##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K


|                                            |  |                                                                                             
|------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the fiscal year ended December 31, 2005
|                                           
|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


Securities registered pursuant to Section 12(b) of the
Act:


|                                                                                         |  |                                          
|---------------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                                                      |  | Name of Each Exchange on Which Registered
|Guarantees of Nortel Networks Corporations
    4.25% Convertible Senior Notes Due 2008. |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act: None




o þ




o þ




þ o


S-K 10-K 10-K.


o


12b-2


o þ o


12b-2


o þ


On April 17, 2006, 1,460,978,638 common shares of Nortel
Networks Limited were issued and outstanding, all of which are
held by Nortel Networks Corporation. The common shares of the
registrant are not traded on any stock exchange.










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EXPLANATORY NOTE














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TABLE OF CONTENTS


|         |  |                                                                                                   |  |  |     | 
|-------- |  | ------------------------------------------------------------------------------------------------- |  |  | --- | 
|        
|PART I  
|ITEM 1.  |  | Business                                                                                          |  |  | 1   | 
|         |  | Overview                                                                                          |  |  | 1   | 
|         |  | Developments in 2005 and 2006                                                                     |  |  | 2   | 
|         |  | Networking solutions                                                                              |  |  | 4   | 
|         |  | Wireless networking solutions                                                                     |  |  | 5   | 
|         |  | GSM and UMTS Networks                                                                             |  |  | 6   | 
|         |  | CDMA Networks                                                                                     |  |  | 7   | 
|         |  | Enterprise Networks                                                                               |  |  | 8   | 
|         |  | Carrier Packet Networks                                                                           |  |  | 10  | 
|         |  | Sales and distribution                                                                            |  |  | 13  | 
|         |  | Backlog                                                                                           |  |  | 14  | 
|         |  | Product standards, certification and regulations                                                  |  |  | 14  | 
|         |  | Sources and availability of materials                                                             |  |  | 14  | 
|         |  | Seasonality                                                                                       |  |  | 15  | 
|         |  | Strategic alliances, acquisitions and minority investments                                        |  |  | 15  | 
|         |  | Research and development                                                                          |  |  | 16  | 
|         |  | Intellectual property                                                                             |  |  | 16  | 
|         |  | Employee relations                                                                                |  |  | 17  | 
|         |  | Environmental matters                                                                             |  |  | 17  | 
|ITEM 1A. |  | Risk Factors                                                                                      |  |  | 18  | 
|ITEM 1B. |  | Unresolved Staff Comments                                                                         |  |  | 41  | 
|ITEM 2.  |  | Properties                                                                                        |  |  | 41  | 
|ITEM 3.  |  | Legal Proceedings                                                                                 |  |  | 41  | 
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                               |  |  | 47  | 
|        
|PART II 
|ITEM 5.  |  | Market for Registrants Common Equity and Related
    Stockholder Matters                         |  |  | 48  | 
|ITEM 6.  |  | Selected Financial Data                                                                           |  |  | 48  | 
|ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations         |  |  | 50  | 
|         |  | Business Overview                                                                                 |  |  | 52  | 
|         |  | Developments in 2005 and 2006                                                                     |  |  | 55  | 
|         |  | Restatements; Nortel Audit Committee Independent Review;
    Material Weaknesses; Related Matters |  |  | 59  | 
|         |  | Results of Operations  Continuing operations                                                     |  |  | 71  | 
|         |  | Results of Operations  Discontinued Operations                                                   |  |  | 90  | 
|         |  | Liquidity and Capital Resources                                                                   |  |  | 90  | 
|         |  | Off-balance Sheet Arrangements                                                                    |  |  | 101 | 
|         |  | Application of Critical Accounting Policies and Estimates                                         |  |  | 103 | 
|         |  | Accounting Changes and Recent Accounting Pronouncements                                           |  |  | 112 | 
|         |  | Canadian Supplement                                                                               |  |  | 114 | 
|         |  | Market Risk                                                                                       |  |  | 116 | 
|         |  | Equity Price risk                                                                                 |  |  | 117 | 
|         |  | Environmental Matters                                                                             |  |  | 117 | 
|         |  | Legal Proceedings                                                                                 |  |  | 117 | 
|ITEM 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  |  | 117 | 
|ITEM 8.  |  | Financial Statements and Supplementary Data                                                       |  |  | 118 | 
|ITEM 9.  |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure          |  |  | 223 | 
|ITEM 9A. |  | Controls and Procedures                                                                           |  |  | 224 | 
|ITEM 9B. |  | Other Information                                                                                 |  |  | 233 | 

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|           |  |                                                                                                    |     |  |     | 
|---------- |  | -------------------------------------------------------------------------------------------------- | --- |  | --- | 
|          
|PART III  
|ITEM 10.   |  | Directors and Executive Officers of the Registrant                                                 |     |  | 234 | 
|           |  | Executive officers and certain other non-executive board
    appointed officers of the Registrant  |     |  | 236 | 
|           |  | Section 16(a) beneficial ownership reporting compliance                                            |     |  | 239 | 
|           |  | Audit committee financial expert                                                                   |     |  | 239 | 
|           |  | Audit committee                                                                                    |     |  | 239 | 
|           |  | Code of ethics and other corporate governance matters                                              |     |  | 239 | 
|           |  | Code of ethics and appointment of Chief Ethics Officers                                            |     |  | 240 | 
|ITEM 11.   |  | Executive Compensation                                                                             |     |  | 240 | 
|           |  | Summary compensation table                                                                         |     |  | 241 | 
|           |  | Option grants in 2005                                                                              |     |  | 243 | 
|           |  | Aggregate option exercises in 2005 and year-end option values                                      |     |  | 243 | 
|           |  | Retirement plans                                                                                   |     |  | 244 | 
|           |  | Supplemental disclosure on retirement arrangements                                                 |     |  | 247 | 
|           |  | Certain employment arrangements                                                                    |     |  | 248 | 
|           |  | Executive retention and termination plan (or ERTP)                                                 |     |  | 250 | 
|           |  | Total compensation                                                                                 |     |  | 251 | 
|           |  | Compensation of directors                                                                          |     |  | 254 | 
|           |  | Compensation committee interlocks and insider participation                                        |     |  | 255 | 
|ITEM 12.   |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters |     |  | 255 | 
|           |  | Security ownership of certain beneficial owners                                                    |     |  | 255 | 
|           |  | Security ownership of directors and management                                                     |     |  | 255 | 
|ITEM 13.   |  | Certain Relationships and Related Transactions                                                     |     |  | 257 | 
|           |  | Indebtedness of Management                                                                         |     |  | 257 | 
|           |  | Related party transactions                                                                         |     |  | 257 | 
|ITEM 14.   |  | Principal Accountant Fees and Services                                                             |     |  | 257 | 
|           |  | Audit fees                                                                                         |     |  | 258 | 
|           |  | Audit-related fees                                                                                 |     |  | 258 | 
|           |  | Tax fees                                                                                           |     |  | 258 | 
|           |  | All other fees                                                                                     |     |  | 258 | 
|          
|PART IV   
|ITEM 15.   |  | Exhibits, Financial Statement Schedules                                                            |     |  | 259 | 
|SIGNATURES |  |                                                                                                    | 266 | 

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














ii



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PART I







|        |         
|------- | --------
|ITEM 1. | Business




Overview












3b-4




10-K, 10-Q, 8-K www.nortel.com


1



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Developments in 2005 and 2006




| |                         
| | ------------------------
| | Our Business Environment











| |                                      
| | -------------------------------------
| | Third Restatement and Related Matters

81-1.




2



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| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An event of default occurred under our $1.3 billion
    one-year credit facility, or the 2006 Credit Facility.                                                                                                                                                                     
| |  | An event of default occurred under our $750 million support
    facility or the EDC Support Facility.                                                                                                                                                                              
| |  | We and NNC are not in compliance with our obligations to deliver
    our SEC filings to the trustees under our public debt indentures.                                                                                                                                             
| |  | We suspended, as of March 10, 2006, the grant of any new
    equity and exercise or settlement of previously outstanding
    awards under various Nortel employee plans.                                                                                                           
| |  | On April 10, 2006, the Ontario Securities Commission issued
    a final order prohibiting all trading by our directors, officers
    and certain current and former employees in our and NNLs
    securities.                                                                     
| |  | We are in breach of the continued listing requirements of the
    New York Stock Exchange, or NYSE, and the Toronto Stock
    Exchange, or TSX.                                                                                                                                    
| |  | We postponed our Annual Shareholders Meeting for 2005 to
    June 29, 2006 due to the delay in filing this report.                                                                                                                                                                
| |  | We announced the need to delay the filing of our and NNCs
    Quarterly Reports on
    Form 10-Q for the
    quarter ended March 31, 2006, or the 2006 First Quarter
    Reports. We now expect to file the 2006 First Quarter Reports no
    later than the week of June 5, 2006.





| |             
| | ------------
| | Our Strategy









end-to


end-to


3



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| |                                  
| | ---------------------------------
| | Significant business developments





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 24, 2006, we acquired Tasman Networks, an
    established networking company that provides a portfolio of
    secure enterprise routers, for $99.5 million in cash;                                                                                                                                                                                                                                                                                                                 
| |  | On February 14, 2006, we entered into the 2006 Credit
    Facility and used the net proceeds primarily to repay the
    outstanding $1,275 million aggregate principal amount of
    NNLs 6.125% Notes that matured on February 15,
    2006;                                                                                                                                                                                                                                                  
| |  | On February 8, 2006, NNC first announced that, as a result
    of the previously announced mediation process we entered into
    with the lead plaintiffs in two significant class action
    lawsuits pending in the U.S. District Court for the
    Southern District of New York and based on the recommendation of
    a senior Federal Judge, NNC and the lead plaintiffs have reached
    an agreement in principle to settle these lawsuits, or the
    Proposed Class Action Settlement;
| |  | On November 9, 2005, we and Huawei Technologies Co., Ltd,
    or Huawei, entered into a Memorandum of Understanding to
    establish a joint venture for developing ultra broadband access
    solutions;                                                                                                                                                                                                                                                                                       
| |  | Mr. Mike S. Zafirovski was appointed president and chief
    executive officer, effective November 15, 2005.
    Mr. Zafirovski succeeded Mr. William A. Owens as chief
    executive officer;                                                                                                                                                                                                                                                                                                  
| |  | On November 2, 2005, we formed a joint venture with LG
    named LG-Nortel Co. Ltd., or LG-Nortel, that will offer
    telecommunications and networking solutions to customers in the
    Republic of Korea and other markets globally;                                                                                                                                                                                                                                                        
| |  | On June 3, 2005, we acquired PEC; and                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | We continued the planned divestiture of substantially all of our
    remaining manufacturing operations to Flextronics, as described
    in detail below under Sources and availability of
    materials.                                                                                                                                                                                                                                                                                     






Networking solutions









Networking






| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the connecting of two or more communications devices, such as
    telephones, personal computers and wireless devices, across
    short or long distances to create a network;
| |  | the connecting of two or more networks; or                                                                                                                                      
| |  | the connecting of equipment used in a network.                                                                                                                                  




Network components




4



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| |               
| | --------------
| | Network access









| |                
| | ---------------
| | Core networking





| |                 
| | ----------------
| | Network services






Wireless networking solutions








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile switching centers direct or switch data,
    voice and multimedia communications signals from one network
    circuit to another and also support advanced voice services
    including three-way calling, calling party number/name delivery,
    call holding and call redirection.                                                                                                                                                                                                     
| |  | A home location register is a database that contains subscriber
    data, such as provisioning and service information, and dynamic
    information, such as the wireless handsets current
    location.                                                                                                                                                                                                                                                                                          
| |  | Packet gateways are hardware and software network equipment
    elements that aggregate and manage data communications between
    wireless subscriber devices and public/private data networks,
    such as the Internet. Packet data serving nodes can deliver
    valuable network services including content-based billing,
    security, virtual private networks and quality of service. These
    services provide support for applications being delivered across
    the wireless network.







5



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Markets and Customers









GSM and UMTS Networks


Products




Product development






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There are several GSM/GPRS/EDGE products that are being
    developed to allow GSM operators to use their existing network
    and spectrum allocations more effectively. An example of this is
    Adaptive MultiRate, or AMR, which allows service providers to
    use the radio spectrum allocated to them more efficiently to
    support more customers on the same network.                                                                                                                   
| |  | Our EDGE base station transceivers, including both hardware and
    software, are generally available and are being deployed by
    several customers in the United States and Europe. Our BTS 18000
    product permits the integration of GSM and UMTS technologies and
    gives our service provider customers greater deployment
    flexibility.                                                                                                                                               
| |  | Our UMTS radio network access and core networking products are
    generally available and have been launched by several operators
    in the EMEA region, Asia and in the United States. We are
    continuing to develop our UMTS solutions for use in the Asia
    Pacific (including Greater China) region.                                                                                                                                                                                      
| |  | We continue to work on developing access technologies such as
    High Speed Downlink Packet Access, or HSDPA, and High Speed
    Uplink Packet Access, or HSUPA, Orthogonal Frequency Division
    Multiplexing, or OFDM, and Multiple Input Multiple Output, or
    MIMO, antenna technologies to increase the speed and efficiency
    of broadband wireless access from 3G networks deployed today. We
    are also working on 802.16 d and e standards in the development
    of WiMAX networks.
| |  | We are intending to pursue strategic relationships with other
    companies for research, development and manufacturing of
    equipment that conforms to the Chinese 3G TD-SCDMA standard.                                                                                                                                                                                                                                                                                                          

6



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Markets




Customers




Competition







CDMA Networks


Products


IS-95 1xEV-DO,


Product development






| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our CDMA 3G 1xRTT products are generally available and have been
    deployed in several commercial networks in all our geographic
    regions. Our CDMA
    3G 1xEV-DO product
    is currently being deployed by several large operators in the
    United States and Brazil and is generally available for
    commercial deployment.
| |  | We continue to work on developing and evolving additional access
    technologies in 1xEV, or single channel evolution, to increase
    the speed and efficiency of broadband wireless access including
    the 1xEV-DO Rev. A
    standard.                                                                                            
| |  | We are developing products and services based on WiMAX
    standards, which includes OFDM along with MIMO antenna
    technologies to provide wireless broadband data access to
    complement our 2G and 3G wide-area wireless networks.                                                                                               

Markets




7



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##### 





Customers




Competition








| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | technology leadership, product features and availability;                 
| |  | product quality and reliability;                                          
| |  | conformity to existing and emerging regulatory and industry
    standards;
| |  | warranty and customer support;                                            
| |  | price and cost of ownership;                                              
| |  | interoperability with other networking products;                          
| |  | network management capabilities;                                          
| |  | existing and emerging supplier relationships;                             
| |  | regulatory certification; and                                             
| |  | provision of customer financing.                                          






Enterprise Networks


Products






| |                                   
| | ----------------------------------
| | Circuit and packet voice solutions





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our communications servers and remote gateway products which
    provide converged data, voice and multimedia communications
    systems, using VoIP or session initiation protocol, or SIP, for
    service providers and enterprises. SIP is a standard protocol
    for initiating an interactive user session that involves
    multimedia elements such as video, voice, chat, gaming and
    virtual reality. We provide a broad range of VoIP based
    telephone devices for use in offices and conference rooms,
    mobile devices for use in wireless local area networks, or WLAN,
    and personal data assistants and softphones for use in personal
    and laptop computers.
| |  | Our customer premises-based circuit and packet telephone
    switching systems which are designed for small, medium and large
    commercial enterprises and government agencies. These systems
    provide or can be configured with multiple applications,
    including voice communications features, such as voice
    messaging, call waiting and call forwarding, as well as advanced
    voice services, converged multimedia applications and other
    networking capabilities.                                                                                                                                                                                                   

