##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


|                                                  |  |                                                                                             
|------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                                 |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|                                                 
|For the Quarterly Period Ended September 30, 2005
|                                                 
|OR                                               
|                                                 
|o                                                 |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From

to


Commission file number: 000-30758


Nortel Networks Limited


(Exact name of registrant as specified in its charter)


|                                                                                                 |  |                                         
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------
|Canada                                                                                           |  | 62-12-62580                             
|(State or other jurisdiction of
    incorporation or organization)                               |  | (I.R.S. Employer
    Identification No.)
|                                                                                                
|8200 Dixie Road, Suite 100
    Brampton, Ontario, Canada(Address of principal executive offices) |  | L6T 5P6(Zip Code)                       

Registrants telephone number including area code
(905) 863-0000




þ o




þ o




o þ




1,460,978,638 shares of common stock without nominal or
par value










---










TABLE OF CONTENTS


|                                                                                                     |  |      |     | 
|---------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                     |  | Page |    
|                                                                                                     |  |      |    
|ITEM 1.Consolidated Financial
    Statements (unaudited)                                             |  |      | 4   | 
|ITEM 2.Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |  |      | 55  | 
|ITEM 3.Quantitative and
    Qualitative Disclosures About Market Risk                                |  |      | 126 | 
|ITEM 4.Controls and
    Procedures                                                                   |  |      | 126 | 
|PART II OTHER INFORMATION                                                                            |  |      |     | 
|ITEM 1.Legal Proceedings                                                                             |  |      | 133 | 
|ITEM 5.Other Information                                                                             |  |      | 135 | 
|ITEM 6.Exhibits                                                                                      |  |      | 135 | 
|SIGNATURES                                                                                           |  |      | 137 | 



All dollar amounts in this document are in United States
dollars unless otherwise stated.














2



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##### Table of Contents



PART I


FINANCIAL INFORMATION


|                                                                                                 |  |      |     | 
|------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                 |  | Page |    
|                                                                                                 |  |      |    
|ITEM 1.Consolidated Financial Statements (unaudited)                                             |  |      | 4   | 
|ITEM 2.Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 55  | 
|ITEM 3.Quantitative and Qualitative Disclosures
    About Market Risk                            |  |      | 126 | 
|ITEM 4.Controls and Procedures                                                                   |  |      | 126 | 

3



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##### Table of Contents






NORTEL NETWORKS LIMITED


Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------- | - | ----- | ---- | - | - | ----- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months               |       |     | Nine Months   |  
|                                                                                                                                                     |                | Ended                      |       |     | Ended         |  
|                                                                                                                                                     |                | September 30,              |       |     | September 30, |  
|                                                                                                                                                     |                |                            |       |     |               |  
|                                                                                                                                                     |                | 2005                       |       |     | 2004          |   |       | 2005 |   |   | 2004  |    
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,655 |     |               | $ | 2,179 |      |   | $ | 8,046 |     |   | $ | 7,213 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,660 |     |               |   | 1,391 |      |   |   | 4,787 |     |   |   | 4,301 |    
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Gross profit                                                                                                                                         |                |                            | 995   |     |               |   | 788   |      |   |   | 3,259 |     |   |   | 2,912 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 570   |     |               |   | 509   |      |   |   | 1,716 |     |   |   | 1,585 |    
|Research and development expense                                                                                                                     |                |                            | 445   |     |               |   | 497   |      |   |   | 1,390 |     |   |   | 1,452 |    
|Amortization of intangibles                                                                                                                          |                |                            | 6     |     |               |   | 2     |      |   |   | 10    |     |   |   | 7     |    
|Special charges                                                                                                                                      |                |                            | 37    |     |               |   | 93    |      |   |   | 148   |     |   |   | 99    |    
|(Gain) loss on sale of businesses and
    assets(a)                                                                                                  |                |                            | 4     |     |               |   | (39   | )    |   |   | 41    |     |   |   | (114  | )  
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Operating earnings (loss)                                                                                                                            |                |                            | (67   | )   |               |   | (274  | )    |   |   | (46   | )   |   |   | (117  | )  
|Other income (expense)  net                                                                                                                         |                |                            | 67    |     |               |   | 44    |      |   |   | 175   |     |   |   | 118   |    
|Interest expense                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (32 | )             |   |       | (22  | ) |   |       | (91 | ) |   |       | (68 | )
|                                                                                                                                                     | Other          |                            |       | (2  | )             |   |       | (3   | ) |   |       | (4  | ) |   |       | (17 | )
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (34   | )   |               |   | (255  | )    |   |   | 34    |     |   |   | (84   | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | (40   | )   |               |   | 30    |      |   |   | (48   | )   |   |   | 32    |    
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|                                                                                                                                                     |                |                            | (74   | )   |               |   | (225  | )    |   |   | (14   | )   |   |   | (52   | )  
|Minority interests  net of tax                                                                                                                      |                |                            | (5    | )   |               |   | 2     |      |   |   | (18   | )   |   |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 1     |     |               |   |      |      |   |   | 3     |     |   |   | (2    | )  
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (78   | )   |               |   | (223  | )    |   |   | (29   | )   |   |   | (59   | )  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 1     |     |               |   | 5     |      |   |   | 2     |     |   |   | 12    |    
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Net earnings (loss)                                                                                                                                  |                |                            | (77   | )   |               |   | (218  | )    |   |   | (27   | )   |   |   | (47   | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 9     |     |               |   | 8     |      |   |   | 28    |     |   |   | 24    |    
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (86   | )   |               | $ | (226  | )    |   | $ | (55   | )   |   | $ | (71   | )  
|                                                                                                                                                     |                |                            |       |     |               |   |       |      |   |   |       |    






|    |                        
|--- | -----------------------
|(a) | Includes related costs.



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NORTEL NETWORKS LIMITED


Consolidated Balance Sheets (unaudited)


|                                                                        |                                                                                                                         |                            |         |       |              |   |         |       | 
|----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----- | ------------ | - | ------- | ----- | 
|                                                                        |                                                                                                                         | September 30,              |         |       | December 31, |  
|                                                                        |                                                                                                                         | 2005                       |         |       | 2004         |  
|                                                                        |                                                                                                                         |                            |         |       |              |  
|                                                                        |                                                                                                                         | (Millions of U.S. dollars, |        
|                                                                        |                                                                                                                         | except for share amounts)  |        
|ASSETS                                                                 
|Current assets                                                          |                                                                                                                         |                            |         |       |              |   |         |      
|                                                                        | Cash and cash equivalents                                                                                               |                            | $       | 2,920 |              |   | $       | 3,607 | 
|                                                                        | Restricted cash and cash equivalents                                                                                    |                            |         | 73    |              |   |         | 80    | 
|                                                                        | Accounts receivable  net                                                                                               |                            |         | 2,929 |              |   |         | 2,800 | 
|                                                                        | Inventories  net                                                                                                       |                            |         | 1,232 |              |   |         | 1,414 | 
|                                                                        | Deferred income taxes  net                                                                                             |                            |         | 371   |              |   |         | 255   | 
|                                                                        | Other current assets                                                                                                    |                            |         | 580   |              |   |         | 355   | 
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total current assets                                                    |                                                                                                                         |                            | 8,105   |       |              |   | 8,511   |      
|Investments                                                             |                                                                                                                         |                            | 166     |       |              |   | 159     |      
|Plant and equipment  net                                               |                                                                                                                         |                            | 1,571   |       |              |   | 1,646   |      
|Goodwill                                                                |                                                                                                                         |                            | 2,339   |       |              |   | 2,123   |      
|Intangible assets  net                                                 |                                                                                                                         |                            | 150     |       |              |   | 78      |      
|Deferred income taxes  net                                             |                                                                                                                         |                            | 3,606   |       |              |   | 3,736   |      
|Other assets                                                            |                                                                                                                         |                            | 560     |       |              |   | 691     |      
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total assets                                                            |                                                                                                                         | $                          | 16,497  |       |              | $ | 16,944  |      
|                                                                        |                                                                                                                         |                            |         |       |              |  
|                                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY                                   
|Current liabilities                                                     |                                                                                                                         |                            |         |       |              |   |         |      
|                                                                        | Trade and other accounts payable                                                                                        |                            | $       | 981   |              |   | $       | 995   | 
|                                                                        | Payroll and benefit-related liabilities                                                                                 |                            |         | 534   |              |   |         | 512   | 
|                                                                        | Contractual liabilities                                                                                                 |                            |         | 396   |              |   |         | 568   | 
|                                                                        | Restructuring liabilities                                                                                               |                            |         | 131   |              |   |         | 254   | 
|                                                                        | Other accrued liabilities                                                                                               |                            |         | 2,487 |              |   |         | 2,788 | 
|                                                                        | Long-term debt due within one year                                                                                      |                            |         | 1,455 |              |   |         | 15    | 
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total current liabilities                                               |                                                                                                                         |                            | 5,984   |       |              |   | 5,132   |      
|Long-term debt                                                          |                                                                                                                         |                            | 628     |       |              |   | 2,062   |      
|Deferred income taxes  net                                             |                                                                                                                         |                            | 226     |       |              |   | 143     |      
|Other liabilities                                                       |                                                                                                                         |                            | 3,374   |       |              |   | 3,189   |      
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total liabilities                                                       |                                                                                                                         |                            | 10,212  |       |              |   | 10,526  |      
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Minority interests in subsidiary companies                              |                                                                                                                         |                            | 105     |       |              |   | 94      |      
|Guarantees, commitments and contingencies (notes 10, 11
    and 16)     |                                                                                                                         |                            |         |       |              |   |         |      
|SHAREHOLDERS EQUITY                                                   
|Preferred shares, without par value  Authorized
    shares: unlimited; |                                                                                                                         |                            |         |       |              |   |         |      
|                                                                        | Issued and outstanding shares: 30,000,000 as of
    September 30, 2005 and 30,000,000 as of December 31,
    2004       |                            |         | 536   |              |   |         | 536   | 
|Common shares, without par value  Authorized shares:
    unlimited;    |                                                                                                                         |                            |         |       |              |   |         |      
|                                                                        | Issued and outstanding shares: 1,460,978,638 as of
    September 30, 2005 and 1,460,978,638 as of
    December 31, 2004 |                            |         | 1,211 |              |   |         | 1,211 | 
|Additional paid-in capital                                              |                                                                                                                         |                            | 22,164  |       |              |   | 22,107  |      
|Accumulated deficit                                                     |                                                                                                                         |                            | (17,047 | )     |              |   | (16,992 | )    
|Accumulated other comprehensive income (loss)                           |                                                                                                                         |                            | (684    | )     |              |   | (538    | )    
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total shareholders equity                                              |                                                                                                                         |                            | 6,180   |       |              |   | 6,324   |      
|                                                                        |                                                                                                                         |                            |         |       |              |  
|Total liabilities and shareholders equity                              |                                                                                                                         | $                          | 16,497  |       |              | $ | 16,944  |      
|                                                                        |                                                                                                                         |                            |         |       |              |  



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NORTEL NETWORKS LIMITED


Consolidated Statements of Cash Flows (unaudited)


|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                            |                                                                                                                                                                                                   | Nine Months                                                                 |      
|                                                                            |                                                                                                                                                                                                   | Ended                                                                       |      
|                                                                            |                                                                                                                                                                                                   | September 30,                                                               |      
|                                                                            |                                                                                                                                                                                                   |                                                                             |      
|                                                                            |                                                                                                                                                                                                   | 2005                                                                        |       |      | 2004 |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|                                                                            |                                                                                                                                                                                                   | (Millions of                                                                |      
|                                                                            |                                                                                                                                                                                                   | U.S. dollars)                                                               |      
|Cash flows from (used in) operating activities                              |                                                                                                                                                                                                   |                                                                             |       |      |      |   |       |     
|                                                                            | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $     | (29  | )    |   | $     | (59  | )   
|                                                                            | Adjustments to reconcile net earnings (loss) from continuing
    operations to net cash from (used in) operating activities, net
    of effects from acquisitions and divestitures of businesses: |                                                                             |       |      |      |   |       |      |     
|                                                                            |                                                                                                                                                                                                   | Amortization and depreciation                                               |       |      | 230  |   |       |      | 260  |  
|                                                                            |                                                                                                                                                                                                   | Non-cash portion of special charges and related asset write downs           |       |      | 3    |   |       |      |     |  
|                                                                            |                                                                                                                                                                                                   | Equity in net (earnings) loss of associated
    companies  net of tax      |       |      | (3   | ) |       |      | 2    |  
|                                                                            |                                                                                                                                                                                                   | Stock option compensation                                                   |       |      | 57   |   |       |      | 55   |  
|                                                                            |                                                                                                                                                                                                   | Deferred income taxes                                                       |       |      | 58   |   |       |      | (12  | )
|                                                                            |                                                                                                                                                                                                   | Other liabilities                                                           |       |      | 251  |   |       |      | 190  |  
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |       |      | 25   |   |       |      | (147 | )
|                                                                            |                                                                                                                                                                                                   | Other  net                                                                 |       |      | (39  | ) |       |      | 67   |  
|                                                                            |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |       |      | (852 | ) |       |      | (787 | )
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|                                                                            | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |       | (299 | )    |   |       | (431 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Cash flows from (used in) investing activities                              |                                                                                                                                                                                                   |                                                                             |       |      |      |   |       |     
|                                                                            | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |       | (166 | )    |   |       | (194 | )   
|                                                                            | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |       | 10   |      |   |       | 10   |     
|                                                                            | Restricted cash and cash equivalents                                                                                                                                                              |                                                                             |       | 9    |      |   |       | (14  | )   
|                                                                            | Acquisitions of investments and businesses  net of
    cash acquired                                                                                                                             |                                                                             |       | (449 | )    |   |       | (7   | )   
|                                                                            | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |       | 308  |      |   |       | 143  |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|                                                                            | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |       | (288 | )    |   |       | (62  | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Cash flows from (used in) financing activities                              |                                                                                                                                                                                                   |                                                                             |       |      |      |   |       |     
|                                                                            | Dividends paid                                                                                                                                                                                    |                                                                             |       | (33  | )    |   |       | (24  | )   
|                                                                            | Increase in notes payable                                                                                                                                                                         |                                                                             |       | 58   |      |   |       | 54   |     
|                                                                            | Decrease in notes payable                                                                                                                                                                         |                                                                             |       | (64  | )    |   |       | (56  | )   
|                                                                            | Repayments of long-term debt                                                                                                                                                                      |                                                                             |       |     |      |   |       | (107 | )   
|                                                                            | Repayments of capital leases payable                                                                                                                                                              |                                                                             |       | (8   | )    |   |       | (5   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|                                                                            | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |       | (47  | )    |   |       | (138 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                                                                                                                                                                   |                                                                             | (86   | )    |      |   | (6    | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Net cash from (used in) continuing operations                               |                                                                                                                                                                                                   |                                                                             | (720  | )    |      |   | (637  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             | 33    |      |      |   | 16    |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                                                                                                   |                                                                             | (687  | )    |      |   | (621  | )   
|Cash and cash equivalents at beginning of period                            |                                                                                                                                                                                                   |                                                                             | 3,607 |      |      |   | 3,928 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|Cash and cash equivalents at end of period                                  |                                                                                                                                                                                                   | $                                                                           | 2,920 |      |      | $ | 3,307 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |      |      |  
|See note 3 for supplemental cash flow information.                          |                                                                                                                                                                                                   |                                                                             |       |      |      |   |       |     



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements (unaudited)


(millions of U.S. dollars, unless otherwise stated)


1.     Significant accounting
policies




| |                      
| | ---------------------
| | Basis of presentation









| |                    
| | -------------------
| | Comparative figures





| |                                 
| | --------------------------------
| | Recent accounting pronouncements





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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)












8



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|   |                   
|-- | ------------------
|2. | Accounting changes



|    |                            
|--- | ---------------------------
|(a) | Implicit Variable Interests





|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|(b) | Accounting for Certain Financial Instruments with
    Characteristics of both Liabilities and Equity







|   |                                         
|-- | ----------------------------------------
|3. | Consolidated financial statement details





| |                                      
| | -------------------------------------
| | Consolidated statements of operations



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                              
| | -----------------------------
| | Other income (expense)  net:

|                                                 |  |               |    |  |               |   |     |      |  |   |      |  |  |   |     |  
|------------------------------------------------ |  | ------------- | -- |  | ------------- | - | --- | ---- |  | - | ---- |  |  | - | --- | -
|                                                 |  | Three Months  |    |  | Nine Months   |  
|                                                 |  | Ended         |    |  | Ended         |  
|                                                 |  | September 30, |    |  | September 30, |  
|                                                 |  |               |    |  |               |  
|                                                 |  | 2005          |    |  | 2004          |   |     | 2005 |  |   | 2004 | 
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 
|Interest income                                  |  | $             | 15 |  |               | $ | 16  |      |  | $ | 43   |  |  | $ | 47  |  
|Gain (loss) on sale or write down of investments |  |               |   |  |               |   | 1   |      |  |   | 16   |  |  |   | 33  |  
|Currency exchange gains (losses)                 |  |               | 21 |  |               |   | 55  |      |  |   | 56   |  |  |   | 55  |  
|Other  net                                      |  |               | 31 |  |               |   | (28 | )    |  |   | 60   |  |  |   | (17 | )
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 
|Other income (expense)  net                     |  | $             | 67 |  |               | $ | 44  |      |  | $ | 175  |  |  | $ | 118 |  
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 







| |                            
| | ---------------------------
| | Consolidated balance sheets



| |                           
| | --------------------------
| | Accounts receivable  net:

|                                      |  |               |       |   |              |   |       |  
|------------------------------------- |  | ------------- | ----- | - | ------------ | - | ----- | -
|                                      |  | September 30, |       |   | December 31, |  
|                                      |  | 2005          |       |   | 2004         |  
|                                      |  |               |       |   |              |  
|Trade receivables                     |  | $             | 2,267 |   |              | $ | 2,259 |  
|Notes receivable                      |  |               | 66    |   |              |   | 42    |  
|Contracts in process                  |  |               | 692   |   |              |   | 608   |  
|                                      |  |               |       |   |              |  
|                                      |  |               | 3,025 |   |              |   | 2,909 |  
|Less: provision for doubtful accounts |  |               | (96   | ) |              |   | (109  | )
|                                      |  |               |       |   |              |  
|Accounts receivable  net             |  | $             | 2,929 |   |              | $ | 2,800 |  
|                                      |  |               |       |   |              |  



| |                   
| | ------------------
| | Inventories  net:

|                                 |  |               |        |   |              |   |        |  
|-------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | -
|                                 |  | September 30, |        |   | December 31, |  
|                                 |  | 2005          |        |   | 2004         |  
|                                 |  |               |        |   |              |  
|Raw materials                    |  | $             | 838    |   |              | $ | 935    |  
|Work in process                  |  |               | 45     |   |              |   | 125    |  
|Finished goods                   |  |               | 1,784  |   |              |   | 1,863  |  
|                                 |  |               |        |   |              |  
|                                 |  |               | 2,667  |   |              |   | 2,923  |  
|Less: provision for inventory    |  |               | (1,046 | ) |              |   | (1,141 | )
|                                 |  |               |        |   |              |  
|Inventories  net                |  |               | 1,621  |   |              |   | 1,782  |  
|Less: long-term
    inventory(a) |  |               | (389   | ) |              |   | (368   | )
|                                 |  |               |        |   |              |  
|Current inventories  net        |  | $             | 1,232  |   |              | $ | 1,414  |  
|                                 |  |               |        |   |              |  






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(a) | Long-term portion of inventory related to deferred costs
    discussed below, which is included in other assets.

10



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






| |                      
| | ---------------------
| | Other current assets:

|                                          |  |               |     |  |              |   |     | 
|----------------------------------------- |  | ------------- | --- |  | ------------ | - | --- | 
|                                          |  | September 30, |     |  | December 31, |  
|                                          |  | 2005          |     |  | 2004         |  
|                                          |  |               |     |  |              |  
|Prepaid expenses                          |  | $             | 222 |  |              | $ | 175 | 
|Income taxes recoverable                  |  |               | 69  |  |              |   | 38  | 
|Current assets of discontinued operations |  |               | 13  |  |              |   | 14  | 
|Other                                     |  |               | 276 |  |              |   | 128 | 
|                                          |  |               |     |  |              |  
|Other current assets                      |  | $             | 580 |  |              | $ | 355 | 
|                                          |  |               |     |  |              |  



| |                           
| | --------------------------
| | Plant and equipment  net:

|                                    |                                                               |               |        |        |              |   |        |        |  
|----------------------------------- | ------------------------------------------------------------- | ------------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                    |                                                               | September 30, |        |        | December 31, |  
|                                    |                                                               | 2005          |        |        | 2004         |  
|                                    |                                                               |               |        |        |              |  
|Cost:                               |                                                               |               |        |        |              |   |        |       
|                                    | Land                                                          |               | $      | 56     |              |   | $      | 63     |  
|                                    | Buildings                                                     |               |        | 1,328  |              |   |        | 1,514  |  
|                                    | Machinery and equipment                                       |               |        | 2,237  |              |   |        | 2,439  |  
|                                    | Capital lease assets  buildings, machinery and
    equipment |               |        | 206    |              |   |        | 42     |  
|                                    |                                                               |               |        |        |              |  
|                                    |                                                               |               | 3,827  |        |              |   | 4,058  |       
|                                    |                                                               |               |        |        |              |  
|Less accumulated depreciation:      |                                                               |               |        |        |              |   |        |       
|                                    | Buildings                                                     |               |        | (453   | )            |   |        | (502   | )
|                                    | Machinery and equipment                                       |               |        | (1,731 | )            |   |        | (1,878 | )
|                                    | Capital lease assets  buildings, machinery and
    equipment |               |        | (72    | )            |   |        | (32    | )
|                                    |                                                               |               |        |        |              |  
|                                    |                                                               |               | (2,256 | )      |              |   | (2,412 | )     
|                                    |                                                               |               |        |        |              |  
|Plant and equipment 
    net(a)(b) |                                                               | $             | 1,571  |        |              | $ | 1,646  |       
|                                    |                                                               |               |        |        |              |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes assets held for sale with a carrying value of $71 and
    $29 as of September 30, 2005 and December 31, 2004,
    respectively, related to owned facilities that were being
    actively marketed. These assets were written down to their
    estimated fair values less costs to sell. The write downs were
    included in special charges. Nortel expects to dispose of all of
    these facilities by the end of the first half of 2006.



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Includes assets accounted for as a financing under
    sale-leaseback accounting guidelines with a carrying value of
    $54 and $43 as of September 30, 2005 and December 31,
    2004, respectively.



| |          
| | ---------
| | Goodwill:



|                                       |                   |          |     |     |          |   |         |          |   |   |            |    |   |       |       |     |   |   |       |     |  
|-------------------------------------- | ----------------- | -------- | --- | --- | -------- | - | ------- | -------- | - | - | ---------- | -- | - | ----- | ----- | --- | - | - | ----- | --- | -
|                                       |                   | Carrier  |     |     |          |   | GSM and |          |   |   |            |   
|                                       |                   | Packet   |     |     | CDMA     |   |         | UMTS     |   |   | Enterprise |    |   |      
|                                       |                   | Networks |     |     | Networks |   |         | Networks |   |   | Networks   |    |   | Total |      
|                                       |                   |          |     |     |          |   |         |          |   |   |            |    |   |       |      
|Balance  net as of December 31, 2004  |                   | $        | 528 |     |          | $ | 28      |          |   | $ | 9          |    |   | $     | 1,558 |     |   | $ | 2,123 |    
|Changes:                               |                   |          |     |     |          |   |         |          |   |   |            |    |   |       |       |     |   |   |       |    
|                                       | Addition (note 8) |          |     |    |          |   |         |         |   |   |            |   |   |       |       | 269 |   |   |       | 269 |  
|                                       | Disposal          |          |     | (38 | )        |   |         |         |   |   |            |   |   |       |       |    |   |   |       | (38 | )
|                                       | Foreign exchange  |          |     | (7  | )        |   |         | (2       | ) |   |            | (1 | ) |       |       | (5  | ) |   |       | (15 | )
|                                       |                   |          |     |     |          |   |         |          |   |   |            |    |   |       |      
|Balance  net as of September 30, 2005 |                   | $        | 483 |     |          | $ | 26      |          |   | $ | 8          |    |   | $     | 1,822 |     |   | $ | 2,339 |    
|                                       |                   |          |     |     |          |   |         |          |   |   |            |    |   |       |      

11



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






| |                         
| | ------------------------
| | Intangible assets  net:

|                               |  |               |     |  |              |   |    | 
|------------------------------ |  | ------------- | --- |  | ------------ | - | -- | 
|                               |  | September 30, |     |  | December 31, |  
|                               |  | 2005          |     |  | 2004         |  
|                               |  |               |     |  |              |  
|Other intangible
    assets(a) |  | $             | 109 |  |              | $ | 38 | 
|Pension intangible assets      |  |               | 41  |  |              |   | 40 | 
|                               |  |               |     |  |              |  
|Intangible assets  net        |  | $             | 150 |  |              | $ | 78 | 
|                               |  |               |     |  |              |  






|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(a) | Includes intangible assets related to an acquisition during the
    second quarter of 2005, see note 8.





| |                           
| | --------------------------
| | Other accrued liabilities:

|                                                                           |  |               |       |  |              |   |       | 
|-------------------------------------------------------------------------- |  | ------------- | ----- |  | ------------ | - | ----- | 
|                                                                           |  | September 30, |       |  | December 31, |  
|                                                                           |  | 2005          |       |  | 2004         |  
|                                                                           |  |               |       |  |              |  
|Outsourcing and selling, general and administrative related
    provisions |  | $             | 285   |  |              | $ | 321   | 
|Customer deposits                                                          |  |               | 28    |  |              |   | 28    | 
|Product related provisions                                                 |  |               | 64    |  |              |   | 57    | 
|Warranty provisions (note 10)                                              |  |               | 231   |  |              |   | 271   | 
|Deferred revenue                                                           |  |               | 1,079 |  |              |   | 1,210 | 
|Miscellaneous taxes                                                        |  |               | 57    |  |              |   | 52    | 
|Income taxes payable                                                       |  |               | 50    |  |              |   | 110   | 
|Interest payable                                                           |  |               | 28    |  |              |   | 40    | 
|Advance billings in excess of revenues recognized to date on
    contracts |  |               | 525   |  |              |   | 581   | 
|Other                                                                      |  |               | 140   |  |              |   | 118   | 
|                                                                           |  |               |       |  |              |  
|Other accrued liabilities                                                  |  | $             | 2,487 |  |              | $ | 2,788 | 
|                                                                           |  |               |       |  |              |  



| |                   
| | ------------------
| | Other liabilities:

|                                                                 |  |               |       |  |              |   |       | 
|---------------------------------------------------------------- |  | ------------- | ----- |  | ------------ | - | ----- | 
|                                                                 |  | September 30, |       |  | December 31, |  
|                                                                 |  | 2005          |       |  | 2004         |  
|                                                                 |  |               |       |  |              |  
|Pension, post-employment and post-retirement benefit liabilities |  | $             | 2,300 |  |              | $ | 2,208 | 
|Restructuring liabilities (note 5)                               |  |               | 217   |  |              |   | 209   | 
|Deferred revenue                                                 |  |               | 625   |  |              |   | 509   | 
|Other long-term provisions                                       |  |               | 232   |  |              |   | 263   | 
|                                                                 |  |               |       |  |              |  
|Other liabilities                                                |  | $             | 3,374 |  |              | $ | 3,189 | 
|                                                                 |  |               |       |  |              |  

12



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                                      
| | -------------------------------------
| | Consolidated statements of cash flows

Change
in operating assets and liabilities:


|                                                      |  |               |      |   |      |   |      |  
|----------------------------------------------------- |  | ------------- | ---- | - | ---- | - | ---- | -
|                                                      |  | Nine Months   |     
|                                                      |  | Ended         |     
|                                                      |  | September 30, |     
|                                                      |  |               |     
|                                                      |  | 2005          |      |   | 2004 |  
|                                                      |  |               |      |   |      |  
|Accounts receivable  net                             |  | $             | (207 | ) |      | $ | 251  |  
|Inventories  net                                     |  |               | 78   |   |      |   | (313 | )
|Income taxes                                          |  |               | (49  | ) |      |   | (64  | )
|Restructuring liabilities                             |  |               | (112 | ) |      |   | (69  | )
|Accounts payable, payroll and contractual liabilities |  |               | (597 | ) |      |   | (521 | )
|Other operating assets and liabilities                |  |               | 35   |   |      |   | (71  | )
|                                                      |  |               |      |   |      |  
|Change in operating assets and liabilities            |  | $             | (852 | ) |      | $ | (787 | )
|                                                      |  |               |      |   |      |  



| |                                     
| | ------------------------------------
| | Interest and taxes paid (recovered):

|                                  |  |               |     |  |      |   |    | 
|--------------------------------- |  | ------------- | --- |  | ---- | - | -- | 
|                                  |  | Nine Months   |    
|                                  |  | Ended         |    
|                                  |  | September 30, |    
|                                  |  |               |    
|                                  |  | 2005          |     |  | 2004 |  
|                                  |  |               |     |  |      |  
|Cash interest paid                |  | $             | 104 |  |      | $ | 99 | 
|Cash taxes paid (recovered)  net |  | $             | 44  |  |      | $ | 38 | 



|   |                    
|-- | -------------------
|4. | Segment information



| |                    
| | -------------------
| | General description







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Carrier Packet Networks provides: (i) circuit and packet
    voice solutions, (ii) data networking and security
    solutions and (iii) optical long-haul and metropolitan
    optical network solutions. Together, these solutions provide or
    transport data, voice and multimedia communications solutions to
    Nortels service provider customers that operate wireline
    networks. These service provider customers include local and
    long distance telephone companies, wireless service providers
    (for the wireline portion of their networks), cable operators
    and other communication service providers.

