaser
    that specified annual sales volume levels would be achieved by
    the business sold over a ten-year period ended December 31,
    2007. Nortels guarantee to the purchaser was governed by
    the laws of the purchasers jurisdiction. As such, the
    purchaser has the right to claim such payments under the volume
    guarantee until January 31, 2018, under the statute of
    limitations of such jurisdiction.(c)
    Nortel has periodically entered
    into agreements with customers and suppliers that include
    intellectual property indemnification obligations that are
    customary in the industry. These agreements generally require
    Nortel to compensate the other party for certain damages and
    costs incurred as a result of third party intellectual property
    claims arising from these transactions. These types of
    guarantees typically have indefinite terms; however, under some
    agreements, Nortel has provided specific terms extending to
    February 2011. 20




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
  (d)
    Nortel has entered into agreements
    with its lessors to guarantee the lease payments of certain
    assignees of its facilities. Generally, these lease agreements
    relate to facilities Nortel vacated prior to the end of the term
    of its lease. These lease agreements require Nortel to make
    lease payments throughout the lease term if the assignee fails
    to make scheduled payments. Most of these lease agreements also
    require Nortel to pay for facility restoration costs at the end
    of the lease term if the assignee fails to do so. These lease
    agreements have expiration dates through June 2015.(e)
    Nortel has agreed to indemnify
    certain of its counterparties in certain receivables
    securitization transactions. Certain receivables securitization
    transactions include indemnifications requiring the repurchase
    of the receivables, under certain conditions, if the receivable
    is not paid by the obligor. The indemnification provisions
    generally expire upon the earlier of either expiration of the
    securitization agreements, which extend through 2008, or
    collection of the receivable amounts by the purchaser. (f)
    On February 14, 2003, Nortel
    entered into an agreement with Export Development Canada
    (EDC) regarding arrangements to provide support for
    certain performance-related obligations arising out of normal
    course business (the EDC Support Facility). Nortel
    has also agreed to indemnify EDC under the EDC Support Facility
    against any legal action brought against EDC that relates to the
    provision of support under the EDC Support Facility. Effective
    December 14, 2007, Nortel and EDC amended and restated the
    EDC Support Facility, among other things, to extend the maturity
    date to December 31, 2011 and to provide for automatic
    renewal each subsequent year, unless either party provides
    written notice to the other of its intent to terminate. As of
    June 30, 2008, there was approximately $182 of outstanding
    support utilized under the EDC Support Facility, approximately
    $150 of which was outstanding under the revolving small bond
    sub-facility,
    with the remaining balance under the revolving large bond
    sub-facility. (g)
    Nortel has identified specified
    price trade-in rights in certain customer arrangements that
    qualify as guarantees. These types of guarantees generally apply
    over a specified period of time and extend through to June 2010.(h)
    On June 27, 2007, Nortel
    entered into a sale lease-back agreement where it agreed to
    provide an indemnity to the purchaser with respect to union and
    employee termination matters. The sale agreement requires Nortel
    to compensate the purchaser for any costs in the event that
    Nortel fails to effectively satisfy termination obligations to
    union employees; if a reinstatement application is brought by
    the union or non-union employees; or if the purchaser is
    required to re-hire selected union employees. The
    indemnification provision expires upon the retirement of the
    last former employee. The nature of the indemnification prevents
    Nortel from making a reasonable estimate of the maximum term of
    the indemnification. (i)
    On February 14, 2008, NNI
    entered into an agreement whereby it indemnified the landlord of
    a property against certain claims that the
    sub-tenant
    may assert against the landlord. The nature of the
    indemnification prevents Nortel from making a reasonable
    estimate of the maximum term of the indemnification.(j)
    On February 28, 2008, Nortel
    entered into a guarantee agreement in which it agreed to repay
    to the bankruptcy estate of a certain debtor for any interim
    dividends paid from the bankruptcy estate that Nortel is not
    entitled to in the event that a creditor steps forward with a
    claim that requires a re-distribution of funds between the
    creditors. The nature of the indemnification prevents Nortel
    from making a reasonable estimate of the maximum term of the
    indemnification. (k)
    The nature of some guarantees and
    indemnification arrangements generally prevents Nortel from
    making a reasonable estimate of the maximum potential amount it
    could be required to pay under such agreements. For this reason,
    no amount has been included in the disclosure in these
    circumstances.  Product
    warranties
    Balance as of December 31, 2007

$
206Payments


(96
)Warranties issued


114Revisions


(27
)Balance as of June 30, 2008

$
197   11.
    Fair
    Value    Fair
    value hierarchy
   21




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
    Level 1:
  Level 2:
  Level 3:
    Determination
    of fair value
    Investments
        Derivatives
    Long-term
    debt
    Market
    valuation adjustments
   22




---



##### 



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


Level 1


Level 2


Level 3AssetsStock investments

$
8


$
8


$



$
Employee benefit trust


89



89Derivatives


78







77



1Auction rate securities


24











24Total assets

$
199


$
97


$
77


$
25LiabilitiesLong-term debt


2,855



2,855







Derivatives


14







8



6Total liabilities

$
2,869


$
2,855


$
8


$
6     Net Realized/UnrealizedGains (Losses) included


Purchases, Sales


Transfers inJanuary 1,


in


Issuances and


and/or (out)


June 30,2008


Earnings


Other


(Settlements)


of Level 3


2008AssetsDerivatives

$
1


















$
1Auction rate securities

$












24






$
24LiabilitiesDerivatives

$
5



1














$
6   12.
    Commitments  Bid,
    performance-related and other bonds
      June 30,


December 31,2008


2007Bid and performance-related
    bonds(a)

$
171


$
155Other
    bonds(b)


71



54Total bid, performance related and other bonds

$
242


$
209     (a)
    Net of restricted cash and cash
    equivalent amounts of $4 and $5 as of June 30, 2008 and
    December 31, 2007, respectively.(b)
    Net of restricted cash and cash
    equivalent amounts of $8 and $27 as of June 30, 2008 and
    December 31, 2007, respectively.  Venture
    capital financing
  start-up
 23




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
    Concentrations
    of risk
        WiMAX
    Strategic Agreement with Alvarion Ltd.
    13.
    Shareholders
    equity    AccumulatedAdditional





OtherPreferred


Common


Paid-in


Accumulated


ComprehensiveShares


Shares


Capital


Deficit


Income (Loss)


TotalBalance as of December 31, 2007

$
536


$
1,211


$
22,401


$
(18,385
)

$
247


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














(33
)

$
5



(28
)Net loss














(189
)






(189
)Foreign currency translation adjustment


















(20
)


(20
)Unrealized loss on investments  net


















(8
)


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


















(3
)


(3
)Share-based compensation










44











44Dividend














(20
)






(20
)Other














3



1



4Balance as of June 30, 2008

$
536


$
1,211


$
22,445


$
(18,624
)

$
222


$
5,790    24




---



##### 



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


Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007Net earnings (loss)

$
(83
)

$
40


$
(189
)