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our customer contact center, messaging and interactive voice and
    web service solutions which are advanced communications tools
    designed to work with our customer premises-based solutions.
    These tools enable employees to efficiently and productively
    communicate with business contacts and other employees
    regardless of where they are located, the applicable time zone
    or whether they choose to interact over the telephone or the
    Internet.



| |                                       
| | --------------------------------------
| | Data networking and security solutions





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our data switches, secure routers and associated security
    products which provide data switching designed to allow our
    customers to provide Internet data security and IP services
    including IP routing, virtual private networks, deep packet
    inspection, firewall applications, policy management and data
    traffic flow management. These products also enable our
    customers to manage and prioritize the Internet content that is
    provided to end-users and balance the amount of communications
    traffic on multiple Internet servers.                                                                                                                                                     
| |  | Our Ethernet switch portfolio which is a series of high
    performance packet switches for our enterprise customers
    small to large local area networks that use the Ethernet, a
    standard computer networking protocol for local area networks. A
    portfolio of Ethernet switches also supply standards-based
    Power-Over-Ethernet (PoE) to various devices, including IP
    telephones, WLAN access points, security cameras and compatible
    remote devices.                                                                                                                                                                                                                                             
| |  | Our multi-protocol routers which offer high-speed, high-capacity
    and medium-capacity data switching to support a wide range of
    data communications technologies, including multi-protocol label
    switching, ATM, IP and frame relay services. Our Ethernet
    routing switches deliver IP routing and switching.                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Our portfolio of WLAN service switching products which are
    designed to provide secure and efficient transmission of WLAN
    data and voice traffic for mobile users. Our wireless mesh
    network solution incorporates the latest security standards to
    protect both user access and network access by providing
    security between wireless access points. A wireless mesh
    solution is ideal for WLAN coverage of large open areas, both
    indoor and outdoor and in areas where Ethernet cabling does not
    exist and is prohibitive to install. Our WLAN voice products
    integrate with our communications servers and gateway products
    to provide a wireless VoIP solution for our customers.
| |  | Our portfolio of optical network switching products which are
    designed to extend the range of storage area networks to enable
    our customers to consolidate their data servers. Our products
    enable enterprises to deploy these storage area networks in
    alternate locations, providing geographic redundancy as part of
    their business continuity strategy.                                                                                                                                                                                                                                                                                                                                              

Product development






| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The continued development of our multimedia communication server
    for enterprise, a product that provides the capability to
    deliver converged data, voice and multimedia applications and
    enhanced networking capabilities.
| |  | Additions to the applications in our communications server
    products to allow integration of VoIP, voice extensible markup
    language, new operating systems and servers, and voice
    recognition speech products.             
| |  | New developments in data networking products that will deliver
    resiliency, enable increased data network traffic and provide
    suitable service levels and network connectivity and power to
    devices over the same line.    
| |  | Updates to our customer premises-based telephone systems to
    support our software that enables those systems to function
    entirely as a packet-based system or as a hybrid packet and
    circuit switching system.             

Markets




9



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Customers




Competition








| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | product quality and reliability;                                          
| |  | conformity to existing and emerging regulatory and industry
    standards;
| |  | price and cost of ownership;                                              
| |  | the ability to leverage existing customer-supplier relationships;         
| |  | interoperability with other networking products;                          
| |  | technology leadership, product features and availability;                 
| |  | sales distribution and channel marketing strategy;                        
| |  | warranty and customer support;                                            
| |  | installed base of product;                                                
| |  | alternative solutions offered to enterprises by service
    providers; and
| |  | the availability of distribution channels.                                




Carrier Packet Networks


Products






| |                                   
| | ----------------------------------
| | Circuit and packet voice solutions





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our wireline voice over packet network solutions for service
    providers, which include softswitches and media gateways. The
    portfolio provides the complete range of voice over packet
    solutions, including local, toll, long-distance and
    international gateway capabilities, and enables voice
    applications to run on the multi-service packet network. These
    solutions leverage more efficient packet-based, as opposed to
    circuit-based, technologies that drive reduced capital and
    operational costs for service providers and provide a platform
    for the delivery of new revenue-generating services, such as
    Centrex IP and VoIP virtual private networks.
| |  | Our multimedia communications services portfolio allows our
    customers to deploy new, enhanced multimedia services, including
    video, collaboration as well as call control and call management
    services. The portfolio                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

10



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | consists of a SIP-based
    application server that can enable an interactive user session
    involving multimedia elements. For example, users are provided
    with the flexibility to customize their communications by
    selecting the medium over which they wish to receive a
    particular message (such as wireline or wireless telephony,
    e-mail and instant
    messaging) and by setting screening criteria such as time of day
    and day of week, month or year.
| |  | Our portfolio of digital, circuit-based telephone switches
    provides local, toll, long-distance and international gateway
    capabilities for service providers. These systems enable service
    providers to connect end-users making local and long-distance
    telephone calls. These products can evolve to voice over packet
    solutions.                                                                                                                                
| |  | Our Nortel Networks Developers Partner Program develops
    solutions to drive the interoperability of our VoIP multimedia
    communications and our digital, circuit-based telephone switch
    portfolios with third party vendors including infrastructure and
    application companies.                                                                                                                                                                                         
| |  | Our IMS solution is designed to enable fixed, mobile and cable
    operators to create a converged core network and rapidly deploy
    a wide variety of new services. The IMS solution currently is in
    trial in multiple countries in Europe.                                                                                                                                                                                                                                    





| |                                       
| | --------------------------------------
| | Data networking and security solutions





| |                             
| | ----------------------------
| | Optical networking solutions





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our next generation photonic networking C/DWDM solutions allow
    multiple light wave signals to be transmitted on the same fiber
    optic strand simultaneously by using different wavelengths of
    light to distinguish specific signals, thereby increasing the
    capacity and flexibility of a network.                                                                                                                                                                                                                                                                                        
| |  | Our multiservice synchronous optical transmission systems use
    traditional optical standards, including the SONET standard,
    which is the most common standard in the United States and
    Canada and some countries in the Asia Pacific region, and the
    SDH standard, which is the most common standard in the EMEA and
    CALA regions and many other countries. Our multiservice
    SONET/SDH solutions comprise optical platforms that integrate
    diverse protocols and technologies to deliver services over a
    cost effective, scalable and reliable converged services network.
| |  | Our optical switching solutions enable communication signals in
    optical fibers to be selectively directed or
    switched from one network circuit to another.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Our network management software and intelligence solutions are
    designed to give our customers the ability to monitor and
    improve the performance of their networks.                                                                                                                                                                                                                                                                                                                                                                                                                              

Product development






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhancements to our voice over packet solutions that will allow
    service providers to connect any business telephone system,
    using standard VoIP protocols, into a common dialing plan with
    connectivity to the public switched telephone network.
    Additional enhancements to our packet voice solutions will
    continue to focus on interoperability with other
    manufacturers equipment, including gateway and integrated
    access device

11



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | manufacturers, as well as on meeting the needs of the Asian and
    European markets. We continue to make improvements to our
    softswitch portfolio by utilizing the latest commercial
    technology to provide our customers with converged wireline and
    wireless service support, superior application choices,
    integrated network management and linear scalable capacity.
| |  | Enhancements to our multimedia communications portfolio, that
    will allow a service provider to offer intelligent multimedia
    services across any manufacturers circuit switches.
    Additionally, development will focus on increasing the breadth
    and usability of multimedia communications applications.                                                                 
| |  | Additions to the digital, circuit-based telephone switch
    portfolio that will allow service providers to offer and manage
    IP voice and multimedia (Centrex IP) services to those
    businesses that use traditional business telephones as well as
    businesses that use next generation telephones designed for use
    in IP networks.                                       
| |  | A focus on cable standards compliance to enhance our solutions
    for the cable operator markets in the United States, Canada and
    EMEA, including support for the open cable standard protocol for
    cable media gateways.                                                                                                                                                        
| |  | Enhancements to our WAN switch portfolio to strengthen the
    solutions we bring to carrier data services, wireless radio
    access networks, and government and secure private networks.
    Development will focus on enhancing the migration to converged
    networks which simultaneously support data, voice and multimedia.                                                     





| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | integrated Ethernet switching into our multiservice Sonet/SDH
    platform enabling the convergence of multiple platforms onto a
    single architecture, lowering network costs, enhancing
    functionality and delivering consistent service quality and
    scalability to satisfy service provider requirements while
    providing carrier grade reliability;
| |  | integrated electronic Dynamically Compensating Optics (eDCO)
    into our photonic solutions to assist our customers to lower
    their network costs by providing improved optical performance
    with reduced network planning and engineering costs;                                                                                                           
| |  | introduced enhanced Reconfigurable Optical Add-Drop Multiplexer
    (eROADM) capabilities managed by the domain optical controller
    into our common photonic layer product to facilitate the
    deployment and operation of regional and long-haul optical
    links; and                                                                                      
| |  | introduced a variety of packet optical access devices enabling
    comprehensive packet optical network solutions.                                                                                                                                                                                                                                                 



Markets






12



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##### 





Customers






Competition








| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | technology leadership, product features and availability;                                              
| |  | price and total cost of ownership;                                                                     
| |  | ability to create new revenue-generating services for service
    providers and cable operators;       
| |  | conformity to existing and emerging regulatory and industry
    standards;                             
| |  | installed base of products and customer relationships;                                                 
| |  | network management capabilities;                                                                       
| |  | product quality and reliability;                                                                       
| |  | warranty and customer support;                                                                         
| |  | interoperability with other networking products;                                                       
| |  | existing and emerging supplier relationships, particularly in
    EMEA and the Asia Pacific region; and
| |  | regulatory certification, particularly for incumbent local and
    long-distance telephone companies.  






Sales and distribution






13



---



##### 










Backlog







Product standards, certification and regulations









Sources and availability of materials




14



---



##### 













| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make significant purchases, directly or indirectly through
    contract manufacturing suppliers, of electronic components and
    assemblies, optical components, original equipment manufacturer,
    or OEM, products, software products, outsourced assemblies,
    outsourced products and other materials and components from many
    domestic and foreign sources;
| |  | develop and maintain alternative sources for certain essential
    materials and components; and                                                                                                                                                                                                                                                                         
| |  | occasionally maintain special internal inventories of components
    or assemblies or request that they be maintained by suppliers to
    satisfy customer demand or to minimize effects of possible
    market shortages.                                                                                                                                               








Seasonality







Strategic alliances, acquisitions and minority investments






start-up


start-up


15



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##### 








Research and development










| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | 4,760 regular full-time research and development employees in
    Canada;           
| |  | 3,967 regular full-time research and development employees in
    the United States;
| |  | 2,048 regular full-time research and development employees in
    EMEA; and         
| |  | 2,477 regular full-time research and development employees in
    other countries.  





|                                              |  |                       |       |  |      |   |       |      |  |   |       | 
|--------------------------------------------- |  | --------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                              |  | 2005                  |       |  | 2004 |   |       | 2003 | 
|                                              |  |                       |       |  |      |   |       |      | 
|                                              |  | (Millions of dollars) |      
|R&D expense                                   |  | $                     | 1,856 |  |      | $ | 1,960 |      |  | $ | 1,973 | 
|R&D costs incurred on behalf of
    others(a) |  |                       | 28    |  |      |   | 40    |      |  |   | 72    | 
|                                              |  |                       |       |  |      |   |       |      | 
|Total                                         |  | $                     | 1,884 |  |      | $ | 2,000 |      |  | $ | 2,045 | 
|                                              |  |                       |       |  |      |   |       |      | 






|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | These costs included research and development charged to our
    customers pursuant to contracts that provided for full recovery
    of the estimated cost of development, material, engineering,
    installation and all other applicable costs, which were
    accounted for as contract costs.




Intellectual property






16



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##### 








Employee relations






| |   |                                                         
| | - | --------------------------------------------------------
| |  | 13,271 regular full-time employees in the United States;
| |  | 7,775 regular full-time employees in Canada;            
| |  | 6,897 regular full-time employees in EMEA; and          
| |  | 7,297 regular full-time employees in other countries.   











| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | one labor contract covering approximately 30% of Canadian
    unionized employees which was renewed, ratified and became
    effective February 26, 2006 and is for a three year term;
| |  | one labor contract covering less than one percent of Canadian
    unionized employees which expires in August 2006;                                                                   
| |  | one labor contract covering approximately 18% of Canadian
    unionized employees which expires in 2014;                                                                              
| |  | one labor contract covering approximately 11% of Canadian
    unionized employees which expires in 2007; and                                                                          
| |  | one labor contract covering approximately 40% of Canadian
    unionized employees which expires in 2008.                                                                              








Environmental matters




17



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##### 








Financial information by operating segment and product
category







Financial information by geographic area







Working capital







ITEM 1A. Risk Factors


Certain statements in this Annual Report on
Form 10-K 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. 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.


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.


We have organized our risks into the following categories:




| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | Risks Relating to Our Restatements and Related Matters;                 
| |  | Risks Relating to Our Business; and                                     
| |  | Risks Relating to Our Liquidity, Financing Arrangements and
    Capital.

The above categories and the order in which we have listed
our risk factors is not intended to limit your consideration of
the possible effects of these risks on our business or to
categorize or rank our risks by likelihood of occurrence or
severity to our business. Any adverse effects related to the
risks discussed below may, and likely would, have an adverse
impact on many aspects of our business.


18



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##### 



Risks Relating to Our Restatements and Related Matters




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

10-K




97-2,


81-1.








| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                         
| |  | It is uncertain at this time if and when the Proposed
    Class Action Settlement will be finalized and approved. If
    the Proposed Class Action Settlement is finalized and
    approved, it would require NNC to pay $575 million in cash
    and would result in the dilution of its existing equity position.

19



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NNC is subject to additional significant pending civil
    litigation actions, which are not encompassed by the Proposed
    Class Action Settlement and which, if decided against it or
    as a result of settlement, could require NNC to pay substantial
    judgments, settlements, fines or other penalties and could
    result in the dilution of its existing equity positions, and we
    cannot predict the timing of developments in these matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Material adverse legal judgments, fines, penalties or
    settlements, including the Proposed Class Action
    Settlement, could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | We and our independent registered chartered accountants have
    identified a number of material weaknesses related to our
    internal control over financial reporting and we have concluded
    that our internal control over financial reporting was
    ineffective as of December 31, 2005. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Full implementation of the governing principles of the
    Independent Review as they relate to remedial measures and the
    full remediation of our material weaknesses, internal control
    over financial reporting and disclosure controls and procedures
    will continue to take significant time and effort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Our credit ratings are below investment grade, 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 adversely affected and may
    continue to adversely affect our business and the market price
    of NNCs publicly traded securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | We may not be able to attract or retain the personnel necessary
    to achieve our business objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The delay in filing of our and NNCs 2005
    Form 10-K and
    related matters caused us, and the anticipated delay in filing
    the 2006 First Quarter Reports will cause us, to breach our
    public debt indentures and seek waivers from our lenders under
    the 2006 Credit Facility and from EDC under the EDC Support
    Facility, which may affect our liquidity. We and NNC are
    currently in discussions with these lenders and EDC to negotiate
    waivers and, although we expect we will reach agreement with the
    lenders and EDC with respect to the terms of an acceptable
    waiver, there can be no assurance we will obtain such waivers.
    Any future delays in filing our periodic reports could cause us
    to breach our public debt indentures and our obligations under
    our credit and support facilities. In such circumstances, it is
    possible that the holders of our public debt or our lenders
    would seek to accelerate the maturity of our debt or that EDC or
    the lenders would not grant us further waivers.
| |  | The anticipated delay in filing the 2006 First Quarter Reports
    or any other future breach of the continued listing requirements
    of the NYSE and/or TSX could cause the NYSE and/or the TSX to
    commence suspension or delisting procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Our senior management and Board of Directors have been required
    to devote significant time to our multiple restatements and
    related matters, which could have an adverse impact on our
    business and operational activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 or subject us to
    sanctions and we cannot predict the timing of developments in
    these matters.