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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CDMA Networks provides communication network solutions to
    wireless service provider customers based on CDMA and Time
    Division Multiple Access (TDMA) technologies to
    enable those customers to offer their customers, the subscribers
    for wireless communication services, the ability to be mobile
    while they send and receive voice and data communications using
    wireless devices, such as cellular telephones, personal digital
    assistants and other computing and communications devices.                            
|
| |  | GSM and UMTS Networks also provides communication network
    solutions to Nortels wireless service provider customers;
    however, these solutions are based on GSM and UMTS technologies.                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Enterprise Networks provides: (i) circuit and packet voice
    solutions and (ii) data networking and security solutions
    which provide data, voice and multimedia communications
    solutions to Nortels enterprise customers. Nortels
    Enterprise Networks customers consist of a broad range of
    enterprise customers around the world, including large
    businesses and their branch offices, small businesses and home
    offices, as well as government agencies, educational and other
    institutions and utility organizations.
|
| |  | Other represents miscellaneous business activities
    and corporate functions. None of these activities meet the
    quantitative criteria to be disclosed separately as reportable
    segments. Costs associated with shared services and other
    corporate costs are allocated to the segments based on usage
    determined generally by headcount. Costs not allocated to the
    segments are primarily related to Nortels corporate
    compliance and other non- operational activities and are
    included in Other.                  





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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |         
| | --------
| | Segments



|                                               |  |               |       |   |               |   |       |      |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                               |  | Three Months  |       |   | Nine Months   |  
|                                               |  | Ended         |       |   | Ended         |  
|                                               |  | September 30, |       |   | September 30, |  
|                                               |  |               |       |   |               |  
|                                               |  | 2005          |       |   | 2004          |   |       | 2005 |  |   | 2004  |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Revenues                                       |  |               |       |   |               |   |       |      |  |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $             | 754   |   |               | $ | 533   |      |  | $ | 2,156 |   |  | $ | 1,940 |  
|CDMA Networks                                  |  |               | 539   |   |               |   | 511   |      |  |   | 1,743 |   |  |   | 1,647 |  
|GSM and UMTS Networks                          |  |               | 674   |   |               |   | 543   |      |  |   | 2,182 |   |  |   | 1,910 |  
|Enterprise Networks                            |  |               | 685   |   |               |   | 591   |      |  |   | 1,962 |   |  |   | 1,703 |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Total reportable segments                      |  |               | 2,652 |   |               |   | 2,178 |      |  |   | 8,043 |   |  |   | 7,200 |  
|Other(a)                                       |  |               | 3     |   |               |   | 1     |      |  |   | 3     |   |  |   | 13    |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Total Revenues                                 |  | $             | 2,655 |   |               | $ | 2,179 |      |  | $ | 8,046 |   |  | $ | 7,213 |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Management EBT                                 |  |               |       |   |               |   |       |      |  |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $             | 47    |   |               | $ | (127  | )    |  | $ | 50    |   |  | $ | (225  | )
|CDMA Networks                                  |  |               | 137   |   |               |   | 140   |      |  |   | 499   |   |  |   | 519   |  
|GSM and UMTS Networks                          |  |               | (67   | ) |               |   | (179  | )    |  |   | 12    |   |  |   | (185  | )
|Enterprise Networks                            |  |               | 44    |   |               |   | 48    |      |  |   | 186   |   |  |   | 105   |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Total reportable segments                      |  |               | 161   |   |               |   | (118  | )    |  |   | 747   |   |  |   | 214   |  
|Other(a)                                       |  |               | (152  | ) |               |   | (79   | )    |  |   | (529  | ) |  |   | (313  | )
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Total Management EBT                           |  |               | 9     |   |               |   | (197  | )    |  |   | 218   |   |  |   | (99   | )
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Amortization of intangibles                    |  |               | (6    | ) |               |   | (2    | )    |  |   | (10   | ) |  |   | (7    | )
|Special charges                                |  |               | (37   | ) |               |   | (93   | )    |  |   | (148  | ) |  |   | (99   | )
|Gain (loss) on sale of businesses and assets   |  |               | (4    | ) |               |   | 39    |      |  |   | (41   | ) |  |   | 114   |  
|Income tax benefit (expense)                   |  |               | (40   | ) |               |   | 30    |      |  |   | (48   | ) |  |   | 32    |  
|                                               |  |               |       |   |               |   |       |      |  |   |       |  
|Net earnings (loss) from continuing operations |  | $             | (78   | ) |               | $ | (223  | )    |  | $ | (29   | ) |  | $ | (59   | )
|                                               |  |               |       |   |               |   |       |      |  |   |       |  






|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other represents miscellaneous business activities
    and corporate functions and includes interest attributable to
    long- term debt.



|   |                
|-- | ---------------
|5. | Special charges







15



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |    |  
|------------------------------------------------------- | --------------------------------------------- | --------- | --- | ---------- | --------- | - | --------- | ----------- | - | --------------- | ------------ | ----- | ------------- | ----------- | ----- | ------------- | ---- | - | -- | -- |  | - | --- | -- | -
|                                                        |                                               |           |     |            |           |   |           |             |   | Special Charges |             
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |             
|                                                        |                                               |           |     | Contract   |           |   |           |             |   |                 | Three Months |       |               | Nine Months |      
|                                                        |                                               |           |     | Settlement |           |   | Plant and |             |   |                 |              | Ended |               |             | Ended |              
|                                                        |                                               | Workforce |     |            | and Lease |   |           | Equipment   |   |                 |              |       | September 30, |             |       | September 30, |     
|                                                        |                                               | Reduction |     |            | Costs     |   |           | Write Downs |   |                 | Total        |       |               | 2005        |       |               | 2005 |  
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|2001 Restructuring Plan                                 |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|Provision balance as of December 31,
    2004(a)        |                                               | $         | 15  |            |           | $ | 326       |             |   | $               |             |       |               | $           | 341   |               |      |   |    |    |  |   |     |   
|Revisions to prior accruals:                            |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | (3         | )         |   |           |            |   |                 |              | (1    | )             |             |       | (4            | )    |   | $  |   |  |   | $   | (4 | )
|                                                        | For the three months ended June 30, 2005      |           |     | (2         | )         |   |           | 4           |   |                 |              | (2    | )             |             |       |              |      |   |    |   |  |   |     |   |  
|                                                        | For the three months ended September 30, 2005 |           |     |           |           |   |           | 3           |   |                 |              |      |               |             |       | 3             |      |   |    | 3  |  |   |     | 3  |  
|Cumulative provision (drawdowns) adjustments in 2005:   |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|                                                        | Cash drawdowns                                |           |     | (5         | )         |   |           | (86         | ) |                 |              |      |               |             |       | (91           | )    |   |    |    |  |   |     |    |  
|                                                        | Non-cash drawdowns                            |           |     |           |           |   |           |            |   |                 |              | 3     |               |             |       | 3             |      |   |    |    |  |   |     |    |  
|                                                        | Foreign exchange and other adjustments        |           |     | (1         | )         |   |           | (9          | ) |                 |              |      |               |             |       | (10           | )    |   |    |    |  |   |     |    |  
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|Provision balance as of September 30, 2005              |                                               | $         | 4   |            |           | $ | 238       |             |   | $               |             |       |               | $           | 242   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|2004 Restructuring Plan                                 |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|Provision balance as of December 31,
    2004(a)        |                                               | $         | 122 |            |           | $ |          |             |   | $               |             |       |               | $           | 122   |               |      |   |    |    |  |   |     |   
|Other special charges:                                  |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | 18         |           |   |           | 8           |   |                 |              | 1     |               |             |       | 27            |      |   |    |   |  |   |     | 27 |  
|                                                        | For the three months ended June 30, 2005      |           |     | 32         |           |   |           | 46          |   |                 |              | 4     |               |             |       | 82            |      |   |    |   |  |   |     | 82 |  
|                                                        | For the three months ended September 30, 2005 |           |     | 18         |           |   |           | 13          |   |                 |              | 1     |               |             |       | 32            |      |   |    | 32 |  |   |     | 32 |  
|Revisions to prior accruals:                            |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | (2         | )         |   |           |            |   |                 |              |      |               |             |       | (2            | )    |   |    |   |  |   |     | (2 | )
|                                                        | For the three months ended June 30, 2005      |           |     | 7          |           |   |           |            |   |                 |              | 1     |               |             |       | 8             |      |   |    |   |  |   |     | 8  |  
|                                                        | For the three months ended September 30, 2005 |           |     | (3         | )         |   |           | 5           |   |                 |              |      |               |             |       | 2             |      |   |    | 2  |  |   |     | 2  |  
|Cumulative provision (drawdowns) adjustments in 2005:   |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |   |    |    |  |   |     |   
|                                                        | Cash drawdowns                                |           |     | (148       | )         |   |           | (7          | ) |                 |              |      |               |             |       | (155          | )    |   |    |    |  |   |     |    |  
|                                                        | Non-cash drawdowns                            |           |     |           |           |   |           |            |   |                 |              | (6    | )             |             |       | (6            | )    |   |    |    |  |   |     |    |  
|                                                        | Foreign exchange and other adjustments        |           |     | (1         | )         |   |           | (2          | ) |                 |              | (1    | )             |             |       | (4            | )    |   |    |    |  |   |     |    |  
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|Provision balance as of September 30, 2005              |                                               | $         | 43  |            |           | $ | 63        |             |   | $               |             |       |               | $           | 106   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|Total provision balance as of September 30,
    2005(a) |                                               | $         | 47  |            |           | $ | 301       |             |   | $               |             |       |               | $           | 348   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  
|Total special charges                                   |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      | $ | 37 |    |  | $ | 148 |   
|                                                        |                                               |           |     |            |           |   |           |             |   |                 |              |       |               |             |       |               |      |  






|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of September 30, 2005 and December 31, 2004, the
    short-term provision balance was $131 and $254, respectively,
    and the long-term provision balance was $217 and $209,
    respectively.

16



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                       |                    |                         |  |    |             |  |  |       |  |  |  |     | 
|------------------------------------------------------ | ------------------ | ----------------------- |  | -- | ----------- |  |  | ----- |  |  |  | --- | 
|                                                       |                    | Employees (approximate) | 
|                                                       |                    |                         | 
|                                                       |                    | Direct(a)               |  |    | Indirect(b) |  |  | Total | 
|                                                       |                    |                         |  |    |             |  |  |       | 
|RFT employee notifications for the three months ended: |                    |                         |  |    |             |  |  |       |  |  |  |    
|                                                       | March 31, 2005     |                         |  | 20 |             |  |  | 220   |  |  |  | 240 | 
|                                                       | June 30, 2005      |                         |  | 15 |             |  |  | 445   |  |  |  | 460 | 
|                                                       | September 30, 2005 |                         |  | 26 |             |  |  | 228   |  |  |  | 254 | 






|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Direct employees included employees performing manufacturing,
    assembly, testing and inspection activities associated with the
    production of Nortels products.



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Indirect employees included employees performing manufacturing,
    management, sales, marketing, research and development and
    administrative activities.



| |                        
| | -----------------------
| | 2001 Restructuring Plan



| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2005









| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2004







17



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                   |  |                   |    |                  |                    |               |                    |  |             |                    |    |   |                    |   |   |  |  |   |    | 
|------------------ |  | ----------------- | -- | ---------------- | ------------------ | ------------- | ------------------ |  | ----------- | ------------------ | -- | - | ------------------ | - | - |  |  | - | -- | 
|                   |  |                   |    | Costs During the |                    | Payments Made |                    |  | Adjustments |                    |    |  
|                   |  | Accrued Balance   |    |                  | Nine Months        |               | During the Nine    |  |             | During the Nine    |    |   | Accrued Balance    |  
|                   |  | as of             |    |                  | Ended              |               | Months Ended       |  |             | Months Ended       |    |   | as of              |  
|                   |  | December 31, 2004 |    |                  | September 30, 2005 |               | September 30, 2005 |  |             | September 30, 2005 |    |   | September 30, 2005 |  
|                   |  |                   |    |                  |                    |               |                    |  |             |                    |    |   |                    |  
|Lease
    costs(a) |  | $                 | 31 |                  |                    | $             |                   |  |             | $                  | (2 | ) |                    | $ | 2 |  |  | $ | 31 | 






|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Total estimated costs, net of estimated sublease income,
    associated with these accruals are $69, of which $19 was drawn
    down by cash payments of $21 and offset by non-cash adjustments
    of $2 prior to January 1, 2005.



| |                             
| | ----------------------------
| | Special charges  by segment



|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |    |  
|---------------------------------------------------------------------- | --------------------------------------------- | --------- | -- | ---------- | --------- | - | --------- | ----------- | - | - | ----- | -- | - | - | -- | -- | -
|                                                                       |                                               |           |    | Contract   |           |   |           |             |  
|                                                                       |                                               |           |    | Settlement |           |   | Plant and |             |   |  
|                                                                       |                                               | Workforce |    |            | and Lease |   |           | Equipment   |   |   |      
|                                                                       |                                               | Reduction |    |            | Costs     |   |           | Write Downs |   |   | Total |   
|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |   
|2001 Restructuring Plan                                                |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|Carrier Packet Networks:                                               |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           | $  | (1         | )         |   | $         |            |   |   | $     | (1 | ) |   | $  | (2 | )
|                                                                       | For the three months ended June 30, 2005      |           |    | (1         | )         |   |           | 2           |   |   |       | (1 | ) |   |    |   |  
|                                                                       | For the three months ended September 30, 2005 |           |    |           |           |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|GSM and UMTS Networks:                                                 |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           |    | (1         | )         |   |           |            |   |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended June 30, 2005      |           |    | (1         | )         |   |           | 1           |   |   |       | (1 | ) |   |    | (1 | )
|                                                                       | For the three months ended September 30, 2005 |           |    |           |           |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|Enterprise Networks:                                                   |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           |    | (1         | )         |   |           |            |   |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended June 30, 2005      |           |    |           |           |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|                                                                       | For the three months ended September 30, 2005 |           |    |           |           |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|Other:                                                                 |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended June 30, 2005      |           |    |           |           |   |           |            |   |   |       |   |   |   |    |   |  
|                                                                       | For the three months ended September 30, 2005 |           |    |           |           |   |           |            |   |   |       |   |   |   |    |   |  
|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |   
|Total special charges for the nine months ended
    September 30, 2005 |                                               | $         | (5 | )          |           | $ | 7         |             |   | $ | (3    | )  |   | $ | (1 | ) 
|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |   
|Carrier Packet Networks:                                               |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2004     |           | $  | 6          |           |   | $         | 1           |   |   | $     |   |   |   | $  | 7  |  
|                                                                       | For the three months ended June 30, 2004      |           |    |           |           |   |           | (1          | ) |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended September 30, 2004 |           |    | (4         | )         |   |           | 9           |   |   |       | 1  |   |   |    | 6  |  
|GSM and UMTS Networks:                                                 |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended September 30, 2004 |           |    |           |           |   |           | 8           |   |   |       |   |   |   |    | 8  |  
|Enterprise Networks:                                                   |                                               |           |    |            |           |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended September 30, 2004 |           |    |           |           |   |           | 7           |   |   |       |   |   |   |    | 7  |  
|Other                                                                  |                                               |           |   |            |           |   |          |             |   |   |      |    |   |   |   |   
|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |   
|Total special charges for the nine months ended
    September 30, 2004 |                                               | $         | 2  |            |           | $ | 24        |             |   | $ | 1     |    |   | $ | 27 |   
|                                                                       |                                               |           |    |            |           |   |           |             |   |   |       |   

18



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






| |                        
| | -----------------------
| | 2004 Restructuring Plan



| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2005









| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2004





19



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                             
| | ----------------------------
| | Special charges  by segment



|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |    | 
|---------------------------------------------------------------------- | --------------------------------------------- | --------- | -- | ---------- | --------- | - | --------- | ----------- |  | - | ----- | - |  | - | --- | -- | 
|                                                                       |                                               |           |    | Contract   |           |   |           |             | 
|                                                                       |                                               |           |    | Settlement |           |   | Plant and |             |  |  
|                                                                       |                                               | Workforce |    |            | and Lease |   |           | Equipment   |  |   |      
|                                                                       |                                               | Reduction |    |            | Costs     |   |           | Write Downs |  |   | Total |  
|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |  
|2004 Restructuring Plan                                                |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|Carrier Packet Networks:                                               |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended March 31, 2005     |           | $  | 9          |           |   | $         | 1           |  |   | $     | 1 |  |   | $   | 11 | 
|                                                                       | For the three months ended June 30, 2005      |           |    | 28         |           |   |           | 36          |  |   |       | 4 |  |   |     | 68 | 
|                                                                       | For the three months ended September 30, 2005 |           |    | 5          |           |   |           | 9           |  |   |       | 1 |  |   |     | 15 | 
|CDMA Networks:                                                         |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended March 31, 2005     |           |    | 1          |           |   |           |            |  |   |       |  |  |   |     | 1  | 
|                                                                       | For the three months ended June 30, 2005      |           |    | 2          |           |   |           | 1           |  |   |       |  |  |   |     | 3  | 
|                                                                       | For the three months ended September 30, 2005 |           |    | 2          |           |   |           | 2           |  |   |       |  |  |   |     | 4  | 
|GSM and UMTS Networks:                                                 |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended March 31, 2005     |           |    | 3          |           |   |           |            |  |   |       |  |  |   |     | 3  | 
|                                                                       | For the three months ended June 30, 2005      |           |    | 6          |           |   |           | 6           |  |   |       | 1 |  |   |     | 13 | 
|                                                                       | For the three months ended September 30, 2005 |           |    | 5          |           |   |           | 4           |  |   |       |  |  |   |     | 9  | 
|Enterprise Networks:                                                   |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended March 31, 2005     |           |    | 3          |           |   |           | 7           |  |   |       |  |  |   |     | 10 | 
|                                                                       | For the three months ended June 30, 2005      |           |    | 3          |           |   |           | 3           |  |   |       |  |  |   |     | 6  | 
|                                                                       | For the three months ended September 30, 2005 |           |    | 3          |           |   |           | 3           |  |   |       |  |  |   |     | 6  | 
|Other                                                                  |                                               |           |   |            |           |   |          |             |  |   |      |   |  |   |    |   
|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |  
|Total special charges for the nine months ended
    September 30, 2005 |                                               | $         | 70 |            |           | $ | 72        |             |  | $ | 7     |   |  | $ | 149 |   
|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |  
|Carrier Packet Networks:                                               |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended September 30, 2004 |           | $  | 49         |           |   | $         |            |  |   | $     |  |  |   | $   | 49 | 
|CDMA Networks:                                                         |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended September 30, 2004 |           |    | 6          |           |   |           |            |  |   |       |  |  |   |     | 6  | 
|GSM and UMTS Networks:                                                 |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended September 30, 2004 |           |    | 4          |           |   |           |            |  |   |       |  |  |   |     | 4  | 
|Enterprise Networks:                                                   |                                               |           |    |            |           |   |           |             |  |   |       |   |  |   |     |   
|                                                                       | For the three months ended September 30, 2004 |           |    | 13         |           |   |           |            |  |   |       |  |  |   |     | 13 | 
|Other                                                                  |                                               |           |   |            |           |   |          |             |  |   |      |   |  |   |    |   
|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |  
|Special charges for the nine months ended September 30, 2004           |                                               | $         | 72 |            |           | $ |          |             |  | $ |      |   |  | $ | 72  |   
|                                                                       |                                               |           |    |            |           |   |           |             |  |   |       |  



|   |             
|-- | ------------
|6. | Income taxes



20



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




















21



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|   |                       
|-- | ----------------------
|7. | Employee benefit plans









|                                                                |  |               |      |   |               |   |      |      |  |   |      |   |  |   |      |  
|--------------------------------------------------------------- |  | ------------- | ---- | - | ------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                |  | Three Months  |      |   | Nine Months   |  
|                                                                |  | Ended         |      |   | Ended         |  
|                                                                |  | September 30, |      |   | September 30, |  
|                                                                |  |               |      |   |               |  
|                                                                |  | 2005          |      |   | 2004          |   |      | 2005 |  |   | 2004 |  
|                                                                |  |               |      |   |               |   |      |      |  |   |      |  
|Pension expense:                                                |  |               |      |   |               |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                                    |  | $             | 32   |   |               | $ | 30   |      |  | $ | 97   |   |  | $ | 90   |  
|Interest cost                                                   |  |               | 112  |   |               |   | 104  |      |  |   | 342  |   |  |   | 311  |  
|Expected return on plan assets                                  |  |               | (105 | ) |               |   | (102 | )    |  |   | (321 | ) |  |   | (305 | )
|Amortization of prior service cost                              |  |               | 1    |   |               |   | 1    |      |  |   | 3    |   |  |   | 3    |  
|Amortization of net losses (gains)                              |  |               | 24   |   |               |   | 19   |      |  |   | 72   |   |  |   | 57   |  
|Curtailment, contractual and special termination losses (gains) |  |               | 1    |   |               |   |     |      |  |   | 25   |   |  |   |     |  
|                                                                |  |               |      |   |               |   |      |      |  |   |      |  
|Net pension expense                                             |  | $             | 65   |   |               | $ | 52   |      |  | $ | 218  |   |  | $ | 156  |  
|                                                                |  |               |      |   |               |   |      |      |  |   |      |  





|                                   |  |               |    |   |               |   |    |      |  |   |      |   |  |   |    |  
|---------------------------------- |  | ------------- | -- | - | ------------- | - | -- | ---- |  | - | ---- | - |  | - | -- | -
|                                   |  | Three Months  |    |   | Nine Months   |  
|                                   |  | Ended         |    |   | Ended         |  
|                                   |  | September 30, |    |   | September 30, |  
|                                   |  |               |    |   |               |  
|                                   |  | 2005          |    |   | 2004          |   |    | 2005 |  |   | 2004 |  
|                                   |  |               |    |   |               |   |    |      |  |   |      |  
|Post-retirement benefit cost:      |  |               |    |   |               |   |    |      |  |   |      |   |  |   |    |  
|Service cost                       |  | $             | 2  |   |               | $ | 2  |      |  | $ | 6    |   |  | $ | 7  |  
|Interest cost                      |  |               | 10 |   |               |   | 10 |      |  |   | 31   |   |  |   | 31 |  
|Expected return on plan assets     |  |               |   |   |               |   |   |      |  |   | (2   | ) |  |   | (1 | )
|Amortization of prior service cost |  |               | (1 | ) |               |   |   |      |  |   | (3   | ) |  |   | (2 | )
|Amortization of net losses (gains) |  |               |   |   |               |   |   |      |  |   |     |   |  |   | 2  |  
|                                   |  |               |    |   |               |   |    |      |  |   |      |  
|Net post-retirement benefit cost   |  | $             | 11 |   |               | $ | 12 |      |  | $ | 32   |   |  | $ | 37 |  
|                                   |  |               |    |   |               |   |    |      |  |   |      |  

22



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






|   |                                                     
|-- | ----------------------------------------------------
|8. | Acquisitions, divestitures and change in investments



| |             
| | ------------
| | Acquisitions



| |                    
| | -------------------
| | PEC Solutions, Inc.









23



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                  |                                         |   |     |     | 
|--------------------------------- | --------------------------------------- | - | --- | --- | 
|Purchase price                    |                                         | $ | 449 |    
|                                  |                                         |   |    
|Assets acquired:                  |                                         |   |     |    
|                                  | Cash and cash equivalents               |   | $   | 26  | 
|                                  | Accounts receivable  net               |   |     | 65  | 
|                                  | Other current assets                    |   |     | 34  | 
|                                  | Investments                             |   |     | 8   | 
|                                  | Plant and equipment                     |   |     | 32  | 
|                                  | Other intangible assets                 |   |     | 84  | 
|                                  | Goodwill                                |   |     | 269 | 
|                                  | Other assets                            |   |     | 5   | 
|                                  |                                         |   |    
|                                  |                                         |   | 523 |    
|                                  |                                         |   |    
|Less liabilities assumed:         |                                         |   |     |    
|                                  | Trade and other accounts payable        |   |     | 6   | 
|                                  | Payroll and benefit-related liabilities |   |     | 15  | 
|                                  | Other accrued liabilities               |   |     | 17  | 
|                                  | Long-term debt                          |   |     | 33  | 
|                                  | Other liabilities                       |   |     | 3   | 
|                                  |                                         |   |    
|                                  |                                         |   | 74  |    
|                                  |                                         |   |    
|Fair value of net assets acquired |                                         | $ | 449 |    
|                                  |                                         |   |    





|                                     |  |            |    |              |                |  |    | 
|------------------------------------ |  | ---------- | -- | ------------ | -------------- |  | -- | 
|                                     |  |            |    | Amortization |               
|                                     |  | Fair Value |    |              | Period (Years) | 
|                                     |  |            |    |              |                | 
|Trade name                           |  | $          | 7  |              |                |  | 4  | 
|Software licenses                    |  |            | 1  |              |                |  | 5  | 
|Customer contracts and relationships |  |            | 76 |              |                |  | 10 | 
|                                     |  |            |    |              |                | 
|Total intangible assets              |  | $          | 84 |              |                |  |    | 
|                                     |  |            |    |              |                | 



|                                                |  |               |       |             |               |   |       |      |  |   |       |  
|----------------------------------------------- |  | ------------- | ----- | ----------- | ------------- | - | ----- | ---- |  | - | ----- | -
|                                                |  |               |       | Nine Months |              
|                                                |  | Three Months  |       |             | Ended         |  
|                                                |  | Ended         |       |             | September 30, |  
|                                                |  | September 30, |       |             |               |  
|                                                |  | 2004          |       |             | 2005          |   |       | 2004 | 
|                                                |  |               |       |             |               |   |       |      | 
|Revenues                                        |  | $             | 2,234 |             |               | $ | 8,155 |      |  | $ | 7,357 |  
|Net earnings (loss) applicable to common shares |  | $             | (224  | )           |               | $ | (64   | )    |  | $ | (63   | )
|                                                |  |               |       |             |               |   |       |      | 

24



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |             
| | ------------
| | Divestitures



| |                         
| | ------------------------
| | Manufacturing operations













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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                      
| | ---------------------
| | Change in investments







| |      
| | -----
| | Other







|   |                                      
|-- | -------------------------------------
|9. | Long-term debt and support facilities







| |                 
| | ----------------
| | Support facility



26



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)














|    |           
|--- | ----------
|10. | Guarantees





|    |                                                  
|--- | -------------------------------------------------
|(a) | Business sale and business combination agreements





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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)










|    |                                                  
|--- | -------------------------------------------------
|(b) | Intellectual property indemnification obligations







|    |                 
|--- | ----------------
|(c) | Lease agreements







|    |                            
|--- | ---------------------------
|(d) | Third party debt agreements





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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(e) | Indemnification of banks and agents under EDC Support
    Facility and security agreements















|    |                                 
|--- | --------------------------------
|(f) | Other indemnification agreements







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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)


Product warranties




|                                 |                   |   |     |      |  
|-------------------------------- | ----------------- | - | --- | ---- | -
|Balance as of December 31, 2004  |                   | $ | 271 |     
|                                 | Payments          |   |     | (183 | )
|                                 | Warranties issued |   |     | 148  |  
|                                 | Revisions         |   |     | (5   | )
|                                 |                   |   |    
|Balance as of September 30, 2005 |                   | $ | 231 |     
|                                 |                   |   |    



|    |            
|--- | -----------
|11. | Commitments



| |                                         
| | ----------------------------------------
| | Bid, performance related and other bonds



|                                               |  |               |     |  |              |   |     | 
|---------------------------------------------- |  | ------------- | --- |  | ------------ | - | --- | 
|                                               |  | September 30, |     |  | December 31, |  
|                                               |  | 2005          |     |  | 2004         |  
|                                               |  |               |     |  |              |  
|Bid and performance related
    bonds(a)       |  | $             | 244 |  |              | $ | 362 | 
|Other
    bonds(b)                             |  |               | 45  |  |              |   | 68  | 
|                                               |  |               |     |  |              |  
|Total bid, performance related and other bonds |  | $             | 289 |  |              | $ | 430 | 
|                                               |  |               |     |  |              |  






|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(a) | Net of restricted cash and cash equivalent amounts of $37 and
    $36 as of September 30, 2005 and December 31, 2004,
    respectively.