$
(63
)Other comprehensive income (loss) adjustments:Change in foreign currency translation adjustment


(13
)


70



(20
)


82Unrealized loss on investments 
    net(a)






(1
)


(8
)


(3
)Unamortized pension and post-retirement actuarial losses and
    prior service cost  net


(9
)


14



(3
)


29Unrealized derivative gain (loss) on cash flow
    hedges 
    net(b)






23







29Other


1







1



Comprehensive income (loss)

$
(104
)

$
146


$
(219
)

$
74     (a)
    Certain securities deemed
    available-for-sale
    by Nortel are measured at fair value. Unrealized holding losses
    related to these securities are excluded from net loss and are
    included in accumulated other comprehensive income until
    realized. Unrealized loss on investments was net of tax of nil
    and nil for the three and six months ended June 30, 2008
    and 2007, respectively.(b)
    During the three and six months
    ended June 30, 2008 and 2007, nil and nil, nil and $5,
    respectively, of net derivative gains were reclassified to other
    income (expense)  net. Nortel estimates that no net
    derivative gains included in accumulated other comprehensive
    income will be reclassified into net loss within the next
    12 months.  14.
    Share-based
    compensation plans    Options
    PSUs
  Relative
    Total Shareholder Return Metric Awards
    (PSU-rTSRs)
  36-month 36-month 30-day
  Management
    Operating Margin Metric Awards (PSU-Management
    OMs)
  Form 10-Q
 25




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
  24-month 36-month
  Share-based
    compensation
    Three Months


Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007Share-based compensation:Option expense

$
11


$
21


$
22


$
41RSU expense


7



6



15



10PSU expense  rTSR


2



3



4



4PSU expense  Management OM


1







1



Total share-based compensation reported

$
21


$
30


$
42


$
55       Three Months Ended June 30,

Six Months Ended June 30,2008

2007

2008

2007Black-Scholes-Merton assumptionsExpected dividend yield

0.00%

0.00%

0.00%

0.00%Expected
    volatility(a)

44.89% - 52.32%

52.69% - 53.23%

44.21% - 52.32%

52.69% - 53.56%Risk-free interest
    rate(b)

2.97% - 3.33%

4.54% - 4.92%

2.44% - 3.33%

4.43% - 4.92%Expected option life in
    years(c)

2.90-4.50

4.00

2.90 - 4.50

4.00Range of fair value per option granted

$3.78

$11.39

$3.07 - $3.78

$11.39 -$11.86Range of fair value per SAR granted

$0.38 - $3.13

$10.92

$0.20 - $3.13

$10.92     (a)
    The expected volatility of Nortel
    Networks Corporation common shares is estimated using the daily
    historical share prices over a period equal to the expected term.(b)
    NNC used the five year U.S.
    government Treasury Note rate to approximate the risk-free rate.(c)
    The expected term of the share
    options of four and a half years for 2008 grants is estimated
    based on historical grants with similar vesting periods.   26




---



##### 



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


Six MonthsEnded June 30,


Ended June 30,2008(c)


2007(c)


2008


2007Monte Carlo assumptionsBeta(a)














1.88Historical
    volatility(a)






n/a



43.96
%


n/aRisk-free interest
    rate(b)










1.64
%


4.46
%     (a)
    Commencing in the first quarter of
    2008, NNC employed a three-year historical volatility as an
    input in to the Monte Carlo simulation model to match the life
    expectancy of PSU-rTSRs. Previously, NNC had used Beta as an
    input into the model.(b)
    The risk-free rate used was based
    on the yield of the two-year U.S. government Treasury Note rate.(c)
    Nortel did not grant any PSU-rTSRs
    awards in the three month periods ended June 30, 2008 and
    2007.    15.
    Related
    party transactions      Three Months


Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007Revenues:LG Electronics
    Inc.(a)

$
4


$
5


$
16


$
12Vertical Communications Systems Inc.
    (Vertical)(b)


3



3



7



7Other


3



2



4



4Total

$
10


$
10


$
27


$
23Purchases:LG Electronics
    Inc.(a)


44



103



96



182Sasken Communications Technology Ltd.
    (Sasken)(c)


6



7



11



12GNTEL Co., Ltd.
    (GNTEL)(d)


20



25



44



40Other


5



2



10



3Total

$
75


$
137


$
161


$
237     (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, 2008,
    accounts payable to LGE was net $35, compared to net $31 as of
    December 31, 2007.(b)
    LG-Nortel currently owns a minority
    interest in Vertical. Vertical supports LG-Nortels efforts
    to distribute Nortels products to the North American
    market.(c)
    Nortel currently owns a minority
    interest in Sasken. Nortels purchases from Sasken relate
    primarily to software and software development-related purchases.(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, 2008, accounts payable to
    GNTEL was net $13, compared to net $31 as of December 31,
    2007.   27




---



##### 



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


December 31,2008


2007Condensed consolidated balance sheetsOwing from NNC

$
1,700


$
990Owing from NNC subsidiaries


100



90Other related parties


(45
)


(61
)Related party receivables

$
1,755


$
1,019     16.
    Contingencies         28




---



##### 



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




---



##### 



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




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
        de minimis de minimis de
    minimis
    18.
    Supplemental
    condensed consolidating financial information       31




---



##### 



NORTEL
    NETWORKS LIMITED
  Notes to
    Condensed Consolidated Financial Statements (unaudited) 
    (Continued)
      Rule 3-10 Regulation S-X
   32




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
642


$
1,089


$
1,456


$
(565
)

$
2,622Cost of revenues


367



716



973



(565
)


1,491Gross profit


275



373



483







1,131Selling, general and administrative expense


115



206



254







575Research and development expense


240



156



41







437Amortization of intangible assets






2



9







11Special charges


11



31



25







67Loss (gain) on sale of businesses and assets


(3
)


1











(2
)Other operating income  net


(2
)


(4
)


(2
)






(8
)Operating earnings (loss)


(86
)


(19
)


156







51Other expense (income)  net


(11
)


1



(25
)






(35
)Interest expenseLong-term debt


50



2



7







59Other






1



2







3Earnings (loss) from operations before income taxes, minority
    interests and equity in net loss (earnings) of associated
    companies


(125
)


(23
)


172







24Income tax expense (benefit)


4



1



57







62(129
)


(24
)


115







(38
)Minority interests  net of tax










46







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


(46
)


23



(1
)


23



(1
)Net earnings (loss)


(83
)


(47
)


70



(23
)


(83
)Dividends on preferred shares


9















9Net earnings (loss) applicable to common shares

$
(92
)

$
(47
)

$
70


$
(23
)

$
(92
)  33




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
914


$
1,113


$
1,054


$
(519
)

$
2,562Cost of revenues


483



921



629



(519
)


1,514Gross profit


431



192



425







1,048Selling, general and administrative expense


136



215



242







593Research and development expense


243



156



20







419Amortization of intangible assets






2



11







13Special charges


2



12



22







36Loss (gain) on sale of businesses and assets


1



1



(12
)