20



---



##### 









| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | It is uncertain at this time if and when the Proposed
    Class Action Settlement will be finalized and approved. If
    the Proposed Class Action Settlement is finalized and
    approved, it would require NNC to pay a substantial cash amount
    and would result in a significant dilution of its existing
    equity positions.









21



---



##### 











| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to additional significant pending civil
    litigation actions, which are not encompassed by the Proposed
    Class Action Settlement and which, if decided against us or
    as a result of settlement, could require us to pay substantial
    judgments, settlements, fines 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, including the Proposed Class Action
    Settlement, could have a material adverse effect on our
    business, results of operations, financial condition and
    liquidity, which could be very significant.



22



---



##### 









| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                                                                                                                                                                         
| |  | adversely affecting our credit ratings;                                                                                                                                                                                                                                                                                                                                  
| |  | 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 or more costly for us to make
    acquisitions and investments;                                                                                                                                                                                                                                                                                 
| |  | limiting our ability to obtain, and/or increasing 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 and our independent registered chartered accountants
    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, 2005. 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 generally accepted accounting principles, or GAAP, to
    the initial recording of certain liabilities, including those
    described in Statement of Financial Accounting Standards, or
    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.                                                                                                                                                                                                                                                                                                                               



23



---



##### 













| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Full implementation of the governing principles of the
    Independent Review as they relate to remedial measures, the full
    remediation of our material weaknesses, internal control over
    financial reporting, and disclosure controls and procedures will
    continue to take significant time and effort.



24



---



##### 





| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our credit ratings are below investment grade, 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 affected and may
    continue to adversely affect our business and the market price
    of our publicly traded securities.





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





25



---



##### 













| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The delay in filing of our and NNCs 2005
    Form 10-K and
    related matters caused us, and the anticipated delay in filing
    the 2006 First Quarter Reports will cause us, to breach our
    public debt indentures and seek waivers from our lenders under
    the 2006 Credit Facility and from EDC under the EDC Support
    Facility, which may affect our liquidity. There can be no
    assurance that we will receive such waivers. Any future delays
    in filing our periodic reports could cause us to breach our
    public debt indentures and our obligations under our credit and
    support facilities. In such circumstances, it is possible that
    the holders of our public debt or our lenders would seek to
    accelerate the maturity of our debt or that EDC or the lenders
    would not grant us further waivers.







26



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| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The anticipated delay in filing the 2006 First Quarter
    Reports or any other 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.





Risks Relating to Our Business




| |                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results have historically been subject to
    yearly and quarterly fluctuations and are expected to continue
    to fluctuate, which may adversely affect the market price of our
    publicly traded securities. Factors contributing to these
    fluctuations could have a material adverse effect on our
    business, results of operations and financial condition.





| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to stimulate customer spending by anticipating and
    offering products and services that customers will require in
    the future to increase the efficiency and profitability of their
    networks;                                       
| |  | our ability to focus our business on what we believe to be
    potentially higher growth and higher margin businesses while
    balancing the higher operational and financial risks associated
    with these higher growth and higher margin businesses;
| |  | our ability to enter into strategic alliances and make
    investments, including acquisitions, to strengthen our business
    and to dispose of or exit non-core businesses;                                                                             
| |  | the impact of acquired businesses and technologies on our
    revenues and cost structure;                                                                                                                                                                
| |  | the size and timing of customer orders and shipments;                                                                                                                                                                                                     

27



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the recognition and deferral of revenues in accordance with
    GAAP, which can vary significantly depending on contractual
    practices and associated selling processes;                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | our ability to fund and sustain our research and development
    activities and their impact on the development of future
    products;                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the ability of our customers and suppliers to obtain financing
    to fund capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | the impact of global economic conditions and other trends and
    factors affecting the telecommunications industry that are
    beyond our control, which may result in reduced demand and
    pricing pressure on our products, as discussed below;                                                                                                                                                                                                                                                                                                                               
| |  | fluctuations in our gross margins, as discussed below;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | our ability to execute our strategic plan and to successfully
    complete programs on a timely basis to reduce our cost
    structure, including fixed costs, without negatively impacting
    our relationships with our customers, to streamline our
    operations and to reduce product costs;                                                                                                                                                                                                                                                                                 
| |  | the impact of our product development schedules, product quality
    variances, manufacturing capacity and lead times required to
    produce our products and ability to successfully manage our
    supply-chain and contract manufacturers;                                                                                                                                                                                                                                                                                                                                      
| |  | our ability to maintain appropriate inventory levels;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | our ability to focus on the
    day-to-day operation of
    our business while effecting our multiple restatements,
    implementing improvements to our internal controls and
    procedures, including our accounting systems, internal processes
    and organizations, finalizing and implementing the Proposed
    Class Action Settlement and addressing the other civil
    litigation actions and investigations related to our
    restatements;                                                                                                                           
| |  | the retention of qualified personnel and our ability to
    stabilize and develop our senior management team;                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | the litigation reserve recorded by NCC in connection with the
    Proposed Class Action Settlement, the equity component of
    which will be adjusted in future quarters until the finalization
    of the settlement;                                                                                                                                                                                                                                                                                                                                                             
| |  | our ability to obtain payment from customers on a timely basis
    and the related impact on provisions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | the inherent uncertainties of using forecasts, estimates and
    assumptions for asset valuations and in determining the amounts
    of accrued liabilities, provisions, including with respect to
    customer payments, and other items in our consolidated financial
    statements;                                                                                                                                                                                                                                                                                             
| |  | the impact of changes in global capital markets and interest
    rates, including on our pension plan assets and obligations;                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | the impact of fair value accounting for employee stock options
    which requires 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;                                                                                                                                                                                                                                                                                                                                                       
| |  | 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
    may be beyond our control and an obligation to make a
    significant indemnification payment under such agreements could
    have a negative effect on our reported results;
| |  | our ability to successfully comply with increased and complex
    regulations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | accruals for employee incentive bonuses;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | further restructuring costs; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | the impact of higher insurance premiums and deductibles and
    greater limitations on insurance coverage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          





| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                                                                                                                                     

28



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, and other significant technology
    shifts which could result in rapidly declining markets,
    including for our legacy products, and disproportionate growth
    in new technologies;
| |  | 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.                                                                                                                                                                                                       



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



start-up


end-to




| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



29



---



##### 







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





| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

IP-optimized


IP-optimized


30



---



##### 





IP-optimized




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

IP-optimized


IP-optimized


IP-optimized IP-optimized






| |                                                                       
| | ----------------------------------------------------------------------
| | 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;                                                         

31



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##### 



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | 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;
| |  | acts of war or terrorism;                                       
| |  | natural disasters; and                                          
| |  | other factors, depending on the country involved.               





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our gross margins may decline, which would reduce our
    operating results and could contribute to volatility in the
    market price of our publicly traded securities.





| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased price competition in the networking industry,
    particularly from low cost competitors;                                                                                    
| |  | increased industry consolidation and rationalization 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, obsolescence charges or contract
    and customer settlement costs;                                                                                    
| |  | loss of cost savings on future inventory purchases as a result
    of higher inventory levels;                                                                                         
| |  | increased warranty costs;                                                                                                                                                              
| |  | introduction of new products and costs of entering new markets;                                                                                                                        
| |  | customer requirements for increased level of service;                                                                                                                                  
| |  | changes in distribution channels;                                                                                                                                                      
| |  | excess capacity or excess fixed assets;                                                                                                                                                
| |  | accruals for employee incentive bonuses;                                                                                                                                               
| |  | costs relating to our restatements, including the possibility of
    substantial fines, settlements and/or damages or other penalties
    and/or remedial actions; and                 
| |  | further restructuring costs.                                                                                                                                                           





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





32



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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.





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



33



---



##### 







| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We continue to restructure and transform our business to
    respond to industry and market conditions and to address our
    biggest operational and strategic challenges. The assumptions
    underlying these efforts may prove to be inaccurate, or we may
    fail to achieve the expected benefits from these efforts, and we
    may have to restructure or transform 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.







| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



34



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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.





| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



U.S.-based






| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



35



---



##### 







| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the industry may develop in a different direction than
    anticipated and the technologies we acquire may not prove to be
    those we need or the business model of acquired companies may
    become obsolete;                                                                    
| |  | 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,
    internal controls, businesses and operations in an effective and
    timely manner or at all;                                                                                                                      
| |  | 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;                                                                                                                                       
| |  | potential issuance of equity or equity related securities as a
    result of all or a portion of an acquisition purchase price
    being paid with such equity or equity related securities, which
    could result in the significant dilution of existing equity
    positions; and
| |  | potential assumption of liabilities.                                                                                                                                                                                                                                                 

IP-optimized






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





| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to adequately evolve our financial and
    managerial control and reporting systems and processes, our
    ability to manage and grow our business will be negatively
    affected.



36



---



##### 





| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Our risk management strategy may be not effective or not
    commensurate to the risks we are facing.





Risks Relating to Our Liquidity, Financing Arrangements and
Capital




| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 on acceptable terms or at all.









| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a greater than expected slowdown in capital spending by service
    providers and other customers or other changes to our business
    model could result in materially lower revenues and cash flows;
| |  | costs incurred in connection with restructuring efforts may be
    higher than originally planned and may not lead to the
    anticipated cost savings;                                               

37



---



##### 



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in market demand for networking products, which may
    require increased expenditures to develop and market different
    technologies;                                                              
| |  | we may need to make larger contributions to our defined benefit
    plans in North America and the United Kingdom, or U.K., and
    retirement plans in other countries;                                      
| |  | an increased portion of our cash and cash equivalents may be
    restricted as cash collateral for customer performance bonds and
    contracts if the industry or our current condition
    deteriorates; and
| |  | an inability of our subsidiaries to provide us with funding in
    sufficient amounts could adversely affect our ability to meet
    our obligations.                                                         



| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our obligations under
    our outstanding debt and other obligations and to pay any
    judgments, fines, penalties or settlements in connection with
    our pending civil litigation and investigations;
| |  | require us to delay or reduce capital expenditures or the
    introduction of new products, sell assets and/or forego business
    opportunities such as acquisitions, R&D projects or product
    design enhancements;                            
| |  | increase our vulnerability to economic downturns, adverse
    industry conditions and adverse developments in our business,
    and limit our flexibility in planning for or reacting to such
    changes; and                                     
| |  | place us at a competitive disadvantage compared to competitors
    that have greater liquidity.                                                                                                                                                    



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our high level of debt could materially and adversely
    affect our business, results of operations, financial condition
    and liquidity.







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it could be more difficult for us to satisfy our obligations
    under our outstanding debt and other obligations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | we may have difficulty borrowing money in the future or
    accessing other sources of funding;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | we may have difficulty refinancing our existing debt, should we
    decide to do so, including the $150 million of outstanding
    7.40% Notes due June 15, 2006 issued by an indirect
    wholly owned finance subsidiary of ours and the
    $1.3 billion outstanding under the 2006 Credit Facility due
    in February 2007;                                                                                                                                                                                                                                                                                                              
| |  | we may need to dedicate a substantial portion of our cash and
    cash flow from operations to debt payments, thereby
    significantly reducing the availability of our cash and cash
    flow from operations for other purposes, including payments of
    judgments, settlements, fines or other penalties and our
    operational needs (for example, in order to meet our debt
    service obligations, we may be required to delay or reduce
    capital expenditures or the introduction of new products, sell
    assets and/or forego business opportunities such as
    acquisitions, R&D projects or product design enhancements);
| |  | increase our vulnerability to economic downturns, adverse
    industry conditions and adverse developments in our business,
    and limit our flexibility in planning for or reacting to such
    changes; and                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | place us at a competitive disadvantage compared to competitors
    that have less debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

38



---



##### 





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Covenants under the 2006 Credit Facility and the
    EDC Support Facility impose operating and financial
    restrictions on us, which may prevent us from capitalizing on
    business opportunities.





| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit our ability to create liens on our assets and the assets
    of substantially all of our subsidiaries in excess of certain
    baskets and permitted amounts;                                                                                                                                                
| |  | limit our ability and the ability of substantially all of our
    subsidiaries to merge, consolidate, amalgamate with another
    person;                                                                                                                                                                          
| |  | require NNC to maintain a minimum level of Adjusted EBITDA
    beginning with the twelve-month period ending March 31,
    2006 (for more information on Adjusted EBITDA, see
    Liquidity an Capital Resources  Future Sources
    of Liquidity  Credit facilities in the
    MD&A section of this report);
| |  | require NNC to maintain at least $1 billion of unrestricted
    cash at all times; and                                                                                                                                                                                                                             
| |  | restrict the ability of our subsidiaries to incur funded debt in
    excess of certain amounts without guaranteeing NNLs
    obligations under the EDC Support Facility.                                                                                                                                          







| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain provisions in the indentures governing certain of
    our public debt issues, together with the provisions of the 2006
    Credit Facility, severely limit our ability to incur certain
    types of additional secured debt while the secured loans under
    the 2006 Credit Facility are outstanding.





| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



39



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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.





| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







40



---



##### 






ITEM 1B.     Unresolved Staff
Comments









|        |           
|------- | ----------
|ITEM 2. | Properties



|                                                  |  |                 |    |  |        |  |     |                      |  |                                                        
|------------------------------------------------- |  | --------------- | -- |  | ------ |  | --- | -------------------- |  | -------------------------------------------------------
|                                                  |  | Number of Sites |    |  |       
|                                                  |  |                 |    |  |       
|Type of Site*                                     |  | Owned           |    |  | Leased |  |     | Geographic Locations
|                                                  |  |                 |    |  |        |  |     |                     
|Manufacturing and repair                          |  |                 | 5  |  |        |  |    |                      |  | Canada, EMEA, CALA and the Asia Pacific region         
|Distribution centers                              |  |                 |   |  |        |  | 8   |                      |  | United States, EMEA, CALA and the Asia Pacific region  
|Offices (administration, sales and field service) |  |                 | 4  |  |        |  | 161 |                      |  | All geographic regions                                 
|Research and development                          |  |                 | 4  |  |        |  | 7   |                      |  | United States, Canada, EMEA and the Asia Pacific region
|                                                  |  |                 |    |  |        |  |     |                     
|TOTAL**                                           |  |                 | 13 |  |        |  | 176 |                      |  |                                                        
|                                                  |  |                 |    |  |        |  |     |                     






|   |                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Indicates the primary use of the site. A number of our sites are
    mixed-use facilities.                                                                                                                                                                                                                                                       
|** | Excludes approximately 6.1 million square feet, consisting
    primarily of leased and/or vacant property designated as part of
    a planned square footage reduction in connection with our
    restructuring activities commenced in 2001. At December 31,
    2005 approximately 3.6 million square feet of such property
    was sub-leased.





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | 31% by Global Operations;                                                    
| |  | 14% by Carrier Packet Networks;                                              
| |  | 11% by Enterprise Networks;                                                  
| |  | 6% by CDMA Networks;                                                         
| |  | 8% by GSM and UMTS Networks; and                                             
| |  | 30% by one or more of our reporting segments and/or corporate
    facilities.