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(b) | Net of restricted cash and cash equivalent amounts of $29 and
    $28 as of September 30, 2005 and December 31, 2004,
    respectively.



| |                          
| | -------------------------
| | Venture capital financing





| |                  
| | -----------------
| | Other commitments



|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |  |             |   |   |  |  |   |    | 
|--------------------- |  | ---- | -- |  | ---- | - | -- | ---- |  | - | ---- | ----- |  | ---------- | -- |  | ----------- | - | - |  |  | - | -- | 
|                      |  |      |    |  |      |   |    |      |  |   |      | Total | 
|                      |  | 2006 |    |  | 2007 |   |    | 2008 |  |   | 2009 |       |  | Thereafter |    |  | Obligations |  
|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |  |             |  
|Outsourcing contracts |  | $    | 24 |  |      | $ | 18 |      |  | $ | 18   |       |  | $          | 15 |  |             | $ |  |  |  | $ | 75 | 
|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |  |             |  

30



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                       
|--- | ----------------------
|12. | Financing arrangements



| |                   
| | ------------------
| | Customer financing





|                                   |  |               |     |   |              |   |     |  
|---------------------------------- |  | ------------- | --- | - | ------------ | - | --- | -
|                                   |  | September 30, |     |   | December 31, |  
|                                   |  | 2005          |     |   | 2004         |  
|                                   |  |               |     |   |              |  
|Drawn and outstanding  gross      |  | $             | 51  |   |              | $ | 118 |  
|Provisions for doubtful accounts   |  |               | (35 | ) |              |   | (38 | )
|                                   |  |               |     |   |              |  
|Drawn and outstanding 
    net(a) |  |               | 16  |   |              |   | 80  |  
|Undrawn commitments                |  |               | 52  |   |              |   | 69  |  
|                                   |  |               |     |   |              |  
|Total customer financing           |  | $             | 68  |   |              | $ | 149 |  
|                                   |  |               |     |   |              |  






|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included short-term and long-term amounts. Short-term and
    long-term amounts were included in accounts
    receivable  net and other assets, respectively, in
    the consolidated balance sheets.









| |                                            
| | -------------------------------------------
| | Consolidation of variable interest entities



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)












|    |                               
|--- | ------------------------------
|13. | Stock-based compensation plans









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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                     
| | --------------------
| | Pro forma disclosure



|                                                                  |                                             |               |     |     |               |   |      |      |   |   |      |     |   |   |      |      |  
|----------------------------------------------------------------- | ------------------------------------------- | ------------- | --- | --- | ------------- | - | ---- | ---- | - | - | ---- | --- | - | - | ---- | ---- | -
|                                                                  |                                             | Three Months  |     |     | Nine Months   |  
|                                                                  |                                             | Ended         |     |     | Ended         |  
|                                                                  |                                             | September 30, |     |     | September 30, |  
|                                                                  |                                             |               |     |     |               |  
|                                                                  |                                             | 2005          |     |     | 2004          |   |      | 2005 |   |   | 2004 |    
|                                                                  |                                             |               |     |     |               |   |      |      |   |   |      |    
|Net earnings (loss) applicable to common shares  as
    reported |                                             | $             | (86 | )   |               | $ | (226 | )    |   | $ | (55  | )   |   | $ | (71  | )   
|                                                                  | Stock-based compensation  reported         |               |     | 21  |               |   |      | 17   |   |   |      | 57  |   |   |      | 95   |  
|                                                                  | Stock-based compensation  pro
    forma(a) |               |     | (21 | )             |   |      | (28  | ) |   |      | (64 | ) |   |      | (134 | )
|                                                                  |                                             |               |     |     |               |   |      |      |   |   |      |    
|Net earnings (loss) applicable to common shares  pro
    forma   |                                             | $             | (86 | )   |               | $ | (237 | )    |   | $ | (62  | )   |   | $ | (110 | )   
|                                                                  |                                             |               |     |     |               |   |      |      |   |   |      |    






|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(a) | Stock-based compensation  pro forma expense was net
    of tax of nil in each period.



|                                                     |                                       |               |    |    |               |   |    |      |   |   |      |    |  |   |    |    |  
|---------------------------------------------------- | ------------------------------------- | ------------- | -- | -- | ------------- | - | -- | ---- | - | - | ---- | -- |  | - | -- | -- | -
|                                                     |                                       | Three Months  |    |    | Nine Months   |  
|                                                     |                                       | Ended         |    |    | Ended         |  
|                                                     |                                       | September 30, |    |    | September 30, |  
|                                                     |                                       |               |    |    |               |  
|                                                     |                                       | 2005          |    |    | 2004          |   |    | 2005 |   |   | 2004 |   
|                                                     |                                       |               |    |    |               |   |    |      |   |   |      |   
|Stock-based compensation:                            |                                       |               |    |    |               |   |    |      |   |   |      |    |  |   |    |   
|                                                     | Stock option expense                  |               | $  | 20 |               |   | $  | 19   |   |   | $    | 57 |  |   | $  | 55 |  
|                                                     | Employer portion of
    ESPPs(a)      |               |    |   |               |   |    |     |   |   |      |   |  |   |    |   |  
|                                                     | Restricted Stock Units
    expense(a) |               |    |   |               |   |    |     |   |   |      |   |  |   |    | 41 |  
|                                                     | Deferred Stock Units
    expense(a)   |               |    | 1  |               |   |    | (2   | ) |   |      |   |  |   |    | (1 | )
|                                                     |                                       |               |    |    |               |   |    |      |   |   |      |   
|Total stock-based compensation reported  net of tax |                                       | $             | 21 |    |               | $ | 17 |      |   | $ | 57   |    |  | $ | 95 |   
|                                                     |                                       |               |    |    |               |   |    |      |   |   |      |   






|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(a) | Compensation related to employer portion of ESPPs, RSUs and
    Deferred Stock Units (DSUs) was net of tax of nil in
    each period.



|                                                                |                               |               |      |               |         |   |      |   |  |      |      |       |   |   |      |       |  
|--------------------------------------------------------------- | ----------------------------- | ------------- | ---- | ------------- | ------- | - | ---- | - |  | ---- | ---- | ----- | - | - | ---- | ----- | -
|                                                                |                               | Three Months  |      | Nine Months   |        
|                                                                |                               | Ended         |      | Ended         |        
|                                                                |                               | September 30, |      | September 30, |        
|                                                                |                               |               |      |               |        
|                                                                |                               | 2005          |      |               | 2004(a) |   | 2005 |   |  | 2004 |     
|                                                                |                               |               |      |               |         |   |      |   |  |      |     
|Black-Scholes weighted-average assumptions                      |                               |               |      |               |         |   |      |   |  |      |      |       |   |   |      |      
|                                                                | Expected dividend yield       |               |      | 0.00          | %       |   |      |  |  |      |      | 0.00  | % |   |      | 0.00  | %
|                                                                | Expected volatility           |               |      | 86.40         | %       |   |      |  |  |      |      | 86.40 | % |   |      | 94.49 | %
|                                                                | Risk-free interest rate       |               |      | 4.06          | %       |   |      |  |  |      |      | 4.06  | % |   |      | 2.96  | %
|                                                                | Expected option life in years |               |      | 4             |         |   |      |  |  |      |      | 4     |   |   |      | 4     |  
|Weighted-average stock option fair value per option
    granted |                               | $             | 1.86 |               |         | $ |     |   |  | $    | 1.86 |       |   | $ | 5.21 |      






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(a) | For the three months ended September 30, 2004, no stock
    options were granted.

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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                            
|--- | ---------------------------
|14. | Comprehensive income (loss)



|                                               |                                                                        |               |     |     |               |   |      |      |   |   |      |      |   |   |      |     |  
|---------------------------------------------- | ---------------------------------------------------------------------- | ------------- | --- | --- | ------------- | - | ---- | ---- | - | - | ---- | ---- | - | - | ---- | --- | -
|                                               |                                                                        | Three Months  |     |     | Nine Months   |  
|                                               |                                                                        | Ended         |     |     | Ended         |  
|                                               |                                                                        | September 30, |     |     | September 30, |  
|                                               |                                                                        |               |     |     |               |  
|                                               |                                                                        | 2005          |     |     | 2004          |   |      | 2005 |   |   | 2004 |     
|                                               |                                                                        |               |     |     |               |   |      |      |   |   |      |     
|Net earnings (loss)                            |                                                                        | $             | (77 | )   |               | $ | (218 | )    |   | $ | (27  | )    |   | $ | (47  | )  
|Other comprehensive income (loss) adjustments: |                                                                        |               |     |     |               |   |      |      |   |   |      |      |   |   |      |    
|                                               | Change in foreign currency translation
    adjustment(a)               |               |     | 220 |               |   |      | 39   |   |   |      | (139 | ) |   |      | (33 | )
|                                               | Unrealized gain (loss) on investments 
    net(b)                     |               |     | 20  |               |   |      | (19  | ) |   |      | (3   | ) |   |      | (79 | )
|                                               | Minimum pension liability adjustment  net                             |               |     |    |               |   |      |     |   |   |      | 3    |   |   |      | 1   |  
|                                               | Unrealized derivative gain (loss) on cash flow
    hedges 
    net(c) |               |     | 12  |               |   |      | 10   |   |   |      | (7   | ) |   |      | (2  | )
|                                               |                                                                        |               |     |     |               |   |      |      |   |   |      |     
|Comprehensive income (loss)                    |                                                                        | $             | 175 |     |               | $ | (188 | )    |   | $ | (173 | )    |   | $ | (160 | )  
|                                               |                                                                        |               |     |     |               |   |      |      |   |   |      |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The change in the foreign currency translation adjustment was
    not adjusted for income taxes since it related to indefinite
    term investments in non-U.S. subsidiaries. The change in
    foreign currency translation adjustment for the three months
    ended September 30, 2005 includes a reversal of $187, which
    was originally reclassified to deferred income in the first
    quarter of 2005 as a result of the ongoing divestiture of
    Nortels manufacturing operations to Flextronics.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Certain securities deemed available-for-sale by Nortel were
    measured at fair value. Unrealized holding gains (losses)
    related to these securities were excluded from net earnings
    (loss) and were included in accumulated other comprehensive
    income (loss) until realized. Unrealized gain (loss) on
    investments was net of tax of nil and nil for the three and nine
    months ended September 30, 2005 and 2004, respectively.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | During the three and nine months ended September 30, 2005,
    $1 and $14 of net derivative gains (losses) were reclassified to
    other income (expense)  net, respectively. During the
    three and nine months ended September 30, 2004, $(1) and $1
    of net derivative gains (losses) were reclassified to other
    income (expense)  net, respectively. Nortel estimates
    that $11 of net derivative gains (losses) included in
    accumulated other comprehensive income (loss) will be
    reclassified into net earnings (loss) within the next
    12 months.



|    |                           
|--- | --------------------------
|15. | Related party transactions





|                             |  |               |     |   |              |   |     |  
|---------------------------- |  | ------------- | --- | - | ------------ | - | --- | -
|                             |  | September 30, |     |   | December 31, |  
|                             |  | 2005          |     |   | 2004         |  
|                             |  |               |     |   |              |  
|Consolidated balance sheets  |  |               |     |   |              |   |     |  
|Owing from NNC               |  | $             | 205 |   |              | $ | 134 |  
|Owing from NNC subsidiaries  |  |               | 108 |   |              |   | 114 |  
|Other related
    parties(a) |  |               | (7  | ) |              |   | (5  | )
|                             |  |               |     |   |              |  
|Related party receivables    |  | $             | 306 |   |              | $ | 243 |  
|                             |  |               |     |   |              |  






|    |                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Nortel purchases certain inventory for its Carrier Packet
    Networks business from Bookham, Inc. (Bookham), a
    related party due to Nortels equity interest in Bookham.
    Nortel has certain notes receivable due from Bookham with a
    carrying amount of $20 and $20 as of September 30, 2005 and
    December 31, 2004, respectively.



34



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)








|    |              
|--- | -------------
|16. | Contingencies







35



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)








36



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)












37



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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




















38



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




| |                      
| | ---------------------
| | Environmental matters















| |      
| | -----
| | Other



39



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                  
|--- | -----------------
|17. | Subsequent events









|    |                                               
|--- | ----------------------------------------------
|18. | Reconciliation from U.S. GAAP to Canadian GAAP



40



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |         |     |   |   |         |     |  
|------------------- | -------------------------------------- | ------------------------------------ | - | --- | ------------- | - | - | ---- | -- |  | ---- | ------- | --- | - | - | ------- | --- | -
|                    |                                        | Three Months                         |   |     | Nine Months   |  
|                    |                                        | Ended                                |   |     | Ended         |  
|                    |                                        | September 30,                        |   |     | September 30, |  
|                    |                                        |                                      |   |     |               |  
|                    |                                        | 2005                                 |   |     | 2004          |   |   | 2005 |    |  | 2004 |        
|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |        
|Net earnings (loss) |                                        |                                      |   |     |               |   |   |      |    |  |      |         |     |   |   |        
|                    | U.S. GAAP                              |                                      | $ | (77 | )             |   | $ | (218 | )  |  | $    | (27     | )   |   | $ | (47     | )  
|                    |                                        | Derivative
    accounting(b)((h)(i)) |   |     | (4            | ) |   |      |   |  |      |         | (15 | ) |   |         | 22  |  
|                    |                                        | Stock option
    expense(e)          |   |     | (21           | ) |   |      |   |  |      |         | (21 | ) |   |         |    |  
|                    |                                        | Other(e)                             |   |     | 5             |   |   |      | 11 |  |      |         | 6   |   |   |         | 20  |  
|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |        
|                    | Canadian GAAP                          |                                      | $ | (97 | )             |   | $ | (207 | )  |  | $    | (57     | )   |   | $ | (5      | )  
|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |        
|Canadian GAAP:      |                                        |                                      |   |     |               |   |   |      |    |  |      |         |     |   |   |        
|Accumulated deficit |                                        |                                      |   |     |               |   |   |      |    |  |      |         |     |   |   |        
|                    | Balance at the beginning of the period |                                      |   |     |               |   |   |      |    |  | $    | (18,558 | )   |   | $ | (18,656 | )  
|                    |                                        | Net earnings (loss)                  |   |     |               |   |   |      |    |  |      |         | (57 | ) |   |         | (5  | )
|                    |                                        | Dividends on preferred shares        |   |     |               |   |   |      |    |  |      |         | (28 | ) |   |         | (24 | )
|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |        
|                    | Deficit at the end of the period       |                                      |   |     |               |   |   |      |    |  | $    | (18,643 | )   |   | $ | (18,685 | )  
|                    |                                        |                                      |   |     |               |   |   |      |    |  |      |        



|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |   |        |   |  |   |        | 
|------------------------------------------- |  | ------------------ | ------ |  | ----------------- | - | -------- | ---- |  | ---- | ------ |  |  | ----------- | -------- |  | ---- | - | ------ | - |  | - | ------ | 
|                                            |  | September 30, 2005 |        |  | December 31, 2004 |  
|                                            |  |                    |        |  |                   |  
|                                            |  | U.S.               |        |  |                   |   | Canadian |      |  | U.S. |        |  |  |             | Canadian | 
|                                            |  | GAAP               |        |  | Adjustments       |   |          | GAAP |  |      | GAAP   |  |  | Adjustments |          |  | GAAP |  
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|ASSETS                                     
|Current
    assets(f)                       |  | $                  | 8,105  |  |                   | $ | (9       | )    |  | $    | 8,096  |  |  | $           | 8,511    |  |      | $ | 5      |   |  | $ | 8,516  | 
|Investments(c)(f)                           |  |                    | 166    |  |                   |   | (13      | )    |  |      | 153    |  |  |             | 159      |  |      |   | (16    | ) |  |   | 143    | 
|Plant and equipment  net                   |  |                    | 1,571  |  |                   |   | (4       | )    |  |      | 1,567  |  |  |             | 1,646    |  |      |   | (1     | ) |  |   | 1,645  | 
|Goodwill(a)                                 |  |                    | 2,339  |  |                   |   | (895     | )    |  |      | 1,444  |  |  |             | 2,123    |  |      |   | (910   | ) |  |   | 1,213  | 
|Intangible assets 
    net(g)              |  |                    | 150    |  |                   |   | (41      | )    |  |      | 109    |  |  |             | 78       |  |      |   | (40    | ) |  |   | 38     | 
|Deferred income taxes 
    net(g)          |  |                    | 3,606  |  |                   |   | (201     | )    |  |      | 3,405  |  |  |             | 3,736    |  |      |   | (220   | ) |  |   | 3,516  | 
|Other
    assets(b)(g)                      |  |                    | 560    |  |                   |   | 27       |      |  |      | 587    |  |  |             | 691      |  |      |   | (20    | ) |  |   | 671    | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total assets                                |  | $                  | 16,497 |  |                   | $ | (1,136   | )    |  | $    | 15,361 |  |  | $           | 16,944   |  |      | $ | (1,202 | ) |  | $ | 15,742 | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|                                           
|LIABILITIES AND SHAREHOLDERS EQUITY       
|Current
    liabilities(f)                  |  | $                  | 5,984  |  |                   | $ | (93      | )    |  | $    | 5,891  |  |  | $           | 5,132    |  |      | $ | (42    | ) |  | $ | 5,090  | 
|Long-term
    debt(b)                       |  |                    | 628    |  |                   |   | 7        |      |  |      | 635    |  |  |             | 2,062    |  |      |   | (26    | ) |  |   | 2,036  | 
|Deferred income taxes 
    net(g)          |  |                    | 226    |  |                   |   | 12       |      |  |      | 238    |  |  |             | 143      |  |      |   | 14     |   |  |   | 157    | 
|Other
    liabilities(b)(g)                 |  |                    | 3,374  |  |                   |   | (1,242   | )    |  |      | 2,132  |  |  |             | 3,189    |  |      |   | (1,362 | ) |  |   | 1,827  | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total liabilities                           |  |                    | 10,212 |  |                   |   | (1,316   | )    |  |      | 8,896  |  |  |             | 10,526   |  |      |   | (1,416 | ) |  |   | 9,110  | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|Minority interests in subsidiary companies  |  |                    | 105    |  |                   |   |         |      |  |      | 105    |  |  |             | 94       |  |      |   |       |   |  |   | 94     | 
|Total shareholders equity
    (b)(c)(f)(g) |  |                    | 6,180  |  |                   |   | 180      |      |  |      | 6,360  |  |  |             | 6,324    |  |      |   | 214    |   |  |   | 6,538  | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total liabilities and shareholders equity  |  | $                  | 16,497 |  |                   | $ | (1,136   | )    |  | $    | 15,361 |  |  | $           | 16,944   |  |      | $ | (1,202 | ) |  | $ | 15,742 | 
|                                            |  |                    |        |  |                   |   |          |      |  |      |        |  |  |             |          |  |      |  

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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






|    |                      
|--- | ---------------------
|(a) | Business combinations









|    |                      
|--- | ---------------------
|(b) | Derivative accounting





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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |            
|--- | -----------
|(c) | Investments





|    |                                                   
|--- | --------------------------------------------------
|(d) | Other financial statement presentation differences





|                                                                            |  |               |       |   |               |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                            |  | Three Months  |       |   | Nine Months   |  
|                                                                            |  | Ended         |       |   | Ended         |  
|                                                                            |  | September 30, |       |   | September 30, |  
|                                                                            |  |               |       |   |               |  
|                                                                            |  | 2005          |       |   | 2004          |   |       | 2005 |  |   | 2004  |  
|                                                                            |  |               |       |   |               |   |       |      |  |   |       |  
|Net cash from (used in) operating activities of continuing
    operations   |  | $             | (139  | ) |               | $ | (230  | )    |  | $ | (297  | ) |  | $ | (434  | )
|Net cash from (used in) investing activities of continuing
    operations   |  |               | 93    |   |               |   | (106  | )    |  |   | (288  | ) |  |   | (62   | )
|Net cash from (used in) financing activities of continuing
    operations   |  |               | (11   | ) |               |   | (31   | )    |  |   | (49   | ) |  |   | (138  | )
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |  |               | (1    | ) |               |   | 3     |      |  |   | (86   | ) |  |   | (6    | )
|                                                                            |  |               |       |   |               |   |       |      |  |   |       |  
|Net cash from (used in) continuing operations                               |  |               | (58   | ) |               |   | (364  | )    |  |   | (720  | ) |  |   | (640  | )
|Net cash from (used in) operating activities of discontinued
    operations |  |               |      |   |               |   | 24    |      |  |   | 34    |   |  |   | 20    |  
|                                                                            |  |               |       |   |               |   |       |      |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                        |  |               | (58   | ) |               |   | (340  | )    |  |   | (686  | ) |  |   | (620  | )
|Cash and cash equivalents at beginning of period                            |  |               | 2,983 |   |               |   | 3,652 |      |  |   | 3,611 |   |  |   | 3,932 |  
|                                                                            |  |               |       |   |               |   |       |      |  |   |       |  
|Cash and cash equivalents at end of period                                  |  | $             | 2,925 |   |               | $ | 3,312 |      |  | $ | 2,925 |   |  | $ | 3,312 |  
|                                                                            |  |               |       |   |               |   |       |      |  |   |       |  



|    |      
|--- | -----
|(e) | Other







|    |               
|--- | --------------
|(f) | Joint ventures



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                                           
|--- | ------------------------------------------
|(g) | Pension and other post-retirement benefits





|    |                   
|--- | ------------------
|(h) | Accounting changes



| |                          
| | -------------------------
| | (i) Derivative accounting







| |                                                             
| | ------------------------------------------------------------
| | (ii) Determining whether an arrangement contains a
    lease





| |                                                              
| | -------------------------------------------------------------
| | (iii) Financial instruments  presentation and
    disclosure





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | (iv) Accounting by a customer (including a reseller) for
    certain consideration received from a vendor



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|    |                                          
|--- | -----------------------------------------
|(i) | Recently issued accounting pronouncements





|    |                                                 
|--- | ------------------------------------------------
|19. | Supplemental consolidating financial information













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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)






46



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |        |   |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ---- | --- | ------------ | - | ----- | ------------ | - | - | ------------ | -- | - | ----- | ------ | - |  | - | ----- | --- | -
|                                                                                                                                                     |                | Nortel                     |      |     |              |   | Non-  |              |   |   |              |   
|                                                                                                                                                     |                | Networks                   |      |     | Guarantor    |   |       | Guarantor    |   |   |              |    |  
|                                                                                                                                                     |                | Limited                    |      |     | Subsidiaries |   |       | Subsidiaries |   |   | Eliminations |    |   | Total |       
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|                                                                                                                                                     |                | (Millions of U.S. dollars) |     
|Revenues                                                                                                                                             |                | $                          | 953  |     |              | $ | 1,827 |              |   | $ | 907          |    |   | $     | (1,032 | ) |  | $ | 2,655 |    
|Cost of revenues                                                                                                                                     |                |                            | 418  |     |              |   | 1,364 |              |   |   | 910          |    |   |       | (1,032 | ) |  |   | 1,660 |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Gross profit                                                                                                                                         |                |                            | 535  |     |              |   | 463   |              |   |   | (3           | )  |   |       |       |   |  |   | 995   |    
|Selling, general and administrative expense                                                                                                          |                |                            | 150  |     |              |   | 310   |              |   |   | 110          |    |   |       |       |   |  |   | 570   |    
|Research and development expense                                                                                                                     |                |                            | 192  |     |              |   | 189   |              |   |   | 64           |    |   |       |       |   |  |   | 445   |    
|Amortization of intangibles                                                                                                                          |                |                            |     |     |              |   |      |              |   |   | 6            |    |   |       |       |   |  |   | 6     |    
|Special charges                                                                                                                                      |                |                            | 8    |     |              |   | 24    |              |   |   | 5            |    |   |       |       |   |  |   | 37    |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | (2   | )   |              |   | 4     |              |   |   | 2            |    |   |       |       |   |  |   | 4     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Operating earnings (loss)                                                                                                                            |                |                            | 187  |     |              |   | (64   | )            |   |   | (190         | )  |   |       |       |   |  |   | (67   | )  
|Other income (expense)  net                                                                                                                         |                |                            | 68   |     |              |   | 9     |              |   |   | (10          | )  |   |       |       |   |  |   | 67    |    
|Interest expense                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |        |   |  |   |       |    
|                                                                                                                                                     | Long-term debt |                            |      | (22 | )            |   |       | (3           | ) |   |              | (7 | ) |       |        |  |  |   |       | (32 | )
|                                                                                                                                                     | Other          |                            |      |    |              |   |       | (16          | ) |   |              | 14 |   |       |        |  |  |   |       | (2  | )
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 233  |     |              |   | (74   | )            |   |   | (193         | )  |   |       |       |   |  |   | (34   | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | (75  | )   |              |   | (32   | )            |   |   | 67           |    |   |       |       |   |  |   | (40   | )  
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|                                                                                                                                                     |                |                            | 158  |     |              |   | (106  | )            |   |   | (126         | )  |   |       |       |   |  |   | (74   | )  
|Minority interests  net of tax                                                                                                                      |                |                            |     |     |              |   |      |              |   |   | (5           | )  |   |       |       |   |  |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | (236 | )   |              |   | 130   |              |   |   | 33           |    |   |       | 74     |   |  |   | 1     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (78  | )   |              |   | 24    |              |   |   | (98          | )  |   |       | 74     |   |  |   | (78   | )  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 1    |     |              |   |      |              |   |   |             |    |   |       |       |   |  |   | 1     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Net earnings (loss)                                                                                                                                  |                |                            | (77  | )   |              |   | 24    |              |   |   | (98          | )  |   |       | 74     |   |  |   | (77   | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 9    |     |              |   |      |              |   |   |             |    |   |       |       |   |  |   | 9     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (86  | )   |              | $ | 24    |              |   | $ | (98          | )  |   | $     | 74     |   |  | $ | (86   | )  
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |       

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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |      |   |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ---- | --- | ------------ | - | ----- | ------------ | - | - | ------------ | -- | - | ----- | ---- | - |  | - | ----- | --- | -
|                                                                                                                                                     |                | Nortel                     |      |     |              |   | Non-  |              |   |   |              |   
|                                                                                                                                                     |                | Networks                   |      |     | Guarantor    |   |       | Guarantor    |   |   |              |    |  
|                                                                                                                                                     |                | Limited                    |      |     | Subsidiaries |   |       | Subsidiaries |   |   | Eliminations |    |   | Total |     
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|                                                                                                                                                     |                | (Millions of U.S. dollars) |     
|Revenues                                                                                                                                             |                | $                          | 779  |     |              | $ | 1,592 |              |   | $ | 709          |    |   | $     | (901 | ) |  | $ | 2,179 |    
|Cost of revenues                                                                                                                                     |                |                            | 640  |     |              |   | 1,133 |              |   |   | 519          |    |   |       | (901 | ) |  |   | 1,391 |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Gross profit                                                                                                                                         |                |                            | 139  |     |              |   | 459   |              |   |   | 190          |    |   |       |     |   |  |   | 788   |    
|Selling, general and administrative expense                                                                                                          |                |                            | 114  |     |              |   | 312   |              |   |   | 83           |    |   |       |     |   |  |   | 509   |    
|Research and development expense                                                                                                                     |                |                            | 174  |     |              |   | 258   |              |   |   | 65           |    |   |       |     |   |  |   | 497   |    
|Amortization of intangibles                                                                                                                          |                |                            |     |     |              |   |      |              |   |   | 2            |    |   |       |     |   |  |   | 2     |    
|Special charges                                                                                                                                      |                |                            | 4    |     |              |   | 82    |              |   |   | 7            |    |   |       |     |   |  |   | 93    |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | (2   | )   |              |   | (37   | )            |   |   |             |    |   |       |     |   |  |   | (39   | )  
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Operating earnings (loss)                                                                                                                            |                |                            | (151 | )   |              |   | (156  | )            |   |   | 33           |    |   |       |     |   |  |   | (274  | )  
|Other income (expense)  net                                                                                                                         |                |                            | 17   |     |              |   | 59    |              |   |   | (32          | )  |   |       |     |   |  |   | 44    |    
|Interest expense                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |      |   |  |   |       |    
|                                                                                                                                                     | Long-term debt |                            |      | (16 | )            |   |       |             |   |   |              | (6 | ) |       |      |  |  |   |       | (22 | )
|                                                                                                                                                     | Other          |                            |      | (2  | )            |   |       | (13          | ) |   |              | 12 |   |       |      |  |  |   |       | (3  | )
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (152 | )   |              |   | (110  | )            |   |   | 7            |    |   |       |     |   |  |   | (255  | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | 2    |     |              |   | 9     |              |   |   | 19           |    |   |       |     |   |  |   | 30    |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|                                                                                                                                                     |                |                            | (150 | )   |              |   | (101  | )            |   |   | 26           |    |   |       |     |   |  |   | (225  | )  
|Minority interests  net of tax                                                                                                                      |                |                            |     |     |              |   |      |              |   |   | 2            |    |   |       |     |   |  |   | 2     |    
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | (73  | )   |              |   | (1    | )            |   |   | 18           |    |   |       | 56   |   |  |   |      |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (223 | )   |              |   | (102  | )            |   |   | 46           |    |   |       | 56   |   |  |   | (223  | )  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 5    |     |              |   | 3     |              |   |   |             |    |   |       | (3   | ) |  |   | 5     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Net earnings (loss)                                                                                                                                  |                |                            | (218 | )   |              |   | (99   | )            |   |   | 46           |    |   |       | 53   |   |  |   | (218  | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 8    |     |              |   |      |              |   |   |             |    |   |       |     |   |  |   | 8     |    
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (226 | )   |              | $ | (99   | )            |   | $ | 46           |    |   | $     | 53   |   |  | $ | (226  | )  
|                                                                                                                                                     |                |                            |      |     |              |   |       |              |   |   |              |    |   |       |     

48



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |        |   |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------ | - | ----- | ------------ | - | - | ------------ | --- | - | ----- | ------ | - |  | - | ----- | --- | -
|                                                                                                                                                     |                | Nortel                     |       |     |              |   | Non-  |              |   |   |              |    
|                                                                                                                                                     |                | Networks                   |       |     | Guarantor    |   |       | Guarantor    |   |   |              |     |  
|                                                                                                                                                     |                | Limited                    |       |     | Subsidiaries |   |       | Subsidiaries |   |   | Eliminations |     |   | Total |       
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,859 |     |              | $ | 5,370 |              |   | $ | 2,891        |     |   | $     | (3,074 | ) |  | $ | 8,046 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,365 |     |              |   | 3,996 |              |   |   | 2,500        |     |   |       | (3,074 | ) |  |   | 4,787 |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Gross profit                                                                                                                                         |                |                            | 1,494 |     |              |   | 1,374 |              |   |   | 391          |     |   |       |       |   |  |   | 3,259 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 397   |     |              |   | 977   |              |   |   | 342          |     |   |       |       |   |  |   | 1,716 |    
|Research and development expense                                                                                                                     |                |                            | 585   |     |              |   | 603   |              |   |   | 202          |     |   |       |       |   |  |   | 1,390 |    
|Amortization of intangibles                                                                                                                          |                |                            |      |     |              |   |      |              |   |   | 10           |     |   |       |       |   |  |   | 10    |    
|Special charges                                                                                                                                      |                |                            | 10    |     |              |   | 115   |              |   |   | 23           |     |   |       |       |   |  |   | 148   |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | 31    |     |              |   | 8     |              |   |   | 2            |     |   |       |       |   |  |   | 41    |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Operating earnings (loss)                                                                                                                            |                |                            | 471   |     |              |   | (329  | )            |   |   | (188         | )   |   |       |       |   |  |   | (46   | )  
|Other income (expense)  net                                                                                                                         |                |                            | 89    |     |              |   | 89    |              |   |   | (3           | )   |   |       |       |   |  |   | 175   |    
|Interest expense                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |        |   |  |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (61 | )            |   |       | (9           | ) |   |              | (21 | ) |       |        |  |  |   |       | (91 | )
|                                                                                                                                                     | Other          |                            |       | (7  | )            |   |       | (39          | ) |   |              | 42  |   |       |        |  |  |   |       | (4  | )
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 492   |     |              |   | (288  | )            |   |   | (170         | )   |   |       |       |   |  |   | 34    |    
|Income tax benefit (expense)                                                                                                                         |                |                            | (126  | )   |              |   | (47   | )            |   |   | 125          |     |   |       |       |   |  |   | (48   | )  
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|                                                                                                                                                     |                |                            | 366   |     |              |   | (335  | )            |   |   | (45          | )   |   |       |       |   |  |   | (14   | )  
|Minority interests  net of tax                                                                                                                      |                |                            |      |     |              |   |      |              |   |   | (18          | )   |   |       |       |   |  |   | (18   | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | (395  | )   |              |   | 302   |              |   |   | 77           |     |   |       | 19     |   |  |   | 3     |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (29   | )   |              |   | (33   | )            |   |   | 14           |     |   |       | 19     |   |  |   | (29   | )  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 2     |     |              |   |      |              |   |   |             |     |   |       |       |   |  |   | 2     |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss)                                                                                                                                  |                |                            | (27   | )   |              |   | (33   | )            |   |   | 14           |     |   |       | 19     |   |  |   | (27   | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 28    |     |              |   |      |              |   |   |             |     |   |       |       |   |  |   | 28    |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (55   | )   |              | $ | (33   | )            |   | $ | 14           |     |   | $     | 19     |   |  | $ | (55   | )  
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       