(10
)Other operating income  net


3



6



3







12Operating earnings (loss)


52



(188
)


145







9Other expense (income)  net


(119
)


126



(122
)


3



(112
)Interest expenseLong-term debt


55



2



7







64Other


5



20



(17
)


(2
)


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


111



(336
)


277



(1
)


51Income tax expense (benefit)


(7
)






18







11118



(336
)


259



(1
)


40Minority interests  net of tax










1







1Equity in net loss (earnings) of associated
    companies  net of tax


78



(79
)


(2
)


2



(1
)Net earnings (loss)


40



(257
)


260



(3
)


40Dividends on preferred shares


10















10Net earnings (loss) applicable to common shares

$
30


$
(257
)

$
260


$
(3
)

$
30  34




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
1,301


$
2,217


$
3,036


$
(1,174
)

$
5,380Cost of revenues


754



1,474



2,046



(1,174
)


3,100Gross profit


547



743



990







2,280Selling, general and administrative expense


197



454



521







1,172Research and development expense


461



314



79







854Amortization of intangible assets






4



19







23Special charges


39



63



53







155Loss (gain) on sale of businesses and assets


(3
)


1



(2
)






(4
)Other operating expense (income)  net


(7
)


5



7







5Operating earnings (loss)


(140
)


(98
)


313







75Other expense (income)  net


(11
)


(25
)


(57
)


21



(72
)Interest expenseLong-term debt


100



5



13







118Other


2



2



5







9Earnings (loss) from operations before income taxes, minority
    interests and equity in net loss (earnings) associated companies


(231
)


(80
)


352



(21
)


20Income tax expense (benefit)


8



(2
)


92







98(239
)


(78
)


260



(21
)


(78
)Minority interests  net of tax










113







113Equity in net loss (earnings) of associated
    companies  net of tax


(50
)


13



(2
)


37



(2
)Net earnings (loss)


(189
)


(91
)


149



(58
)


(189
)Dividends on preferred shares


20















20Net earnings (loss) applicable to common shares

$
(209
)

$
(91
)

$
149


$
(58
)

$
(209
)  35




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


Total(Millions of U.S. Dollars)Revenues

$
1,454


$
2,373


$
2,179


$
(961
)

$
5,045Cost of revenues


921



1,612



1,421



(961
)


2,993Gross profit


533



761



758







2,052Selling, general and administrative expense


300



402



494







1,196Research and development expense


415



321



88







824Amortization of intangible assets






4



21







25Special charges


12



60



44







116Loss (gain) on sale of businesses and assets


2



1



(14
)






(11
)Other operating expense (income)  net


(10
)


(8
)


(4
)






(22
)Operating earnings (loss)


(186
)


(19
)


129







(76
)Other expense (income)  net


(152
)


111



(150
)


3



(188
)Interest expenseLong-term debt


110



5



13







128Other


(10
)


40



(33
)


14



11Earnings (loss) from operations before income taxes, minority
    interests and equity in net loss (earnings) of associated
    companies


(134
)


(175
)


299



(17
)


(27
)Income tax expense (benefit)


(9
)


1



32







24(125
)


(176
)


267



(17
)


(51
)Minority interests  net of tax










13







13Equity in net loss (earnings) of associated
    companies  net of tax


(62
)


(50
)


(2
)


113



(1
)Net earnings (loss)


(63
)


(126
)


256



(130
)


(63
)Dividends on preferred shares


20















20Net earnings (loss) applicable to common shares

$
(83
)

$
(126
)

$
256


$
(130
)

$
(83
)  36




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


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

$
219


$
1,109


$
1,735


$



$
3,063Restricted cash and cash equivalents


27



8



22







57Accounts receivable  net


3,012



1,657



3,034



(3,688
)


4,015Inventories  net


84



442



1,302







1,828Deferred income taxes  net


31



336



109







476Other current assets


101



123



305



(1
)


528Total current assets


3,474



3,675



6,507



(3,689
)


9,967Investments


6,615



3,595



(399
)


(9,634
)


177Plant and equipment  net


503



384



589







1,476Goodwill






1,877



514







2,391Intangible assets  net


10



25



134







169Deferred income taxes  net


1,099



1,227



483







2,809Other assets


195



87



258



(13
)


527Total assets

$
11,896


$
10,870


$
8,086


$
(13,336
)

$
17,516LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade and other accounts payable

$
1,556


$
938


$
2,354


$
(3,688
)

$
1,160Payroll and benefit-related liabilities


137



229



254







620Contractual liabilities


8



36



199







243Restructuring liabilities


26



63



43







132Other accrued liabilities


443



1,137



1,555



(1
)


3,134Long-term debt due within one year


1



10



10







21Total current liabilities


2,171



2,413



4,415



(3,689
)


5,310Long-term debt


2,907



90



329







3,326Deferred income taxes  net










31







31Other liabilities


1,028



677



996



(13
)


2,688Total liabilities


6,106



3,180



5,771



(3,702
)


11,355Minority interests in subsidiary companies










371







371Shareholders equity


5,790



7,690



1,944



(9,634
)


5,790Total liabilities and shareholders equity

$
11,896


$
10,870


$
8,086


$
(13,336
)

$
17,516  37




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


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

$
329


$
1,128


$
2,069


$



$
3,526Restricted cash and cash equivalents


34



8



24







66Accounts receivable  net


2,394



1,828



3,120



(3,637
)


3,705Inventories  net


100



505



1,397







2,002Deferred income taxes  net


32



318



137







487Other current assets


86



120



262



(1
)


467Total current assets


2,975



3,907



7,009



(3,638
)


10,253Investments


6,616



3,563



(88
)


(9,897
)


194Plant and equipment  net


528



406



596







1,530Goodwill






1,877



504







2,381Intangible assets  net


18



34



161







213Deferred income taxes  net


1,128



1,245



495







2,868Other assets


171



118



260



(15
)


534Total assets

$
11,436


$
11,150


$
8,937


$
(13,550
)

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

$
1,486


$
998


$
2,382


$
(3,637
)

$
1,229Payroll and benefit-related liabilities


134



259



296







689Contractual liabilities


17



47



208







272Restructuring liabilities


11



46



43







100Other accrued liabilities


463



1,246



2,091



(1
)


3,799Long-term debt due within one year


1



12



10







23Total current liabilities


2,112



2,608



5,030



(3,638
)


6,112Long-term debt


2,243



94



329







2,666Deferred income taxes  net










17







17Other liabilities


1,071



716



1,102



(15
)


2,874Total liabilities


5,426



3,418



6,478



(3,653
)


11,669Minority interests in subsidiary companies










294







294Shareholders equity


6,010



7,732



2,165



(9,897
)


6,010Total liabilities and shareholders equity

$
11,436


$
11,150


$
8,937


$
(13,550
)

$
17,973  38




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


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

$
(189
)

$
(91
)

$
149


$
(58
)

$
(189
)Adjustment to reconcile to net earnings (loss)


(551
)


127



(456
)


58



(822
)Net cash from (used in) operating activities


(740
)