ITEM 3.     Legal Proceedings




41



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##### 













42



---



##### 















43



---



##### 















44



---



##### 











45



---



##### 







out-of








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





46



---



##### 





de minimis de minimis de
minimis









|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security Holders



47



---



##### 






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | Market for Registrants Common Equity and Related
    Stockholder Matters








|        |                                    
|------- | -----------------------------------
|ITEM 6. | Selected Financial Data (Unaudited)

10-K




10-K.


|                                                                  |                       |                            |        |              |      |   |              |      |  |             |       |     |             |      |        |       |  |   |         |       | 
|----------------------------------------------------------------- | --------------------- | -------------------------- | ------ | ------------ | ---- | - | ------------ | ---- |  | ----------- | ----- | --- | ----------- | ---- | ------ | ----- |  | - | ------- | ----- | 
|                                                                  |                       | 2005                       |        |              | 2004 |   |              | 2003 |  |             | 2002  |     |             | 2001 |       
|                                                                  |                       |                            |        |              |      |   |              |      |  |             |       |     |             |      |       
|                                                                  |                       |                            |        | As restated* |      |   | As restated* |      |  | As restated |       |     | As restated |     
|                                                                  |                       |                            |        |              |      |   |              |      |  |             |       |     |             |     
|                                                                  |                       | (Millions of U.S. dollars) |       
|Results of Operations                                             |                       |                            |        |              |      |   |              |      |  |             |       |     |             |      |        |       |  |   |         |      
|Revenues                                                          |                       | $                          | 10,523 |              |      | $ | 9,516        |      |  | $           | 9,932 |     |             | $    | 10,723 |       |  | $ | 18,695  |      
|Research and development expense                                  |                       |                            | 1,856  |              |      |   | 1,960        |      |  |             | 1,973 |     |             |      | 2,085  |       |  |   | 3,128   |      
|Special charges                                                   |                       |                            |        |              |      |   |              |      |  |             |       |     |             |      |        |       |  |   |         |      
|                                                                  | Goodwill impairment   |                            |        |             |      |   |              |     |  |             |       |    |             |      |        | 264   |  |   |         | 2,239 | 
|                                                                  | Other special charges |                            |        | 170          |      |   |              | 181  |  |             |       | 290 |             |      |        | 1,359 |  |   |         | 2,945 | 
|Operating earnings (loss)                                         |                       |                            | (224   | )            |      |   | (221         | )    |  |             | (18   | )   |             |      | (2,462 | )     |  |   | (12,636 | )    
|Other income (expense)  net                                      |                       |                            | 305    |              |      |   | 217          |      |  |             | 458   |     |             |      | (24    | )     |  |   | (503    | )    
|Income tax benefit (expense)                                      |                       |                            | 55     |              |      |   | 30           |      |  |             | 36    |     |             |      | 434    |       |  |   | 2,573   |      
|Net earnings (loss) from continuing operations                    |                       |                            | (1     | )            |      |   | (103         | )    |  |             | 295   |     |             |      | (2,227 | )     |  |   | (11,007 | )    
|Net earnings (loss) from discontinued operations  net
    of tax |                       |                            | 1      |              |      |   | 49           |      |  |             | 183   |     |             |      | (103   | )     |  |   | (2,030  | )    
|Cumulative effect of accounting changes  net of tax              |                       |                            |       |              |      |   |             |      |  |             | (12   | )   |             |      |       |       |  |   | 15      |      
|Dividends on preferred shares                                     |                       |                            | 38     |              |      |   | 33           |      |  |             | 35    |     |             |      | 26     |       |  |   | 27      |      
|Net earnings (loss) applicable to common shares                   |                       |                            | (38    | )            |      |   | (87          | )    |  |             | 431   |     |             |      | (2,356 | )     |  |   | (13,049 | )    
|                                                                  |                       |                            |        |              |      |   |              |      |  |             |       |     |             |      |       

|                                           |  |                            |        |              |      |   |             |      |  |             |        |  |             |      |        |  |  |   |        | 
|------------------------------------------ |  | -------------------------- | ------ | ------------ | ---- | - | ----------- | ---- |  | ----------- | ------ |  | ----------- | ---- | ------ |  |  | - | ------ | 
|                                           |  | 2005                       |        |              | 2004 |   |             | 2003 |  |             | 2002   |  |             | 2001 |       
|                                           |  |                            |        |              |      |   |             |      |  |             |        |  |             |      |       
|                                           |  |                            |        | As restated* |      |   | As restated |      |  | As restated |        |  | As restated |     
|                                           |  |                            |        |              |      |   |             |      |  |             |        |  |             |     
|                                           |  | (Millions of U.S. dollars) |       
|Financial Position as of December 31       |  |                            |        |              |      |   |             |      |  |             |        |  |             |      |        |  |  |   |        | 
|Total assets                               |  | $                          | 17,909 |              |      | $ | 17,736      |      |  | $           | 17,060 |  |             | $    | 17,083 |  |  | $ | 21,124 | 
|Total
    debt(a)                          |  |                            | 2,096  |              |      |   | 2,091       |      |  |             | 2,217  |  |             |      | 2,425  |  |  |   | 3,277  | 
|Minority interests in subsidiary companies |  |                            | 244    |              |      |   | 90          |      |  |             | 77     |  |             |      | 94     |  |  |   | 118    | 
|Preferred shares                           |  |                            | 536    |              |      |   | 536         |      |  |             | 536    |  |             |      | 536    |  |  |   | 536    | 






|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(a) | Total debt includes long-term debt, long-term debt due within
    one year and notes payable.





48



---



##### 





Consolidated Statement of Operations data for the year ended
December 31, 2002


|                                               |  |                            |        |   |             |   |      |             |  |   |        |  
|---------------------------------------------- |  | -------------------------- | ------ | - | ----------- | - | ---- | ----------- |  | - | ------ | -
|                                               |  | As previously reported     |        |   | Adjustments |   |      | As restated | 
|                                               |  |                            |        |   |             |   |      |             | 
|                                               |  | (Millions of U.S. dollars) |       
|Revenues                                       |  | $                          | 10,994 |   |             | $ | (271 | )           |  | $ | 10,723 |  
|Cost of revenues                               |  |                            | 7,139  |   |             |   | (218 | )           |  |   | 6,921  |  
|                                               |  |                            |        |   |             |   |      |             | 
|Gross profit                                   |  |                            | 3,855  |   |             |   | (53  | )           |  |   | 3,802  |  
|                                               |  |                            |        |   |             |   |      |             | 
|Net earnings (loss) from continuing operations |  |                            | (2,163 | ) |             |   | (64  | )           |  |   | (2,227 | )
|Net earnings (loss)                            |  | $                          | (2,264 | ) |             | $ | (66  | )           |  | $ | (2,330 | )
|                                               |  |                            |        |   |             |   |      |             | 

Consolidated Statement of Operations data for the year ended
December 31, 2001


|                                               |  |                            |         |   |             |   |     |             |  |   |         |  
|---------------------------------------------- |  | -------------------------- | ------- | - | ----------- | - | --- | ----------- |  | - | ------- | -
|                                               |  | As previously reported     |         |   | Adjustments |   |     | As restated | 
|                                               |  |                            |         |   |             |   |     |             | 
|                                               |  | (Millions of U.S. dollars) |        
|Revenues                                       |  | $                          | 18,763  |   |             | $ | (68 | )           |  | $ | 18,695  |  
|Cost of revenues                               |  |                            | 14,511  |   |             |   | (64 | )           |  |   | 14,447  |  
|                                               |  |                            |         |   |             |   |     |             | 
|Gross profit                                   |  |                            | 4,252   |   |             |   | (4  | )           |  |   | 4,248   |  
|                                               |  |                            |         |   |             |   |     |             | 
|Net earnings (loss) from continuing operations |  |                            | (11,006 | ) |             |   | (1  | )           |  |   | (11,007 | )
|Net earnings (loss)                            |  | $                          | (13,022 | ) |             |   |    |             |  | $ | (13,022 | )
|                                               |  |                            |         |   |             |   |     |             | 

Revenues and cost of revenues adjustments




|                                      |  |                            |        |   |                  |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------- |  | -------------------------- | ------ | - | ---------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                      |  | Revenues                   |        |   | Cost of Revenues |  
|                                      |  |                            |        |   |                  |  
|                                      |  | 2002                       |        |   | 2001             |   |        | 2002 |  |   | 2001  |  
|                                      |  |                            |        |   |                  |   |        |      |  |   |       |  
|                                      |  | (Millions of U.S. dollars) |       
|As previously reported:               |  | $                          | 10,994 |   |                  | $ | 18,763 |      |  | $ | 7,139 |   |  | $ | 14,511 |  
|Adjustments:                          |  |                            |        |   |                  |   |        |      |  |   |       |   |  |   |        |  
|Application of SOP 81-1               |  | $                          | (157   | ) |                  | $ | (44    | )    |  | $ | (148  | ) |  | $ | (42    | )
|Application of SAB 104 and SOP 97-2   |  |                            | (111   | ) |                  |   | (34    | )    |  |   | (66   | ) |  |   | (24    | )
|Other revenue recognition adjustments |  |                            | (3     | ) |                  |   | 10     |      |  |   | (4    | ) |  |   | 2      |  
|                                      |  |                            |        |   |                  |   |        |      |  |   |       |  
|As restated:                          |  | $                          | 10,723 |   |                  | $ | 18,695 |      |  | $ | 6,921 |   |  | $ | 14,447 |  
|                                      |  |                            |        |   |                  |   |        |      |  |   |       |  

49



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##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

|                                                                                                  |                                                                  |                                             |    |    |    | 
|------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------- | -- | -- | -- | 
|Business Overview                                                                                 |                                                                  |                                             | 52 |   
|                                                                                                  | Our Business                                                     |                                             |    | 52 |   
|                                                                                                  | Our Segments                                                     |                                             |    | 53 |   
|                                                                                                  | How We Measure Performance                                       |                                             |    | 53 |   
|                                                                                                  | Our Business Environment                                         |                                             |    | 54 |   
|                                                                                                  | Our Strategy                                                     |                                             |    | 54 |   
|Developments in 2005 and 2006                                                                     |                                                                  |                                             | 55 |   
|                                                                                                  | 2005 Consolidated Results Summary                                |                                             |    | 55 |   
|                                                                                                  | Significant Business Developments                                |                                             |    | 56 |   
|                                                                                                  |                                                                  | Management                                  |    |    | 56 | 
|                                                                                                  |                                                                  | Proposed Class Action Settlement            |    |    | 56 | 
|                                                                                                  |                                                                  | Credit and Support Facilities               |    |    | 57 | 
|                                                                                                  |                                                                  | Acquisitions                                |    |    | 58 | 
|                                                                                                  |                                                                  | Joint Ventures                              |    |    | 58 | 
|                                                                                                  |                                                                  | Evolution of Our Supply Chain Strategy      |    |    | 58 | 
|                                                                                                  |                                                                  | Optical Components Operations               |    |    | 59 | 
|                                                                                                  |                                                                  | Bharat Sanchar Nigam Limited Contract       |    |    | 59 | 
|Restatements; Nortel Audit Committee Independent Review;
    Material Weaknesses; Related Matters |                                                                  |                                             | 59 |   
|                                                                                                  | First and Second Restatements and Independent Review             |                                             |    | 59 |   
|                                                                                                  | Material Weaknesses in Internal Control over Financial Reporting |                                             |    | 60 |   
|                                                                                                  | Third Restatement                                                |                                             |    | 60 |   
|                                                                                                  | Revenue Independent Review                                       |                                             |    | 69 |   
|                                                                                                  | Regulatory Actions and Pending Litigation                        |                                             |    | 70 |   
|Results of Operations  Continuing Operations                                                     |                                                                  |                                             | 71 |   
|                                                                                                  | Consolidated Information                                         |                                             |    | 71 |   
|                                                                                                  |                                                                  | Revenues                                    |    |    | 71 | 
|                                                                                                  |                                                                  | Geographic Revenues                         |    |    | 73 | 
|                                                                                                  | Gross Profit and Gross Margin                                    |                                             |    | 74 |   
|                                                                                                  | Operating Expenses                                               |                                             |    | 75 |   
|                                                                                                  |                                                                  | Selling, General and Administrative Expense |    |    | 75 | 
|                                                                                                  |                                                                  | Research and Development Expense            |    |    | 76 | 
|                                                                                                  |                                                                  | Special Charges                             |    |    | 76 | 
|                                                                                                  | (Gain) Loss on Sale of Businesses and Assets                     |                                             |    | 79 |   
|                                                                                                  | Other Income  Net                                               |                                             |    | 79 |   
|                                                                                                  | Interest Expense                                                 |                                             |    | 80 |   
|                                                                                                  | Income Tax Benefit (Expense)                                     |                                             |    | 80 |   
|                                                                                                  | Segment Information                                              |                                             |    | 81 |   
|                                                                                                  |                                                                  | Carrier Packet Networks                     |    |    | 82 | 
|                                                                                                  |                                                                  | CDMA Networks                               |    |    | 84 | 
|                                                                                                  |                                                                  | GSM and UMTS Networks                       |    |    | 86 | 
|                                                                                                  |                                                                  | Enterprise Networks                         |    |    | 87 | 
|                                                                                                  |                                                                  | Other                                       |    |    | 89 | 
|Results of Operations  Discontinued Operations                                                   |                                                                  |                                             | 90 |   
|Liquidity and Capital Resources                                                                   |                                                                  |                                             | 90 |   
|                                                                                                  | Cash Flow                                                        |                                             |    | 90 |   
|                                                                                                  |                                                                  | Operating activities                        |    |    | 91 | 

50



---



##### 



|                                                          |                                                                           |                                                                 |     |     |     | 
|--------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------------- | --- | --- | --- | 
|                                                          |                                                                           | Investing activities                                            |     |     | 93  | 
|                                                          |                                                                           | Financing activities                                            |     |     | 93  | 
|                                                          | Future Uses and Sources of Liquidity                                      |                                                                 |     | 94  |    
|                                                          | Future Uses of Liquidity                                                  |                                                                 |     | 94  |    
|                                                          |                                                                           | Contractual cash obligations                                    |     |     | 95  | 
|                                                          |                                                                           | Purchase obligations                                            |     |     | 95  | 
|                                                          |                                                                           | Outsourcing contracts                                           |     |     | 95  | 
|                                                          |                                                                           | Obligations under special charges                               |     |     | 96  | 
|                                                          |                                                                           | Pension, and post-retirement obligations                        |     |     | 96  | 
|                                                          |                                                                           | Other long-term liabilities reflected on the balance
    sheets |     |     | 96  | 
|                                                          |                                                                           | Customer financing                                              |     |     | 96  | 
|                                                          |                                                                           | Acquisitions                                                    |     |     | 97  | 
|                                                          | Future Sources of Liquidity                                               |                                                                 |     | 97  |    
|                                                          |                                                                           | Credit facilities                                               |     |     | 98  | 
|                                                          |                                                                           | Available support facility                                      |     |     | 99  | 
|                                                          |                                                                           | Shelf registration statement and base shelf prospectus          |     |     | 100 | 
|                                                          | Credit Ratings                                                            |                                                                 |     | 100 |    
|Off-Balance Sheet Arrangements                            |                                                                           |                                                                 | 101 |    
|                                                          | Bid, Performance Related and Other Bonds                                  |                                                                 |     | 101 |    
|                                                          | Receivables Securitization and Certain Variable Interest
    Transactions |                                                                 |     | 101 |    
|                                                          | Other Indemnifications or Guarantees                                      |                                                                 |     | 102 |    
|Application of Critical Accounting Policies and Estimates |                                                                           |                                                                 | 103 |    
|                                                          | Revenue Recognition                                                       |                                                                 |     | 103 |    
|                                                          | Provisions for Doubtful Accounts                                          |                                                                 |     | 105 |    
|                                                          | Provisions for Inventory                                                  |                                                                 |     | 106 |    
|                                                          | Provisions for Product Warranties                                         |                                                                 |     | 106 |    
|                                                          | Income Taxes                                                              |                                                                 |     | 107 |    
|                                                          |                                                                           | Tax asset valuation                                             |     |     | 107 | 
|                                                          |                                                                           | Tax contingencies                                               |     |     | 108 | 
|                                                          | Goodwill Valuation                                                        |                                                                 |     | 109 |    
|                                                          | Pension and Post-retirement Benefits                                      |                                                                 |     | 110 |    
|                                                          | Special Charges                                                           |                                                                 |     | 111 |    
|                                                          | Other Contingencies                                                       |                                                                 |     | 111 |    
|Accounting Changes and Recent Accounting Pronouncements   |                                                                           |                                                                 | 112 |    
|                                                          | Accounting Changes                                                        |                                                                 |     | 112 |    
|                                                          | Recent Accounting Pronouncements                                          |                                                                 |     | 112 |    
|Canadian Supplement                                       |                                                                           |                                                                 | 114 |    
|                                                          | Accounting Changes                                                        |                                                                 |     | 114 |    
|                                                          | Outstanding Share Data                                                    |                                                                 |     | 116 |    
|Market Risk                                               |                                                                           |                                                                 | 116 |    
|Equity Price Risk                                         |                                                                           |                                                                 | 117 |    
|Environmental Matters                                     |                                                                           |                                                                 | 117 |    
|Legal Proceedings                                         |                                                                           |                                                                 | 117 |    

51



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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 audited
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States,
or U.S. GAAP.