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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |        |   |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------ | - | ----- | ------------ | - | - | ------------ | --- | - | ----- | ------ | - |  | - | ----- | --- | -
|                                                                                                                                                     |                | Nortel                     |       |     |              |   | Non-  |              |   |   |              |    
|                                                                                                                                                     |                | Networks                   |       |     | Guarantor    |   |       | Guarantor    |   |   |              |     |  
|                                                                                                                                                     |                | Limited                    |       |     | Subsidiaries |   |       | Subsidiaries |   |   | Eliminations |     |   | Total |       
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,443 |     |              | $ | 5,073 |              |   | $ | 2,533        |     |   | $     | (2,836 | ) |  | $ | 7,213 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,648 |     |              |   | 3,488 |              |   |   | 2,001        |     |   |       | (2,836 | ) |  |   | 4,301 |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Gross profit                                                                                                                                         |                |                            | 795   |     |              |   | 1,585 |              |   |   | 532          |     |   |       |       |   |  |   | 2,912 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 327   |     |              |   | 956   |              |   |   | 302          |     |   |       |       |   |  |   | 1,585 |    
|Research and development expense                                                                                                                     |                |                            | 598   |     |              |   | 649   |              |   |   | 205          |     |   |       |       |   |  |   | 1,452 |    
|Amortization of intangibles                                                                                                                          |                |                            |      |     |              |   |      |              |   |   | 7            |     |   |       |       |   |  |   | 7     |    
|Special charges                                                                                                                                      |                |                            | 8     |     |              |   | 78    |              |   |   | 13           |     |   |       |       |   |  |   | 99    |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | (2    | )   |              |   | (38   | )            |   |   | (74          | )   |   |       |       |   |  |   | (114  | )  
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Operating earnings (loss)                                                                                                                            |                |                            | (136  | )   |              |   | (60   | )            |   |   | 79           |     |   |       |       |   |  |   | (117  | )  
|Other income (expense)  net                                                                                                                         |                |                            | 32    |     |              |   | 140   |              |   |   | (54          | )   |   |       |       |   |  |   | 118   |    
|Interest expense                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |        |   |  |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (48 | )            |   |       | (1           | ) |   |              | (19 | ) |       |        |  |  |   |       | (68 | )
|                                                                                                                                                     | Other          |                            |       | (3  | )            |   |       | (50          | ) |   |              | 36  |   |       |        |  |  |   |       | (17 | )
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (155  | )   |              |   | 29    |              |   |   | 42           |     |   |       |       |   |  |   | (84   | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | 48    |     |              |   | (17   | )            |   |   | 1            |     |   |       |       |   |  |   | 32    |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|                                                                                                                                                     |                |                            | (107  | )   |              |   | 12    |              |   |   | 43           |     |   |       |       |   |  |   | (52   | )  
|Minority interests  net of tax                                                                                                                      |                |                            |      |     |              |   |      |              |   |   | (5           | )   |   |       |       |   |  |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 48    |     |              |   | 173   |              |   |   | 12           |     |   |       | (235   | ) |  |   | (2    | )  
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (59   | )   |              |   | 185   |              |   |   | 50           |     |   |       | (235   | ) |  |   | (59   | )  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 12    |     |              |   | 7     |              |   |   |             |     |   |       | (7     | ) |  |   | 12    |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss)                                                                                                                                  |                |                            | (47   | )   |              |   | 192   |              |   |   | 50           |     |   |       | (242   | ) |  |   | (47   | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 24    |     |              |   |      |              |   |   |             |     |   |       |       |   |  |   | 24    |    
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (71   | )   |              | $ | 192   |              |   | $ | 50           |     |   | $     | (242   | ) |  | $ | (71   | )  
|                                                                                                                                                     |                |                            |       |     |              |   |       |              |   |   |              |     |   |       |       

50



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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |        |        |   |   |         |       | 
|--------------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------ | ------------ | - | ------- | ------------ |  | - | ------------ | ----- |  | ----- | ------ | ------ | - | - | ------- | ----- | 
|                                              |                                                | Nortel                     |         |        |              |   | Non-    |              |  |   |              |      
|                                              |                                                | Networks                   |         |        | Guarantor    |   |         | Guarantor    |  |   |              |       | 
|                                              |                                                | Limited                    |         |        | Subsidiaries |   |         | Subsidiaries |  |   | Eliminations |       |  | Total |       
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|                                              |                                                | (Millions of U.S. dollars) |        
|ASSETS                                       
|Current assets                                |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |        |        |   |   |         |      
|                                              | Cash and cash equivalents                      |                            | $       | 57     |              |   | $       | 1,817        |  |   | $            | 1,046 |  |       | $      |       |   |   | $       | 2,920 | 
|                                              | Restricted cash and cash equivalents           |                            |         | 45     |              |   |         | 20           |  |   |              | 8     |  |       |        |       |   |   |         | 73    | 
|                                              | Accounts receivable  net                      |                            |         | 617    |              |   |         | 1,176        |  |   |              | 823   |  |       |        |       |   |   |         | 2,616 | 
|                                              | Intercompany/related party accounts receivable |                            |         | 608    |              |   |         | 975          |  |   |              | 719   |  |       |        | (1,989 | ) |   |         | 313   | 
|                                              | Inventories  net                              |                            |         | 229    |              |   |         | 550          |  |   |              | 453   |  |       |        |       |   |   |         | 1,232 | 
|                                              | Deferred income taxes  net                    |                            |         | 47     |              |   |         | 324          |  |   |              |      |  |       |        |       |   |   |         | 371   | 
|                                              | Other current assets                           |                            |         | 92     |              |   |         | 227          |  |   |              | 261   |  |       |        |       |   |   |         | 580   | 
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total current assets                          |                                                |                            | 1,695   |        |              |   | 5,089   |              |  |   | 3,310        |       |  |       | (1,989 | )      |   |   | 8,105   |      
|Investments                                   |                                                |                            | 1,795   |        |              |   | (6,346  | )            |  |   | 632          |       |  |       | 4,085  |        |   |   | 166     |      
|Intercompany advances                         |                                                |                            | 426     |        |              |   | 1,063   |              |  |   | 2,075        |       |  |       | (3,564 | )      |   |   |        |      
|Plant and equipment  net                     |                                                |                            | 474     |        |              |   | 730     |              |  |   | 367          |       |  |       |       |        |   |   | 1,571   |      
|Goodwill                                      |                                                |                            |        |        |              |   | 1,907   |              |  |   | 432          |       |  |       |       |        |   |   | 2,339   |      
|Intangible assets  net                       |                                                |                            | 36      |        |              |   | 1       |              |  |   | 113          |       |  |       |       |        |   |   | 150     |      
|Deferred income taxes  net                   |                                                |                            | 1,883   |        |              |   | 1,645   |              |  |   | 78           |       |  |       |       |        |   |   | 3,606   |      
|Other assets                                  |                                                |                            | (50     | )      |              |   | 256     |              |  |   | 354          |       |  |       |       |        |   |   | 560     |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total assets                                  |                                                | $                          | 6,259   |        |              | $ | 4,345   |              |  | $ | 7,361        |       |  | $     | (1,468 | )      |   | $ | 16,497  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|                                             
|LIABILITIES AND SHAREHOLDERS EQUITY         
|Current liabilities                           |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |        |        |   |   |         |      
|                                              | Trade and other accounts payable               |                            | $       | 452    |              |   | $       | 517          |  |   | $            | 10    |  |       | $      |       |   |   | $       | 979   | 
|                                              | Intercompany/related party accounts payable    |                            |         | (3,746 | )            |   |         | 3,528        |  |   |              | 2,209 |  |       |        | (1,989 | ) |   |         | 2     | 
|                                              | Payroll and benefit-related liabilities        |                            |         | 66     |              |   |         | 333          |  |   |              | 135   |  |       |        |       |   |   |         | 534   | 
|                                              | Contractual liabilities                        |                            |         | 78     |              |   |         | 138          |  |   |              | 180   |  |       |        |       |   |   |         | 396   | 
|                                              | Restructuring liabilities                      |                            |         | 14     |              |   |         | 102          |  |   |              | 15    |  |       |        |       |   |   |         | 131   | 
|                                              | Other accrued liabilities                      |                            |         | 322    |              |   |         | 1,443        |  |   |              | 722   |  |       |        |       |   |   |         | 2,487 | 
|                                              | Long-term debt due within one year             |                            |         | 1,302  |              |   |         | 12           |  |   |              | 141   |  |       |        |       |   |   |         | 1,455 | 
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total current liabilities                     |                                                |                            | (1,512  | )      |              |   | 6,073   |              |  |   | 3,412        |       |  |       | (1,989 | )      |   |   | 5,984   |      
|Long-term debt                                |                                                |                            | 213     |        |              |   | 114     |              |  |   | 301          |       |  |       |       |        |   |   | 628     |      
|Deferred income taxes  net                   |                                                |                            |        |        |              |   | 186     |              |  |   | 40           |       |  |       |       |        |   |   | 226     |      
|Other liabilities                             |                                                |                            | 1,378   |        |              |   | 1,941   |              |  |   | 54           |       |  |       | 1      |        |   |   | 3,374   |      
|Intercompany advances                         |                                                |                            |        |        |              |   | 297     |              |  |   | 3,267        |       |  |       | (3,564 | )      |   |   |        |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total liabilities                             |                                                |                            | 79      |        |              |   | 8,611   |              |  |   | 7,074        |       |  |       | (5,552 | )      |   |   | 10,212  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Minority interests in subsidiary companies    |                                                |                            |        |        |              |   |        |              |  |   | 105          |       |  |       |       |        |   |   | 105     |      
|                                             
|SHAREHOLDERS EQUITY                         
|Preferred shares                              |                                                |                            | 536     |        |              |   | 237     |              |  |   |             |       |  |       | (237   | )      |   |   | 536     |      
|Common shares                                 |                                                |                            | 1,211   |        |              |   | 5,416   |              |  |   | 1,177        |       |  |       | (6,593 | )      |   |   | 1,211   |      
|Additional paid-in capital                    |                                                |                            | 22,164  |        |              |   | 812     |              |  |   | 5,112        |       |  |       | (5,924 | )      |   |   | 22,164  |      
|Accumulated deficit                           |                                                |                            | (17,047 | )      |              |   | (11,231 | )            |  |   | (6,460       | )     |  |       | 17,691 |        |   |   | (17,047 | )    
|Accumulated other comprehensive income (loss) |                                                |                            | (684    | )      |              |   | 500     |              |  |   | 353          |       |  |       | (853   | )      |   |   | (684    | )    
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total shareholders equity                    |                                                |                            | 6,180   |        |              |   | (4,266  | )            |  |   | 182          |       |  |       | 4,084  |        |   |   | 6,180   |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       
|Total liabilities and shareholders equity    |                                                | $                          | 6,259   |        |              | $ | 4,345   |              |  | $ | 7,361        |       |  | $     | (1,468 | )      |   | $ | 16,497  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |  |       |       

51



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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |        |        |   |   |         |       | 
|--------------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------ | ------------ | - | ------- | ------------ |  | - | ------------ | ----- | - | ----- | ------ | ------ | - | - | ------- | ----- | 
|                                              |                                                | Nortel                     |         |        |              |   | Non-    |              |  |   |              |      
|                                              |                                                | Networks                   |         |        | Guarantor    |   |         | Guarantor    |  |   |              |       |  
|                                              |                                                | Limited                    |         |        | Subsidiaries |   |         | Subsidiaries |  |   | Eliminations |       |   | Total |       
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|                                              |                                                | (Millions of U.S. dollars) |        
|ASSETS                                       
|Current assets                                |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |        |        |   |   |         |      
|                                              | Cash and cash equivalents                      |                            | $       | (2     | )            |   | $       | 2,414        |  |   | $            | 1,195 |   |       | $      |       |   |   | $       | 3,607 | 
|                                              | Restricted cash and cash equivalents           |                            |         | 52     |              |   |         | 20           |  |   |              | 8     |   |       |        |       |   |   |         | 80    | 
|                                              | Accounts receivable  net                      |                            |         | 476    |              |   |         | 1,244        |  |   |              | 831   |   |       |        |       |   |   |         | 2,551 | 
|                                              | Intercompany/related party accounts receivable |                            |         | 541    |              |   |         | 1,135        |  |   |              | 776   |   |       |        | (2,203 | ) |   |         | 249   | 
|                                              | Inventories  net                              |                            |         | 298    |              |   |         | 608          |  |   |              | 508   |   |       |        |       |   |   |         | 1,414 | 
|                                              | Deferred income taxes  net                    |                            |         | 45     |              |   |         | 211          |  |   |              | (1    | ) |       |        |       |   |   |         | 255   | 
|                                              | Other current assets                           |                            |         | 33     |              |   |         | 166          |  |   |              | 156   |   |       |        |       |   |   |         | 355   | 
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total current assets                          |                                                |                            | 1,443   |        |              |   | 5,798   |              |  |   | 3,473        |       |   |       | (2,203 | )      |   |   | 8,511   |      
|Investments                                   |                                                |                            | 2,222   |        |              |   | (6,772  | )            |  |   | 508          |       |   |       | 4,201  |        |   |   | 159     |      
|Intercompany advances                         |                                                |                            | 346     |        |              |   | 1,102   |              |  |   | 2,066        |       |   |       | (3,514 | )      |   |   |        |      
|Plant and equipment  net                     |                                                |                            | 480     |        |              |   | 771     |              |  |   | 395          |       |   |       |       |        |   |   | 1,646   |      
|Goodwill                                      |                                                |                            |        |        |              |   | 1,946   |              |  |   | 177          |       |   |       |       |        |   |   | 2,123   |      
|Intangible assets  net                       |                                                |                            | 37      |        |              |   | 1       |              |  |   | 40           |       |   |       |       |        |   |   | 78      |      
|Deferred income taxes  net                   |                                                |                            | 1,824   |        |              |   | 1,814   |              |  |   | 98           |       |   |       |       |        |   |   | 3,736   |      
|Other assets                                  |                                                |                            | 80      |        |              |   | 288     |              |  |   | 323          |       |   |       |       |        |   |   | 691     |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total assets                                  |                                                | $                          | 6,432   |        |              | $ | 4,948   |              |  | $ | 7,080        |       |   | $     | (1,516 | )      |   | $ | 16,944  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|                                             
|LIABILITIES AND SHAREHOLDERS EQUITY         
|Current liabilities                           |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |        |        |   |   |         |      
|                                              | Trade and other accounts payable               |                            | $       | 486    |              |   | $       | 391          |  |   | $            | 118   |   |       | $      |       |   |   | $       | 995   | 
|                                              | Intercompany/related party accounts payable    |                            |         | (3,561 | )            |   |         | 3,626        |  |   |              | 2,138 |   |       |        | (2,203 | ) |   |         |      | 
|                                              | Payroll and benefit-related liabilities        |                            |         | 68     |              |   |         | 306          |  |   |              | 138   |   |       |        |       |   |   |         | 512   | 
|                                              | Contractual liabilities                        |                            |         | 175    |              |   |         | 218          |  |   |              | 175   |   |       |        |       |   |   |         | 568   | 
|                                              | Restructuring liabilities                      |                            |         | 32     |              |   |         | 184          |  |   |              | 38    |   |       |        |       |   |   |         | 254   | 
|                                              | Other accrued liabilities                      |                            |         | 380    |              |   |         | 1,642        |  |   |              | 766   |   |       |        |       |   |   |         | 2,788 | 
|                                              | Long-term debt due within one year             |                            |         | 13     |              |   |         | 12           |  |   |              | (10   | ) |       |        |       |   |   |         | 15    | 
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total current liabilities                     |                                                |                            | (2,407  | )      |              |   | 6,379   |              |  |   | 3,363        |       |   |       | (2,203 | )      |   |   | 5,132   |      
|Long-term debt                                |                                                |                            | 1,520   |        |              |   | 120     |              |  |   | 422          |       |   |       |       |        |   |   | 2,062   |      
|Deferred income taxes  net                   |                                                |                            |        |        |              |   | 108     |              |  |   | 35           |       |   |       |       |        |   |   | 143     |      
|Other liabilities                             |                                                |                            | 995     |        |              |   | 1,928   |              |  |   | 266          |       |   |       |       |        |   |   | 3,189   |      
|Intercompany advances                         |                                                |                            |        |        |              |   | 297     |              |  |   | 3,217        |       |   |       | (3,514 | )      |   |   |        |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total liabilities                             |                                                |                            | 108     |        |              |   | 8,832   |              |  |   | 7,303        |       |   |       | (5,717 | )      |   |   | 10,526  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Minority interests in subsidiary companies    |                                                |                            |        |        |              |   |        |              |  |   | 94           |       |   |       |       |        |   |   | 94      |      
|                                             
|SHAREHOLDERS EQUITY                         
|Preferred shares                              |                                                |                            | 536     |        |              |   | 237     |              |  |   |             |       |   |       | (237   | )      |   |   | 536     |      
|Common shares                                 |                                                |                            | 1,211   |        |              |   | 5,417   |              |  |   | 1,622        |       |   |       | (7,039 | )      |   |   | 1,211   |      
|Additional paid-in capital                    |                                                |                            | 22,107  |        |              |   | 775     |              |  |   | 4,243        |       |   |       | (5,018 | )      |   |   | 22,107  |      
|Accumulated deficit                           |                                                |                            | (16,992 | )      |              |   | (10,931 | )            |  |   | (6,450       | )     |   |       | 17,381 |        |   |   | (16,992 | )    
|Accumulated other comprehensive income (loss) |                                                |                            | (538    | )      |              |   | 618     |              |  |   | 268          |       |   |       | (886   | )      |   |   | (538    | )    
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total shareholders equity                    |                                                |                            | 6,324   |        |              |   | (3,884  | )            |  |   | (317         | )     |   |       | 4,201  |        |   |   | 6,324   |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       
|Total liabilities and shareholders equity    |                                                | $                          | 6,432   |        |              | $ | 4,948   |              |  | $ | 7,080        |       |   | $     | (1,516 | )      |   | $ | 16,944  |      
|                                              |                                                |                            |         |        |              |   |         |              |  |   |              |       |   |       |       

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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |   |    |     |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -- | ---- | ------------ | - | ----- | ------------ | ---- | - | ------------ | ---- | ---- | ----- | - | -- | --- | - | ----- | ---- | ---- | -
|                                                                            |                                                                                                                                                                                                   | Nortel                                                                      |    |      |              |   | Non-  |              |      |   |              |     
|                                                                            |                                                                                                                                                                                                   | Networks                                                                    |    |      | Guarantor    |   |       | Guarantor    |      |   |              |      |     
|                                                                            |                                                                                                                                                                                                   | Limited                                                                     |    |      | Subsidiaries |   |       | Subsidiaries |      |   | Eliminations |      |      | Total |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|                                                                            |                                                                                                                                                                                                   | (Millions of U.S. dollars)                                                  |   
|Cash flows from (used in) operating activities                              |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |   |    |     |   |       |     
|                                                                            | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $  | (29  | )            |   | $     | (33          | )    |   | $            | 14   |      |       | $ | 19 |     |   | $     | (29  | )   
|                                                                            | Adjustments to reconcile net earnings (loss) from continuing
    operations to net cash from (used in) operating activities, net
    of effects from acquisitions and divestitures of businesses: |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |   |    |     |   |       |      |     
|                                                                            |                                                                                                                                                                                                   | Amortization and depreciation                                               |    |      | 29           |   |       |              | 132  |   |              |      | 69   |       |   |    |    |   |       |      | 230  |  
|                                                                            |                                                                                                                                                                                                   | Non-cash portion of special charges and related asset write downs           |    |      | (7           | ) |       |              | 7    |   |              |      | 3    |       |   |    |    |   |       |      | 3    |  
|                                                                            |                                                                                                                                                                                                   | Equity in net earnings (loss) of associated
    companies  net of tax      |    |      | 395          |   |       |              | (302 | ) |              |      | (77  | )     |   |    | (19 | ) |       |      | (3   | )
|                                                                            |                                                                                                                                                                                                   | Stock option compensation                                                   |    |      | 9            |   |       |              | 36   |   |              |      | 12   |       |   |    |    |   |       |      | 57   |  
|                                                                            |                                                                                                                                                                                                   | Deferred income taxes                                                       |    |      |             |   |       |              | 56   |   |              |      | 2    |       |   |    |    |   |       |      | 58   |  
|                                                                            |                                                                                                                                                                                                   | Other liabilities                                                           |    |      | 77           |   |       |              | 165  |   |              |      | 9    |       |   |    |    |   |       |      | 251  |  
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |    |      | 31           |   |       |              | (9   | ) |              |      | 3    |       |   |    |    |   |       |      | 25   |  
|                                                                            |                                                                                                                                                                                                   | Other  net                                                                 |    |      | (14          | ) |       |              | (12  | ) |              |      | (13  | )     |   |    |    |   |       |      | (39  | )
|                                                                            |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |    |      | (377         | ) |       |              | (225 | ) |              |      | (250 | )     |   |    |    |   |       |      | (852 | )
|                                                                            |                                                                                                                                                                                                   | Intercompany/related party activity                                         |    |      | (254         | ) |       |              | (306 | ) |              |      | 560  |       |   |    |    |   |       |      |     |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|                                                                            | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |    | (140 | )            |   |       | (491         | )    |   |              | 332  |      |       |   |   |     |   |       | (299 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Cash flows from (used in) investing activities                              |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |   |    |     |   |       |     
|                                                                            | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |    | (14  | )            |   |       | (96          | )    |   |              | (56  | )    |       |   |   |     |   |       | (166 | )   
|                                                                            | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |    | 9    |              |   |       | 1            |      |   |              |     |      |       |   |   |     |   |       | 10   |     
|                                                                            | Restricted cash and cash equivalents                                                                                                                                                              |                                                                             |    | 9    |              |   |       |             |      |   |              |     |      |       |   |   |     |   |       | 9    |     
|                                                                            | Acquisitions of investments and businesses-net of cash acquired                                                                                                                                   |                                                                             |    |     |              |   |       | (9           | )    |   |              | (440 | )    |       |   |   |     |   |       | (449 | )   
|                                                                            | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |    | 210  |              |   |       | 37           |      |   |              | 61   |      |       |   |   |     |   |       | 308  |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|                                                                            | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |    | 214  |              |   |       | (67          | )    |   |              | (435 | )    |       |   |   |     |   |       | (288 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Cash flows from (used in) financing activities                              |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |   |    |     |   |       |     
|                                                                            | Dividends paid                                                                                                                                                                                    |                                                                             |    | (28  | )            |   |       |             |      |   |              | (5   | )    |       |   |   |     |   |       | (33  | )   
|                                                                            | Increase in notes payable                                                                                                                                                                         |                                                                             |    |     |              |   |       |             |      |   |              | 58   |      |       |   |   |     |   |       | 58   |     
|                                                                            | Decrease in notes payable                                                                                                                                                                         |                                                                             |    |     |              |   |       |             |      |   |              | (64  | )    |       |   |   |     |   |       | (64  | )   
|                                                                            | Repayments of capital leases payable                                                                                                                                                              |                                                                             |    | 1    |              |   |       | (6           | )    |   |              | (3   | )    |       |   |   |     |   |       | (8   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|                                                                            | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |    | (27  | )            |   |       | (6           | )    |   |              | (14  | )    |       |   |   |     |   |       | (47  | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                                                                                                                                                                   |                                                                             | (1 | )    |              |   | (54   | )            |      |   | (31          | )    |      |       |  |    |     |   | (86   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Net cash from (used in) continuing operations                               |                                                                                                                                                                                                   |                                                                             | 46 |      |              |   | (618  | )            |      |   | (148         | )    |      |       |  |    |     |   | (720  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             | 13 |      |              |   | 21    |              |      |   | (1           | )    |      |       |  |    |     |   | 33    |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                                                                                                   |                                                                             | 59 |      |              |   | (597  | )            |      |   | (149         | )    |      |       |  |    |     |   | (687  | )   
|Cash and cash equivalents at beginning of period                            |                                                                                                                                                                                                   |                                                                             | (2 | )    |              |   | 2,414 |              |      |   | 1,195        |      |      |       |  |    |     |   | 3,607 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  
|Cash and cash equivalents at end of period                                  |                                                                                                                                                                                                   | $                                                                           | 57 |      |              | $ | 1,817 |              |      | $ | 1,046        |      |      | $     |  |    |     | $ | 2,920 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |      |              |   |       |              |      |   |              |      |      |       |  

53



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##### Table of Contents



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements
(unaudited)  (Continued)




|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |   |      |     |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -- | --- | ------------ | - | ----- | ------------ | ---- | - | ------------ | --- | ---- | ----- | - | ---- | --- | - | ----- | ---- | ---- | -
|                                                                            |                                                                                                                                                                                                   | Nortel                                                                      |    |     |              |   | Non-  |              |      |   |              |    
|                                                                            |                                                                                                                                                                                                   | Networks                                                                    |    |     | Guarantor    |   |       | Guarantor    |      |   |              |     |     
|                                                                            |                                                                                                                                                                                                   | Limited                                                                     |    |     | Subsidiaries |   |       | Subsidiaries |      |   | Eliminations |     |      | Total |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|                                                                            |                                                                                                                                                                                                   | (Millions of U.S. dollars)                                                  |   
|Cash flows from (used in) operating activities                              |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |   |      |     |   |       |     
|                                                                            | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $  | (59 | )            |   | $     | 185          |      |   | $            | 50  |      |       | $ | (235 | )   |   | $     | (59  | )   
|                                                                            | Adjustments to reconcile net earnings (loss) from continuing
    operations to net cash from (used in) operating activities, net
    of effects from acquisitions and divestitures of businesses: |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |   |      |     |   |       |      |     
|                                                                            |                                                                                                                                                                                                   | Amortization and depreciation                                               |    |     | 31           |   |       |              | 132  |   |              |     | 97   |       |   |      |    |   |       |      | 260  |  
|                                                                            |                                                                                                                                                                                                   | Equity in net earnings (loss) of associated
    companies  net of tax      |    |     | (48          | ) |       |              | (173 | ) |              |     | (12  | )     |   |      | 235 |   |       |      | 2    |  
|                                                                            |                                                                                                                                                                                                   | Stock option compensation                                                   |    |     | 29           |   |       |              | 15   |   |              |     | 11   |       |   |      |    |   |       |      | 55   |  
|                                                                            |                                                                                                                                                                                                   | Deferred income taxes                                                       |    |     | 14           |   |       |              | (7   | ) |              |     | (19  | )     |   |      |    |   |       |      | (12  | )
|                                                                            |                                                                                                                                                                                                   | Other liabilities                                                           |    |     | 60           |   |       |              | 115  |   |              |     | 15   |       |   |      |    |   |       |      | 190  |  
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |    |     | 1            |   |       |              | (76  | ) |              |     | (72  | )     |   |      |    |   |       |      | (147 | )
|                                                                            |                                                                                                                                                                                                   | Other  net                                                                 |    |     | 18           |   |       |              | (49  | ) |              |     | 98   |       |   |      |    |   |       |      | 67   |  
|                                                                            |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |    |     | (328         | ) |       |              | (649 | ) |              |     | 190  |       |   |      |    |   |       |      | (787 | )
|                                                                            |                                                                                                                                                                                                   | Intercompany/related party activity                                         |    |     | 340          |   |       |              | (17  | ) |              |     | (323 | )     |   |      |    |   |       |      |     |  
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|                                                                            | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |    | 58  |              |   |       | (524         | )    |   |              | 35  |      |       |   |     |     |   |       | (431 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Cash flows from (used in) investing activities                              |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |   |      |     |   |       |     
|                                                                            | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |    | (20 | )            |   |       | (118         | )    |   |              | (56 | )    |       |   |     |     |   |       | (194 | )   
|                                                                            | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |    | 4   |              |   |       | 1            |      |   |              | 5   |      |       |   |     |     |   |       | 10   |     
|                                                                            | Restricted cash and cash equivalents                                                                                                                                                              |                                                                             |    | (23 | )            |   |       |             |      |   |              | 9   |      |       |   |     |     |   |       | (14  | )   
|                                                                            | Acquisitions of investments and businesses  net of
    cash acquired                                                                                                                             |                                                                             |    | (1  | )            |   |       | (6           | )    |   |              |    |      |       |   |     |     |   |       | (7   | )   
|                                                                            | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |    | 1   |              |   |       | 66           |      |   |              | 76  |      |       |   |     |     |   |       | 143  |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|                                                                            | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |    | (39 | )            |   |       | (57          | )    |   |              | 34  |      |       |   |     |     |   |       | (62  | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Cash flows from (used in) financing activities                              |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |   |      |     |   |       |     
|                                                                            | Dividends paid                                                                                                                                                                                    |                                                                             |    | (24 | )            |   |       |             |      |   |              |    |      |       |   |     |     |   |       | (24  | )   
|                                                                            | Increase in notes payable                                                                                                                                                                         |                                                                             |    |    |              |   |       |             |      |   |              | 54  |      |       |   |     |     |   |       | 54   |     
|                                                                            | Decrease in notes payable                                                                                                                                                                         |                                                                             |    |    |              |   |       |             |      |   |              | (56 | )    |       |   |     |     |   |       | (56  | )   
|                                                                            | Repayments of long-term debt                                                                                                                                                                      |                                                                             |    |    |              |   |       | (85          | )    |   |              | (22 | )    |       |   |     |     |   |       | (107 | )   
|                                                                            | Repayments of capital leases payable                                                                                                                                                              |                                                                             |    | (1  | )            |   |       | (8           | )    |   |              | 4   |      |       |   |     |     |   |       | (5   | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|                                                                            | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |    | (25 | )            |   |       | (93          | )    |   |              | (20 | )    |       |   |     |     |   |       | (138 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                                                                                                                                                                   |                                                                             |   |     |              |   | (2    | )            |      |   | (4           | )   |      |       |  |      |     |   | (6    | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Net cash from (used in) continuing operations                               |                                                                                                                                                                                                   |                                                                             | (6 | )   |              |   | (676  | )            |      |   | 45           |     |      |       |  |      |     |   | (637  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             | 16 |     |              |   |      |              |      |   |             |     |      |       |  |      |     |   | 16    |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                                                                                                   |                                                                             | 10 |     |              |   | (676  | )            |      |   | 45           |     |      |       |  |      |     |   | (621  | )   
|Cash and cash equivalents at beginning of period                            |                                                                                                                                                                                                   |                                                                             | (8 | )   |              |   | 2,963 |              |      |   | 973          |     |      |       |  |      |     |   | 3,928 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  
|Cash and cash equivalents at end of period                                  |                                                                                                                                                                                                   | $                                                                           | 2  |     |              | $ | 2,287 |              |      | $ | 1,018        |     |      | $     |  |      |     | $ | 3,307 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |    |     |              |   |       |              |      |   |              |     |      |       |  