36



(307
)






(1,011
)Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(22
)


(26
)


(39
)






(87
)Change in restricted cash and cash equivalents


9















9Acquisitions of investments and businesses  net of
    cash acquired






(29
)


(3
)






(32
)Proceeds from the sales of investments and businesses and assets


7



5



14







26Net cash from (used in) investing activities


(6
)


(50
)


(28
)






(84
)Cash flows from (used in) financing activitiesDividends paid, including paid by subsidiaries to minority
    interests


(20
)






(1
)






(21
)Increase in notes payable










78







78Decrease in notes payable










(70
)






(70
)Proceeds from issuance of long-term debt


668















668Repayments of capital leases payable






(5
)


(6
)






(11
)Debt issuance costs


(13
)














(13
)Net cash from (used in) financing activities


635



(5
)


1







631Effect of foreign exchange rate changes on cash and cash
    equivalents


1















1Net increase (decrease) in cash and cash equivalents


(110
)


(19
)


(334
)






(463
)Cash and cash equivalents at beginning of period


329



1,128



2,069







3,526Cash and cash equivalents at end of period

$
219


$
1,109


$
1,735


$



$
3,063  39




---



##### 



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





Non-Networks


Guarantor


GuarantorLimited


Subsidiary


Subsidiaries


Eliminations


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

$
(63
)

$
(126
)

$
256


$
(130
)

$
(63
)Adjustment to reconcile to net earnings (loss)


739



218



13



130



1,100Net cash from (used in) operating activities


676



92



269







1,037Cash flows from (used in) investing activitiesExpenditures for plant and equipment


(33
)


(29
)


(47
)






(109
)Proceeds on disposals of plant and equipment


58



3



23







84Change in restricted cash and cash equivalents






2



5







7Acquisitions of investments and businesses  net of
    cash acquired


(2
)


(2
)


(22
)






(26
)Proceeds from the sales of investments and businesses and assets


(52
)


7



27







(18
)Net cash from (used in) investing activities


(29
)


(19
)


(14
)






(62
)Cash flows from (used in) financing activitiesDividends paid, including paid by subsidiaries to minority
    interest


(25
)














(25
)Increase in notes payable










24







24Decrease in notes payable










(27
)






(27
)Repayments of capital leases payables


(1
)


(3
)


(7
)






(11
)Net cash from (used in) financing activities


(26
)


(3
)


(10
)






(39
)Effect of foreign exchange rate changes on cash and cash
    equivalents


48







(6
)






42Net increase (decrease) in cash and cash equivalents


669



70



239







978Cash and cash equivalents at beginning of period


626



1,145



1,716







3,487Cash and cash equivalents at end of period

$
1,295


$
1,215


$
1,955


$



$
4,465  40




---



##### 



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


41Results of Operations


46Segment Information


55Liquidity and Capital Resources


62Off-Balance Sheet Arrangements


67Application of Critical Accounting Policies and Estimates


67Accounting Changes and Recent Accounting Pronouncements


80Outstanding Share Data


82Market Risk


82Environmental Matters


82Legal Proceedings


82Cautionary Notice Regarding Forward-Looking Information


82   The following Managements Discussion and Analysis, or
    MD&A, is intended to help the reader understand the results
    of operations and financial condition of Nortel Networks
    Limited, or Nortel. The MD&A should be read in combination
    with our unaudited condensed consolidated financial statements
    and the accompanying notes. All Dollar amounts in this MD&A
    are in millions of United States, or U.S., Dollars except per
    share amounts or unless otherwise stated.
  Certain statements in this MD&A contain words such as
    could, expects, may,
    anticipates, believes,
    intends, estimates, plans,
    envisions, seeks and other similar
    language and are considered forward-looking statements or
    information under applicable securities laws. These statements
    are based on our current expectations, estimates, forecasts and
    projections about the operating environment, economies and
    markets in which we operate which we believe are reasonable but
    which are subject to important assumptions, risks and
    uncertainties and may prove to be inaccurate. Consequently, our
    actual results could differ materially from our expectations set
    out in this MD&A. In particular, see the Risk Factors
    section of this report and our Annual Report on
    Form 10-K
    for the year ended December 31, 2007, or 2007 Annual Report
    and our Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2008, or 2008 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
       41




---



##### 



42




---



##### 



end-to-end
    macro-economic
  How We
    Measure Business Performance
  non-U.S. GAAP non-U.S. GAAP non-U.S. GAAP
  non-U.S. GAAP
   43




---



##### 



Second
    Quarter Financial Highlights
    For the Three Months Ended June 30


For the Six Months Ended June 302008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenues

$
2,622


$
2,562


$
60



2



5,380


$
5,045



335



7Gross profit


1,131



1,048



83



8



2,280



2,052



228



11Gross margin %


43.1
%


40.9
%






2.2 points



42.4
%


40.7
%






1.7 pointsSelling, general and administrative expense


575



593



(18
)


(3
)


1,172



1,196



(24
)


(2
)Research and development expense


437



419



18



4



854



824



30



4Management OM


119



36



83







254



32



222Management OM %


4.5
%


1.4
%






3.1 points



4.7
%


0.6
%






4.1 pointsNet earnings (loss)


(83
)


40



(123
)






(189
)


(63
)


(126
)   Q2
    2008 vs. Q2 2007
  
    Revenues increased 2% to $2,622:Revenues increased by
    $60 in the second quarter of 2008 compared to the second quarter
    of 2007 primarily due to increases in the GS, ES and MEN
    segments, partially offset by a decrease in the CN segment. From
    a geographic perspective, the increase was due to Asia and
    Canada, partially offset by declines in the U.S., Europe, the
    Middle East and Africa, or EMEA, and Caribbean and Latin
    American, or CALA regions. The increase in GS was mainly due to
    the completion of a certain customer contract obligation in
    connection with the termination of a customer contract in the
    second quarter of 2008, resulting in the recognition of
    previously deferred revenues and an adjustment to
    contract-related revenues due to the contract settlement
    provisions. The increase in the ES segment was mainly due to
    volume increases across multiple customers and the completion of
    certain customer contract obligations resulting in the
    recognition of previously deferred revenue. The increase in the
    MEN segment was primarily due to the completion of a certain
    customer contract deliverable resulting in the recognition of
    previously deferred revenues and the favorable impact of foreign
    exchange fluctuations. The decrease in the CN segment was
    primarily due to reduced customer spending as a result of
    capital expenditure constraints and current U.S. market
    conditions.
    Gross margin increased 2.2 percentage points to 43.1%:The increase was due to an increase in the GS, CN and ES
    segments. The increase was primarily due to cost reduction
    initiatives, changes in a contract-related accrual in the second
    quarter of 2008 compared to the second quarter of 2007 and
    higher volumes, partially offset by a decrease due to the
    negative impacts of price erosion and product mix.
    Management OM increased by $83 to $119:The increase in
    Management OM was due to the increase in gross profit and
    decrease in SG&A expense, partially offset by an increase
    in R&D expense. SG&A expense decreased primarily due
    to cost savings from our previously announced restructuring
    activities and savings due to lower expenses in relation to our
    internal control remediation plans and finance transformation
    activities. These cost savings were partially offset by the
    unfavorable impact of foreign exchange fluctuations.
    Net earnings decreased from net earnings of $40 to a net loss
    of $83:Net earnings decreased by $123 primarily due to
    higher income tax expense, minority interest attributable to
    income and special charges, partially offset by lower interest
    expense.
    Cash and cash equivalents decreased from $3,215 at
    March 31, 2008 to $3,063 at June 30, 2008:The
    decrease in cash and cash equivalents was primarily due to cash
    used in operating activities of $749, cash used in investing
    activities of $40 and net unfavorable foreign exchange impacts
    of $8, partially offset by cash from financing activities of
    $645.  First
    six months of 2008 vs. first six months of 2007
  