As discussed herein, this MD&A gives effect to the Third
Restatement as described below in Restatements; Nortel
Networks Audit Committee Independent Review; Material
Weaknesses; Related Matters and in note 4 of the
accompanying audited consolidated financial statements. The
Third Restatement involved the restatement of our consolidated
financial statements for 2004, 2003, 2002, 2001 and the first,
second and third quarters of 2005 and 2004. Amendments to our
prior filings with the United States Securities and Exchange
Commission, or SEC, would be required in order for us to be in
full compliance with our reporting obligations under the
Exchange Act. We believe that we have included in this report
all information needed for current investor understanding.
Disclosure in the Annual Report on
Form 10-K for the
year ended December 31, 2004, or the 2004
Form 10-K, and the
Quarterly Reports on
Form 10-Q, for the
quarterly periods ended March 31, June 30, and
September 30, 2005, or the 2005
Form 10-Qs, would
in large part repeat the disclosure contained in this report.
Accordingly, we do not plan to amend our 2005
Form 10-Qs, 2004
Form 10-K or any
other prior filings. SEC review may require us to amend this
report or our other public filings.


Certain statements in this MD&A contain words such as
could, expects, may,
anticipates, believes,
intends, estimates, plans,
envisions, seeks and other similar
language and are considered forward-looking statements or
information under applicable securities laws. These statements
are based on our current expectations, estimates, forecasts and
projections about the operating environment, economies and
markets in which we operate. These statements are subject to
important assumptions, risks and uncertainties, which are
difficult to predict and the actual outcome may be materially
different. Although we believe expectations reflected in such
forward-looking statements are reasonable based upon the
assumptions in this MD&A, they may prove to be inaccurate
and consequently our actual results could differ materially from
our expectations set out in this MD&A. In particular, the
risk factors described in the Risk Factors section
of this report could cause actual results or events to differ
materially from those contemplated in forward-looking
statements. Unless required by applicable securities laws, we
disclaim any intention or obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise.


Where we say we, us, our,
NNL, or Nortel, we mean Nortel Networks
Corporation or Nortel Networks Limited and its subsidiaries, as
applicable, and where we refer to the industry, we
mean the telecommunications industry. All dollar amounts in this
MD&A are in millions of United States, or U.S., dollars
unless otherwise stated. All amounts for prior periods and prior
period comparisons are presented on a restated basis unless
otherwise stated.


We are the principal direct operating subsidiary of Nortel
Networks Corporation, or NNC. NNC holds all of our outstanding
common shares but none of our outstanding preferred shares.
NNCs common shares are publicly traded on the New York
Stock Exchange, or NYSE, and Toronto Stock Exchange, or TSX
under the symbol NT. Our cumulative Redeemable
Class A Preferred Shares Series 5 and Non-cumulative
Redeemable Class A Preferred Shares Series 7 are
traded on the TSX under the symbols NTL.PR.F and
NTL.PR.G, respectively. Acquisitions involving any
share consideration are completed by NNC, while acquisitions
involving only cash consideration are generally completed by
Nortel.





Business Overview





Our Business




52



---



##### 








Our Segments






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Carrier Packet Networks provides: (i) circuit and packet
    voice solutions, (ii) data networking and security
    solutions and (iii) optical networking solutions. Together,
    these solutions provide 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, cable operators and other communication
    service providers.                                              
| |  | CDMA Networks provides communication network solutions to our
    wireless service provider customers based on Code Division
    Multiple Access, or CDMA, and Time Division Multiple Access, or
    TDMA, technologies to enable those service providers 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 Global System for Mobile
    Communications, or GSM, and Universal Mobile Telecommunications
    System, or 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.                                  





How We Measure Performance






53



---



##### 






Our Business Environment













Our Strategy










end-to


54



---



##### 





end-to





Developments in 2005 and 2006





2005 Consolidated Results Summary




|                                                                  |  |                            |        |      |          |  |      |      |      |   |          |   |  |      |      |   |          |   |       |   |  |  |      |  
|----------------------------------------------------------------- |  | -------------------------- | ------ | ---- | -------- |  | ---- | ---- | ---- | - | -------- | - |  | ---- | ---- | - | -------- | - | ----- | - |  |  | ---- | -
|                                                                  |  |                            |        | % of |          |  |      |      | % of |   |          |   |  | % of |     
|                                                                  |  | 2005                       |        |      | Revenues |  |      | 2004 |      |   | Revenues |   |  | 2003 |      |   | Revenues |  
|                                                                  |  |                            |        |      |          |  |      |      |      |   |          |   |  |      |      |   |          |  
|                                                                  |  | (Millions of U.S. dollars) |       
|Revenues                                                          |  | $                          | 10,523 |      |          |  |      |      |      | $ | 9,516    |   |  |      |      |   |          | $ | 9,932 |   |  |  |      |  
|Gross profit                                                      |  |                            | 4,267  |      |          |  | 40.5 |      |      |   | 3,956    |   |  |      | 41.6 |   |          |   | 4,200 |   |  |  | 42.3 |  
|Operating expenses                                                |  |                            |        |      |          |  |      |      |      |   |          |   |  |      |      |   |          |   |       |   |  |  |      |  
|Selling, general and administrative expense                       |  |                            | 2,401  |      |          |  | 22.8 |      |      |   | 2,118    |   |  |      | 22.3 |   |          |   | 1,956 |   |  |  | 19.7 |  
|Research and development expense                                  |  |                            | 1,856  |      |          |  | 17.6 |      |      |   | 1,960    |   |  |      | 20.6 |   |          |   | 1,973 |   |  |  | 19.9 |  
|Special charges                                                   |  |                            | 170    |      |          |  | 1.6  |      |      |   | 181      |   |  |      | 1.9  |   |          |   | 290   |   |  |  | 2.9  |  
|Gain (loss) on sale of businesses and assets                      |  |                            | (47    | )    |          |  | (0.4 | )    |      |   | 91       |   |  |      | 1.0  |   |          |   | 4     |   |  |  |     |  
|Operating earnings (loss)                                         |  |                            | (224   | )    |          |  | (2.1 | )    |      |   | (221     | ) |  |      | (2.3 | ) |          |   | (18   | ) |  |  | (0.2 | )
|Other income  net                                                |  |                            | 305    |      |          |  | 2.9  |      |      |   | 217      |   |  |      | 2.3  |   |          |   | 458   |   |  |  | 4.6  |  
|Interest expense                                                  |  |                            | 129    |      |          |  | 1.2  |      |      |   | 116      |   |  |      | 1.2  |   |          |   | 121   |   |  |  | 1.2  |  
|Income tax benefit                                                |  |                            | 55     |      |          |  | 0.5  |      |      |   | 30       |   |  |      | 0.3  |   |          |   | 36    |   |  |  | 0.4  |  
|Net earnings (loss) from continuing operations                    |  |                            | (1     | )    |          |  | (0.0 | )    |      |   | (103     | ) |  |      | (1.1 | ) |          |   | 295   |   |  |  | 3.0  |  
|Net earnings (loss) from discontinued operations  net
    of tax |  |                            | 1      |      |          |  |     |      |      |   | 49       |   |  |      | 0.5  |   |          |   | 183   |   |  |  | 1.8  |  
|Net earnings (loss)                                               |  | $                          |       |      |          |  |     |      |      | $ | (54      | ) |  |      | (0.6 | ) |          | $ | 466   |   |  |  | 4.7  |  
|                                                                  |  |                            |        |      |          |  |      |      |      |   |          |   |  |      |      |   |          |  









55



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##### 














Significant Business Developments







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










| |                                 
| | --------------------------------
| | Proposed Class Action Settlement





56



---



##### 














| |                              
| | -----------------------------
| | Credit and Support Facilities









57



---



##### 








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














| |               
| | --------------
| | Joint Ventures



LG-Nortel LG-Nortel. LG-Nortel LG-Nortel LG-Nortel LG-Nortel,







| |                                       
| | --------------------------------------
| | Evolution of Our Supply Chain Strategy





58



---



##### 














| |                              
| | -----------------------------
| | Optical Components Operations












| |                                      
| | -------------------------------------
| | Bharat Sanchar Nigam Limited Contract






Restatements; Nortel Audit Committee Independent Review;
Material Weaknesses; Related Matters







| |                                                         
| | --------------------------------------------------------
| | First and Second Restatements and Independent
    Review



59



---



##### 



10-K,









| |                                                                     
| | --------------------------------------------------------------------
| | 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 Statement of Financial
    Accounting Standards, or 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.                                                                                                                                                                                                                                                                                              










| |                  
| | -----------------
| | Third Restatement



60



---



##### 





97-2


81-1,




| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain complex arrangements with multiple deliverables were
    previously fully accounted for under the
    percentage-of-completion method of
    SOP 81-1, but
    elements outside of the scope of
    SOP 81-1 should
    have been examined for separation under the guidance in
    EITF 00-21; and
| |  | Certain complex arrangements accounted for under the
    percentage-of-completion method did not meet the criteria for
    this treatment in
    SOP 81-1 and
    should instead have been accounted for using completed contract
    accounting under SOP 81-1.                                           









| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Consolidated Statement of Operations data for the year
    ended December 31, 2004

|                                                                                                                                      |  |               |       |                  |             |   |      |             |  |   |             |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----- | ---------------- | ----------- | - | ---- | ----------- |  | - | ----------- | - |  | - | ----- | -
|                                                                                                                                      |  |               |       | Revenue and Cost |             |   |      |             | 
|                                                                                                                                      |  | As Previously |       |                  | of Revenue  |   |      | Other       |  |   |            
|                                                                                                                                      |  | Reported      |       |                  | Adjustments |   |      | Adjustments |  |   | As Restated |  
|                                                                                                                                      |  |               |       |                  |             |   |      |             |  |   |             |  
|Revenues                                                                                                                              |  | $             | 9,828 |                  |             | $ | (312 | )           |  | $ |            |   |  | $ | 9,516 |  
|Gross profit                                                                                                                          |  |               | 4,093 |                  |             |   | (133 | )           |  |   | (4          | ) |  |   | 3,956 |  
|Operating earnings (loss)                                                                                                             |  |               | (82   | )                |             |   | (133 | )           |  |   | (6          | ) |  |   | (221  | )
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net loss of associated companies |  |               | 42    |                  |             |   | (133 | )           |  |   | (29         | ) |  |   | (120  | )
|Net earnings (loss) from continuing operations                                                                                        |  |               | 58    |                  |             |   | (132 | )           |  |   | (29         | ) |  |   | (103  | )
|Net earnings (loss) from discontinued operations  net
    of tax                                                                     |  |               | 49    |                  |             |   |     |             |  |   |            |   |  |   | 49    |  
|Net earnings (loss)                                                                                                                   |  |               | 107   |                  |             |   | (132 | )           |  |   | (29         | ) |  |   | (54   | )
|                                                                                                                                      |  |               |       |                  |             |   |      |             |  |   |             |  

61



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##### 





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Consolidated Statement of Operations data for the year
    ended December 31, 2003

|                                                                                                                                      |  |               |        |                  |             |   |      |             |  |   |             |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ---------------- | ----------- | - | ---- | ----------- |  | - | ----------- | - |  | - | ----- | -
|                                                                                                                                      |  |               |        | Revenue and Cost |             |   |      |             | 
|                                                                                                                                      |  | As Previously |        |                  | of Revenue  |   |      | Other       |  |   |            
|                                                                                                                                      |  | Reported      |        |                  | Adjustments |   |      | Adjustments |  |   | As Restated |  
|                                                                                                                                      |  |               |        |                  |             |   |      |             |  |   |             |  
|Revenues                                                                                                                              |  | $             | 10,193 |                  |             | $ | (261 | )           |  | $ |            |   |  | $ | 9,932 |  
|Gross profit                                                                                                                          |  |               | 4,332  |                  |             |   | (122 | )           |  |   | (10         | ) |  |   | 4,200 |  
|Operating earnings (loss)                                                                                                             |  |               | 152    |                  |             |   | (122 | )           |  |   | (48         | ) |  |   | (18   | )
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net loss of associated companies |  |               | 461    |                  |             |   | (132 | )           |  |   | (10         | ) |  |   | 319   |  
|Net earnings (loss) from continuing operations                                                                                        |  |               | 430    |                  |             |   | (125 | )           |  |   | (10         | ) |  |   | 295   |  
|Net earnings (loss) from discontinued operations  net
    of tax                                                                     |  |               | 184    |                  |             |   |     |             |  |   | (1          | ) |  |   | 183   |  
|Net earnings (loss)                                                                                                                   |  |               | 602    |                  |             |   | (125 | )           |  |   | (11         | ) |  |   | 466   |  
|                                                                                                                                      |  |               |        |                  |             |   |      |             |  |   |             |  



| |                                          
| | -----------------------------------------
| | Revenues and cost of revenues adjustments



|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ---------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | Revenues |       |   | Cost of Revenues |  
|                                                                          |  |          |       |   |                  |  
|                                                                          |  | 2004     |       |   | 2003             |   |        | 2004 |  |   | 2003  |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As previously reported                                                    |  | $        | 9,828 |   |                  | $ | 10,193 |      |  | $ | 5,735 |   |  | $ | 5,861 |  
|Adjustments:                                                              |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | (84   | ) |                  |   | (118   | )    |  |   | (55   | ) |  |   | (103  | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (174  | ) |                  |   | (49    | )    |  |   | (127  | ) |  |   | (26   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (38   | ) |                  |   | (84    | )    |  |   | 14    |   |  |   | (36   | )
|Other revenue recognition adjustments                                     |  |          | (16   | ) |                  |   | (10    | )    |  |   | (11   | ) |  |   | 26    |  
|Other
    adjustments(a)                                                  |  |          |      |   |                  |   |       |      |  |   | 4     |   |  |   | 10    |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As restated                                                               |  | $        | 9,516 |   |                  | $ | 9,932  |      |  | $ | 5,560 |   |  | $ | 5,732 |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  






|    |                                                                 
|--- | ----------------------------------------------------------------
|(a) | For further details see explanations of Other
    adjustments.



| |                        
| | -----------------------
| | Application of SOP 81-1

00-21, 81-1 percentage-of percentage-of


percentage-of percentage-of 81-1. percentage-of


62



---



##### 





| |                                                                          
| | -------------------------------------------------------------------------
| | Interaction between multiple revenue recognition accounting
    standards

97-2 00-21.


percentage-of 97-2.