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|        |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS  TABLE OF
    CONTENTS

|                                                  |                                                                              |                                                                      |    |    |    | 
|------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------------------------------------- | -- | -- | -- | 
|Business Overview                                 |                                                                              |                                                                      | 57 |   
|                                                  | Our Business                                                                 |                                                                      |    | 57 |   
|                                                  | Our Segments                                                                 |                                                                      |    | 57 |   
|                                                  | Our Strategy and Outlook                                                     |                                                                      |    | 58 |   
|                                                  |                                                                              | Strategy                                                             |    |    | 58 | 
|                                                  |                                                                              | Financial targets                                                    |    |    | 59 | 
|                                                  |                                                                              | 2005 Outlook                                                         |    |    | 60 | 
|                                                  | Evolution of Our Supply Chain Strategy                                       |                                                                      |    | 60 |   
|Developments in 2005                              |                                                                              |                                                                      | 62 |   
|                                                  | First Nine Months Consolidated Results
    Summary                           |                                                                      |    | 62 |   
|                                                  | Significant Business Developments                                            |                                                                      |    | 64 |   
|                                                  |                                                                              | Management                                                           |    |    | 64 | 
|                                                  |                                                                              | Acquisitions                                                         |    |    | 64 | 
|                                                  |                                                                              | Joint ventures                                                       |    |    | 65 | 
|                                                  |                                                                              | Optical components operations                                        |    |    | 65 | 
|                                                  |                                                                              | Bharat Sanchar Nigam Limited
    contract                            |    |    | 65 | 
|                                                  |                                                                              | Real Estate                                                          |    |    | 65 | 
|                                                  | Nortel Audit Committee Independent Review;
    Restatements; Related Matters |                                                                      |    | 66 |   
|                                                  |                                                                              | Restatements and Independent
    Review                              |    |    | 66 | 
|                                                  |                                                                              | Revenue Independent Review                                           |    |    | 66 | 
|                                                  |                                                                              | Material weaknesses in internal control
    over financial reporting |    |    | 67 | 
|                                                  |                                                                              | EDC Support Facility                                                 |    |    | 68 | 
|                                                  |                                                                              | Debt securities                                                      |    |    | 68 | 
|                                                  |                                                                              | Shelf registration statement                                         |    |    | 68 | 
|                                                  |                                                                              | Regulatory actions and pending
    litigation                        |    |    | 68 | 
|                                                  |                                                                              | Stock-based compensation plans                                       |    |    | 69 | 
|Results of Operations 
    Continuing Operations |                                                                              |                                                                      | 70 |   
|                                                  | Consolidated Information                                                     |                                                                      |    | 70 |   
|                                                  |                                                                              | Revenues                                                             |    |    | 70 | 
|                                                  |                                                                              | Geographic Revenues                                                  |    |    | 70 | 
|                                                  | Gross Profit and Gross Margin                                                |                                                                      |    | 72 |   
|                                                  | Operating Expenses                                                           |                                                                      |    | 73 |   
|                                                  |                                                                              | Selling, general and administrative
    expense                      |    |    | 73 | 
|                                                  |                                                                              | Research and development expense                                     |    |    | 74 | 
|                                                  |                                                                              | Special charges                                                      |    |    | 74 | 
|                                                  | Gain (Loss) on Sale of Businesses and
    Assets                             |                                                                      |    | 79 |   
|                                                  | Other Income (Expense)  Net                                                 |                                                                      |    | 80 |   
|                                                  | Interest Expense                                                             |                                                                      |    | 81 |   
|                                                  | Income Tax Benefit (Expense)                                                 |                                                                      |    | 81 |   
|                                                  | Net Earnings (Loss) From Continuing
    Operations                           |                                                                      |    | 81 |   
|                                                  | Segment Information                                                          |                                                                      |    | 82 |   
|                                                  |                                                                              | Carrier Packet Networks                                              |    |    | 83 | 
|                                                  |                                                                              | CDMA Networks                                                        |    |    | 85 | 
|                                                  |                                                                              | GSM and UMTS Networks                                                |    |    | 86 | 
|                                                  |                                                                              | Enterprise Networks                                                  |    |    | 88 | 
|                                                  |                                                                              | Other                                                                |    |    | 90 | 

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|                                                              |                                                            |                                                            |     |     |    | 
|------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------------------------- | --- | --- | -- | 
|Liquidity and Capital Resources                               |                                                            |                                                            | 90  |    
|                                                              | Cash Flows                                                 |                                                            |     | 91  |   
|                                                              |                                                            | Operating activities                                       |     |     | 91 | 
|                                                              |                                                            | Investing activities                                       |     |     | 94 | 
|                                                              |                                                            | Financing activities                                       |     |     | 94 | 
|                                                              | Uses of Liquidity                                          |                                                            |     | 94  |   
|                                                              |                                                            | Contractual cash obligations                               |     |     | 95 | 
|                                                              |                                                            | Customer financing                                         |     |     | 95 | 
|                                                              |                                                            | Acquisitions                                               |     |     | 96 | 
|                                                              | Sources of Liquidity                                       |                                                            |     | 96  |   
|                                                              |                                                            | Credit facilities                                          |     |     | 96 | 
|                                                              |                                                            | Available support facility                                 |     |     | 97 | 
|                                                              |                                                            | Shelf registration statement and base
    shelf prospectus |     |     | 97 | 
|                                                              | Credit Ratings                                             |                                                            |     | 98  |   
|Off-Balance Sheet Arrangements                                |                                                            |                                                            | 98  |    
|                                                              | Bid, Performance Related and Other Bonds                   |                                                            |     | 98  |   
|                                                              | Receivables Securitization Transactions                    |                                                            |     | 99  |   
|Application of Critical Accounting
    Policies and Estimates |                                                            |                                                            | 99  |    
|                                                              | Provisions for Doubtful Accounts                           |                                                            |     | 99  |   
|                                                              | Provisions for Inventory                                   |                                                            |     | 100 |   
|                                                              | Provisions for Product Warranties                          |                                                            |     | 101 |   
|                                                              | Tax Asset Valuation                                        |                                                            |     | 101 |   
|                                                              | Goodwill Valuation                                         |                                                            |     | 102 |   
|                                                              | Special Charges                                            |                                                            |     | 102 |   
|Accounting Changes and Recent Accounting
    Pronouncements   |                                                            |                                                            | 102 |    
|                                                              | Accounting Changes                                         |                                                            |     | 102 |   
|                                                              | Recent Accounting Pronouncements                           |                                                            |     | 103 |   
|Canadian Supplement                                           |                                                            |                                                            | 104 |    
|                                                              | Accounting Changes                                         |                                                            |     | 104 |   
|                                                              | Outstanding Share Data                                     |                                                            |     | 105 |   
|Market Risk                                                   |                                                            |                                                            | 105 |    
|Equity Price Risk                                             |                                                            |                                                            | 106 |    
|Environmental Matters                                         |                                                            |                                                            | 106 |    
|Legal Proceedings                                             |                                                            |                                                            | 106 |    
|Risk Factors/ Forward Looking
    Statements                  |                                                            |                                                            | 107 |    
|                                                              | Risks Relating to Our Restatements and
    Related Matters |                                                            |     | 107 |   
|                                                              | Risks Relating to Our Business                             |                                                            |     | 113 |   

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MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


You should read this Managements Discussion and
Analysis of Financial Condition and Results of Operation, or
MD&A, in combination with the accompanying unaudited
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States,
or U.S. GAAP.


This section contains forward looking statements and should
be read in conjunction with the risk factors described below
under Risk Factors/ Forward Looking Statements. All
dollar amounts in this MD&A are in millions of
United States, or U.S., dollars unless otherwise stated.


Where we say we, us, our
or Nortel, we mean Nortel Networks Limited or Nortel
Networks Limited and its subsidiaries, as applicable, and where
we refer to the industry, we mean the
telecommunications industry.





Business Overview





Our Business









Our Segments






57



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Carrier Packet Networks provides: (i) circuit and packet
    voice solutions, (ii) data networking and security
    solutions and (iii) optical long-haul and metropolitan
    optical network solutions. Together, these solutions provide or
    transport data, voice and multimedia communications solutions to
    our service provider customers that operate wireline networks.
    These service provider customers include local and long distance
    telephone companies, wireless service providers (for the
    wireline portion of their networks), cable operators and other
    communication service providers.
|
| |  | CDMA Networks provides communication network solutions to
    wireless service provider customers based on CDMA and Time
    Division Multiple Access, or TDMA, technologies to enable those
    customers to offer their customers, the subscribers for wireless
    communication services, the ability to be mobile while they send
    and receive voice and data communications using wireless
    devices, such as cellular telephones, personal digital
    assistants and other computing and communications devices.                                                                                                   
|
| |  | GSM and UMTS Networks also provides communication network
    solutions to our wireless service provider customers; however,
    these solutions are based on GSM and UMTS technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Enterprise Networks provides: (i) circuit and packet voice
    solutions and (ii) data networking and security solutions
    which provide data, voice and multimedia communications
    solutions to our enterprise customers. Our Enterprise Networks
    customers consist of a broad range of enterprise customers
    around the world, including large businesses and their branch
    offices, small businesses and home offices, as well as
    government agencies, educational and other institutions and
    utility organizations.                                                                                  
|
| |  | Other represents miscellaneous business activities
    and corporate functions. None of these activities meet the
    quantitative criteria to be disclosed separately as reportable
    segments. Costs associated with shared services and other
    corporate costs are allocated to the segments based on usage
    determined generally by headcount. Costs not allocated to the
    segments are primarily related to our corporate compliance and
    other non- operational activities and are included in
    Other.                                                                                               








Our Strategy and Outlook







| |         
| | --------
| | Strategy



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| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a commitment to best corporate practices and ethical conduct;                                                                                                 
|
| |  | a simplified organizational structure, making it easier for
    customers to do business with us and to reflect alignment with
    carrier converged networks;
|
| |  | an increased focus on the enterprise market and customers;                                                                                                    
|
| |  | optimized R&D programs for highly secure, available and
    reliable converged networks;                                                                      
|
| |  | a focus on partnerships, emerging markets and strategic
    acquisitions;                                                                                     
|
| |  | a focus on overall marketing strategy;                                                                                                                        
|
| |  | the strategic review of embedded services to assess
    opportunities in the professional services business; and                                              
|
| |  | a distinct focus on government and defense customers.                                                                                                         










| |                  
| | -----------------
| | Financial targets









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| |             
| | ------------
| | 2005 Outlook












Evolution of Our Supply Chain Strategy










60



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Developments in 2005





First Nine Months Consolidated Results Summary




|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |   |  |   |       |     |   |  |       |      |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | -------------------------- | ----- | -- | ------------------------- |  | ------------- | ---- |  | - | ------------- | ------------- | - | ---- | ----- | ---- | ------------- | - | ----- | ---- | - |  | ------------- | - |  | - | ----- | --- | - |  | ----- | ---- | -
|                                                                                                                                                     |       | For the Three Months Ended |       |    | For the Nine Months Ended | 
|                                                                                                                                                     |       |                            |       |    |                           | 
|                                                                                                                                                     |       | September 30,              |       |    |                           |  | September 30, |      |  |   |               | September 30, |   |      |       |      | September 30, |   |       |     
|                                                                                                                                                     |       | 2005                       |       |    | % of Revenues             |  |               | 2004 |  |   | % of Revenues |               |   | 2005 |       |      | % of Revenues |   |       | 2004 |   |  | % of Revenues |  
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|                                                                                                                                                     |       | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |       | $                          | 2,655 |    |                           |  | 100.0         |      |  | $ | 2,179         |               |   |      | 100.0 |      |               | $ | 8,046 |      |   |  | 100.0         |   |  | $ | 7,213 |     |   |  | 100.0 |     
|Cost of revenues                                                                                                                                     |       |                            | 1,660 |    |                           |  | 62.5          |      |  |   | 1,391         |               |   |      | 63.8  |      |               |   | 4,787 |      |   |  | 59.5          |   |  |   | 4,301 |     |   |  | 59.6  |     
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|Gross profit                                                                                                                                         |       |                            | 995   |    |                           |  | 37.5          |      |  |   | 788           |               |   |      | 36.2  |      |               |   | 3,259 |      |   |  | 40.5          |   |  |   | 2,912 |     |   |  | 40.4  |     
|Selling, general and administrative expense                                                                                                          |       |                            | 570   |    |                           |  | 21.5          |      |  |   | 509           |               |   |      | 23.4  |      |               |   | 1,716 |      |   |  | 21.3          |   |  |   | 1,585 |     |   |  | 22.0  |     
|Research and development expense                                                                                                                     |       |                            | 445   |    |                           |  | 16.8          |      |  |   | 497           |               |   |      | 22.8  |      |               |   | 1,390 |      |   |  | 17.3          |   |  |   | 1,452 |     |   |  | 20.1  |     
|Amortization of intangibles                                                                                                                          |       |                            | 6     |    |                           |  | 0.2           |      |  |   | 2             |               |   |      |      |      |               |   | 10    |      |   |  | 0.1           |   |  |   | 7     |     |   |  |      |     
|Special charges                                                                                                                                      |       |                            | 37    |    |                           |  | 1.4           |      |  |   | 93            |               |   |      | 4.4   |      |               |   | 148   |      |   |  | 1.9           |   |  |   | 99    |     |   |  | 1.5   |     
|(Gain) loss on sale of businesses and assets                                                                                                         |       |                            | 4     |    |                           |  | 0.1           |      |  |   | (39           | )             |   |      | (1.8  | )    |               |   | 41    |      |   |  | 0.5           |   |  |   | (114  | )   |   |  | (1.6  | )   
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|Operating earnings (loss)                                                                                                                            |       |                            | (67   | )  |                           |  | (2.5          | )    |  |   | (274          | )             |   |      | (12.6 | )    |               |   | (46   | )    |   |  | (0.6          | ) |  |   | (117  | )   |   |  | (1.6  | )   
|Other income (expense)  net                                                                                                                         |       |                            | 67    |    |                           |  | 2.5           |      |  |   | 44            |               |   |      | 2.0   |      |               |   | 175   |      |   |  | 2.1           |   |  |   | 118   |     |   |  | 1.5   |     
|Interest expense
    Long-term debt                                                                                                                  |       |                            | (32   | )  |                           |  | (1.3          | )    |  |   | (22           | )             |   |      | (1.0  | )    |               |   | (91   | )    |   |  | (1.1          | ) |  |   | (68   | )   |   |  | (0.9  | )   
|                                                                                                                                                     | Other |                            |       | (2 | )                         |  |               |     |  |   |               | (3            | ) |      |       | (0.1 | )             |   |       | (4   | ) |  |               |  |  |   |       | (17 | ) |  |       | (0.2 | )
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |       |                            | (34   | )  |                           |  | (1.3          | )    |  |   | (255          | )             |   |      | (11.7 | )    |               |   | 34    |      |   |  | 0.4           |   |  |   | (84   | )   |   |  | (1.2  | )   
|Income tax benefit (expense)                                                                                                                         |       |                            | (40   | )  |                           |  | (1.5          | )    |  |   | 30            |               |   |      | 1.4   |      |               |   | (48   | )    |   |  | (0.6          | ) |  |   | 32    |     |   |  | 0.5   |     
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|                                                                                                                                                     |       |                            | (74   | )  |                           |  | (2.8          | )    |  |   | (225          | )             |   |      | (10.3 | )    |               |   | (14   | )    |   |  | (0.2          | ) |  |   | (52   | )   |   |  | (0.7  | )   
|Minority interests  net of tax                                                                                                                      |       |                            | (5    | )  |                           |  | (0.1          | )    |  |   | 2             |               |   |      | 0.1   |      |               |   | (18   | )    |   |  | (0.2          | ) |  |   | (5    | )   |   |  | (0.1  | )   
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |       |                            | 1     |    |                           |  |              |      |  |   |              |               |   |      |      |      |               |   | 3     |      |   |  |              |   |  |   | (2    | )   |   |  |      |     
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|Net earnings (loss) from continuing operations                                                                                                       |       |                            | (78   | )  |                           |  | (2.9          | )    |  |   | (223          | )             |   |      | (10.2 | )    |               |   | (29   | )    |   |  | (0.4          | ) |  |   | (59   | )   |   |  | (0.8  | )   
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |       |                            | 1     |    |                           |  |              |      |  |   | 5             |               |   |      | 0.2   |      |               |   | 2     |      |   |  | 0.1           |   |  |   | 12    |     |   |  | 0.1   |     
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  
|Net earnings (loss)                                                                                                                                  |       | $                          | (77   | )  |                           |  | (2.9          | )    |  | $ | (218          | )             |   |      | (10.0 | )    |               | $ | (27   | )    |   |  | (0.3          | ) |  | $ | (47   | )   |   |  | (0.7  | )   
|                                                                                                                                                     |       |                            |       |    |                           |  |               |      |  |   |               |               |   |      |       |      |               |   |       |      |   |  |               |  



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63



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Significant Business Developments







| |           
| | ----------
| | Management










| |             
| | ------------
| | Acquisitions









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| |               
| | --------------
| | Joint ventures












| |                              
| | -----------------------------
| | Optical components operations








| |                                      
| | -------------------------------------
| | Bharat Sanchar Nigam Limited contract








| |            
| | -----------
| | Real Estate



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Nortel Audit Committee Independent Review; Restatements;
Related Matters







| |                                    
| | -----------------------------------
| | Restatements and Independent Review










| |                           
| | --------------------------
| | Revenue Independent Review

. .




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| |                                                                     
| | --------------------------------------------------------------------
| | Material weaknesses in internal control over financial
    reporting





| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of compliance with written Nortel procedures for monitoring
    and adjusting balances related to certain accruals and
    provisions, including restructuring charges and contract and
    customer accruals;                                                                                                                                                  
|
| |  | lack of compliance with Nortel procedures for appropriately
    applying applicable GAAP to the initial recording of certain
    liabilities including those described in SFAS No. 5,
    Accounting for Contingencies, or
    SFAS No. 5, and to foreign currency translation as
    described in SFAS No. 52, Foreign Currency
    Translation, or SFAS No. 52;
|
| |  | lack of sufficient personnel with appropriate knowledge,
    experience and training in U.S. GAAP and lack of sufficient
    analysis and documentation of the application of U.S. GAAP
    to transactions, including but not limited to revenue
    transactions;                                                                                                  
|
| |  | lack of a clear organization and accountability structure within
    the accounting function, including insufficient review and
    supervision, combined with financial reporting systems that are
    not integrated and which require extensive manual
    interventions; and                                                                                     
|
| |  | lack of sufficient awareness of, and timely and appropriate
    remediation of, internal control issues by Nortel personnel.                                                                                                                                                                                                                                         







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| |                     
| | --------------------
| | EDC Support Facility
















| |                
| | ---------------
| | Debt securities








| |                             
| | ----------------------------
| | Shelf registration statement








| |                                          
| | -----------------------------------------
| | Regulatory actions and pending litigation



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| |                               
| | ------------------------------
| | Stock-based compensation plans





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Results of Operations  Continuing Operations





Consolidated Information







| |         
| | --------
| | Revenues













| |                    
| | -------------------
| | Geographic Revenues



|              |  |                                          |       |  |                                         |   |       |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          |  |  |   |     |  |  |  |    | 
|------------- |  | ---------------------------------------- | ----- |  | --------------------------------------- | - | ----- | -------- |  | - | -------- |  |  | ---- | -- |  | ---- | - | ----- | -------- |  | - | -------- |  |  | - | --- |  |  |  | -- | 
|              |  | For the Three Months Ended September 30, |       |  | For the Nine Months Ended September 30, |  
|              |  |                                          |       |  |                                         |  
|              |  | 2005                                     |       |  | 2004                                    |   |       | $ Change |  |   | % Change |  |  | 2005 |    |  | 2004 |   |       | $ Change |  |   | % Change | 
|              |  |                                          |       |  |                                         |   |       |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          | 
|United States |  | $                                        | 1,282 |  |                                         | $ | 1,114 |          |  | $ | 168      |  |  |      | 15 |  |      | $ | 3,825 |          |  | $ | 3,653    |  |  | $ | 172 |  |  |  | 5  | 
|EMEA          |  |                                          | 642   |  |                                         |   | 581   |          |  |   | 61       |  |  |      | 10 |  |      |   | 2,085 |          |  |   | 1,820    |  |  |   | 265 |  |  |  | 15 | 
|Canada        |  |                                          | 163   |  |                                         |   | 122   |          |  |   | 41       |  |  |      | 34 |  |      |   | 460   |          |  |   | 413      |  |  |   | 47  |  |  |  | 11 | 
|Asia Pacific  |  |                                          | 379   |  |                                         |   | 227   |          |  |   | 152      |  |  |      | 67 |  |      |   | 1,193 |          |  |   | 904      |  |  |   | 289 |  |  |  | 32 | 
|CALA(a)       |  |                                          | 189   |  |                                         |   | 135   |          |  |   | 54       |  |  |      | 40 |  |      |   | 483   |          |  |   | 423      |  |  |   | 60  |  |  |  | 14 | 
|              |  |                                          |       |  |                                         |   |       |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          | 
|Consolidated  |  | $                                        | 2,655 |  |                                         | $ | 2,179 |          |  | $ | 476      |  |  |      | 22 |  |      | $ | 8,046 |          |  | $ | 7,213    |  |  | $ | 833 |  |  |  | 12 | 
|              |  |                                          |       |  |                                         |   |       |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          | 






|    |                                                 
|--- | ------------------------------------------------
|(a) | The Caribbean and Latin America region, or CALA.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Q3 2005 vs. Q3 2004 and first nine months of 2005 vs.
    first nine months of 2004





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| |                    
| | -------------------
| | Q3 2005 vs. Q2 2005











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| |     
| | ----
| | 2005







| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continued growth in our voice over internet protocol, or VoIP,
    technologies and our 3G wireless technologies;                                                                                                                       
|
| |  | build-out of the BSNL contract in the Asia Pacific region. For
    further information related to the BSNL contract, see
    Developments in 2005  Significant Business
    Developments  Bharat Sanchar Nigam Limited
    contract;
|
| |  | expansion and enhancement of existing networks by our customers
    due to their subscriber growth and competitive pressures;                                                                                                           
|
| |  | anticipated growth in our Enterprise Networks business including
    revenues from our acquisition of PEC, particularly in our
    converged networks products; and                                                                     
|
| |  | expected continued growth in metro optical.                                                                                                                                                                                             





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | customers limiting their investment in mature technologies as
    they focus on maximizing return on invested capital;                                                                                                                                                                                                                                                                                                                               
|
| |  | pricing pressures on sales of certain of our products as a
    result of increased competition, particularly from low cost
    suppliers;                                                                                                                                                                                                                                                                                                            
|
| |  | consolidation of service providers which may reduce overall
    spending on our telecommunications equipment, including to date
    in our GSM and UMTS Networks segment; and                                                                                                                                                                                                                                                                        
|
| |  | the impact of our financial restatement and related activities
    and the internal restructuring and realignment programs. For
    additional information, see Developments in
    2005  Nortel Audit Committee Independent Review;
    Restatements; Related Matters. While customer support
    generally remains strong, we believe that these activities will
    continue to have an adverse impact on our business performance
    in 2005.






Gross Profit and Gross Margin


|             |  |                                          |      |   |                                         |   |      |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          |   |  |   |         |  |  |  |    | 
|------------ |  | ---------------------------------------- | ---- | - | --------------------------------------- | - | ---- | -------- |  | - | -------- |  |  | ---- | -- |  | ---- | - | ----- | -------- |  | - | -------- | - |  | - | ------- |  |  |  | -- | 
|             |  | For the Three Months Ended September 30, |      |   | For the Nine Months Ended September 30, |  
|             |  |                                          |      |   |                                         |  
|             |  | 2005                                     |      |   | 2004                                    |   |      | $ Change |  |   | % Change |  |  | 2005 |    |  | 2004 |   |       | $ Change |  |   | % Change |  
|             |  |                                          |      |   |                                         |   |      |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          |  
|Gross profit |  | $                                        | 995  |   |                                         | $ | 788  |          |  | $ | 207      |  |  |      | 26 |  |      | $ | 3,259 |          |  | $ | 2,912    |   |  | $ | 347     |  |  |  | 12 | 
|Gross margin |  |                                          | 37.5 | % |                                         |   | 36.2 | %        |  |   | 1.3 pts  |  |  |      |    |  |      |   | 40.5  | %        |  |   | 40.4     | % |  |   | 0.1 pts |  |  |  |    | 
|             |  |                                          |      |   |                                         |   |      |          |  |   |          |  |  |      |    |  |      |   |       |          |  |   |          |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of approximately $240 due to overall higher sales
    volumes;                                                                                                                                                                                                                                                                                                                            
|
| |  | an increase of approximately $88 due to lower project losses
    related to the BSNL contract in India. For further information
    related to the BSNL contract, see Developments in
    2005  Significant Business Developments 
    Bharat Sanchar Nigam Limited contract; and                                                                                                                 
|
| |  | an increase of approximately $50 due to continued improvements
    in our cost structure primarily as a result of lower material
    pricing; partially offset by                                                                                                                                                                                                                                     
|
| |  | a decrease of approximately $160 primarily as a result of
    (i) pricing pressures on certain of our products due to
    increased competition for service provider and enterprise
    customers; and (ii) unfavorable product mix associated with
    increased sales of our next generation products which typically
    have lower gross margins in the early stages of product
    evolution; and

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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | a decrease of approximately $10 primarily due to increases in
    warranty provisions.





| |   |                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of approximately $430 due to overall higher sales
    volumes;                                                                                                                                                                                                                                                                                                          
|
| |  | an increase of approximately $220 due to continued improvements
    in our cost structure primarily as a result of lower material
    pricing;                                                                                                                                                                                                                                      
|
| |  | an increase of $65 primarily due to recoveries in inventory
    provisions and lower warranty cost as a result of improved
    product quality; and                                                                                                                                                                                                                                 
|
| |  | an increase of approximately $56 due to lower project losses
    related to the BSNL contract in India. For further information
    related to the BSNL contract, see Developments in
    2005  Significant Business Developments 
    Bharat Sanchar Nigam Limited contract; partially offset by                                                                               
|
| |  | a decrease of $405 primarily as a result of (i) pricing
    pressures on certain of our products due to increased
    competition for service provider and enterprise customers; and
    (ii) unfavorable product mix associated with increased
    sales of our next generation products which typically have lower
    gross margins in the early stages of product evolution; and
|
| |  | a decrease of $18 related to our employee bonus plans.                                                                                                                                                                                                                                                                                                                              