    Revenues increased 7% to $5,380:Revenues increased by
    $335 in the first six months of 2008 compared to the first six
    months of 2007 primarily due to increases in the CN, GS and ES
    segments, partially offset by a decline in the MEN segment. From
    a geographic perspective, the increase is primarily due to an
    increase in Asia and Canada, partially offset by decreases in
    the U.S., CALA and EMEA regions. The increase in CN was
    primarily due to the completion of certain contract obligations
    for multiple customers in LG-Nortel Co. Ltd., or LG-Nortel, our
    joint venture with LGE, resulting in the recognition of
    previously deferred revenues. The increase in GS was primarily
    due to volume increases across multiple customers, the
    completion of a certain customer contract obligation in
    LG-Nortel resulting in the recognition of previously deferred
    revenue and the completion of certain customer contract 44




---



##### 



obligations resulting from the termination of a customer
    contract in the first six months of 2008. The increase in ES was
    due to volume increases across multiple customers. The decrease
    in MEN was largely due to the completion of a certain customer
    contract deliverable resulting from the termination of a
    supplier agreement in the first six months of 2007 that did not
    repeat in the first six months of 2008. 
    Gross margin increased 1.7 percentage points to 42.4%:The increase was due to an increase in the MEN and CN
    segments, partially offset by a decrease in the ES segment. The
    increase was primarily due to the increase in volume and higher
    revenues, the favorable impact of foreign exchange fluctuations
    and cost reduction initiatives. This increase was partially
    offset by the negative impacts of price erosion.
    Management OM increased by $222 to $254:The increase in
    Management OM was due to the increase in gross profit and
    decrease in SG&A expense, partially offset by an increase
    in R&D expense. SG&A expense decreased primarily due
    to a decrease in employee-related expenses and lower expenses in
    relation to our internal control remediation plans and finance
    transformation activities, partially offset by the unfavorable
    foreign exchange impacts and an increase in charges related to
    our employee compensation plans.
    Net loss increased from a net loss of $63 to a net loss of
    $189:The increase in net loss was mainly due to a higher
    income tax expense, a shareholder litigation settlement recovery
    in the first six months of 2007 that was not repeated in the
    first six months of 2008, minority interest attributable to
    income and special charges, partially offset by lower interest
    expenses.
    Cash and cash equivalents decreased from $3,526 at
    December 31, 2007 to $3,063 at June 30, 2008:The
    decrease in cash and cash equivalents was primarily due to cash
    used in operating activities of $1,011, partially offset by cash
    from investing activities of $631 and the net favorable foreign
    exchange impacts of $1.  Significant
    Business Developments
  WiMAX
    Strategic Agreement
    2008
    Restructuring Plan
    Global
    Class Action Settlement
   45




---



##### 



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


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeUnited States

$
1,039


$
1,171


$
(132
)


(11
)

$
2,120


$
2,387


$
(267
)


(11
)EMEA


634



678



(44
)


(6
)


1,225



1,256



(31
)


(2
)Canada


200



178



22



12



366



351



15



4Asia


584



336



248



74



1,371



718



653



91CALA


165



199



(34
)


(17
)


298



333



(35
)


(11
)Consolidated

$
2,622


$
2,562


$
60



2


$
5,380


$
5,045


$
335



7   Q2
    2008 vs. Q2 2007
    Asia
     46




---



##### 



Canada
      U.S.
        EMEA
         47




---



##### 



CALA
      First
    six months of 2008 vs. first six months of 2007
    Asia
            Canada
     48




---



##### 



U.S.
            CALA
         49




---



##### 



EMEA
            Gross
    Margin
  For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeGross profit

$
1,131


$
1,048


$
83



8


$
2,280


$
2,052


$
228



11Gross margin


43.1
%


40.9
%






2.2 points



42.4
%


40.7
%






1.7 points   Q2
    2008 vs. Q2 2007
   50




---



##### 



First
    six months of 2008 vs. first six months of 2007
    Management
    OM
  For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeManagement OM

$
119


$
36


$
83






$
254


$
32


$
222Management OM as a percentage of revenue


4.5
%


1.4
%






3.1 points



4.7
%


0.6
%






4.1 points   Q2
    2008 vs. Q2 2007
    First
    six months of 2008 vs. first six months of 2007
   51




---



##### 



Special
    Charges
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% Change2008 Restructuring Plan

$
36


$



$
36






$
103


$



$
1032007 Restructuring Plan


24



33



(9
)


(27
)


48



108



(60
)


(56
)2006 Restructuring Plan


(1
)






(1
)






(1
)


5



(6
)


(120
)2004 Restructuring Plan


5



2



3



150



5



2



3



1502001 Restructuring Plan


3



1



2



200







1



(1
)


(100
)Total special charges

$
67


$
36


$
31



86


$
155


$
116


$
39



34   2008
    Restructuring Plan
    2007
    Restructuring Plan
    2006
    Restructuring Plan
    2004 and
    2001 Restructuring Plans
   52




---



##### 



MetroEnterprise


Carrier


Ethernet


GlobalSolutions


Networks


Networks


Services


Total2008 Restructuring Plan

$
11


$
14


$
6


$
5


$
362007 Restructuring Plan


1



22



1







242006 Restructuring Plan






(1
)










(1
)2004 Restructuring Plan


1



2



1



1



52001 Restructuring Plan


1



1



1







3Total special charges for the three months ended June 30,
    2008

$
14


$
38


$
9


$
6


$
672008 Restructuring Plan

$
37


$
35


$
15


$
16


$
1032007 Restructuring Plan


4



34



9



1



482006 Restructuring Plan






(1
)










(1
)2004 Restructuring Plan


1



2



1



1



52001 Restructuring Plan


















Total special charges for the six months ended June 30, 2008

$
42


$
70


$
25


$
18


$
1552007 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 ended June 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 ended June 30, 2007

$
19


$
71


$
21


$
5


$
116   Gain on
    Sales of Businesses and Assets
      Other
    Operating Expense (Income)  Net
    For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2008


2007(a)


2008


2007(a)Royalty license income  net

$
(8
)

$
(4
)

$
(16
)

$
(14
)Litigation charges (recovery)  net


(1
)