00-21 97-2 00-21 97-2 81-1 81-1 97-2 81-1. 97-2


percentage-of 97-2




| |                                        
| | ---------------------------------------
| | Application of SAB 104 and
    SOP 97-2

97-2


97-2,




63



---



##### 





97-2.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A cumulative correction previously recorded in the third quarter
    of 2004 has now been recorded primarily in 2003, and prior
    periods resulting in an increase to revenue of $89 in the third
    quarter of 2004. The adjustment was to correct for previously
    recognized revenue relating to past sales of Optical Networks
    equipment which we determined should have been deferred and
    recognized with the delivery of future contractual PCS and other
    services over the term of the PCS.
| |  | A cumulative correction in the fourth quarter of 2004 has now
    been recorded in the appropriate prior periods resulting in an
    increase to revenue of $40 in the fourth quarter of 2004. The
    adjustment was to correct for previously recognized revenue
    related to an EMEA contract which should have been deferred
    until the delivery of certain undelivered elements such as
    services.                                                                                                    



| |                                      
| | -------------------------------------
| | Other revenue recognition adjustments





| |                  
| | -----------------
| | Other adjustments





| |                         
| | ------------------------
| | Health and Welfare Trust





| |                 
| | ----------------
| | Foreign exchange



64



---



##### 











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







| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2004, we had recorded a cumulative correction to
    reclassify an operating lease to a capital lease. These
    adjustments have now been recorded to the appropriate prior
    periods which resulted in a decrease in selling, general and
    administrative expense in the year ended December 31, 2004
    of $16 and an increase in the year ended December 31, 2003
    of $5.
| |  | We had previously recorded the release of a customer financing
    provision of $9 in 2004 that should have been recorded in 2003.
    As a result, selling, general and administrative expense has
    increased by $9 for the year ended December 31, 2004 and
    decreased by $9 for the year ended December 31, 2003.                                                                   
| |  | We have corrected the useful lives of various leasehold
    improvement assets, included in plant and equipment 
    net, which resulted in a decrease to depreciation expense for
    the year ended December 31, 2004 of $6 and an increase for
    the year ended December 31, 2003 of $3.                                                                                               



| |                  
| | -----------------
| | Reclassifications





65



---



##### 



Quarterly information






| |                                          
| | -----------------------------------------
| | Consolidated Statement of Operations data

|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          |  |  |   |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ---------- |  | - | -------- |  |  | - | ----- | 
|                                                                                                                                                     |  | Three Months Ended |       |   | Three Months Ended |  
|                                                                                                                                                     |  | March 31, 2005     |       |   | March 31, 2004     |  
|                                                                                                                                                     |  |                    |       |   |                    |  
|                                                                                                                                                     |  | As                 |       |   |                    |   | As    |            |  |  
|                                                                                                                                                     |  | Previously         |       |   | As                 |   |       | Previously |  |   | As       | 
|                                                                                                                                                     |  | Reported           |       |   | Restated           |   |       | Reported   |  |   | Restated | 
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          | 
|Revenues                                                                                                                                             |  | $                  | 2,536 |   |                    | $ | 2,389 |            |  | $ | 2,444    |  |  | $ | 2,366 | 
|Gross profit                                                                                                                                         |  |                    | 1,059 |   |                    |   | 1,014 |            |  |   | 1,072    |  |  |   | 1,031 | 
|Operating earnings (loss)                                                                                                                            |  |                    | (6    | ) |                    |   | (69   | )          |  |   | 58       |  |  |   | 12    | 
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |  |                    | 10    |   |                    |   | (45   | )          |  |   | 114      |  |  |   | 69    | 
|Net earnings (loss) from continuing operations                                                                                                       |  |                    | (9    | ) |                    |   | (64   | )          |  |   | 116      |  |  |   | 72    | 
|Net earnings from discontinued operations  net of tax                                                                                               |  |                    | 2     |   |                    |   | 2     |            |  |   | 1        |  |  |   | 1     | 
|Net earnings (loss)                                                                                                                                  |  | $                  | (7    | ) |                    | $ | (62   | )          |  | $ | 117      |  |  | $ | 73    | 
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          | 



| |                                          
| | -----------------------------------------
| | Consolidated Statement of Operations data

|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          |  |  |   |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ---------- |  | - | -------- |  |  | - | ----- | 
|                                                                                                                                                     |  | Three Months Ended |       |   | Three Months Ended |  
|                                                                                                                                                     |  | June 30, 2005      |       |   | June 30, 2004      |  
|                                                                                                                                                     |  |                    |       |   |                    |  
|                                                                                                                                                     |  | As                 |       |   |                    |   | As    |            |  |  
|                                                                                                                                                     |  | Previously         |       |   | As                 |   |       | Previously |  |   | As       | 
|                                                                                                                                                     |  | Reported           |       |   | Restated           |   |       | Reported   |  |   | Restated | 
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          | 
|Revenues                                                                                                                                             |  | $                  | 2,855 |   |                    | $ | 2,619 |            |  | $ | 2,590    |  |  | $ | 2,478 | 
|Gross profit                                                                                                                                         |  |                    | 1,205 |   |                    |   | 1,104 |            |  |   | 1,052    |  |  |   | 1,006 | 
|Operating earnings (loss)                                                                                                                            |  |                    | 27    |   |                    |   | (69   | )          |  |   | 99       |  |  |   | 48    | 
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |  |                    | 58    |   |                    |   | (22   | )          |  |   | 57       |  |  |   | 15    | 
|Net earnings (loss) from continuing operations                                                                                                       |  |                    | 58    |   |                    |   | (20   | )          |  |   | 48       |  |  |   | 7     | 
|Net earnings from discontinued operations  net of tax                                                                                               |  |                    | (1    | ) |                    |   | (1    | )          |  |   | 6        |  |  |   | 6     | 
|Net earnings (loss)                                                                                                                                  |  | $                  | 57    |   |                    | $ | (21   | )          |  | $ | 54       |  |  | $ | 13    | 
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          | 



| |                                          
| | -----------------------------------------
| | Consolidated Statement of Operations data

|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ---------- |  | - | -------- | - |  | - | ----- | -
|                                                                                                                                                     |  | Three Months Ended |       |   | Three Months Ended |  
|                                                                                                                                                     |  | September 30, 2005 |       |   | September 30, 2004 |  
|                                                                                                                                                     |  |                    |       |   |                    |  
|                                                                                                                                                     |  | As                 |       |   |                    |   | As    |            |  |  
|                                                                                                                                                     |  | Previously         |       |   | As                 |   |       | Previously |  |   | As       |  
|                                                                                                                                                     |  | Reported           |       |   | Restated           |   |       | Reported   |  |   | Restated |  
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          |  
|Revenues                                                                                                                                             |  | $                  | 2,655 |   |                    | $ | 2,518 |            |  | $ | 2,179    |   |  | $ | 2,159 |  
|Gross profit                                                                                                                                         |  |                    | 995   |   |                    |   | 967   |            |  |   | 788      |   |  |   | 778   |  
|Operating earnings (loss)                                                                                                                            |  |                    | (67   | ) |                    |   | (85   | )          |  |   | (274     | ) |  |   | (282  | )
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |  |                    | (34   | ) |                    |   | (67   | )          |  |   | (255     | ) |  |   | (295  | )
|Net earnings (loss) from continuing operations                                                                                                       |  |                    | (78   | ) |                    |   | (111  | )          |  |   | (223     | ) |  |   | (263  | )
|Net earnings from discontinued operations  net of tax                                                                                               |  |                    | 1     |   |                    |   | 2     |            |  |   | 5        |   |  |   | 5     |  
|Net earnings (loss)                                                                                                                                  |  | $                  | (77   | ) |                    | $ | (109  | )          |  | $ | (218     | ) |  | $ | (258  | )
|                                                                                                                                                     |  |                    |       |   |                    |   |       |            |  |   |          |  

66



---



##### 





| |                                          
| | -----------------------------------------
| | Consolidated Statement of Operations data

|                                                                                                                                                     |  |                    |       |  |          |   |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- |  | -------- | - | ----- | 
|                                                                                                                                                     |  | Three Months Ended |      
|                                                                                                                                                     |  | December 31, 2004  |      
|                                                                                                                                                     |  |                    |      
|                                                                                                                                                     |  | As                 |       |  |         
|                                                                                                                                                     |  | Previously         |       |  | As       |  
|                                                                                                                                                     |  | Reported           |       |  | Restated |  
|                                                                                                                                                     |  |                    |       |  |          |  
|Revenues                                                                                                                                             |  | $                  | 2,615 |  |          | $ | 2,513 | 
|Gross profit                                                                                                                                         |  |                    | 1,181 |  |          |   | 1,141 | 
|Operating earnings (loss)                                                                                                                            |  |                    | 35    |  |          |   | 1     | 
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |  |                    | 126   |  |          |   | 91    | 
|Net earnings (loss) from continuing operations                                                                                                       |  |                    | 117   |  |          |   | 81    | 
|Net earnings from discontinued operations  net of tax                                                                                               |  |                    | 37    |  |          |   | 37    | 
|Net earnings (loss)                                                                                                                                  |  | $                  | 154   |  |          | $ | 118   | 
|                                                                                                                                                     |  |                    |       |  |          |  

Adjustments




|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ------- | - | ----- | ------------ |  | - | -------- | - |  | ------- | ----- | - | ------------ | - | ----- | ----------- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | 2005     |       |   | 2004    |  
|                                                                          |  |          |       |   |         |  
|                                                                          |  | Three    |       |   | Three   |   |       | Three        |  |   | Three    |   |  | Three   |       |   | Three        |   |       | Three       | 
|                                                                          |  | Months   |       |   | Months  |   |       | Months       |  |   | Months   |   |  | Months  |       |   | Months       |   |       | Months      | 
|                                                                          |  | Ended    |       |   | Ended   |   |       | Ended        |  |   | Ended    |   |  | Ended   |       |   | Ended        |   |       | Ended       | 
|                                                                          |  | March 31 |       |   | June 30 |   |       | September 30 |  |   | March 31 |   |  | June 30 |       |   | September 30 |   |       | December 31 | 
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as previously reported                                         |  | $        | 2,536 |   |         | $ | 2,855 |              |  | $ | 2,655    |   |  | $       | 2,444 |   |              | $ | 2,590 |             |  | $ | 2,179 |   |  | $ | 2,615 |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 82    |   |         |   | (23   | )            |  |   | (13      | ) |  |         | (22   | ) |              |   | (29   | )           |  |   | (17   | ) |  |   | (16   | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (183  | ) |         |   | (155  | )            |  |   | (70      | ) |  |         | (19   | ) |              |   | (31   | )           |  |   | (49   | ) |  |   | (75   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (53   | ) |         |   | (45   | )            |  |   | (62      | ) |  |         | (37   | ) |              |   | (54   | )           |  |   | 42    |   |  |   | 11    |  
|Other revenue recognition adjustments                                     |  |          | 7     |   |         |   | (13   | )            |  |   | 8        |   |  |         |      |   |              |   | 2     |             |  |   | 4     |   |  |   | (22   | )
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as restated                                                    |  | $        | 2,389 |   |         | $ | 2,619 |              |  | $ | 2,518    |   |  | $       | 2,366 |   |              | $ | 2,478 |             |  | $ | 2,159 |   |  | $ | 2,513 |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as previously reported                              |  | $        | (7    | ) |         | $ | 57    |              |  | $ | (77      | ) |  | $       | 117   |   |              | $ | 54    |             |  | $ | (218  | ) |  | $ | 154   |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 9     |   |         |   | (12   | )            |  |   | (6       | ) |  |         | (3    | ) |              |   | (14   | )           |  |   | (3    | ) |  |   | (8    | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (26   | ) |         |   | (12   | )            |  |   | (7       | ) |  |         | (6    | ) |              |   | (7    | )           |  |   | (10   | ) |  |   | (24   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (26   | ) |         |   | (25   | )            |  |   | (22      | ) |  |         | (23   | ) |              |   | (26   | )           |  |   | 2     |   |  |   | (5    | )
|Other revenue recognition adjustments                                     |  |          | (3    | ) |         |   | (50   | )            |  |   | 6        |   |  |         | (9    | ) |              |   | 3     |             |  |   | 2     |   |  |   |      |  
|Gain on sale of businesses                                                |  |          | (21   | ) |         |   | 25    |              |  |   |         |   |  |         | (1    | ) |              |   |      |             |  |   |      |   |  |   | (6    | )
|Health and WelfareTrust                                                   |  |          |      |   |         |   |      |              |  |   |         |   |  |         |      |   |              |   |      |             |  |   |      |   |  |   | (1    | )
|Foreign exchange(i)                                                       |  |          | 2     |   |         |   | 11    |              |  |   | (5       | ) |  |         |      |   |              |   | 6     |             |  |   | (34   | ) |  |   | (10   | )
|Other                                                                     |  |          | 10    |   |         |   | (15   | )            |  |   | 2        |   |  |         | (2    | ) |              |   | (3    | )           |  |   | 3     |   |  |   | 18    |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as restated                                         |  | $        | (62   | ) |         | $ | (21   | )            |  | $ | (109     | ) |  | $       | 73    |   |              | $ | 13    |             |  | $ | (258  | ) |  | $ | 118   |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 






|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Includes the foreign exchange gains and losses resulting from
    the Third Restatement adjustments, and the correction of certain
    foreign exchange errors as described in note 4 of the
    accompanying consolidated financial statements.