Operating Expenses







| |                                            
| | -------------------------------------------
| | Selling, general and administrative expense

|             |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |    |  |      |   |       |          |   |   |          |      |   |   |     |          |   |  |   |  | 
|------------ | ---------------- | ---------------------------------------- | --- | ---- | --------------------------------------- | - | --- | -------- | - | - | -------- | -------- | - | ---- | -- |  | ---- | - | ----- | -------- | - | - | -------- | ---- | - | - | --- | -------- | - |  | - |  | 
|             |                  | For the Three Months Ended September 30, |     |      | For the Nine Months Ended September 30, |  
|             |                  |                                          |     |      |                                         |  
|             |                  | 2005                                     |     |      | 2004                                    |   |     | $ Change |   |   | % Change |          |   | 2005 |    |  | 2004 |   |       | $ Change |   |   | % Change |     
|             |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |    |  |      |   |       |          |   |   |          |     
|SG&A expense |                  | $                                        | 570 |      |                                         | $ | 509 |          |   | $ | 61       |          |   |      | 12 |  |      | $ | 1,716 |          |   | $ | 1,585    |      |   | $ | 131 |          |   |  | 8 | 
|             | As % of revenues |                                          |     | 21.5 | %                                       |   |     | 23.4     | % |   |          | (1.9 pts | ) |      |    |  |      |   |       | 21.3     | % |   |          | 22.0 | % |   |     | (0.7 pts | ) |  |   |  | 
|             |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |    |  |      |   |       |          |   |   |          |     





| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net trade receivable recoveries in the third quarter of 2004 not
    repeated in 2005;                                                                             
|
| |  | increase in sales and marketing expenses primarily related to
    our PEC acquisition; and                                                                         
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar; partially offset by
|
| |  | cost savings associated with our 2004 Restructuring Plan.                                                                                                          





| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs related to our internal control remedial measures,
    investments in our finance processes and restatement related
    activities of approximately $162 in the first nine months of
    2005 compared to approximately $69 for the same period in 2004;
|
| |  | net trade receivable recoveries in the third quarter of 2004 not
    repeated in 2005;                                                                                                                                                                        
|
| |  | significant unfavorable foreign exchange rate fluctuation
    impacts associated with the strengthening of the Canadian
    dollar, euro and British pound against the U.S. dollar;                                                                           
|
| |  | increased expenses of $20 related to our employee bonus
    plans; and                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase in sales and marketing expenses primarily related to
    our PEC acquisition; partially offset by                                                                                                                  
|
| |  | a decrease of approximately $39 in our stock based compensation
    primarily related to a payout under our RSU program in the first
    nine months of 2004 that was not repeated in the first nine
    months of 2005; and
|
| |  | cost savings associated with our 2004 Restructuring Plan.                                                                                                                                                                   








| |                                 
| | --------------------------------
| | Research and development expense

|            |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |     |   |      |   |       |          |   |   |          |      |   |   |     |          |   |  |    |   | 
|----------- | ---------------- | ---------------------------------------- | --- | ---- | --------------------------------------- | - | --- | -------- | - | - | -------- | -------- | - | ---- | --- | - | ---- | - | ----- | -------- | - | - | -------- | ---- | - | - | --- | -------- | - |  | -- | - | 
|            |                  | For the Three Months Ended September 30, |     |      | For the Nine Months Ended September 30, |  
|            |                  |                                          |     |      |                                         |  
|            |                  | 2005                                     |     |      | 2004                                    |   |     | $ Change |   |   | % Change |          |   | 2005 |     |   | 2004 |   |       | $ Change |   |   | % Change |     
|            |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |     |   |      |   |       |          |   |   |          |     
|R&D expense |                  | $                                        | 445 |      |                                         | $ | 497 |          |   | $ | (52      | )        |   |      | (10 | ) |      | $ | 1,390 |          |   | $ | 1,452    |      |   | $ | (62 | )        |   |  | (4 | )
|            | As % of revenues |                                          |     | 16.8 | %                                       |   |     | 22.8     | % |   |          | (6.0 pts | ) |      |     |   |      |   |       | 17.3     | % |   |          | 20.1 | % |   |     | (2.8 pts | ) |  |    |   | 
|            |                  |                                          |     |      |                                         |   |     |          |   |   |          |          |   |      |     |   |      |   |       |          |   |   |          |     





| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cost savings associated with our 2004 Restructuring Plan;
    partially offset by                                                                         
|
| |  | increased investments in targeted product areas;                                                                                                          
|
| |  | unfavorable foreign exchange impacts associated with the
    strengthening of the Canadian dollar, euro and British pound
    against the U.S. dollar; and
|
| |  | increased expense of approximately $18 related to our employee
    bonus plans.                                                                           







| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | VoIP and multimedia IP telephony solutions;                                                                                                                      
|
| |  | services edge capability to realize simplification of customer
    network operations and broadband access technologies, including
    wireless and wireline; and
|
| |  | enhanced network security to ensure the level of reliability and
    performance that has traditionally existed in carrier networks.                             










| |                
| | ---------------
| | Special charges





74



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75



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|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |    |  
|------------------------------------------------------- | --------------------------------------------- | --------- | --- | -------- | -------------- | - | --------- | ----------- | - | --------------- | ----- | ----- | ------------- | ---- | ----- | ------------- | ---- | - | -- | -- |  | - | --- | -- | -
|                                                        |                                               |           |     |          |                |   |           |             |   | Special Charges |      
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |      
|                                                        |                                               |           |     |          |                |   |           |             |   | Three Months    |       |       | Nine Months   |     
|                                                        |                                               |           |     | Contract |                |   | Plant and |             |   |                 |       | Ended |               |      | Ended |              
|                                                        |                                               | Workforce |     |          | Settlement and |   |           | Equipment   |   |                 |       |       | September 30, |      |       | September 30, |     
|                                                        |                                               | Reduction |     |          | Lease Costs    |   |           | Write Downs |   |                 | Total |       |               | 2005 |       |               | 2005 |  
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|2001 Restructuring Plan                                 |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|Provision balance as of December 31,
    2004(a)        |                                               | $         | 15  |          |                | $ | 326       |             |   | $               |      |       |               | $    | 341   |               |      |   |    |    |  |   |     |   
|Revisions to prior accruals:                            |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | (3       | )              |   |           |            |   |                 |       | (1    | )             |      |       | (4            | )    |   | $  |   |  |   | $   | (4 | )
|                                                        | For the three months ended June 30, 2005      |           |     | (2       | )              |   |           | 4           |   |                 |       | (2    | )             |      |       |              |      |   |    |   |  |   |     |   |  
|                                                        | For the three months ended September 30, 2005 |           |     |         |                |   |           | 3           |   |                 |       |      |               |      |       | 3             |      |   |    | 3  |  |   |     | 3  |  
|Cumulative provision (drawdowns)                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|adjustments in 2005:                                    |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|                                                        | Cash drawdowns                                |           |     | (5       | )              |   |           | (86         | ) |                 |       |      |               |      |       | (91           | )    |   |    |    |  |   |     |    |  
|                                                        | Non-cash drawdowns                            |           |     |         |                |   |           |            |   |                 |       | 3     |               |      |       | 3             |      |   |    |    |  |   |     |    |  
|                                                        | Foreign exchange and other adjustments        |           |     | (1       | )              |   |           | (9          | ) |                 |       |      |               |      |       | (10           | )    |   |    |    |  |   |     |    |  
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|Provision balance as of September 30, 2005              |                                               | $         | 4   |          |                | $ | 238       |             |   | $               |      |       |               | $    | 242   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|2004 Restructuring Plan                                 |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|Provision balance as of December 31,
    2004(a)        |                                               | $         | 122 |          |                | $ |          |             |   | $               |      |       |               | $    | 122   |               |      |   |    |    |  |   |     |   
|Other special charges:                                  |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | 18       |                |   |           | 8           |   |                 |       | 1     |               |      |       | 27            |      |   |    |   |  |   |     | 27 |  
|                                                        | For the three months ended June 30, 2005      |           |     | 32       |                |   |           | 46          |   |                 |       | 4     |               |      |       | 82            |      |   |    |   |  |   |     | 82 |  
|                                                        | For the three months ended September 30, 2005 |           |     | 18       |                |   |           | 13          |   |                 |       | 1     |               |      |       | 32            |      |   |    | 32 |  |   |     | 32 |  
|Revisions to prior accruals:                            |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|                                                        | For the three months ended March 31, 2005     |           |     | (2       | )              |   |           |            |   |                 |       |      |               |      |       | (2            | )    |   |    |   |  |   |     | (2 | )
|                                                        | For the three months ended June 30, 2005      |           |     | 7        |                |   |           |            |   |                 |       | 1     |               |      |       | 8             |      |   |    |   |  |   |     | 8  |  
|                                                        | For the three months ended September 30, 2005 |           |     | (3       | )              |   |           | 5           |   |                 |       |      |               |      |       | 2             |      |   |    | 2  |  |   |     | 2  |  
|Cumulative provision (drawdowns) adjustments in 2005:   |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |   |    |    |  |   |     |   
|                                                        | Cash drawdowns                                |           |     | (148     | )              |   |           | (7          | ) |                 |       |      |               |      |       | (155          | )    |   |    |    |  |   |     |    |  
|                                                        | Non-cash drawdowns                            |           |     |         |                |   |           |            |   |                 |       | (6    | )             |      |       | (6            | )    |   |    |    |  |   |     |    |  
|                                                        | Foreign exchange and other adjustments        |           |     | (1       | )              |   |           | (2          | ) |                 |       | (1    | )             |      |       | (4            | )    |   |    |    |  |   |     |    |  
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|Provision balance as of September 30, 2005              |                                               | $         | 43  |          |                | $ | 63        |             |   | $               |      |       |               | $    | 106   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|Total provision balance as of September 30,
    2005(a) |                                               | $         | 47  |          |                | $ | 301       |             |   | $               |      |       |               | $    | 348   |               |      |   |    |    |  |   |     |   
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  
|Total special charges                                   |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      | $ | 37 |    |  | $ | 148 |   
|                                                        |                                               |           |     |          |                |   |           |             |   |                 |       |       |               |      |       |               |      |  






|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of September 30, 2005 and December 31, 2004, the
    short-term provision balance was $131 and $254, respectively,
    and the long-term provision balance was $217 and $209,
    respectively.



| |                        
| | -----------------------
| | 2001 Restructuring Plan



| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2005



76



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| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2004









| |                             
| | ----------------------------
| | Special charges  by segment



|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |    |  
|---------------------------------------------------------------------- | --------------------------------------------- | --------- | - | -------- | -------------- | - | --------- | ----------- | - | - | ----- | -- | - | - | -- | -- | -
|                                                                       |                                               |           |   | Contract |                |   | Plant and |             |   |  
|                                                                       |                                               | Workforce |   |          | Settlement and |   |           | Equipment   |   |   |      
|                                                                       |                                               | Reduction |   |          | Lease Costs    |   |           | Write Downs |   |   | Total |   
|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |   
|2001 Restructuring Plan                                                |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|Carrier Packet Networks:                                               |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           | $ | (1       | )              |   | $         |            |   |   | $     | (1 | ) |   | $  | (2 | )
|                                                                       | For the three months ended June 30, 2005      |           |   | (1       | )              |   |           | 2           |   |   |       | (1 | ) |   |    |   |  
|                                                                       | For the three months ended September 30, 2005 |           |   |         |                |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|GSM and UMTS Networks:                                                 |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           |   | (1       | )              |   |           |            |   |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended June 30, 2005      |           |   | (1       | )              |   |           | 1           |   |   |       | (1 | ) |   |    | (1 | )
|                                                                       | For the three months ended September 30, 2005 |           |   |         |                |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|Enterprise Networks:                                                   |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2005     |           |   | (1       | )              |   |           |            |   |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended June 30, 2005      |           |   |         |                |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|                                                                       | For the three months ended September 30, 2005 |           |   |         |                |   |           | 1           |   |   |       |   |   |   |    | 1  |  
|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |   
|Total special charges for the nine months                              |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | ended September 30, 2005                      |           | $ | (5       | )              |   | $         | 7           |   |   | $     | (3 | ) |   | $  | (1 | )
|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |   
|Carrier Packet Networks:                                               |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended March 31, 2004     |           | $ | 6        |                |   | $         | 1           |   |   | $     |   |   |   | $  | 7  |  
|                                                                       | For the three months ended June 30, 2004      |           |   |         |                |   |           | (1          | ) |   |       |   |   |   |    | (1 | )
|                                                                       | For the three months ended September 30, 2004 |           |   | (4       | )              |   |           | 9           |   |   |       | 1  |   |   |    | 6  |  
|GSM and UMTS Networks:                                                 |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended September 30, 2004 |           |   |         |                |   |           | 8           |   |   |       |   |   |   |    | 8  |  
|Enterprise Networks:                                                   |                                               |           |   |          |                |   |           |             |   |   |       |    |   |   |    |   
|                                                                       | For the three months ended September 30, 2004 |           |   |         |                |   |           | 7           |   |   |       |   |   |   |    | 7  |  
|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |   
|Total special charges for the nine months ended
    September 30, 2004 |                                               | $         | 2 |          |                | $ | 24        |             |   | $ | 1     |    |   | $ | 27 |   
|                                                                       |                                               |           |   |          |                |   |           |             |   |   |       |   



77



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| |                        
| | -----------------------
| | 2004 Restructuring Plan



| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2005









| |                                               
| | ----------------------------------------------
| | Three and nine months ended September 30, 2004





78



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| |                             
| | ----------------------------
| | Special charges  by segment



|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |    | 
|------------------------------------------------------------ | --------------------------------------------- | --------- | -- | -------- | -------------- | - | --------- | ----------- |  | - | ----- | - |  | - | --- | -- | 
|                                                             |                                               |           |    | Contract |                |   | Plant and |             |  |  
|                                                             |                                               | Workforce |    |          | Settlement and |   |           | Equipment   |  |   |      
|                                                             |                                               | Reduction |    |          | Lease Costs    |   |           | Write Downs |  |   | Total |  
|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |  
|2004 Restructuring Plan                                      |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|Carrier Packet Networks:                                     |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended March 31, 2005     |           | $  | 9        |                |   | $         | 1           |  |   | $     | 1 |  |   | $   | 11 | 
|                                                             | For the three months ended June 30, 2005      |           |    | 28       |                |   |           | 36          |  |   |       | 4 |  |   |     | 68 | 
|                                                             | For the three months ended September 30, 2005 |           |    | 5        |                |   |           | 9           |  |   |       | 1 |  |   |     | 15 | 
|CDMA Networks:                                               |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended March 31, 2005     |           |    | 1        |                |   |           |            |  |   |       |  |  |   |     | 1  | 
|                                                             | For the three months ended June 30, 2005      |           |    | 2        |                |   |           | 1           |  |   |       |  |  |   |     | 3  | 
|                                                             | For the three months ended September 30, 2005 |           |    | 2        |                |   |           | 2           |  |   |       |  |  |   |     | 4  | 
|GSM and UMTS Networks:                                       |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended March 31, 2005     |           |    | 3        |                |   |           |            |  |   |       |  |  |   |     | 3  | 
|                                                             | For the three months ended June 30, 2005      |           |    | 6        |                |   |           | 6           |  |   |       | 1 |  |   |     | 13 | 
|                                                             | For the three months ended September 30, 2005 |           |    | 5        |                |   |           | 4           |  |   |       |  |  |   |     | 9  | 
|Enterprise Networks:                                         |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended March 31, 2005     |           |    | 3        |                |   |           | 7           |  |   |       |  |  |   |     | 10 | 
|                                                             | For the three months ended June 30, 2005      |           |    | 3        |                |   |           | 3           |  |   |       |  |  |   |     | 6  | 
|                                                             | For the three months ended September 30, 2005 |           |    | 3        |                |   |           | 3           |  |   |       |  |  |   |     | 6  | 
|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |  
|Special charges for the nine months ended September 30, 2005 |                                               | $         | 70 |          |                | $ | 72        |             |  | $ | 7     |   |  | $ | 149 |   
|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |  
|Carrier Packet Networks:                                     |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended September 30, 2004 |           | $  | 49       |                |   | $         |            |  |   | $     |  |  |   | $   | 49 | 
|CDMA Networks:                                               |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended September 30, 2004 |           |    | 6        |                |   |           |            |  |   |       |  |  |   |     | 6  | 
|GSM and UMTS Networks:                                       |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended September 30, 2004 |           |    | 4        |                |   |           |            |  |   |       |  |  |   |     | 4  | 
|Enterprise Networks:                                         |                                               |           |    |          |                |   |           |             |  |   |       |   |  |   |     |   
|                                                             | For the three months ended September 30, 2004 |           |    | 13       |                |   |           |            |  |   |       |  |  |   |     | 13 | 
|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |  
|Special charges for the nine months ended September 30, 2004 |                                               | $         | 72 |          |                | $ |          |             |  | $ |      |   |  | $ | 72  |   
|                                                             |                                               |           |    |          |                |   |           |             |  |   |       |  






Gain (Loss) on Sale of Businesses and Assets






79



---



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Other Income (Expense)  Net




|                                                 |  |               |    |  |               |   |     |      |  |   |      |  |  |   |     |  
|------------------------------------------------ |  | ------------- | -- |  | ------------- | - | --- | ---- |  | - | ---- |  |  | - | --- | -
|                                                 |  | For the Three |    |  | For the Nine  |  
|                                                 |  | Months Ended  |    |  | Months Ended  |  
|                                                 |  | September 30, |    |  | September 30, |  
|                                                 |  |               |    |  |               |  
|                                                 |  | 2005          |    |  | 2004          |   |     | 2005 |  |   | 2004 | 
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 
|Interest
    income(a)                           |  | $             | 15 |  |               | $ | 16  |      |  | $ | 43   |  |  | $ | 47  |  
|Gain (loss) on sale or write down of investments |  |               |   |  |               |   | 1   |      |  |   | 16   |  |  |   | 33  |  
|Currency exchange gains
    (losses)(b)          |  |               | 21 |  |               |   | 55  |      |  |   | 56   |  |  |   | 55  |  
|Other  net                                      |  |               | 31 |  |               |   | (28 | )    |  |   | 60   |  |  |   | (17 | )
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 
|Total other income (expense)  net               |  | $             | 67 |  |               | $ | 44  |      |  | $ | 175  |  |  | $ | 118 |  
|                                                 |  |               |    |  |               |   |     |      |  |   |      | 






|    |                                               
|--- | ----------------------------------------------
|(a) | Interest income on our short-term investments.



|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(b) | Currency exchange gains (losses) were primarily related to
    day-to-day transactional activities.





| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dividend income of $11 on our short-term investments; and                                                                                                                           
|
| |  | cumulative adjustment of $16 in the third quarter of 2005
    related to sub-lease income that was previously recorded as a
    reduction in SG&A expense in the first half of 2005;





| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | gain of $31 resulting from the correction in the third quarter
    of 2004 of an error in functional currency designation of an
    entity in Brazil that occurred from the third quarter of 2001 to
    the second quarter of 2004; and
|
| |  | gain of $8 related to a certain customer bankruptcy settlement;
    partially offset by                                                                                                                                                 
|
| |  | loss of $19 related to prepaid equity forward purchase contracts
    that were entered into in connection with the issuance of
    restricted stock units; and                                                                          
|
| |  | loss of $12 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting.                                                                                           





| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dividend income of $31 on our short-term investments;                                                                                                                                   
|
| |  | gain of $21 related to the sale of our remaining Arris Group
    Inc., or Arris Group, shares;                                                                                          
|
| |  | gain of $17 related to a customer exclusivity clause settlement;                                                                                                                        
|
| |  | cumulative adjustment of $16 in the third quarter of 2005
    related to sub-lease income that was previously recorded as a
    reduction in SG&A expense in the first half of 2005; and
|
| |  | gain of $10 on customer financing arrangements; partially offset
    by                                                                                                                 
|
| |  | loss of $18 from the sale of certain account
    receivables; and                                                                                                                       
|
| |  | loss of $7 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting.                                            





| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | gain of $31 resulting from the correction in the third quarter
    of 2004 of an error in functional currency designation of an
    entity in Brazil that occurred over the period from the third
    quarter of 2001 to the second quarter of 2004;
|
| |  | gain of $18 related to the sale of our remaining 7 million
    common shares of Entrust Inc., or Entrust;                                                                                                                                           
|
| |  | gain of $13 related to the sale of Arris Group shares; and                                                                                                                                                                                          
|
| |  | gain of $8 related to a certain customer bankruptcy settlement;
    partially offset by                                                                                                                                                             

80



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##### Table of Contents





| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | loss of $27 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting; and        
|
| |  | loss of $8 related to prepaid equity forward purchase contracts
    that were entered into in connection with the issuance of
    restricted stock units.




Interest Expense









Income Tax Benefit (Expense)















Net Earnings (Loss) From Continuing Operations




81



---



##### Table of Contents






Segment Information




|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |   |  |   |      |   |  |  |      |  
|---------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------------------------------- | - | ----- | -------- |  | - | -------- | - |  | ---- | ---- | - | ---- | - | ----- | -------- |  | - | -------- | - |  | - | ---- | - |  |  | ---- | -
|                                               |  | For the Three Months Ended September 30, |       |   | For the Nine Months Ended September 30, |  
|                                               |  |                                          |       |   |                                         |  
|                                               |  | 2005                                     |       |   | 2004                                    |   |       | $ Change |  |   | % Change |   |  | 2005 |      |   | 2004 |   |       | $ Change |  |   | % Change |  
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Revenues                                       |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |   |  |   |      |   |  |  |      |  
|Carrier Packet Networks                        |  | $                                        | 754   |   |                                         | $ | 533   |          |  | $ | 221      |   |  |      | 41   |   |      | $ | 2,156 |          |  | $ | 1,940    |   |  | $ | 216  |   |  |  | 11   |  
|CDMA Networks                                  |  |                                          | 539   |   |                                         |   | 511   |          |  |   | 28       |   |  |      | 5    |   |      |   | 1,743 |          |  |   | 1,647    |   |  |   | 96   |   |  |  | 6    |  
|GSM and UMTS Networks                          |  |                                          | 674   |   |                                         |   | 543   |          |  |   | 131      |   |  |      | 24   |   |      |   | 2,182 |          |  |   | 1,910    |   |  |   | 272  |   |  |  | 14   |  
|Enterprise Networks                            |  |                                          | 685   |   |                                         |   | 591   |          |  |   | 94       |   |  |      | 16   |   |      |   | 1,962 |          |  |   | 1,703    |   |  |   | 259  |   |  |  | 15   |  
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Total reportable segments                      |  |                                          | 2,652 |   |                                         |   | 2,178 |          |  |   | 474      |   |  |      | 22   |   |      |   | 8,043 |          |  |   | 7,200    |   |  |   | 843  |   |  |  | 12   |  
|Other(a)                                       |  |                                          | 3     |   |                                         |   | 1     |          |  |   | 2        |   |  |      | 200  |   |      |   | 3     |          |  |   | 13       |   |  |   | (10  | ) |  |  | (77  | )
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Total revenues                                 |  | $                                        | 2,655 |   |                                         | $ | 2,179 |          |  | $ | 476      |   |  |      | 22   |   |      | $ | 8,046 |          |  | $ | 7,213    |   |  | $ | 833  |   |  |  | 12   |  
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Management EBT                                 |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |   |  |   |      |   |  |  |      |  
|Carrier Packet Networks                        |  | $                                        | 47    |   |                                         | $ | (127  | )        |  | $ | 174      |   |  |      | 137  |   |      | $ | 50    |          |  | $ | (225     | ) |  | $ | 275  |   |  |  | 122  |  
|CDMA Networks                                  |  |                                          | 137   |   |                                         |   | 140   |          |  |   | (3       | ) |  |      | (2   | ) |      |   | 499   |          |  |   | 519      |   |  |   | (20  | ) |  |  | (4   | )
|GSM and UMTS Networks                          |  |                                          | (67   | ) |                                         |   | (179  | )        |  |   | 112      |   |  |      | 63   |   |      |   | 12    |          |  |   | (185     | ) |  |   | 197  |   |  |  | 106  |  
|Enterprise Networks                            |  |                                          | 44    |   |                                         |   | 48    |          |  |   | (4       | ) |  |      | (8   | ) |      |   | 186   |          |  |   | 105      |   |  |   | 81   |   |  |  | 77   |  
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Total reportable segments                      |  |                                          | 161   |   |                                         |   | (118  | )        |  |   | 279      |   |  |      | 236  |   |      |   | 747   |          |  |   | 214      |   |  |   | 533  |   |  |  | 249  |  
|Other(a)                                       |  |                                          | (152  | ) |                                         |   | (79   | )        |  |   | (73      | ) |  |      | (92  | ) |      |   | (529  | )        |  |   | (313     | ) |  |   | (216 | ) |  |  | (69  | )
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Total Management EBT                           |  |                                          | 9     |   |                                         |   | (197  | )        |  |   | 206      |   |  |      | 105  |   |      |   | 218   |          |  |   | (99      | ) |  |   | 317  |   |  |  | 320  |  
|Amortization of intangibles                    |  |                                          | (6    | ) |                                         |   | (2    | )        |  |   | (4       | ) |  |      | (200 | ) |      |   | (10   | )        |  |   | (7       | ) |  |   | (3   | ) |  |  | (43  | )
|Special charges                                |  |                                          | (37   | ) |                                         |   | (93   | )        |  |   | 56       |   |  |      | 60   |   |      |   | (148  | )        |  |   | (99      | ) |  |   | (49  | ) |  |  | (49  | )
|Gain (loss) on sale of businesses and assets   |  |                                          | (4    | ) |                                         |   | 39    |          |  |   | (43      | ) |  |      | (110 | ) |      |   | (41   | )        |  |   | 114      |   |  |   | (155 | ) |  |  | (136 | )
|Income tax benefit (expense)                   |  |                                          | (40   | ) |                                         |   | 30    |          |  |   | (70      | ) |  |      | (233 | ) |      |   | (48   | )        |  |   | 32       |   |  |   | (80  | ) |  |  | (250 | )
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  
|Net earnings (loss) from continuing operations |  | $                                        | (78   | ) |                                         | $ | (223  | )        |  | $ | 145      |   |  |      | 65   |   |      | $ | (29   | )        |  | $ | (59      | ) |  | $ | 30   |   |  |  | 51   |  
|                                               |  |                                          |       |   |                                         |   |       |          |  |   |          |   |  |      |      |   |      |   |       |          |  |   |          |  






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(a) | Other represents miscellaneous business activities
    and corporate functions.





|                                    |  |                            |     |   |                           |   |       |     |  |       |          |   |       |        |    |   |        |       |     |      |       |   |     |   |  |          |      |   |        |   |     |   |  |   |    |  |  |   |      |  
|----------------------------------- |  | -------------------------- | --- | - | ------------------------- | - | ----- | --- |  | ----- | -------- | - | ----- | ------ | -- | - | ------ | ----- | --- | ---- | ----- | - | --- | - |  | -------- | ---- | - | ------ | - | --- | - |  | - | -- |  |  | - | ---- | -
|                                    |  | For the Three Months Ended |     |   | For the Nine Months Ended |  
|                                    |  | September 30, 2005         |     |   | September 30, 2005        |  
|                                    |  |                            |     |   |                           |  
|                                    |  | Gross                      |     |   |                           |   | Other |     |  | Total |          |   | Gross |        |    |   |        | Other |     |      | Total |  
|                                    |  | Profit                     |     |   | SG&A                      |   |       | R&D |  |       | Items(b) |   |       | Change |    |   | Profit |       |     | SG&A |       |   | R&D |   |  | Items(b) |      |   | Change |  
|                                    |  |                            |     |   |                           |   |       |     |  |       |          |   |       |        |    |   |        |       |     |      |       |   |     |   |  |          |      |   |        |  
|Carrier Packet Networks             |  | $                          | 122 |   |                           | $ | 7     |     |  | $     | 39       |   |       | $      | 6  |   |        | $     | 174 |      |       | $ | 178 |   |  | $        | 27   |   |        | $ | 68  |   |  | $ | 2  |  |  | $ | 275  |  
|CDMA Networks                       |  |                            | (12 | ) |                           |   | 5     |     |  |       | 3        |   |       |        | 1  |   |        |       | (3  | )    |       |   | (40 | ) |  |          | 12   |   |        |   | 3   |   |  |   | 5  |  |  |   | (20  | )
|GSM and UMTS Networks               |  |                            | 89  |   |                           |   | 5     |     |  |       | 19       |   |       |        | (1 | ) |        |       | 112 |      |       |   | 145 |   |  |          | 9    |   |        |   | 27  |   |  |   | 16 |  |  |   | 197  |  
|Enterprise Networks                 |  |                            | 18  |   |                           |   | (13   | )   |  |       | (6       | ) |       |        | (3 | ) |        |       | (4  | )    |       |   | 124 |   |  |          | (28  | ) |        |   | (15 | ) |  |   |   |  |  |   | 81   |  
|                                    |  |                            |     |   |                           |   |       |     |  |       |          |   |       |        |    |   |        |       |     |      |       |   |     |   |  |          |      |   |        |  
|Total change of reportable segments |  |                            | 217 |   |                           |   | 4     |     |  |       | 55       |   |       |        | 3  |   |        |       | 279 |      |       |   | 407 |   |  |          | 20   |   |        |   | 83  |   |  |   | 23 |  |  |   | 533  |  
|Other(a)                            |  |                            | (10 | ) |                           |   | (65   | )   |  |       | (3       | ) |       |        | 5  |   |        |       | (73 | )    |       |   | (60 | ) |  |          | (151 | ) |        |   | (21 | ) |  |   | 16 |  |  |   | (216 | )
|                                    |  |                            |     |   |                           |   |       |     |  |       |          |   |       |        |    |   |        |       |     |      |       |   |     |   |  |          |      |   |        |  
|Total Change                        |  | $                          | 207 |   |                           | $ | (61   | )   |  | $     | 52       |   |       | $      | 8  |   |        | $     | 206 |      |       | $ | 347 |   |  | $        | (131 | ) |        | $ | 62  |   |  | $ | 39 |  |  | $ | 317  |  
|                                    |  |                            |     |   |                           |   |       |     |  |       |          |   |       |        |    |   |        |       |     |      |       |   |     |   |  |          |      |   |        |  






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(a) | Other represents miscellaneous business activities
    and corporate functions.



|    |                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Other items is comprised of interest expense, other
    income (expense)  net, minority interests 
    net of tax and equity in net loss of associated
    companies  net of tax. Interest attributable to
    long-term debt has not been allocated to a reportable segment
    and is included in Other.

82



---



##### Table of Contents








| |                        
| | -----------------------
| | Carrier Packet Networks



| |         
| | --------
| | Revenues








| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Q3 2005 vs. Q3 2004 and first nine months of 2005 vs. first
    nine months of 2004











| |               
| | --------------
| | Management EBT



83



---



##### Table of Contents





| |                    
| | -------------------
| | Q3 2005 vs. Q3 2004





| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | recovery in inventory provisions due to sale of inventory that
    was previously fully provided for; and                                                                             
|
| |  | continued improvements in our cost structure primarily as a
    result of workforce reductions and associated reductions in
    other related costs; partially offset by              
|
| |  | unfavorable product mix associated with increased sales of our
    next generation products which typically have lower gross
    margins in the early stages of product evolution; and
|
| |  | continued pricing pressures on certain of our products due to
    increased competition.                                                                                              





| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued impact of our workforce reductions across all
    regions and associated reductions in other related costs such as
    information services and real estate; partially offset by
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar; and                                           
|
| |  | lower net trade and customer financing receivable recoveries.                                                                                                                                 





| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued impact of our workforce reductions that targeted a
    level of R&D expense that was more representative of the
    volume of our business; partially offset by
|
| |  | investment in targeted programs to increase the feature content
    in our Carrier Packet Networks portfolio; and                                                            
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar.                              



| |                                                        
| | -------------------------------------------------------
| | First nine months of 2005 vs. first nine months of 2004





| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | recovery in inventory provisions due to sale of inventory that
    was previously fully provided for;                                                                                 
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing; and                                                                                 
|
| |  | lower warranty costs; partially offset by                                                                                                                                             
|
| |  | increased expenses related to our employee bonus plan;                                                                                                                                
|
| |  | unfavorable product mix associated with increased sales of our
    next generation products which typically have lower gross
    margins in the early stages of product evolution; and
|
| |  | continued pricing pressures on certain of our products due to
    increased competition.                                                                                              





| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued impact of our workforce reductions across all
    regions and associated reductions in other related costs such as
    information services and real estate; partially offset by
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar, British pound and
    euro against the U.S. dollar;                       
|
| |  | increase in legal fees related to patent litigation;                                                                                                                                          
|
| |  | increased expenses related to our employee bonus plan; and                                                                                                                                    
|
| |  | lower net trade and customer financing receivable recoveries.                                                                                                                                 





| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued impact of our workforce reductions that targeted a
    level of R&D expense that was more representative of the
    volume of our business; partially offset by

84



---



##### Table of Contents





| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased expenses related to our employee bonus plan;                                                                                                           
|
| |  | investment in targeted programs to increase the feature content
    in our Carrier Packet Networks portfolio; and                                                
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar and British pound
    against the U.S. dollar.






| |              
| | -------------
| | CDMA Networks



| |         
| | --------
| | Revenues








| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Q3 2005 vs. Q3 2004 and first nine months of 2005 vs. first
    nine months of 2004





| |               
| | --------------
| | Management EBT





| |                    
| | -------------------
| | Q3 2005 vs. Q3 2004





| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfavorable product mix associated with increased sales of our
    next generation products which typically have lower gross
    margins in the early stages of product evolution; partially
    offset by
|
| |  | overall higher sales volume; and                                                                                                                                                                          
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing.                                                                                                         





| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | higher net trade and customer financing receivable recoveries in
    the third quarter of 2005; and
|
| |  | the ongoing focus on efficiencies and cost reduction activities.                                   





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase in allocation of shared costs to other business
    segments; partially offset by                                                     
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar.