(8
)


11



(8
)Other  net


1







10



Other operating expense (income)  net

$
(8
)

$
(12
)

$
5


$
(22
)     (a)
    Includes items that were previously
    reported as non-operating and have been reclassified from
    Other income  net accordingly.   53




---



##### 



Other
    Income  Net
    For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2008


2007


2008


2007Interest and dividend income

$
(34
)

$
(60
)

$
(72
)

$
(122
)Losses on sale and writedowns of investments


2



5



2



5Currency exchange gains  net


(34
)


(71
)


(14
)


(70
)Other  net


31



14



12



(1
)Other income  net

$
(35
)

$
(112
)

$
(72
)

$
(188
)   mark-to-market
    Interest
    Expense
    Income
    Tax Expense
       54




---



##### 



Segment
    Information  Carrier
    Networks
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenuesCDMA solutions

$
446


$
494


$
(48
)


(10
)

$
1,001


$
1,062


$
(61
)


(6
)GSM and UMTS solutions


448



402



46



11



984



673



311



46Circuit and packet voice solutions


144



162



(18
)


(11
)


271



332



(61
)


(18
)Total Revenues

$
1,038


$
1,058


$
(20
)


(2
)

$
2,256


$
2,067


$
189



9Management OM

$
185


$
177


$
8



5


$
445


$
331


$
114



34   Q2
    2008 vs. Q2 2007
           55




---



##### 



First
    six months of 2008 vs. first six months of 2007
             56




---



##### 



Enterprise
    Solutions
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenuesCircuit and packet voice solutions

$
413


$
393


$
20



5


$
871


$
768


$
103



13Data networking and security solutions


197



197











380



419



(39
)


(9
)Total Revenues

$
610


$
590


$
20



3


$
1,251


$
1,187


$
64



5Management OM

$
(19
)

$
(6
)

$
(13
)


(217
)

$
(38
)

$
(8
)

$
(30
)


(375
)   Q2
    2008 vs. Q2 2007
          First
    six months of 2008 vs. first six months of 2007
         57




---



##### 



Global
    Services
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenues

$
536


$
494


$
42



9


$
1,052


$
942


$
110



12Management OM

$
83


$
76


$
7



9


$
155


$
151


$
4



3   Q2
    2008 vs. Q2 2007
            First
    six months of 2008 vs. first six months of 2007
     58




---



##### 



Metro
    Ethernet Networks
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenuesOptical networking solutions

$
300


$
285


$
15



5


$
547


$
548


$
(1
)


(0
)Data networking and security solutions


78



78











158



188



(30
)


(16
)Total Revenues

$
378


$
363


$
15



4


$
705


$
736


$
(31
)


(4
)Management OM

$
17


$
11


$
6



55


$
(8
)

$
(9
)

$
1



11   Q2
    2008 vs. Q2 2007
         59




---



##### 



First
    six months of 2008 vs. first six months of 2007
            Other
    For the Three Months Ended June 30,


For the Six Months Ended June 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% ChangeRevenues

$
60


$
57


$
3



5


$
116


$
113


$
3



3Management OM

$
(147
)

$
(222
)

$
75



34


$
(300
)

$
(433
)

$
133



31  60




---



##### 



Q2
    2008 vs. Q2 2007
      First
    six months of 2008 vs. first six months of 2007
     61




---



##### 



Liquidity
    and Capital Resources  Cash
    Flow
      For the Six Months Ended June 30,2008


2007


ChangeNet loss

$
(189
)

$
(63
)

$
(126
)Non-cash items


411



284



127Changes in operating assets and liabilities:Accounts receivable  net

$
(310
)

$
1,169


$
(1,479
)Inventories  net


(82
)


(46
)


(36
)Accounts payable


(77
)


193



(270
)(469
)


1,316



(1,785
)Deferred costs


261



31



230Income taxes


(28
)


(17
)


(11
)Payroll, accrued and contractual liabilities


(257
)


(302
)


45Deferred revenue


(160
)


(132
)


(28
)Advanced billings in excess of revenues recognized to date on
    contracts


(419
)


151



(570
)Restructuring liabilities


32



8



24Other


(193
)


(239
)


46Changes in other operating assets and liabilities


(764
)


(500
)


(264
)Net cash from (used in) operating activities


(1,011
)


1,037



(2,048
)Net cash from (used in) investing activities


(84
)


(62
)


(22
)Net cash from (used in) financing activities


631



(39
)


670Effect of foreign exchange rate changes on cash and cash
    equivalents


1



42



(41
)Net increase (decrease) in cash and cash equivalents


(463
)


978



(1,441
)Cash and cash equivalents at beginning of period


3,526



3,487



39Cash and cash equivalents at end of period

$
3,063


$
4,465


$
(1,402
)   Operating
    Activities
  LG-Nortel
   62




---



##### 



Accounts
    Receivable
  June 30,


December 31,2008


2007


$ Change


% ChangeAccounts receivable

$
2,159


$
2,578


$
(419
)


(16
)Days sales outstanding in accounts receivable
    (DSO)(a)


74



72      (a)
    DSO is the average number of days
    our receivables are outstanding based on a 90 day cycle.
    DSO is a metric that approximates the measure of the average
    number of days from when we recognize revenue until we collect
    cash from our customers. DSO for each quarter is calculated by
    dividing the quarter end accounts
    receivable-net
    balance by revenues for the quarter, in each case as determined
    in accordance with U.S. GAAP, and multiplying by 90 days.    Inventory
  June 30,


December 31,2008


2007


$ Change


% ChangeInventory  net (excluding deferred costs)

$
569


$
513


$
56



11Net inventory days
    (NID)(a)


33



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


December 31,2008


2007


$ Change


% ChangeTrade accounts payable

$
1,066


$
1,152


$
(86
)


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


64



58      (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.    Deferred
    Revenue
   63




---



##### 



Investing
    Activities
      Financing
    Activities
      Other
    Items
      Fair
    Value Measurements
    available-for-sale
    Senior
    Notes Offering
   64