67



---



##### 



Credit
and Support Facilities






10-Q




| |                       
| | ----------------------
| | Public debt securities







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

10-Ks,


68



---



##### 





| |                   
| | ------------------
| | Regulatory actions





| |                
| | ---------------
| | Stock exchanges

10-Ks.




| |                             
| | ----------------------------
| | Annual Shareholders Meeting






Revenue Independent Review










69



---



##### 








Regulatory Actions and Pending Litigation












70



---



##### 






Results of Operations  Continuing Operations





Consolidated Information







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

Demand
Trends for Our Network Solutions




|                                                 |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |   |          |  |       |          |  |   |      |   |  |  |     |  
|------------------------------------------------ |  | ------------------- | ------ |  | ------------ | - | ----- | ------------ |  | - | -------- |  |  | -------- | ----- | - | -------- |  | ----- | -------- |  | - | ---- | - |  |  | --- | -
|                                                 |  | For the Years Ended |        |  |              |   |      
|                                                 |  | December 31,        |        |  | 2005 vs 2004 |   |       | 2004 vs 2003 | 
|                                                 |  |                     |        |  |              |   |       |              | 
|                                                 |  | 2005                |        |  | 2004         |   |       | 2003         |  |   | $ Change |  |  | % Change |       |   | $ Change |  |       | % Change | 
|                                                 |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |   |          |  |       |          | 
|CDMA
    solutions(a)(d)                         |  | $                   | 2,321  |  |              | $ | 2,216 |              |  | $ | 2,356    |  |  | $        | 105   |   |          |  | 5     |          |  | $ | (140 | ) |  |  | (6  | )
|GSM and UMTS
    solutions(d)                    |  |                     | 2,799  |  |              |   | 2,411 |              |  |   | 1,882    |  |  |          | 388   |   |          |  | 16    |          |  |   | 529  |   |  |  | 28  |  
|Circuit and packet voice solutions
    (b)(d)    |  |                     | 2,748  |  |              |   | 2,582 |              |  |   | 2,989    |  |  |          | 166   |   |          |  | 6     |          |  |   | (407 | ) |  |  | (14 | )
|Optical networking
    solutions(b)(d)           |  |                     | 1,186  |  |              |   | 958   |              |  |   | 1,172    |  |  |          | 228   |   |          |  | 24    |          |  |   | (214 | ) |  |  | (18 | )
|Data networking and security
    solutions(b)(d) |  |                     | 1,321  |  |              |   | 1,338 |              |  |   | 1,501    |  |  |          | (17   | ) |          |  | (1    | )        |  |   | (163 | ) |  |  | (11 | )
|Other(c)                                         |  |                     | 148    |  |              |   | 11    |              |  |   | 32       |  |  |          | 137   |   |          |  | 1,245 |          |  |   | (21  | ) |  |  | (66 | )
|                                                 |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |   |          |  |       |          | 
|Total                                            |  | $                   | 10,523 |  |              | $ | 9,516 |              |  | $ | 9,932    |  |  | $        | 1,007 |   |          |  | 11    |          |  | $ | (416 | ) |  |  | (4  | )
|                                                 |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |   |          |  |       |          | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | CDMA solutions include revenues from traditional TDMA solutions
    (which were no longer significant in 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(b) | Circuit and packet voice and data networking and security
    solutions each aggregate revenues included in our Carrier Packet
    Networks and Enterprise Networks segments, while optical
    networking solutions are included in our Carrier Packet Networks
    segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(c) | Other includes our revenues from PEC (included in our Enterprise
    Networks segment), which we acquired in June 2005, and various
    other network solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(d) | In the first quarter of 2006, we expect the following two new
    product groups to form our reportable segments:
    (i) Enterprise Solutions and Packet Networks, which
    combines optical networking solutions (included in our Carrier
    Packet Networks segment in 2005), data networking and security
    solutions and portions of circuit and packet voice solutions
    (included in both our Carrier Packet Networks segment and
    Enterprise Networks segment in 2005) into a unified product
    group; and (ii) Mobility and Converged Core Networks, which
    combines our CDMA solutions and GSM and UMTS solutions (each in
    a separate segment in 2005) and other circuit and packet voice
    solutions (included in our Carrier Packet Networks segment in
    2005).





| |               
| | --------------
| | CDMA Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2005, revenues from our CDMA solutions (which increased 5%
    over 2004) were positively impacted by significant expansion to
    meet increased subscriber demand, primarily in developed
    countries, and the evolution of wireless networks to next
    generation CDMA technologies, which facilitate mobile high speed
    data services. Demand for new CDMA technologies was generally
    greater in developed countries with an installed base of CDMA
    solutions. In addition, network completions and industry
    consolidation negatively impacted our revenues in certain
    regions. Revenues from TDMA solutions were not significant.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, revenues from our CDMA solutions (which decreased 6%
    over 2003) were negatively impacted by substantial declines in
    TDMA solutions across all regions as customers continued to
    migrate from the mature TDMA technology to GSM and CDMA wireless
    technologies. Revenues from CDMA solutions were positively
    impacted in developed countries by factors that positively
    impacted revenues in 2005. Network completions during the first
    half of 2003 negatively impacted our revenues in certain regions.



| |                       
| | ----------------------
| | GSM and UMTS Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2005, revenues from our GSM and UMTS solutions (which
    increased 16% over 2004) reflected increases in both GSM
    solutions and UMTS solutions. Revenues from our GSM solutions
    were positively impacted by greater infrastructure sales,
    particularly in developing countries, related to increasing
    demand by subscribers. In addition, industry consolidation and a
    mature installed base of GSM solutions negatively impacted our
    revenues in certain regions. Revenues from our UMTS solutions
    were positively impacted by higher subscriber demand to support
    progressively more sophisticated communication services and
    continued transition to this next generation

71



---



##### 



| |  |                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | technology primarily in developed countries where demand for
    these services is highest and to a lesser extent in developing
    countries. In addition, industry consolidation negatively
    impacted our revenues in the U.S.



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, revenues from our GSM and UMTS solutions (which
    increased 28% over 2003) reflected increases in both GSM
    solutions and UMTS solutions. Revenues from these solutions were
    impacted in all regions by the same factors that were present in
    2005. In addition, new contracts were obtained in certain
    regions.



| |                                   
| | ----------------------------------
| | Circuit and Packet Voice Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2005, revenues from our circuit and packet voice solutions
    (which increased 6% over 2004) were positively impacted by an
    increase in packet voice solutions offset by declines in circuit
    voice solutions. Revenues from packet voice solutions were
    positively impacted by increased demand for next-generation
    packetized communications, including VoIP, which resulted in
    reduced expenditures, primarily by service providers, for
    circuit voice solutions that do not readily accommodate these
    forms of communication. Demand for circuit and packet voice
    solutions varied across developed and developing countries.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, revenues from our circuit and packet voice solutions
    (which decreased 14% over 2003) were negatively impacted by a
    substantial decrease in circuit voice solutions partially offset
    by an increase in packet voice solutions. Revenues from circuit
    voice solutions were negatively impacted due to continued
    reductions in capital expenditures by our service provider
    customers and a reduction in spending on our mature products in
    all regions where these solutions are marketed. Packet voice
    solutions were impacted in all regions by the same factors that
    positively impacted revenues in 2005. In addition, revenues from
    packet voice solutions were negatively impacted by enterprise
    customers in certain regions reducing their spending on certain
    of our products.



| |                                       
| | --------------------------------------
| | Data Networking and Security Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2005, revenues from our data networking and security
    solutions (which remained essentially flat over 2004) were
    negatively impacted by reduced demand for our legacy routing
    solutions and a mature router access market. Revenues were
    positively impacted by demand for IP based services and related
    next generation routing solutions, which include features such
    as power over Ethernet. This demand varied across developed and
    developing countries depending on the rate of network upgrade
    and expansion.



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, revenues from our data networking and security
    solutions (which decreased 11% over 2003) were impacted by
    factors that negatively impacted revenues in 2005, particularly
    in developed countries and in relation to our mature products
    due to the ongoing shift toward IP based services.



| |                             
| | ----------------------------
| | Optical Networking Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2005, revenues from our optical networking solutions (which
    increased 24% over 2004) were positively impacted by increased
    demand for multimedia and other communications at broadband
    network speeds. Revenues from our metro networking solutions
    were positively impacted by the delivery of triple play services
    (data, voice and multimedia) by a range of service providers,
    particularly in developed countries where these services are
    readily available. Revenues from our long-haul solutions were
    positively impacted by network expansion by wireless and other
    service providers in developed countries where the focus is on
    maximizing return on invested capital by increasing the capacity
    utilization rates and efficiency of existing networks to meet
    fluctuations in subscriber demand.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, revenues from our optical networking solutions (which
    decreased 18% over 2003) were negatively impacted by reduced
    spending by service providers in developed countries on
    long-haul solutions as they continued to focus on maximizing
    return on invested capital by increasing their capacity
    utilization rates and efficiency of existing networks to meet
    fluctuations in subscriber demand partially offset by increases
    in metro networking solutions, particularly in developed
    countries, for the same reasons that positively impacted these
    revenues in 2005. Significant excess inventories and capacity
    related to optical networking solutions continued to exist in a
    number of regions which also resulted in ongoing pricing
    pressures.

72



---



##### 






Geographic
Revenues




|              |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |  |          |  |    |          |  |   |      |   |  |  |     |  
|------------- |  | ------------------- | ------ |  | ------------ | - | ----- | ------------ |  | - | -------- |  |  | -------- | ----- |  | -------- |  | -- | -------- |  | - | ---- | - |  |  | --- | -
|              |  | For the Years Ended |        |  |              |   |      
|              |  | December 31,        |        |  | 2005 vs 2004 |   |       | 2004 vs 2003 | 
|              |  |                     |        |  |              |   |       |              | 
|              |  | 2005                |        |  | 2004         |   |       | 2003         |  |   | $ Change |  |  | % Change |       |  | $ Change |  |    | % Change | 
|              |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |  |          |  |    |          | 
|United States |  | $                   | 5,206  |  |              | $ | 4,646 |              |  | $ | 5,329    |  |  | $        | 560   |  |          |  | 12 |          |  | $ | (683 | ) |  |  | (13 | )
|EMEA          |  |                     | 2,725  |  |              |   | 2,496 |              |  |   | 2,253    |  |  |          | 229   |  |          |  | 9  |          |  |   | 243  |   |  |  | 11  |  
|Canada        |  |                     | 576    |  |              |   | 553   |              |  |   | 599      |  |  |          | 23    |  |          |  | 4  |          |  |   | (46  | ) |  |  | (8  | )
|Asia Pacific  |  |                     | 1,405  |  |              |   | 1,261 |              |  |   | 1,258    |  |  |          | 144   |  |          |  | 11 |          |  |   | 3    |   |  |  |    |  
|CALA          |  |                     | 611    |  |              |   | 560   |              |  |   | 493      |  |  |          | 51    |  |          |  | 9  |          |  |   | 67   |   |  |  | 14  |  
|              |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |  |          |  |    |          | 
|Consolidated  |  | $                   | 10,523 |  |              | $ | 9,516 |              |  | $ | 9,932    |  |  | $        | 1,007 |  |          |  | 11 |          |  | $ | (416 | ) |  |  | (4  | )
|              |  |                     |        |  |              |   |       |              |  |   |          |  |  |          |       |  |          |  |    |          | 



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 12% increase in revenues in the U.S. primarily due to a
    substantial increase in packet voice and optical networking
    solutions, a significant increase in CDMA solutions and an
    improvement in data networking and security solutions. The
    increase in optical networking solutions was negatively impacted
    by a decrease in optical networking solutions in the first
    quarter of 2005 due to shipping delays to our customers as a
    result of the completion of a portion of the Flextronics
    transaction relating to manufacturing facilities in Montreal.
    The increase in revenues in the U.S. was also significantly
    impacted by our acquisition of PEC in the second quarter of 2005
    and the recognition of previously deferred revenues upon
    deployment of a software upgrade related to packet voice
    solutions. These increases in revenue were partially offset by a
    substantial decrease in circuit voice solutions and lower
    revenues from GSM and UMTS solutions;
| |  | 9% increase in revenues in EMEA primarily due to a substantial
    increase in GSM and UMTS solutions and packet voice solutions
    and a significant increase in optical networking solutions.
    These increases in revenue were partially offset by a
    substantial decrease in CDMA solutions due to network
    completions and industry consolidation, a significant decrease
    in circuit voice solutions and a decline in data networking and
    security solutions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 4% increase in revenues in Canada primarily due to a substantial
    increase in CDMA solutions, packet voice solutions and data
    networking and security solutions, a significant increase in
    optical networking solutions and favorable foreign exchange rate
    fluctuation impact associated with the strengthening of the
    Canadian dollar against the U.S. dollar; partially offset
    by a substantial decrease in circuit voice solutions and a
    substantial decrease in GSM solutions primarily due to industry
    consolidation. The increase in optical networking solutions was
    negatively impacted by a decrease in optical networking
    solutions in the first quarter of 2005 due to shipping delays to
    our customers as a result of the completion of a portion of the
    Flextronics transaction relating to manufacturing facilities in
    Montreal;                                                                                                                                   
| |  | 11% increase in revenues in Asia Pacific primarily due to a
    substantial increase in GSM and UMTS solutions (due primarily to
    the BSNL contract described under Developments in 2005 and
    2006  Significant Business Developments 
    Bharat Sanchar Nigam Limited Contract). This increase was
    partially offset by a substantial decrease in CDMA solutions due
    to the impact of network completions during the first half of
    2004; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 9% increase in revenues in CALA due primarily to a substantial
    increase in GSM solutions and optical networking solutions and
    significant increase in circuit and packet voice solutions
    partially offset by a substantial decrease in data networking
    and security solutions and significant decrease in CDMA
    solutions in the first half of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |              
| | -------------
| | 2004 vs. 2003





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 13% decrease in revenues in the U.S. primarily due to a
    substantial decrease in circuit voice solutions, optical
    networking solutions and data networking and security solutions.
    The decrease is also due in part to a substantial decrease in
    revenues due to the recognition of revenues in 2003 deferred
    from prior periods that did not occur to the same extent in 2004
    as described under Segment Information 
    Enterprise Networks. These declines were partially offset
    by an increase in GSM and UMTS solutions;

73



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 8% decrease in revenues in Canada primarily due to a substantial
    decrease in circuit voice solutions, CDMA solutions and
    significant decrease in optical networking solutions due to
    network completions during the first half of 2003. These
    decreases were partially offset by a substantial increase in GSM
    and UMTS solutions;                                    
|
| |  | revenues in Asia Pacific were essentially flat. CDMA solutions
    and optical networking solutions revenues decreased
    substantially primarily due to network completions during the
    first half of 2003. These declines were offset by a substantial
    increase in GSM and UMTS solutions and an improvement in data
    networking and security solutions; partially offset by:
|
| |  | 11% increase in revenues in EMEA primarily due to a substantial
    increase in GSM and UMTS solutions and CDMA solutions partially
    offset by decrease in circuit voice solutions related to reduced
    spending by service provider customers and significant decrease
    in optical networking solutions; and                                                                     
|
| |  | 14% increase in revenues in CALA primarily from a substantial
    increase in GSM solutions, packet voice solutions and data
    networking and security solutions. These increases were
    partially offset by significant decrease in CDMA solutions and a
    slight decrease in optical networking solutions.                                                                        