85



---



##### Table of Contents





| |                                                        
| | -------------------------------------------------------
| | First nine months of 2005 vs. first nine months of 2004





| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfavorable product mix associated with increased sales of our
    next generation products which typically have lower gross
    margins in the early stages of product evolution; and
|
| |  | pricing pressures on certain of our products due to increased
    competition for service provider customers; partially offset by                                                     
|
| |  | overall higher sales volume; and                                                                                                                                                      
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing.                                                                                     





| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | decreases in selling and marketing expenses in our Asia Pacific
    region; and         
|
| |  | the ongoing focus on efficiencies and cost reduction activities;
    partially offset by
|
| |  | increases in bad debts expense; and                                                     
|
| |  | increased expenses related to our employee bonus plan.                                  





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase in allocation of shared costs to other business
    segments ; and                                                                    
|
| |  | reduced spending due to project timing and completions;
    partially offset by                                                                
|
| |  | incremental investment in targeted new programs;                                                                                               
|
| |  | increased expenses related to our employee bonus plan; and                                                                                     
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar.






| |                      
| | ---------------------
| | GSM and UMTS Networks



| |         
| | --------
| | Revenues








| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Q3 2005 vs. Q3 2004 and first nine months of 2005 vs. first
    nine months of 2004





86



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| |               
| | --------------
| | Management EBT





| |                    
| | -------------------
| | Q3 2005 vs. Q3 2004





| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | overall higher sales volumes;                                                                                                                                                                                 
|
| |  | an estimated project loss of approximately $71 in the third
    quarter of 2005 compared to an estimated project loss of $159 in
    the third quarter of 2004 related to our contract in India with
    BSNL;
|
| |  | favorable product mix associated with increased sales of certain
    of our products which have higher margins;                                                                                               
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing; partially offset by                                                                                         
|
| |  | increased inventory provisions; and                                                                                                                                                                           
|
| |  | pricing pressures on certain of our products due to increased
    competition for service provider customers.                                                                                                 





| |   |                                           
| | - | ------------------------------------------
| |  | the impact of our spending reductions; and
|
| |  | decreases in employee related expenses.   





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of our program spending reductions; partially offset
    by                                                             
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar.



| |                                                        
| | -------------------------------------------------------
| | First nine months of 2005 vs. first nine months of 2004





| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | overall higher sales volumes;                                                                                                                                                                                      
|
| |  | estimated project loss of approximately $103 in the first nine
    months of 2005 compared to a estimated project loss of $159 in
    the first nine months of 2004 related to our contract in India
    with BSNL;
|
| |  | a decrease in contract-related costs including a reduction in
    losses incurred from customer trials in the second quarter of
    2004 not repeated in 2005; and                                                 
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing; partially offset by                                                                                              
|
| |  | contractual release of penalties related to customer contracts
    in 2004 not repeated in 2005; and                                                                                                               
|
| |  | pricing pressures on certain of our products due to increased
    competition for service provider customers.                                                                                                      





| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of our workforce reductions across all regions and
    associated reductions in other related costs such as information
    services and real estate; and

87



---



##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | decreases in employee related expenses; partially offset by                                                                     
|
| |  | increased expenses related to our employee bonus plan; and                                                                      
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the euro against the U.S. dollar.





| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of our workforce reductions across all regions and
    associated reductions in other related costs such as information
    services and real estate, resulting in program spending
    reductions; partially offset by
|
| |  | increased expenses related to our employee bonus plan; and                                                                                                                                                                        
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the euro and Canadian dollar against the
    U.S. dollar.                                                                                      





| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a cash settlement of $17 in connection with the release of an
    exclusivity commitment agreement which has been recorded as a
    gain in other income (expense).






| |                    
| | -------------------
| | Enterprise Networks



| |         
| | --------
| | Revenues








| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Q3 2005 vs. Q3 2004 and first nine months of 2005 vs. first
    nine months of 2004







88



---



##### Table of Contents





| |               
| | --------------
| | Management EBT





| |                    
| | -------------------
| | Q3 2005 vs. Q3 2004





| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | pricing pressures on our data products due to increased
    competition for enterprise customers;
|
| |  | increased services revenues that typically have lower
    margins; and                           
|
| |  | increased warranty costs; partially offset by                                                    
|
| |  | increased revenues from software upgrades that typically have
    higher margins; and            
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing.





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | increases in sales and marketing expenses primarily related to
    our PEC acquisition;                                            
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar;
|
| |  | increases in employee related expenses; and                                                                                        
|
| |  | increase in bad debts expense; partially offset by                                                                                 
|
| |  | the continued impact of our workforce reductions.                                                                                  





| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | acceleration of R&D programs related to IP technologies;
    partially offset by            
|
| |  | timing of recognition of certain software development
    costs; and                        
|
| |  | effectively prioritizing investment in data products and
    increased outsourcing activity.



| |                                                        
| | -------------------------------------------------------
| | First nine months of 2005 vs. first nine months of 2004





| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | higher sales volumes of software upgrades that typically have
    higher margins; and                                  
|
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing; partially offset by  
|
| |  | pricing pressures on our data products due to increased
    competition for enterprise customers primarily in EMEA; and
|
| |  | increased warranty costs.                                                                                              





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | increases in sales and marketing expenses primarily related to
    our PEC acquisition;                                            
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar;
|
| |  | increased expenses related to our employee bonus plan;                                                                             
|
| |  | an increase in bad debt expense; and                                                                                               
|
| |  | increases in employee related expenses; partially offset by                                                                        
|
| |  | the continued impact of our workforce reductions.                                                                                  

89



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##### Table of Contents







| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | timing of recognition of certain software development costs;                                
|
| |  | increased expenses related to our employee bonus plan; and                                  
|
| |  | acceleration of R&D programs related to IP technologies;
    partially offset by            
|
| |  | effectively prioritizing investment in data products and
    increased outsourcing activity.






| |      
| | -----
| | Other



| |               
| | --------------
| | Management EBT





| |                    
| | -------------------
| | Q3 2005 vs. Q3 2004





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | net trade receivable recoveries in the third quarter of 2004 not
    repeated in 2005; and                                                  
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar and euro against the
    U.S. dollar.







| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | foreign exchange gains of $21 primarily related to day-to-day
    transactional activities; and                                                                                                                   
|
| |  | losses related to changes in fair value of derivative financial
    instruments that do not meet the criteria for hedge accounting
    in the third quarter of 2004 not repeated in the third quarter
    of 2005.



| |                                                        
| | -------------------------------------------------------
| | First nine months of 2005 vs. first nine months of 2004





| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs associated with our internal control remedial measures,
    investment in our finance processes and restatement related
    activities;                                                                        
|
| |  | net trade receivable recoveries in the third quarter of 2004 not
    repeated in 2005; and                                                                                                                           
|
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar and euro against the
    U.S. dollar; partially offset by                                                     
|
| |  | a decrease in stock based compensation in the first quarter of
    2005 due to the RSU expense that was incurred in the first
    quarter of 2004 and not repeated in 2005 as the program was
    terminated in 2004.







| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | foreign exchange gains of $56 primarily related to day-to-day
    transactional activities; partially offset by                                                                             
|
| |  | lower gains related to the sale of investments in the first nine
    months of 2005 primarily related to the sale of shares in Arris
    Group and Entrust in the first nine months of 2004.




Liquidity and Capital Resources




90



---



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Cash Flows




|                                                                            |  |      |       |   |      |   |       |  
|--------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                            |  | 2005 |       |   | 2004 |  
|                                                                            |  |      |       |   |      |  
|Net cash from (used in) operating activities of continuing
    operations   |  | $    | (299  | ) |      | $ | (431  | )
|Net cash from (used in) investing activities of continuing
    operations   |  |      | (288  | ) |      |   | (62   | )
|Net cash from (used in) financing activities of continuing
    operations   |  |      | (47   | ) |      |   | (138  | )
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |  |      | (86   | ) |      |   | (6    | )
|                                                                            |  |      |       |   |      |  
|Net cash from (used in) continuing operations                               |  |      | (720  | ) |      |   | (637  | )
|Net cash from (used in) operating activities of discontinued
    operations |  |      | 33    |   |      |   | 16    |  
|                                                                            |  |      |       |   |      |  
|Net increase (decrease) in cash and cash equivalents                        |  |      | (687  | ) |      |   | (621  | )
|Cash and cash equivalents at beginning of period                            |  |      | 3,607 |   |      |   | 3,928 |  
|                                                                            |  |      |       |   |      |  
|Cash and cash equivalents at end of period                                  |  | $    | 2,920 |   |      | $ | 3,307 |  
|                                                                            |  |      |       |   |      |  






| |                     
| | --------------------
| | Operating activities







| |                                            
| | -------------------------------------------
| | Changes in operating assets and liabilities









| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | income tax payments of $44 in the first nine months of 2005
    compared to $38 in the first nine months of 2004 primarily due
    to an increase in income in certain taxable
    jurisdictions; and                             
|
| |  | a decrease of $363 from other changes in operating assets and
    liabilities primarily due to a reduction in liabilities,
    including the deferred revenue balance and project loss
    associated with the contract with BSNL.



91



---



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| |                        
| | -----------------------
| | Working capital metrics





| |                          
| | -------------------------
| | Accounts receivable  net



(a)







|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 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.





| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of approximately 3 days due to a note
    receivable that resulted from the transfer of one of our
    manufacturing facilities to Flextronics, which did not have a
    corresponding revenue impact; partially offset by
|
| |  | recognition of revenue that was previously deferred for which
    there was no corresponding increase in accounts receivable.                                                                                                         





| |                  
| | -----------------
| | Inventories  net



92



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##### Table of Contents



(a)







|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | NID for each quarter is calculated by dividing the average of
    the current quarter and prior quarter inventories 
    net by the cost of revenues for the quarter, in each case as
    determined in accordance with U.S. GAAP, and multiplying by
    90 days. Finished goods inventory includes certain direct
    and incremental costs associated with arrangements where title
    and risk of loss was transferred to the customer but revenue was
    deferred due to other revenue recognition criteria not being
    met. As of September 30, 2005 and September 30, 2004,
    these deferred costs totaled $796 and $622, respectively.









| |                                                  
| | -------------------------------------------------
| | Days of purchases outstanding in accounts payable



(a)







|    |                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 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.





93



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| |                     
| | --------------------
| | Investing activities










| |                     
| | --------------------
| | Financing activities














Uses of Liquidity






| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | debt service, including repayment of our debt of $1,275 due in
    February 2006 and $150 due in June 2006;                                                                                    
|
| |  | pension and post-retirement benefits;                                                                                                                                                          
|
| |  | capital expenditures;                                                                                                                                                                          
|
| |  | investment of approximately $145 in our joint venture with LG in
    Korea;                                                                                                                    
|
| |  | costs relating to workforce reduction and other restructuring
    activities;                                                                                                                  
|
| |  | our finance transformation project which will include, among
    other things, implementing SAP to provide an integrated global
    financial system; and                                      
|
| |  | costs in relation to the restatement related activities, matters
    related to the Revenue Independent Review and other related
    matters, including regulatory and other legal proceedings.



94



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| |                             
| | ----------------------------
| | Contractual cash obligations








| |                      
| | ---------------------
| | Outsourcing contracts



|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |             |  |   |   |  |  |   |    | 
|--------------------- |  | ---- | -- |  | ---- | - | -- | ---- |  | - | ---- | ----- |  | ---------- | -- | ----------- |  | - | - |  |  | - | -- | 
|                      |  |      |    |  |      |   |    |      |  |   |      | Total | 
|                      |  | 2006 |    |  | 2007 |   |    | 2008 |  |   | 2009 |       |  | Thereafter |    | Obligations | 
|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |             | 
|Outsourcing contracts |  | $    | 24 |  |      | $ | 18 |      |  | $ | 18   |       |  | $          | 15 |             |  | $ |  |  |  | $ | 75 | 
|                      |  |      |    |  |      |   |    |      |  |   |      |       |  |            |    |             |  |  






| |                   
| | ------------------
| | Customer financing



|                                   |  |               |     |   |              |   |     |  
|---------------------------------- |  | ------------- | --- | - | ------------ | - | --- | -
|                                   |  | September 30, |     |   | December 31, |  
|                                   |  | 2005          |     |   | 2004         |  
|                                   |  |               |     |   |              |  
|Drawn and outstanding  gross      |  | $             | 51  |   |              | $ | 118 |  
|Provisions for doubtful accounts   |  |               | (35 | ) |              |   | (38 | )
|                                   |  |               |     |   |              |  
|Drawn and outstanding 
    net(a) |  |               | 16  |   |              |   | 80  |  
|Undrawn commitments                |  |               | 52  |   |              |   | 69  |  
|                                   |  |               |     |   |              |  
|Total customer financing           |  | $             | 68  |   |              | $ | 149 |  
|                                   |  |               |     |   |              |  






|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included short-term and long-term amounts. Short-term and
    long-term amounts were included in accounts
    receivable  net and other assets, respectively, in
    the unaudited consolidated balance sheets.



95



---



##### Table of Contents












| |             
| | ------------
| | Acquisitions








Sources of Liquidity











| |                  
| | -----------------
| | Credit facilities



96



---



##### Table of Contents








| |                           
| | --------------------------
| | Available support facility





| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | $300 of committed revolving support for performance bonds or
    similar instruments, of which $131 was outstanding;                    
|
| |  | $150 of uncommitted support for receivables sales and/or
    securitizations, of which none was utilized; and                           
|
| |  | $300 of uncommitted support for performance bonds and/or
    receivables sales and/or securitizations, of which $50 was
    outstanding.













| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | pledges of substantially all of our assets and those of most of
    its U.S. and Canadian subsidiaries; and              
|
| |  | guarantees by certain of our wholly owned subsidiaries organized
    in the U.S., Canada, England, Ireland and Hong Kong.










| |                                                           
| | ----------------------------------------------------------
| | Shelf registration statement and base shelf
    prospectus



97



---



##### Table of Contents








Credit Ratings


|                                  |  |                          |    |  |                  |  |      |             |  |  |                  | 
|--------------------------------- |  | ------------------------ | -- |  | ---------------- |  | ---- | ----------- |  |  | ---------------- | 
|                                  |  | Rating on Long-Term Debt |    |  | Rating on        |  |      |            
|                                  |  | Issued or Guaranteed by  |    |  | Preferred Shares |  |      |            
|                                  |  | Nortel Networks          |    |  | Issued by Nortel |  |      |            
|                                  |  | Limited/Nortel Networks  |    |  | Networks         |  |      |            
|Rating Agency                     |  | Corporation              |    |  | Limited          |  |      | Last Update | 
|                                  |  |                          |    |  |                  |  |      |             | 
|Standard & Poors Ratings Service |  |                          | B- |  |                  |  | CCC- |             |  |  | October 27, 2005 | 
|Moodys Investors Service, Inc.   |  |                          | B3 |  |                  |  | Caa3 |             |  |  | October 27, 2005 | 






Off-Balance Sheet Arrangements





Bid, Performance Related and Other Bonds






|                                               |  |               |     |  |              |   |     | 
|---------------------------------------------- |  | ------------- | --- |  | ------------ | - | --- | 
|                                               |  | September 30, |     |  | December 31, |  
|                                               |  | 2005          |     |  | 2004         |  
|                                               |  |               |     |  |              |  
|Bid and performance related
    bonds(a)       |  | $             | 244 |  |              | $ | 362 | 
|Other
    bonds(b)                             |  |               | 45  |  |              |   | 68  | 
|                                               |  |               |     |  |              |  
|Total bid, performance related and other bonds |  | $             | 289 |  |              | $ | 430 | 
|                                               |  |               |     |  |              |  






|    |  |                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Net of restricted cash and cash equivalents amounts of $37 and
    $36 as of September 30, 2005 and December 31, 2004,
    respectively.
|   
|(b) |  | Net of restricted cash and cash equivalents amounts of $29 and
    $28 as of September 30, 2005 and December 31, 2004,
    respectively.



98



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##### Table of Contents








Receivables Securitization Transactions







Application of Critical Accounting Policies and Estimates













Provisions for Doubtful Accounts






| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | a customers ability to meet and sustain its financial
    commitments;                
|
| |  | a customers current and projected financial condition;                                
|
| |  | the positive or negative effects of the current and projected
    industry outlook; and
|
| |  | the economy in general.                                                                

99



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##### Table of Contents







|                                                                                  |  |               |       |   |              |   |       |  
|--------------------------------------------------------------------------------- |  | ------------- | ----- | - | ------------ | - | ----- | -
|                                                                                  |  | September 30, |       |   | December 31, |  
|                                                                                  |  | 2005          |       |   | 2004         |  
|                                                                                  |  |               |       |   |              |  
|Gross accounts receivable                                                         |  | $             | 3,025 |   |              | $ | 2,909 |  
|Provision for doubtful accounts                                                   |  |               | (96   | ) |              |   | (109  | )
|                                                                                  |  |               |       |   |              |  
|Accounts receivable  net                                                         |  | $             | 2,929 |   |              | $ | 2,800 |  
|                                                                                  |  |               |       |   |              |  
|Accounts receivable provision as a percentage of gross accounts
    receivables   |  |               | 3     | % |              |   | 4     | %
|Gross long-term receivables                                                       |  | $             | 89    |   |              | $ | 159   |  
|Provision for doubtful accounts                                                   |  |               | (60   | ) |              |   | (65   | )
|                                                                                  |  |               |       |   |              |  
|Net long-term receivables                                                         |  | $             | 29    |   |              | $ | 94    |  
|                                                                                  |  |               |       |   |              |  
|Long-term receivable provision as a percentage of gross
    long-term receivables |  |               | 67    | % |              |   | 41    | %




Provisions for Inventory








|                                                        |  |               |        |   |              |   |        |  
|------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | -
|                                                        |  | September 30, |        |   | December 31, |  
|                                                        |  | 2005          |        |   | 2004         |  
|                                                        |  |               |        |   |              |  
|Gross inventory                                         |  | $             | 2,667  |   |              | $ | 2,923  |  
|Inventory provisions                                    |  |               | (1,046 | ) |              |   | (1,141 | )
|                                                        |  |               |        |   |              |  
|Inventories 
    net(a)                                |  | $             | 1,621  |   |              | $ | 1,782  |  
|                                                        |  |               |        |   |              |  
|Inventory provisions as a percentage of gross inventory |  |               | 39     | % |              |   | 39     | %






|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(a) | Includes long-term portion of inventory related to the deferred
    costs, which is included in other assets.



100



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##### Table of Contents






Provisions for Product Warranties








|                                 |                   |               |     |      |  
|-------------------------------- | ----------------- | ------------- | --- | ---- | -
|                                 |                   | September 30, |    
|                                 |                   | 2005          |    
|                                 |                   |               |    
|Balance as of December 31, 2004  |                   | $             | 271 |     
|                                 | Payments          |               |     | (183 | )
|                                 | Warranties issued |               |     | 148  |  
|                                 | Revisions         |               |     | (5   | )
|                                 |                   |               |    
|Balance as of September 30, 2005 |                   | $             | 231 |     
|                                 |                   |               |    






Tax Asset Valuation








| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | cumulative losses in recent years;                                               
|
| |  | history of loss carryforwards and other tax assets expiring;                     
|
| |  | the carryforward period associated with the deferred tax assets;                 
|
| |  | the nature of the income that can be used to realize the
    deferred tax assets;
|
| |  | our net earnings (loss); and                                                     
|
| |  | future earnings potential determined through the use of internal
    forecasts.  

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Goodwill Valuation









Special Charges







Accounting Changes and Recent Accounting Pronouncements





Accounting Changes




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| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implicit Variable Interests  the adoption of
    Financial Accounting Standards Board, or FASB Staff Position, or
    FSP, FASB Interpretation No., or FIN, 46R-5, Implicit
    Variable Interests under FIN 46 (Revised December 2003),
    Consolidation of Variable Interest Entities in 2005 did
    not have an impact on our results of operations and financial
    condition.
|
| |  | Accounting for certain financial instruments with
    characteristics of both liabilities and equity 
    the adoption of SFAS No. 150, Accounting for
    Certain Financial Instruments with Characteristics of both
    Liabilities and Equity, as amended by FSP FAS 150-3,
    in 2003 did not have a material impact on our results of
    operations and financial condition.  




Recent Accounting Pronouncements










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Canadian Supplement











Accounting Changes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Derivative accounting  Effective
    January 1, 2004, we adopted Accounting Guideline 13,
    Hedging Relationships, or AcG-13, which establishes
    specific criteria for derivatives to qualify for hedge
    accounting. We had been previously applying these criteria under
    U.S. GAAP; therefore, there was no impact on adoption of
    AcG-13. Concurrent with the adoption of AcG-13, we also adopted
    the Canadian Institute of Chartered

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Accountants, or CICAs, Emerging Issues Committee, or EIC,
    128, Accounting for Trading, Speculative or Non-Hedging
    Derivative Financial Instruments, or EIC 128. As a result
    of the adoption of EIC 128, certain warrants, which had been
    previously recorded at cost under Canadian GAAP, are required to
    be recorded at fair value consistent with U.S. GAAP. The
    impact of this accounting change, which had been recorded
    prospectively as at January 1, 2004, was an increase to
    investments and other income of $23 for the nine months ended
    September 30, 2004.                                                                                                                                                                                                                                                                                                   
|
| |  | Determining whether an arrangement contains a
    lease  In December 2004, the EIC issued abstract
    150, Determining Whether an Arrangement Contains a
    Lease, or EIC 150. EIC 150 provides guidance on how to
    determine whether an arrangement contains a lease that is within
    the scope of CICA Handbook Section 3065,
    Leases. The guidance in EIC 150 is based on whether
    the arrangement conveys to the purchaser the right to use a
    tangible asset, and is effective for us for arrangements entered
    into or modified after January 1, 2005. We have already
    adopted equivalent guidance under U.S. GAAP. The adoption
    of EIC 150 did not have any material impact on our results of
    operations and financial condition.                                                                                                                                    
|
| |  | Financial Instruments  Presentation and
    Disclosure  In January 2004, the CICA issued
    amendments to CICA Handbook Section 3860, Financial
    Instruments  Presentation and Disclosure, or
    Section 3860, to require obligations that must be or may be
    settled, at the issuers option, by a variable number of
    the issuers own equity instruments to be presented as
    liabilities. Thus, securities issued by an enterprise that give
    the issuer unrestricted rights to settle the principal amount in
    cash or in the equivalent value of its own equity instruments
    will no longer be presented as equity. The amendments to
    Section 3860 are applicable to us beginning January 1,
    2005 on a retroactive basis. The adoption of the amendments to
    Section 3860 did not have any material impact on our
    results of operations and financial condition.
|
| |  | Accounting by a customer (including a reseller) for certain
    consideration received from a vendor  In January
    2005, the EIC issued amended abstract 144, Accounting by a
    Customer (including a Reseller) for Certain Consideration
    Received from a Vendor. The amendment is effective
    retroactively for periods commencing on or after
    February 15, 2005. The amendment requires companies to
    recognize the benefit of non-discretionary rebates for achieving
    specified cumulative purchasing levels as a reduction of the
    cost of purchases over the relevant period, provided the rebate
    is probable and reasonably estimable. Otherwise, the rebates
    would be recognized as purchasing milestones are achieved. The
    adoption of the new amendment did not have a material impact on
    our results of operations and financial condition.                




Outstanding Share Data







Market Risk








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Equity Price Risk







Environmental Matters











Legal Proceedings




106



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Risk Factors/ Forward Looking Statements


You should carefully consider the risks described below
before investing in our securities. The risks described below
are not the only ones facing us. Additional risks not currently
known to us or that we currently believe are immaterial may also
impair our business, results of operations, financial condition
and liquidity. Unless required by applicable securities laws, we
do not have any intention or obligation to publicly update or
revise any forward looking statements, whether as a result of
new information, future events or otherwise.


Certain statements in this Quarterly Report on Form 10-Q
contain words such as could, expects,
may, anticipates, believes,
intends, estimates, plans,
envisions, seeks and other similar
language and are considered forward looking statements. These
statements are based on our current expectations, estimates,
forecasts and projections about the operating environment,
economies and markets in which we operate. In addition, other
written or oral statements which are considered forward looking
may be made by us or others on our behalf. These statements are
subject to important risks, uncertainties and assumptions, which
are difficult to predict and the actual outcome may be
materially different. In particular, the risks described below
could cause actual events to differ materially from those
contemplated in forward looking statements.





Risks Relating to Our Restatements and Related Matters




| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our two restatements of our consolidated financial
    statements and related events have had, and will continue to
    have, a material adverse effect on us.











| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are subject to ongoing regulatory and criminal investigations
    in the U.S. and Canada, which could require us to pay
    substantial fines or other penalties and we cannot predict the
    timing of developments in these matters.                                                                                                                      
|
| |  | We are subject to significant pending civil litigation, which if
    decided against us or as a result of settlement, could require
    us to pay substantial judgments, settlements or other penalties
    and could result in the significant dilution of existing equity
    positions and we cannot predict the timing of developments in
    these matters.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Material adverse legal judgments, fines, penalties or
    settlements could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.                                                                                                                                                                                                                                       
|
| |  | We cannot predict the outcome of the Revenue Independent Review
    being undertaken by our Audit Committee.                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We and our independent auditors have identified a number of
    material weaknesses related to our internal control over
    financial reporting and concluded that our internal control over
    financial reporting was ineffective as of December 31,
    2004. These material weaknesses remain unremedied, which could
    continue to impact our ability to report our results of
    operations and financial condition accurately and in a timely
    manner.
|
| |  | The governing principles of the Independent Review particularly
    as they relate to remedial measures may take time to implement
    and a number of remedial measures remain to be addressed in
    whole or in part.                                                                                                                                                                                                                                             
|
| |  | Our credit ratings have been downgraded and we are currently
    unable to access, in its current form, our shelf registration
    statement filed with the SEC, each of which may adversely affect
    our liquidity.                                                                                                                                                                                                                                               
|
| |  | Continuing negative publicity has and may adversely affect our
    business.                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We may not be able to attract or retain the personnel necessary
    to achieve our business objectives.                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Any future delays in filing our periodic reports could cause us
    to breach our public debt indentures and our obligations under
    the EDC Support Facility and seek waivers from EDC under the EDC
    Support Facility. In such circumstances, it is possible that the
    holders of our public debt would seek to accelerate the maturity
    of that debt and EDC would not grant us further waivers.                                                       
|
| |  | Any future breach of the continued listing requirements of the
    NYSE and TSX could cause the NYSE and/or the TSX to commence
    suspension or delisting procedures in respect of Nortel Networks
    Corporations common shares or other of our or NNCs
    listed securities.                                                                                                                                                                                 



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to ongoing regulatory and criminal
    investigations in the U.S. and Canada, which could require us to
    pay substantial fines or other penalties and we cannot predict
    the timing of developments in these matters.









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| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to significant pending civil litigation,
    which if decided against us or as a result of settlement, could
    require us to pay substantial judgments, settlements or other
    penalties and could result in the significant dilution of
    existing equity positions and we cannot predict the timing of
    developments in these matters.









| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Material adverse legal judgments, fines, penalties or
    settlements could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.



109



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| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring us to dedicate a substantial portion of our cash
    and/or cash flow from operations to payments of such judgments,
    fines, penalties or settlements, thereby reducing the
    availability of our cash and/or cash flow to fund working
    capital, capital expenditures, R&D efforts and other general
    corporate purposes, including debt reduction;
|
| |  | making it more difficult for us to satisfy our payment
    obligations with respect to our outstanding indebtedness;                                                                                                                                                                                                                                                     
|
| |  | increasing the difficulty and/or cost to us of refinancing our
    indebtedness;                                                                                                                                                                                                                                                                                         
|
| |  | increasing our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                                                                                                                                                    
|
| |  | limiting our flexibility in planning for, or reacting to,
    changes in our businesses and the industries in which we operate;                                                                                                                                                                                                                                          
|
| |  | making it more difficult for us to make acquisitions and
    investments;                                                                                                                                                                                                                                                                                                
|
| |  | limiting our ability to obtain, and/or increase the cost of
    obtaining, directors and officers liability
    insurance and/or other types of insurance; and                                                                                                                                                                                                         
|
| |  | restricting our ability to introduce new technologies and
    products and/or exploit business opportunities.                                                                                                                                                                                                                                                            



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We cannot predict the outcome of the Revenue Independent
    Review being undertaken by our Audit Committee.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We and our independent auditors have identified a number
    of material weaknesses related to our internal control over
    financial reporting and concluded that our internal control over
    financial reporting was ineffective as at December 31,
    2004. These material weaknesses remain unremedied, which could
    continue to impact our ability to report our results of
    operations and financial condition accurately and in a timely
    manner.





| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of compliance with written Nortel procedures for monitoring
    and adjusting balances related to certain accruals and
    provisions, including restructuring charges and contract and
    customer accruals;                                                             
|
| |  | lack of compliance with Nortel procedures for applying
    applicable GAAP to the initial recording of certain liabilities,
    including those described in SFAS No. 5, and to
    foreign currency translation as described in
    SFAS No. 52;                               
|
| |  | lack of sufficient personnel with appropriate knowledge,
    experience and training in U.S. GAAP and lack of sufficient
    analysis and documentation of the application of U.S. GAAP
    to transactions, including, but not limited to, revenue
    transactions;           
|
| |  | lack of a clear organization and accountability structure within
    the accounting function, including insufficient review and
    supervision, combined with financial reporting systems that are
    not integrated and which require extensive manual
    interventions; and

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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | lack of sufficient awareness of, and timely and appropriate
    remediation of, internal control issues by Nortel personnel.









| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The governing principles of the Independent Review
    particularly as they relate to remedial measures may take time
    to implement and a number of remedial measures remain to be
    addressed in whole or in part.





| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our credit ratings have been downgraded and we are
    currently unable to access, in its current form, our shelf
    registration statement filed with the SEC, each of which may
    adversely affect our liquidity.