---



##### 



Future
    Uses and Sources of Liquidity
    
    We expect our ability to increase revenue and generate positive
    cash from operating activities to be a primary uncertainty
    regarding our liquidity. In prior years, our operating results
    have generally produced negative cash flow from operations due
    in large part to our inability to reduce operating expenses as a
    percentage of revenue and other factors discussed in this
    report. If capital spending by our customers changes or pricing
    and margins change from what we currently expect, due to current
    economic uncertainties in North America or elsewhere raising
    concerns about decreases in projected spending rates by both
    carrier and enterprise customers, or for other reasons, our
    revenues and cash flows may be materially lower and we may be
    required to further reduce our investments or take other
    measures in order to meet our cash requirements;
    Our ability and willingness to access the capital markets is
    based on many factors including market conditions and our
    overall financial objectives. Currently, our ability is limited
    by the covenant restrictions in our indentures and by our and
    NNCs credit ratings, both of which have, in part,
    contributed to our increased interest and borrowing costs. We
    cannot provide any assurance that our net cash requirements will
    be as we currently expect, or that financings will be available
    to us on acceptable terms, or at all; and
    We are subject to litigation proceedings and, as a result, any
    judgments or settlements in connection with our pending civil
    litigation not encompassed by the Global Class Action
    Settlement, or criminal investigations related to certain
    restatements of our and NNCs financial statements, could
    have a material adverse effect on our business, results of
    operations, financial condition and liquidity.  Future
    Uses of Liquidity
    
    cash contributions for pension, post retirement and post
    employment funding of approximately $355;
    capital expenditures of approximately $200;
    costs related to workforce reductions and real estate actions in
    connection with our active restructuring plans of approximately
    $250;
    preferred share dividends of approximately $53 including taxes;
    costs associated with contractual commitments related to the
    divestiture of our manufacturing operations to Flextronics
    Telecom Systems, Ltd. of approximately $70 to be paid in the
    third quarter; and
    an earn-out payment to LGE of approximately $51 based on the
    2007 performance of LG-Nortel to be paid in the third quarter of
    2008.  and/or
 65




---



##### 



Contractual
    cash obligations
    Future
    Sources of Liquidity
      Available
    support facility
    
    $300 of committed revolving support for performance bonds or
    similar instruments with individual amounts of up to $25, of
    which $150 was outstanding; and
    $450 of uncommitted revolving support for performance bonds or
    similar instruments
    and/or
    receivables sales
    and/or
    securitizations, of which $32 was outstanding.      Short-form
    registration of securities
   66




---



##### 



Credit
    Ratings
  Moodys


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


B3



B−NNLs $2,675 high-yield notes consisting of the July 2006
    Notes and the 2016 Fixed Rate Notes issued May 2008


B3



B−NNCs $1,150 Convertible Notes consisting of the 2012 notes
    and 2014 notes


B3



B−NNLs $200 notes due 2023


B3



CCCNortel Networks Capital Corporations $150 notes due 2026


B3



CCCNNL Preferred Shares:Series 5


Caa1



CCC−Series 7


Caa1



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


December 31,2008


2007Bid and performance-related
    bonds(a)

$
171


$
155Other
    bonds(b)


71



54Total bid, performance-related and other bonds

$
242


$
209      (a) Net of restricted cash and
    cash equivalents amounts of $4 and $5 as of June 30, 2008
    and December 31, 2007, respectively.
 (b) Net of restricted cash and
    cash equivalents amounts of $8 and $27 as of June 30, 2008
    and December 31, 2007, respectively.
   Application
    of Critical Accounting Policies and Estimates   67




---



##### 



Revenue
    Recognition
        
    whether the delivered item has value to the customer on a
    stand-alone basis;
    whether there is objective and reliable evidence of the fair
    value of the undelivered item(s); and
    if the contract includes a general right of return relative to
    the delivered item, delivery or performance of the undelivered
    item(s) is considered probable and is substantially in our
    control.  and/or and/or
    97-2, SOP 97-2,
 68




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##### 



SOP 81-1, SOP 81-1, percentage-of-completion percentage-of-completion SOP 81-1 SOP 81-1 EITF 00-21 SOP 81-1 SOP 81-1
        SOP 97-2. SOP 97-2 EITF 03-5, 97-2 More-Than-Incidental SOP 97-2 SOP 97-2 when-and-if
  SOP 97-2 00-21, EITF 00-21,
 69




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##### 




    Complex arrangements that involve multiple deliverables such as
    future software deliverables
    and/or
    post-contract 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 64% of our
    deferred revenue balance and will be recognized upon delivery of
    the final undelivered elements and over time.
    In many instances, our contractual billing arrangements do not
    match the timing of the recognition of revenue. Often this
    occurs in contracts accounted for under
    SOP 81-1
    where we generally recognize the revenue based on a measure of
    the percentage of costs incurred to date relative to the
    estimated total expected contract costs. We estimate that
    approximately 9% of our deferred revenue balance relates to
    contractual arrangements where billing milestones preceded
    revenue recognition.      As ofJune 30,


December 31,2008


2007


$ Change


% ChangeDeferred revenue

$
1,458


$
1,619


$
(161
)


(10
)Advance billings


1,071



1,490



(419
)


(28
)Total deferred revenue

$
2,529


$
3,109


$
(580
)


(19
)     Provisions
    for Doubtful Accounts
    
    age of the receivables;
    customers ability to meet and sustain its financial
    commitments; 70




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##### 




    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.        As ofJune 30,


December 31,2008


2007Gross accounts receivable

$
4,062


$
3,767Provision for doubtful accounts


(47
)


(62
)Accounts receivable  net

$
4,015


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


1
%


2
%Gross long-term receivables

$
54


$
44Provision for doubtful accounts


(41
)


(35
)Net long-term receivables

$
13


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


76
%


80
%   Provisions
    for Inventories
         As ofJune 30,


December 31,2008


2007Gross inventory

$
2,818


$
3,118Inventory provisions


(812
)


(907
)Inventories 
    net(a)

$
2,006


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


29
%


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


59
%


64
%     (a)
    Includes the long-term portion of
    inventory related to deferred costs of $178 and $209 as of
    June 30, 2008 and December 31, 2007, respectively,
    which is included in other assets.(b)
    Calculated excluding deferred costs
    of $1,437 and $1,698 as of June 30, 2008 and
    December 31, 2007, respectively. 71




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##### 



and/or
  Provisions
    for Product Warranties
        Balance at December 31, 2007

$
206Payments


(96
)Warranties issued


114Revisions


(27
)Balance at June 30, 2008

$
197       Income
    Taxes
  Tax
    Asset Valuation
   72




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##### 




    the amount of, and trends related to, cumulative earnings or
    losses realized over the most recent 12 quarters;
    our current period net earnings (loss) and its impact on our
    strong history of earnings prior to 2001;
    future earnings projections as determined through the use of
    internal forecasts, including the impact of sales backlog and
    existing contracts;
    our ability to carry forward our tax losses and investment tax
    credits, including tax planning strategies to accelerate
    utilization of such assets;
    industry, business, or other circumstances that may adversely
    affect future operations, and the nature of the future income
    required to realize our deferred tax asset.               73




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##### 



Future
    Projections of Profitability
              Tax


Net


Other


Gross





NetBenefit of


Investment


Temporary


Deferred


Valuation


DeferredLosses


Tax Credits


Differences


Tax Asset


Allowance


Tax AssetCanada

$
858


$
1,100


$
585


$
2,543


$
(1,398
)

$
1,145United States


837



363



878



2,078



(515
)


1,563United Kingdom


459







182



641



(324
)


317France


485



53



130



668



(580
)


88Other


465







220



685



(554
)


131Total

$
3,104


$
1,516


$
1,995


$
6,615


$
(3,371
)