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| |                                                                             
| | ----------------------------------------------------------------------------
| | Continuing negative publicity has and may adversely affect
    our business.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | We may not be able to attract or retain the personnel
    necessary to achieve our business objectives.





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| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any future delays in filing our periodic reports could
    cause us to breach our public debt indentures and our
    obligations under the EDC Support Facility and seek waivers from
    EDC under the EDC Support Facility. In such circumstances, it is
    possible that the holders of our public debt would seek to
    accelerate the maturity of that debt and EDC would not grant us
    further waivers.





| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any future breach of the continued listing requirements of
    the NYSE or TSX could cause the NYSE and/or the TSX to commence
    suspension or delisting procedures in respect of Nortel Networks
    Corporation common shares or other of our or NNCs listed
    securities.








Risks Relating to Our Business




| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Restrictions on how we and our president and chief
    executive officer conduct our business arising from a settlement
    with Motorola could adversely affect our business, results of
    operations and financial condition.



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| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We continue to restructure our business to respond to
    industry and market conditions. The assumptions underlying our
    restructuring efforts may prove to be inaccurate and we may have
    to restructure our business again in the future.









| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the estimates and assumptions used in asset valuations, which
    are based on our forecasts of future business
    performance; and                                                                
|
| |  | accounting estimates related to the useful life and
    recoverability of the net book value of these assets, including
    inventory, goodwill, net deferred taxes and other intangible
    assets.





| |                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results have historically been subject to
    yearly and quarterly fluctuations and are expected to continue
    to fluctuate. Factors contributing to these fluctuations could
    have a material adverse effect on our business, results of
    operations and financial condition.





| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to execute our strategic plan, including the planned
    workforce reductions, without negatively impacting our
    relationships with our customers, the delivery of products based
    on new and developing technologies at competitive prices, the
    effectiveness of our internal processes and organizations and
    the retention of qualified personnel;
|
| |  | our ability to stabilize and develop our senior management team;                                                                                                                                                                                                                                                                                                              
|
| |  | our ability to focus on the day-to-day operation of our business
    while implementing improvements in our internal controls and
    procedures, including our accounting systems, and addressing the
    civil litigation actions and investigations related to our
    restatements;                                                                                       
|
| |  | our ability to successfully implement programs to stimulate
    customer spending by anticipating and offering the kinds of
    products and services customers will require in the future to
    increase the efficiency and profitability of their networks;                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully complete programs on a timely basis
    to reduce our cost structure, including fixed costs, to
    streamline our operations and to reduce product costs;                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | our ability to successfully manage our manufacturing operations,
    which are substantially outsourced to contract manufacturers;                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | our ability to successfully comply with increased and complex
    regulations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | our ability to focus our business on what we believe to be
    potentially higher growth, higher margin businesses and to
    dispose of or exit non-core businesses;                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | increased price and product competition in the networking
    industry, including from low cost competitors;                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | our ability to compete with low cost competitors, including
    those offering attractive customer financing arrangements;                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the inherent uncertainties of using forecasts, estimates and
    assumptions for asset valuations and in determining the amounts
    of accrued liabilities, provisions and other items in our
    consolidated financial statements;                                                                                                                                                                                                                                                                                                                                               
|
| |  | the impact of changes in global capital markets and interest
    rates on our pension plan assets and obligations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | fluctuations in our gross margins;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | the development, introduction and market acceptance of new
    technologies, and integrated networking solutions, as well as
    the adoption of new networking standards;                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the overall trend toward industry consolidation and
    rationalization among our customers, competitors and suppliers;                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | our ability to make investments, including acquisitions, to
    strengthen our business;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | the ability of our customers and suppliers to obtain financing
    to fund capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | variations in sales channels, product costs and the mix of
    products sold;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | the size and timing of customer orders and shipments;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | our ability to obtain payment from customers on a timely basis;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | our ability to continue to obtain customer performance bonds and
    contracts;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | our ability to maintain appropriate inventory levels;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | the impact of acquired businesses and technologies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | our ability to fund and sustain our research and development
    activities;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | the impact of our product development schedules, product quality
    variances, manufacturing capacity and lead times required to
    produce our products;                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the impact of higher insurance premiums and deductibles and
    greater limitations on insurance coverage;                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the impact of our decision to adopt fair value accounting for
    employee stock options on a prospective basis as of
    January 1, 2003, which caused us to record an expense over
    the stock option vesting period, based on the fair value at the
    date the options are granted;                                                                                                                                                                                                                                                                                          
|
| |  | the requirement to perform goodwill impairment tests on an
    annual basis and between annual tests in certain circumstances,
    to value our deferred tax assets and to partially accrue
    unfunded pension liabilities; and                                                                                                                                                                                                                                                                                                                                                   
|
| |  | the impact of agreements we have entered into that may require
    us to make certain indemnification payments to third parties in
    the event of certain changes in an underlying economic
    characteristic related to assets, liabilities or equity
    securities of such third parties. The occurrence of events that
    may cause us to become liable to make an indemnification payment
    is not within our control and an obligation to make a
    significant indemnification payment under such agreements could
    have a negative effect on our reported results.



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| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Global economic conditions and other trends and factors
    affecting the telecommunications industry are beyond our control
    and may result in reduced demand and pricing pressure on our
    products.





| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adverse changes in the public and private equity and debt
    markets and our ability, as well as the ability of our customers
    and suppliers, to obtain financing or to fund working capital
    and capital expenditures;           
|
| |  | adverse changes in the credit quality of our customers and
    suppliers;                                                                                                                                                                
|
| |  | adverse changes in the market conditions in our industry and the
    specific markets for our products;                                                                                                                                  
|
| |  | the trend towards the sale of converged networking solutions,
    which could lead to reduced capital spending on multiple
    networks by our customers;                                                                                
|
| |  | visibility to, and the actual size and timing of, capital
    expenditures by our customers;                                                                                                                                             
|
| |  | inventory practices, including the timing of product and service
    deployment, of our customers;                                                                                                                                       
|
| |  | the amount of network capacity and the network capacity
    utilization rates of our customers, and the amount of sharing
    and/or acquisition of new and/or existing network capacity by
    our customers;                           
|
| |  | policies of our customers regarding utilization of single or
    multiple vendors for the products they purchase;                                                                                                                        
|
| |  | the overall trend toward industry consolidation and
    rationalization among our customers, competitors and suppliers;                                                                                                                  
|
| |  | conditions in the broader market for communications products,
    including data networking products and computerized information
    access equipment and services;                                                                     
|
| |  | increased price competition, particularly from low cost
    competitors;                                                                                                                                                                 
|
| |  | changes in legislation or accounting rules and governmental and
    environmental regulation or intervention affecting
    communications or data networking;                                                                            
|
| |  | computer viruses, break-ins and similar disruptions from
    unauthorized tampering with our computer systems;                                                                                                                           
|
| |  | acts of war, terrorism or natural disasters that could lead to
    disruptions in general global economic activity, changes in
    logistics and security arrangements and reduced customer demand
    for our products and services; and
|
| |  | cautious capital spending in our industry, which has affected,
    and could affect, demand for, or pricing pressures on, our
    products.                                                                                              



| |                                                                             
| | ----------------------------------------------------------------------------
| | Our gross margins may decline, which would reduce our
    operating results.





| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased price competition, particularly from low cost
    competitors;                                                                                           
|
| |  | increased industry consolidation among our customers, which may
    lead to decreased demand for, and downward pricing pressure on
    the prices of, our products;
|
| |  | changes in product and geographic mix;                                                                                                                             
|
| |  | customer and contract settlement costs;                                                                                                                            
|
| |  | higher product, material or labor costs;                                                                                                                           
|
| |  | increased inventory provisions or contract and customer
    settlement costs;                                                                                      
|
| |  | warranty costs;                                                                                                                                                    
|
| |  | obsolescence charges;                                                                                                                                              
|
| |  | loss of cost savings on future inventory purchases as a result
    of high inventory levels;                                                                       

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| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | introduction of new products and costs of entering new markets;                                                                                                   
|
| |  | increased levels of customer services;                                                                                                                            
|
| |  | changes in distribution channels;                                                                                                                                 
|
| |  | excess capacity or excess fixed assets;                                                                                                                           
|
| |  | accruals for employee incentive bonuses;                                                                                                                          
|
| |  | further restructuring costs; and                                                                                                                                  
|
| |  | costs related to our restatements, including the possibility of
    substantial fines, settlements and/or damages or other
    penalties, and/or remedial actions.





| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash flow fluctuations may affect our ability to fund our
    working capital requirements or achieve our business objectives
    in a timely manner. Additional sources of funds may not be
    available or may not be available on acceptable terms.







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| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be materially and adversely affected by cautious
    capital spending by our customers. Increased consolidation among
    our customers and the loss of customers in certain markets could
    have a material adverse effect on our business, results of
    operations and financial condition.





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business, results of operations, financial condition
    and liquidity may be materially and adversely affected by our
    high level of debt.







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may have difficulty borrowing money in the future or
    accessing other sources of funding;                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | a high debt level may affect our ability to refinance our
    existing debt, should we decide to do so, including the debt of
    $1,275 relating to our 6.125% Notes due February 15,
    2006 and the debt of $150 relating to the 7.40% Notes due
    June 15, 2006 issued by an indirect wholly owned subsidiary
    of ours;                                                                                                                                   
|
| |  | we may need to use a large portion of our cash flow from
    operations to pay principal and interest on our indebtedness, in
    particular, if we are unable to refinance existing debt that is
    coming due in 2006, should we decide to do so, the amount of
    cash available to finance our operations and other business
    activities and our ability to pay any judgments, fines,
    penalties or settlements, if any, would be significantly reduced;
|
| |  | a high debt level, arduous or restrictive terms and conditions,
    or lower than expected cash flows would make us more vulnerable
    to economic downturns and adverse developments in our business;                                                                                                                                                                                                                                                             
|
| |  | if operating cash flows are not sufficient to meet our operating
    expenses, capital expenditures and debt service requirements as
    they become due, we may be required, in order to meet our debt
    service obligations, to delay or reduce capital expenditures or
    the introduction of new products, sell assets and/or forego
    business opportunities including acquisitions, R&D projects
    or product design enhancements; and                 
|
| |  | a high level of debt may place us at a competitive disadvantage
    compared to our competitors that have less debt.                                                                                                                                                                                                                                                                                                                                                



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An increased portion of our cash and cash equivalents may
    be restricted as cash collateral if we are unable to secure
    alternative support for certain obligations arising out of our
    normal course business activities.



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| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | An inability of our subsidiaries to provide us with
    funding in sufficient amounts could adversely affect our ability
    to meet our obligations.





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | We may need to make larger contributions to our defined
    benefit plans in the future.





| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If market conditions deteriorate or future results of
    operations are less than expected, an additional valuation
    allowance may be required for all or a portion of our deferred
    tax assets.





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our performance may be materially and adversely affected
    if our expectations regarding market demand for particular
    products prove to be wrong.





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| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have made, and may continue to make, strategic
    acquisitions. If we are not successful in operating or
    integrating these acquisitions, our business, results of
    operations and financial condition may be materially and
    adversely affected.





| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the industry may develop in a different direction than
    anticipated and the technologies we acquire may not prove to be
    those we need;                             
|
| |  | the future valuations of acquired businesses may decrease from
    the market price we paid for these acquisitions;                                                       
|
| |  | the revenues of acquired businesses may not offset increased
    operating expenses associated with these acquisitions;                                                   
|
| |  | potential difficulties in completing in-process research and
    development projects and delivering high quality products to our
    customers;                          
|
| |  | potential difficulties in integrating new products, software,
    businesses and operations in an efficient and effective manner;                                         
|
| |  | our customers or customers of the acquired businesses may defer
    purchase decisions as they evaluate the impact of the
    acquisitions on our future product strategy;
|
| |  | potential loss of key employees of the acquired businesses;                                                                                                               
|
| |  | diversion of the attention of our senior management from the
    operation of our daily business;                                                                         
|
| |  | entering new markets in which we have limited experience and
    where competitors may have a stronger market presence;                                                   
|
| |  | the potential adverse effect on our cash position as a result of
    all or a portion of an acquisition purchase price being paid in
    cash; and                        
|
| |  | potential assumption of liabilities.                                                                                                                                      



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| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in highly dynamic and volatile industries
    characterized by rapidly changing technologies, evolving
    industry standards, frequent new product introductions and short
    product life cycles.









| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | We face significant competition and may not be able to
    maintain our market share and may suffer from competitive
    pricing practices.







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| |                                                                       
| | ----------------------------------------------------------------------
| | We face certain barriers in our efforts to expand
    internationally.





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | reversals or delays in the opening of foreign markets to new
    competitors;
|
| |  | trade protection measures;                                                   
|
| |  | exchange controls;                                                           
|
| |  | currency fluctuations;                                                       
|
| |  | investment policies;                                                         
|
| |  | restrictions on repatriation of cash;                                        
|
| |  | nationalization or regulation of local industry;                             
|
| |  | economic, social and political risks;                                        
|
| |  | taxation;                                                                    
|
| |  | interest rates;                                                              
|
| |  | challenges in staffing and managing international opportunities;             
|
| |  | other factors, depending on the country involved;                            
|
| |  | acts of war or terrorism; and                                                
|
| |  | natural disasters.                                                           





| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Fluctuations in foreign currency exchange rates could
    negatively impact our business, results of operations and
    financial condition.



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| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to protect our intellectual property rights, or
    if we are subject to adverse judgments or settlements arising
    out of disputes regarding intellectual property rights, our
    business, results of operations and financial condition could be
    materially and adversely affected.





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Rationalization and consolidation in the industry may lead
    to increased competition and harm our business.





| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in regulation of the Internet and/or other aspects
    of the industry may affect the manner in which we conduct our
    business and may materially and adversely affect our business,
    results of operations and financial condition.





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| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Industry concerns could continue and increase our exposure
    to our customers credit risk and the risk that our
    customers will not be able to fulfill their payment obligations
    to us under customer financing arrangements.









| |                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Negative developments associated with our supply contracts
    and contract manufacturing agreements including in our Carrier
    Packet Networks segment as a result of using a sole supplier for
    key optical components of our Carrier Packet Networks solutions
    may materially and adversely affect our business, results of
    operations, financial condition and supply relationships.





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| |                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many of our current and planned products are highly
    complex and may contain defects or errors that are detected only
    after deployment in telecommunications networks, which could
    harm our reputation and adversely affect our business, results
    of operations and financial condition.





| |                                                                           
| | --------------------------------------------------------------------------
| | Our business may suffer if our strategic alliances are not
    successful.



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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to the investigations and litigation arising
    out of our restatements, we are also subject to numerous class
    actions and other lawsuits as well as lawsuits in the ordinary
    course of business.








|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 3. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                        
|------- | -----------------------
|ITEM 4. | Controls and Procedures

Management Conclusions Concerning Disclosure Controls and
Procedures








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Second Restatement and the revisions to our preliminary
    unaudited results for the year ended December 31, 2003;                                                                                                                                                                                                                                                                                                                                      
|
| |  | the findings of the Independent Review summarized in the
    Summary of Findings and of Recommended Remedial Measures
    of the Independent Review, submitted to the Audit
    Committee in January 2005 by WilmerHale and Huron Consulting
    Services LLC, or the Independent Review Summary, included
    in Item 9A of our 2003 Annual Report, and adopted by the
    Board of Directors;                                                            
|
| |  | the terminations for cause of our former president and chief
    executive officer, former chief financial officer, former
    controller and seven additional senior finance employees during
    the course of the Independent Review and the reasons therefor as
    described in the Independent Review Summary;                                                                                                                                         
|
| |  | the material weaknesses in our internal control over financial
    reporting that we and our external auditor, Deloitte, have
    identified (as more fully described below);                                                                                                                                                                                                                                                                                
|
| |  | the measures we have identified, developed and begun to
    implement, beginning in November 2003, to remedy those material
    weaknesses (as more fully described below);                                                                                                                                                                                                                                                                                  
|
| |  | managements assessment of our internal control over
    financial reporting and conclusion that our internal control
    over financial reporting was not effective as at
    December 31, 2004, and Deloittes attestation report
    with respect to that assessment and conclusion, each pursuant to
    the requirements of Section 404 of the Sarbanes-Oxley Act
    of 2002, or SOX 404, included in Item 8 and Item 9A of
    our 2004 Annual Report;
|
| |  | the conclusion of the CEO and CFO that our disclosure controls
    and procedures as at March 31, 2005 and as at May 31,
    2005 were not effective, included in Item 4 of our
    Quarterly Report on Form 10-Q for the first quarter of
    2005, or the 2005 First Quarter Report;                                                                                                                                                                       
|
| |  | the conclusion of the CEO and CFO that our disclosure controls
    and procedures as at June 30, 2005 and as at August 8,
    2005 were not effective, included in Item 4 of our
    Quarterly Report on Form 10-Q for the second quarter of
    2005, or the 2005 Second Quarter Report; and                                                                                                                                                                
|
| |  | the ongoing Revenue Independent Review (as more fully described
    below).                                                                                                                                                                                                                                                                                                                                                                                  

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Material Weaknesses in Internal Control Over Financial
Reporting






| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;                                                                                                                                                         
|
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with applicable GAAP, and that receipts and
    expenditures are being made only in accordance with
    authorizations of management and the Board of Directors; and
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.                                                                                                   



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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of compliance with written Nortel procedures for monitoring
    and adjusting balances related to certain accruals and
    provisions, including restructuring charges and contract and
    customer accruals;                                                             
|
| |  | lack of compliance with Nortel procedures for appropriately
    applying applicable GAAP to the initial recording of certain
    liabilities, including those described in SFAS No. 5,
    and to foreign currency translation as described in
    SFAS No. 52;                 
|
| |  | lack of sufficient personnel with appropriate knowledge,
    experience and training in U.S. GAAP and lack of sufficient
    analysis and documentation of the application of U.S. GAAP
    to transactions, including, but not limited to, revenue
    transactions;           
|
| |  | lack of a clear organization and accountability structure within
    the accounting function, including insufficient review and
    supervision, combined with financial reporting systems that are
    not integrated and which require extensive manual interventions;
    and
|
| |  | lack of sufficient awareness of, and timely and appropriate
    remediation of, internal control issues by Nortel personnel.                                                                                                                                                    









Changes in Internal Control Over Financial Reporting and
Remedial Measures






| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishing standards of conduct to be enforced through
    appropriate discipline;                                                                                   
|
| |  | infusing strong technical skills and experience into the finance
    organization;                                                                                     
|
| |  | requiring comprehensive, on-going training on increasingly
    complex accounting standards;                                                                           
|
| |  | strengthening and improving internal controls and processes;                                                                                                           
|
| |  | establishing a compliance program throughout the Company which
    is appropriately staffed and funded;                                                                
|
| |  | requiring management to provide clear and concise information,
    in a timely manner, to the Board of Directors to facilitate its
    decision-making; and            
|
| |  | implementing an information technology platform that improves
    the reliability of financial reporting and reduces the
    opportunities for manipulation of results.

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| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Appointment of New Senior Leadership with an emphasis on High
    Ethical and Moral Standards.



| |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In April 2004, we terminated for cause our former president and
    chief executive officer, former chief financial officer and
    former controller. In August 2004, we terminated for cause seven
    additional senior finance employees with significant
    responsibilities for our financial reporting as a whole or for
    their respective business units and geographic regions.
|
| |  | Following those actions, we appointed new senior leadership,
    including a new CEO, CFO, controller, and chief audit and
    security officer.                                                                                                                                                                                                                                            



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Emphasis by New Senior Management of Honesty and Ethical
    Behavior.



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Management continues to focus on promoting a culture of honesty
    and ethical behaviour through various initiatives such as senior
    management and employee communications, including education
    sessions, town hall meetings and training.                                                                      
|
| |  | Management continues to address the improper conduct associated
    with the misuse of provisions and releases that was found in the
    Independent Review on provisioning. We have taken and continue
    to take disciplinary action with respect to some employees and
    plan to make additional personnel changes.



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | Emphasis on Reliable and Transparent Financial Reporting.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Over the course of and subsequent to the Second Restatement
    process, our current CEO, William A. Owens, our CFO through
    the Second Restatement process, William R. Kerr, and our
    current CFO, Peter Currie, have communicated to employees the
    importance of the Second Restatement process and the ongoing
    need for reliable and transparent financial reporting and
    ethical conduct. Additionally, our senior management team
    encourages employees to raise issues of concern to
    managements attention without fear of retribution.
|
| |  | Since July 2004, we have reinforced the importance of internal
    controls over financial reporting throughout the organization,
    including through numerous education sessions, staff meetings,
    and formal presentations, to various levels of management.                                                                                                                                                                                                                                                                                                   
|
| |  | Beginning in September 2004, we implemented mandatory training
    procedures for senior management with respect to our internal
    back-up certification process to support
    certification requirements with respect to                                                                                                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | our periodic reports. Quarterly, we review and amend as
    necessary our list of back-up certifiers and train
    any new certifiers as required.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Beginning in 2005, as part of the preparation of our 2004 Annual
    Report, we implemented a process to increase visibility to
    management of potential accounting adjustments after the close
    of a financial reporting period. In addition, management now
    also highlights to the Audit Committee all adjustments made, or
    considered if potentially significant, after the close of a
    financial period. In 2005, our CFO and controller also
    implemented a quarterly financial review with senior business
    leaders prior to filing our financial results.
|
| |  | In the third quarter of 2005, we improved the global systems and
    processes first implemented in 2004 to better track our accrued
    liabilities and provisions and help support our balance sheet
    review process.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In connection with our assessment of internal control over
    financial reporting pursuant to SOX 404, we have begun to modify
    or enhance existing processes and implement new control
    activities, including improved levels of documentation, and
    enhanced monitoring and supervision of accounting processes such
    as the reconciliation of account balances and compliance with
    internal policies.                                                                                                                                                              



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Alignment of Leadership Compensation with Financial
    Accountability.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Beginning in 2004, the Board of Directors has taken steps to
    include financial accountability as a key qualitative factor in
    the individual leadership performance objectives for
    determination of incentive cash awards under our annual
    incentive plan.                                                                                                                                                                                                                                                                                                                
|
| |  | In January 2005, we received notification from certain senior
    executives that they would as a matter of corporate leadership
    and integrity pay an amount equal to their Return to
    Profitability bonuses (net of tax withheld at source), to
    demonstrate, among other things, that inappropriate accounting
    conduct was unacceptable to them. These payments are to be made
    over a three year period. The first payments were made in August
    2005 by these current (and in some cases now former) senior
    executives in accordance with this undertaking.



| |   |                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extended Balance Sheet Reviews. In March 2005, we
    implemented extended and enhanced balance sheet review
    procedures for each financial period beginning with the third
    quarter of 2004 such that we conducted regular balance sheet
    reviews across all segments and major statutory entities in
    advance of our periodic report filings.
|
| |  | Finance Department Organizational Structure. We have
    begun to implement plans to transform our finance organization,
    which include a renewed commitment to transparency, accuracy,
    accountability and competency as fundamental goals.                                                                                                         



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We continue to hire finance personnel (with a focus on qualified
    accounting professionals) to strengthen the finance
    organizations technical skills and experience and to
    address employee attrition.



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | Strengthening of Control Group and Separation from Financial
    Planning and Analysis.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the third quarter of 2005, we began the process of
    identifying the appropriate segregation of duties between our
    financial planning and analysis organization and our control
    group. We expect to substantially complete this segregation by
    the end of the first quarter of 2006. This segregation will
    implement another remedial principle adopted by the Board of
    Directors, and is part of a global organizational design we
    developed with the assistance of Accenture, Inc. This design
    also modifies and clarifies roles and accountabilities within
    the finance organization. Implementation of a new finance
    organization structure commenced in the second quarter of 2005
    and should conclude in 2007.
|
| |  | We are continuing the implementation, in stages, of an
    information technology platform (SAP) to provide an integrated
    global financial system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |   |                                 
| | - | --------------------------------
| |  | On-going Training and Processes.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To strengthen our finance organizations technical skills
    and experience, we re-established in the second quarter of 2004
    our formal finance training group to implement ongoing training
    programs for our finance personnel. Training of finance
    personnel is on-going. For example, in the third quarter of
    2005, we commenced more in-depth training for finance personnel
    in revenue recognition under U.S. GAAP, as well as
    introductory financial statement review courses for certain
    non-finance personnel.

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| |   |                
| | - | ---------------
| |  | Internal Audit.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the first quarter of 2004, the Audit Committee of the Board
    of Directors modified the mandate of our internal audit function
    to place a greater emphasis on the adequacy of, and compliance
    with, procedures relating to internal control over financial
    reporting.                                                                                                                                 
|
| |  | In October 2004, we engaged outside consultants to conduct a
    strategic performance review of the internal audit function. The
    objective of this review was to ensure that internal audit meets
    professional internal audit standards and moves towards audit
    best practices. Following this review, we began to implement the
    recommendations from the review, and implementation is ongoing.      
|
| |  | In July 2005, we appointed Robert J. Bartzokas, an experienced
    accounting and auditing professional and an expert in
    U.S. GAAP, as vice-president, audit, reporting both to the
    CEO and the Chairman of the Audit Committee. In October 2005,
    Mr. Bartzokas role was expanded to include
    responsibility for corporate security, and his title was changed
    to chief audit and security officer.



| |   |                                
| | - | -------------------------------
| |  | Manual Journal Entry Processes.



| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Beginning in the fourth quarter of 2004, we developed new
    procedures related to manual journal entries, which focus on
    approvals, more stringent documentation processes, and
    restricted user access to manual journal entry functions to
    specific approved users. We continue to work towards achieving
    full implementation of these manual journal entry procedures.
|
| |  | Consistent with our established processes and similar tools used
    in North America and CALA, in the third quarter of 2005, we
    implemented a new data management tool to collect and centralize
    the manual journal entry documentation for our global corporate
    consolidations organization.                                                                                







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The appointment of our chief audit and security officer Robert
    Bartzokas, which is more fully described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Concurrent with and arising from the completion of the portion
    of the Flextronics transaction related to the manufacturing
    activities in Chateaudun, France, as described in greater detail
    under Business Overview  Evolution of Our
    Supply Chain Strategy in the MD&A section of this
    report, we migrated in the third quarter of 2005 existing
    accounts payable and supply chain functions related to this
    transaction to SAP. Approximately 350 employees from
    various business functions located primarily in Chateaudun were
    transferred in connection with the completion of the
    transaction. In addition, we also completed the transition of
    repair services for the optical product line to Flextronics in
    EMEA. In relation to these activities, we have modified our
    internal controls to accommodate changes in our business
    processes and implemented some compensating manual processes and
    controls which we continue to monitor to determine whether any
    additional compensating controls are required.
|
| |  | We completed a few migrations and implementations for certain
    SAP modules for our operations and accounts payable activities
    in Japan, Australia and New Zealand and implemented a new
    accounts receivable software system in Australia and
    New Zealand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In the third quarter of 2005, we migrated or upgraded our legacy
    contract ledger revenue recognition systems in Australia, New
    Zealand, Japan and CALA to the same system used in North
    America, adding region specific requirements as required. In
    relation to these activities, we have implemented several
    compensating manual controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | We enhanced our process for documenting and reviewing permitted
    staff access to our information global financial reporting
    systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



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Revenue Independent Review












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PART II


OTHER INFORMATION







|        |                  
|------- | -----------------
|ITEM 1. | Legal Proceedings











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ITEM 5.     Other Information









|        |         
|------- | --------
|ITEM 6. | Exhibits



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|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .1          |  | Proxy Agreement effective as of July 29, 2005 with respect
    to Capital Stock of Nortel Government Solutions Inc. by and
    among Nortel Networks Corporation, Nortel Networks Limited,
    Nortel Networks Inc., Nortel Government Solutions Inc., James
    Frey, Thomas McInerney, Gregory Newbold, and the United States
    Department of Defense.                                 
|            | 10 | .2*         |  | Letter dated March 1, 2005, to Mr. Lynton (Red)
    Wilson, Chairman of the Board of Nortel Networks Corporation,
    delivered on August 11, 2005 from certain officers of
    Nortel Networks Corporation modifying their letter of
    undertaking dated January 10, 2005 (filed as
    Exhibit 10.1 to Nortel Networks Limiteds Current
    Report on Form 8-K dated August 18, 2005).
|            | 10 | .3          |  | Escrow Agreement dated as of March 1, 2005 and as entered
    into on August 11, 2005 between Nortel Networks
    Corporation, Computershare Trust Company of Canada and certain
    officers of Nortel Networks Corporation.                                                                                                                                                              
|            | 10 | .4*         |  | Third Amending Agreement to Asset Purchase Agreement between
    Nortel Networks Limited, Flextronics International Ltd., and
    Flextronics Telecom Systems Ltd., made as of August 22,
    2005 (filed as Exhibit 99.1 to Nortel Network
    Limiteds Current Report on Form 8-K dated
    August 26, 2005).                                                                           
|            | 10 | .5*         |  | Form of Instrument of Award in connection with the award of
    restricted stock units under the Nortel 2005 Stock Incentive
    Plan (filed as Exhibit 10.1 to Nortel Network
    Limiteds Current Report on Form 8-K dated
    September 12, 2005).                                                                                                                                     
|            | 10 | .6          |  | Termination Agreement dated September 7, 2005 between
    Nicholas DeRoma, Chief Legal Officer and Nortel Networks
    Corporation.                                                                                                                                                                                                                                                        
|            | 31 | .1          |  | Certification of the Vice-Chairman 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 Vice-Chairman and Chief Executive Officer
    and 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.

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##### Table of Contents






SIGNATURES




NORTEL NETWORKS LIMITED


(Registrant)


|                            |  |                         
|--------------------------- |  | ------------------------
|Chief Financial Officer     |  | Chief Accounting Officer
|                           
|                           
|/s/ PETER W. CURRIE         |  | /s/ PAUL W. KARR        
|                            |  |                         
|PETER W. CURRIE             |  | PAUL W. KARR            
|Executive Vice-President    |  | Controller              
|and Chief Financial Officer |  |                         



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