$
3,244  74




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##### 



Canada
             75




---



##### 



U.S.
      U.K.
    France
    Transfer
    Pricing
       76




---



##### 



Valuation
    Allowance
      Tax
    Contingencies
             77




---



##### 



2001-2005
  2001-2005 and/or
  Goodwill
    Valuation
    
    a significant adverse change in the business climate or legal
    factors;
    an adverse action or assessment by a regulator;
    unanticipated competition;
    loss of key personnel;
    the likelihood that a reporting unit or a significant portion of
    a reporting unit will be sold or disposed of;
    a change in reportable segments;
    results of testing for recoverability of a significant asset
    group within a reporting unit; and
    recognition of a goodwill impairment loss in the financial
    statements of a subsidiary that is a component of a reporting
    unit.        
    DCF model:  assumptions regarding revenue
    growth rates, gross margin percentages, discount rates and
    terminal growth rates;
    Revenue Multiple model:  estimates of 2007
    revenue growth and the selection of comparable companies to
    determine an appropriate multiple; and
    EBITDA Multiple model:  2007 projected EBITDA
    and the selection of comparable companies to determine an
    appropriate multiple.   78




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##### 



Pension
    and Post-retirement Benefits
                Special
    Charges
   79




---



##### 



Accounting
    Changes and Recent Accounting Pronouncements  Accounting
    Changes
    
    The Fair Value Option for Financial Assets and Financial
    Liabilities:  In February 2007, the Financial
    Accounting Standards Board, or FASB, issued
    SFAS No. 159, The Fair Value Option for
    Financial Assets and Financial Liabilities  Including
    an amendment of FASB Statement No. 115, or
    SFAS 159. SFAS 159 allows the irrevocable election of
    fair value as the initial and subsequent measurement attribute
    for certain financial assets and liabilities and other items on
    an
    instrument-by-instrument
    basis. Changes in fair value would be reflected in earnings as
    they occur. The objective of SFAS 159 is to improve
    financial reporting by providing entities with the opportunity
    to mitigate volatility in reported earnings caused by measuring
    related assets and liabilities differently without having to
    apply complex hedge accounting provisions. For us, SFAS 159
    is effective as of January 1, 2008. We have elected not to
    apply the fair value option for any of our eligible financial
    instruments and other items in the current period.
    Fair Value Measurements:  In September 2006,
    the FASB issued SFAS No. 157 Fair Value
    Measurements, or SFAS 157, which establishes a single
    definition of fair value and a framework for measuring fair
    value and requires expanded disclosures about fair value
    measurements. SFAS 157 is effective for financial
    statements issued for fiscal years beginning after
    November 15, 2007. We partially adopted the provisions of
    SFAS 157 effective January 1, 2008. For disclosure
    related to SFAS 157, see note 11, Fair
    Value, to the accompanying unaudited condensed
    consolidated financial statements.
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an Amendment of FASB
    Statements No. 87, 88, 106, and 132(R):  In
    September 2006, the FASB issued SFAS No. 158,
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an Amendment of FASB
    Statements No. 87, 88, 106, and 132(R), or
    SFAS 158. Effective for fiscal years ending after
    December 15, 2006, SFAS 158 requires an employer to
    recognize the overfunded or underfunded status of a defined
    benefit pension and post-retirement plan (other than a
    multiemployer plan) as an asset or liability in its statement of
    financial position and to recognize changes in that funded
    status in the year in which the changes occur through
    comprehensive income. We adopted these requirements in fiscal
    2006.   80




---



##### 



Recent
    Accounting Pronouncements
  SFAS 157-2, SFAS 157-2.
  No. 07-1 EITF 07-1. EITF 07-1 EITF 07-1 EITF 07-1
        SFAS No. 142-3, SFAS 142-3. SFAS 142-3 SFAS 142-3 SFAS 142-3 SFAS 142-3
   81




---



##### 



Outstanding
    Share Data   Market
    Risk   Environmental
    Matters      de minimis de minimis de minimis
   Legal
    Proceedings   Cautionary
    Notice Regarding Forward-Looking Information   82




---



##### 



83




---



##### 



ITEM 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Market
    Risk
  value-at-risk
        Equity
    Price Risk
   84




---



##### 



ITEM 4.
    Controls
    and Procedures  Management
    Conclusions Concerning Disclosure Controls and
    Procedures
  Rule 13a-15
  Internal
    Control Over Financial Reporting
  Rules 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with U.S. GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.    Changes
    in Internal Control Over Financial Reporting
   85




---



##### 



PART II
    OTHER INFORMATION  ITEM 1.
    Legal
    Proceedings  Global Class Action
    Settlement:
  RCMP charges against former
    executives:
  Canadian pension class action: Pension Benefits Act
  Ipernica:
    ITEM 1A.
    Risk
    Factors  Form 10-Q
  and/or
 86




---



##### 



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

Description4
.1*

Third Supplemental Indenture dated as of May 28, 2008 to
    Indenture Dated as of July 5, 2006 among Nortel Networks
    Limited as Issuer, Nortel Networks Corporation , Nortel Networks
    Inc. as Guarantors and The Bank of New York as Trustee (filed as
    Exhibit 4.1 to Nortel Networks Limiteds current
    report on
    Form 8-K
    dated May 28, 2008).10
.1*

Purchase Agreement dated May 21, 2008 among Nortel Networks
    Limited, Nortel Networks Corporation, Nortel Networks Inc. and a
    representative of the initial purchasers (filed as
    Exhibit 10.1 to Nortel Networks Limiteds current
    report on
    Form 8-K
    dated May 28, 2008).10
.2*

Registration Rights Agreement dated May 28, 2008 among
    Nortel Networks Limited, Nortel Networks Corporation and Nortel
    Networks Inc. and a representative of the initial purchasers
    (filed as Exhibit 10.2 to Nortel Networks Limiteds
    current report on
    Form 8-K
    dated May 28, 2008).10
.3

Dennis Carey, Executive Vice-President, Corporate Operations
    Employment Letter amended effective June 23, 2008.10
.4

David Drinkwater, Chief Legal Officer Employment Letter dated
    December 9, 2005.10
.5

Steve Slattery letter agreement concerning the cessation of
    Mr. Slatterys responsibilities as President,
    Enterprise Solutions of Nortel Networks Corporation and Nortel
    Networks Limited effective September 18, 2007.10
.6

Forms of Instrument of Grant as amended effective March 3,
    2008 generally provided to recipients of stock options and stock
    appreciation rights under the Nortel 2005 Stock Incentive Plan,
    As Amended and Restated (the SIP) and forms of
    Instruments of Award as amended effective March 3, 2008
    generally provided to recipients of restricted stock units and
    performance stock units granted under the SIP.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 Executive Vice-President and Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32


Certification of the President and Chief Executive Officer and
    the Executive Vice-President and Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.      *
    Incorporated by reference. 87




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##### 



SIGNATURES    NORTEL
    NETWORKS LIMITED
    (Registrant)
  Chief
    Financial Officer

Chief Accounting Officer/s/  Paviter
    S. Binning

/s/  Paul
    W. KarrPaviter
    S. BinningExecutive Vice-President and Chief Financial Officer

Paul
    W. KarrController    88