Gross Profit and Gross Margin


|             |  |                     |       |   |              |   |       |              |  |   |        |   |  |          |         |   |        |  |   |          |  |   |         |   |  |  |    |  
|------------ |  | ------------------- | ----- | - | ------------ | - | ----- | ------------ |  | - | ------ | - |  | -------- | ------- | - | ------ |  | - | -------- |  | - | ------- | - |  |  | -- | -
|             |  | For the Years Ended |       |   |              |   |      
|             |  | December 31,        |       |   | 2005 vs 2004 |   |       | 2004 vs 2003 | 
|             |  |                     |       |   |              |   |       |              | 
|             |  | 2005                |       |   | 2004         |   |       | 2003         |  |   | Change |   |  | % Change |         |   | Change |  |   | % Change | 
|             |  |                     |       |   |              |   |       |              |  |   |        |   |  |          |         |   |        |  |   |          | 
|Gross profit |  | $                   | 4,267 |   |              | $ | 3,956 |              |  | $ | 4,200  |   |  | $        | 311     |   |        |  | 8 |          |  | $ | (244    | ) |  |  | (6 | )
|Gross margin |  |                     | 40.5  | % |              |   | 41.6  | %            |  |   | 42.3   | % |  |          | (1.1pts | ) |        |  |   |          |  |   | (0.7pts | ) |  |  |    |  
|             |  |                     |       |   |              |   |       |              |  |   |        |   |  |          |         |   |        |  |   |          | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of approximately $570 due to overall higher sales
    volumes;                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | an increase of approximately $240 due to continued improvements
    in our cost structure primarily as a result of lower material
    pricing;                                                                                                                                                                                                                                                                                                                                 
|
| |  | an increase of $45 primarily due to recoveries in our inventory
    provisions related to the sale of certain optical inventory that
    was previously provided for and lower warranty costs as a result
    of improved product quality in the first half of 2005; and                                                                                                                                                                                                       
|
| |  | an estimated project loss of approximately $148 in 2005 compared
    to a project loss of $160 in 2004 related to the BSNL contract
    in India. For further information related to the BSNL contract,
    see Developments in 2005 and 2006  Significant
    Business Developments  Bharat Sanchar Nigam Limited
    Contract; partially offset by                                                                                                                       
|
| |  | a decrease of $535 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 than our
    traditional network expansion products and circuit switching
    technologies; and
|
| |  | a decrease of $21 related to our employee bonus plans primarily
    in the first half of 2005.                                                                                                                                                                                                                                                                                                                                                                                 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease of approximately $511 primarily as a result of
    (i) pricing pressures on certain of our products due to
    increased competition for service provider and enterprise
    customers; (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 (iii) lower sales volumes of network
    expansion products and software upgrades that typically have
    higher margins;
|
| |  | an estimated project loss of approximately $160 related to a
    contract with BSNL in India recognized in 2004. For further
    information related to the BSNL contract, see Developments
    in 2005 and 2006  Significant Business
    Developments  Bharat Sanchar Nigam Limited
    Contract;                                                                                                                                                                                                                     
|
| |  | a decrease of approximately $235 due to overall lower sales
    volumes; and                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | a one-time reduction in accruals of $53 associated with a
    certain customer bankruptcy settlement in the third quarter of
    2003 not repeated in 2004; partially offset by                                                                                                                                                                                                                                                                                                                                             

74



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an estimated increase of approximately $425 due to continued
    improvements in our cost structure primarily as a result of
    lower material pricing;                                                                                                                                                                                                          
|
| |  | an increase of approximately $205 primarily due to (i) an
    absence of significant inventory provision costs that were
    incurred in prior years as a result of excess inventories due to
    a decline in revenues in the Carrier Packet Networks segment of
    our business; and (ii) lower warranty costs as a result of
    improved product quality; and
|
| |  | an approximate $85 decrease in expenses related to our employee
    return to profitability, or RTP, and regular bonus plans which
    were not incurred in 2004.                                                                                                                                                                                                 




Operating Expenses







| |                                            
| | -------------------------------------------
| | Selling, General and Administrative Expense

|             |                  |                     |       |      |              |   |       |              |   |   |        |      |   |          |     |        |        |  |    |          |  |   |     |        |  |  |   |  | 
|------------ | ---------------- | ------------------- | ----- | ---- | ------------ | - | ----- | ------------ | - | - | ------ | ---- | - | -------- | --- | ------ | ------ |  | -- | -------- |  | - | --- | ------ |  |  | - |  | 
|             |                  | For the Years Ended |       |      | 2005 vs 2004 |   |       | 2004 vs 2003 |  
|             |                  | December 31,        |       |      |              |   |       |              |  
|             |                  |                     |       |      | $            |   |       |              |   | $ |        |      |  
|             |                  | 2005                |       |      | 2004         |   |       | 2003         |   |   | Change |      |   | % Change |     |        | Change |  |    | % Change | 
|             |                  |                     |       |      |              |   |       |              |   |   |        |      |   |          |     |        |        |  |    |          | 
|SG&A expense |                  | $                   | 2,401 |      |              | $ | 2,118 |              |   | $ | 1,956  |      |   | $        | 283 |        |        |  | 13 |          |  | $ | 162 |        |  |  | 8 | 
|             | As % of revenues |                     |       | 22.8 | %            |   |       | 22.3         | % |   |        | 19.7 | % |          |     | 0.5pts |        |  |    |          |  |   |     | 2.6pts |  |  |   |  | 
|             |                  |                     |       |      |              |   |       |              |   |   |        |      |   |          |     |        |        |  |    |          | 





| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net trade and customer financing receivable recoveries of
    approximately $9 in 2005 compared with recoveries of $118
    realized primarily in the second half of 2004;                                                                                        
|
| |  | costs related to our internal control remedial measures and
    investments in our finance processes and restatement related
    activities of approximately $211 in 2005 compared to
    approximately $136 in 2004;                                             
|
| |  | an increase in sales and marketing expense in the second half of
    2005 of approximately $53 arising from the consolidation of the
    results of PEC and LG-Nortel;                                                                                            
|
| |  | increased expenses of $26 related to our employee bonus plans;                                                                                                                                                                                                    
|
| |  | unfavorable foreign exchange rate fluctuation impacts associated
    with the strengthening of the Canadian dollar against the
    U.S. dollar;                                                                                                                   
|
| |  | expenses of approximately $39 incurred in the fourth quarter of
    2005 related to our agreement to reimburse Mr. Zafirovski
    for his settlement with Motorola and increased costs associated
    with the departure of senior executives; partially offset by
|
| |  | cost savings associated with our 2004 Restructuring Plan and
    cost containment initiatives; and                                                                                                                                                                
|
| |  | a decrease of approximately $25 in our stock-based compensation
    primarily due to costs incurred for our RSU program in the first
    quarter of 2004 that was not repeated in 2005.                                                                           





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs related to our restatement activities of approximately
    $115 in 2004;                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | significant unfavorable foreign exchange impacts associated with
    the strengthening of the Canadian dollar, euro and British pound
    against the U.S. dollar;                                                                                                                                                                                                                                                                                               
|
| |  | an increase in expense related to our stock-based compensation
    plans, including restricted stock unit and stock option
    programs; and                                                                                                                                                                                                                                                                                                                     
|
| |  | net trade and customer financing receivable recoveries totaling
    $118 in 2004 compared to a recovery of $189 in 2003. Recoveries
    were higher in 2003 as a result of favorable settlements related
    to the sale or restructuring of various receivables and net
    recoveries on other trade and customer financing receivables due
    to subsequent collections for amounts exceeding our original
    estimates of net recovery; partially offset by
|
| |  | a decrease of approximately $120 related to our RTP and regular
    bonus plans in 2004 compared to 2003.                                                                                                                                                                                                                                                                                                                                                        



75



---



##### 








| |                                 
| | --------------------------------
| | Research and Development Expense

|            |                  |                     |       |      |              |   |       |              |   |   |          |      |   |          |      |         |          |  |    |          |  |   |     |         |  |  |    |   | 
|----------- | ---------------- | ------------------- | ----- | ---- | ------------ | - | ----- | ------------ | - | - | -------- | ---- | - | -------- | ---- | ------- | -------- |  | -- | -------- |  | - | --- | ------- |  |  | -- | - | 
|            |                  | For the Years Ended |       |      |              |   |      
|            |                  | December 31,        |       |      | 2005 vs 2004 |   |       | 2004 vs 2005 |  
|            |                  |                     |       |      |              |   |       |              |  
|            |                  | 2005                |       |      | 2004         |   |       | 2003         |   |   | $ Change |      |   | % Change |      |         | $ Change |  |    | % Change | 
|            |                  |                     |       |      |              |   |       |              |   |   |          |      |   |          |      |         |          |  |    |          | 
|R&D expense |                  | $                   | 1,856 |      |              | $ | 1,960 |              |   | $ | 1,973    |      |   | $        | (104 | )       |          |  | (5 | )        |  | $ | (13 | )       |  |  | (1 | )
|            | As % of revenues |                     |       | 17.6 | %            |   |       | 20.6         | % |   |          | 19.9 | % |          |      | (3.0pts | )        |  |    |          |  |   |     | 0.7 pts |  |  |    |   | 
|            |                  |                     |       |      |              |   |       |              |   |   |          |      |   |          |      |         |          |  |    |          | 





| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | cost savings associated with our 2004 Restructuring Plan;
    partially offset by                                             
|
| |  | increased investments in targeted product areas, primarily in
    Enterprise Networks;                                        
|
| |  | increased expense of approximately $24 related to our employee
    bonus plans; and                                           
|
| |  | unfavorable foreign exchange impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar.







| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | network applications (VoIP and multimedia solutions) for
    enterprise and service provider customers;                                                          
|
| |  | services edge capability to realize simplification of customer
    network operations and broadband access technologies, including
    wireless and wireline; and
|
| |  | next-generation packet transport for converged networks.                                                                                                         






| |                
| | ---------------
| | Special Charges









76



---



##### 









77



---



##### 





|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |     |   |   |     |      |  
|------------------------------------------------------ | -------------------------------------- | --------- | --- | ---------- | --------- | - | --------- | ----------- | - | - | ----- | --- | - | - | --- | ---- | -
|                                                       |                                        |           |     | Contract   |           |   |           |             |  
|                                                       |                                        |           |     | Settlement |           |   | Plant and |             |   |  
|                                                       |                                        | Workforce |     |            | and Lease |   |           | Equipment   |   |   |      
|                                                       |                                        | Reduction |     |            | Costs     |   |           | Write Downs |   |   | Total |    
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|2004 Restructuring Plan                                |                                        |           |     |            |           |   |           |             |   |   |       |     |   |   |     |     
|Provision balance as of January 1, 2004                |                                        | $         |    |            |           | $ |          |             |   | $ |      |     |   | $ |    |     
|                                                       | Other special charges                  |           |     | 163        |           |   |           |            |   |   |       | 2   |   |   |     | 165  |  
|                                                       | Cash drawdowns                         |           |     | (38        | )         |   |           |            |   |   |       |    |   |   |     | (38  | )
|                                                       | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | (2  | ) |   |     | (2   | )
|                                                       | Foreign exchange and other adjustments |           |     | (1         | )         |   |           |            |   |   |       |    |   |   |     | (1   | )
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|Provision balance as of December 31, 2004              |                                        |           | 124 |            |           |   |          |             |   |   |      |     |   |   | 124 |     
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|                                                       | Other special charges                  |           |     | 68         |           |   |           | 72          |   |   |       | 30  |   |   |     | 170  |  
|                                                       | Revisions to prior accruals            |           |     |           |           |   |           | 6           |   |   |       | 1   |   |   |     | 7    |  
|                                                       | Cash drawdowns                         |           |     | (167       | )         |   |           | (13         | ) |   |       |    |   |   |     | (180 | )
|                                                       | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | (30 | ) |   |     | (30  | )
|                                                       | Foreign exchange and other adjustments |           |     | (4         | )         |   |           | (4          | ) |   |       | (1  | ) |   |     | (9   | )
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|Provision balance as of December 31, 2005              |                                        | $         | 21  |            |           | $ | 61        |             |   | $ |      |     |   | $ | 82  |     
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|2001 Restructuring Plan                                |                                        |           |     |            |           |   |           |             |   |   |       |     |   |   |     |     
|Provision balance as of January 1, 2004                |                                        | $         | 66  |            |           | $ | 459       |             |   | $ |      |     |   | $ | 525 |     
|                                                       | Other special charges                  |           |     | 7          |           |   |           |            |   |   |       |    |   |   |     | 7    |  
|                                                       | Revisions to prior accruals            |           |     | (4         | )         |   |           | 13          |   |   |       |    |   |   |     | 9    |  
|                                                       | Cash drawdowns                         |           |     | (49        | )         |   |           | (167        | ) |   |       |    |   |   |     | (216 | )
|                                                       | Non-cash drawdowns                     |           |     | (4         | )         |   |           |            |   |   |       |    |   |   |     | (4   | )
|                                                       | Foreign exchange and other adjustments |           |     | (1         | )         |   |           | 19          |   |   |       |    |   |   |     | 18   |  
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|Provision balance as of December 31, 2004              |                                        |           | 15  |            |           |   | 324       |             |   |   |      |     |   |   | 339 |     
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|                                                       | Revisions to prior accruals            |           |     | (5         | )         |   |           | 1           |   |   |       | (3  | ) |   |     | (7   | )
|                                                       | Cash drawdowns                         |           |     | (6         | )         |   |           | (107        | ) |   |       |    |   |   |     | (113 | )
|                                                       | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | 3   |   |   |     | 3    |  
|                                                       | Foreign exchange and other adjustments |           |     | (1         | )         |   |           | (5          | ) |   |       |    |   |   |     | (6   | )
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|Provision balance as of December 31, 2005              |                                        | $         | 3   |            |           | $ | 213       |             |   | $ |      |     |   | $ | 216 |     
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    
|Total provision balance as of December 31,
    2005(a) |                                        | $         | 24  |            |           | $ | 274       |             |   | $ |      |     |   | $ | 298 |     
|                                                       |                                        |           |     |            |           |   |           |             |   |   |       |    






|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of December 31, 2005 and 2004, the short-term provision
    balance was $95 and $254, respectively, and the long-term
    provision balance was $203 and $209, respectively.





|                            |                         |                    |     |     |                    |   |     |                 |  |   |      |    |   |      |    |   |      |   |     |      |  |   |      |     |  |   |     |    |  |   |     |     | 
|--------------------------- | ----------------------- | ------------------ | --- | --- | ------------------ | - | --- | --------------- |  | - | ---- | -- | - | ---- | -- | - | ---- | - | --- | ---- |  | - | ---- | --- |  | - | --- | -- |  | - | --- | --- | 
|                            |                         | 2004               |     |     | 2001               |   |     | Total           | 
|                            |                         | Restructuring Plan |     |     | Restructuring Plan |   |     | Special Charges | 
|                            |                         |                    |     |     |                    |   |     |                 | 
|                            |                         | 2005               |     |     | 2004               |   |     | 2005            |  |   | 2004 |    |   | 2003 |    |   | 2005 |   |     | 2004 |  |   | 2003 |    
|                            |                         |                    |     |     |                    |   |     |                 |  |   |      |    |   |      |    |   |      |   |     |      |  |   |      |    
|Special charges by segment: |                         |                    |     |     |                    |   |     |                 |  |   |      |    |   |      |    |   |      |   |     |      |  |   |      |     |  |   |     |    |  |   |     |    
|                            | Carrier Packet Networks |                    | $   | 106 |                    |   | $   | 83              |  |   | $    | (3 | ) |      | $  | 9 |      |   | $   | 123  |  |   | $    | 103 |  |   | $   | 92 |  |   | $   | 123 | 
|                            | CDMA Networks           |                    |     | 11  |                    |   |     | 14              |  |   |      |   |   |      |    | 2 |      |   |     | 11   |  |   |      | 11  |  |   |     | 16 |  |   |     | 11  | 
|                            | GSM and UMTS Networks   |                    |     | 32  |                    |   |     | 21              |  |   |      | (3 | ) |      |    | 2 |      |   |     | 74   |  |   |      | 29  |  |   |     | 23 |  |   |     | 74  | 
|                            | Enterprise Networks     |                    |     | 28  |                    |   |     | 26              |  |   |      | (1 | ) |      |    | 2 |      |   |     | 55   |  |   |      | 27  |  |   |     | 28 |  |   |     | 55  | 
|                            | Other                   |                    |     |    |                    |   |     | 21              |  |   |      |   |   |      |    | 1 |      |   |     | 27   |  |   |      |    |  |   |     | 22 |  |   |     | 27  | 
|                            |                         |                    |     |     |                    |   |     |                 |  |   |      |    |   |      |    |   |      |   |     |      |  |   |      |    
|Total special charges       |                         | $                  | 177 |     |                    | $ | 165 |                 |  | $ | (7   | )  |   | $    | 16 |   |      | $ | 290 |      |  | $ | 170  |     |  | $ | 181 |    |  | $ | 290 |    
|                            |                         |                    |     |     |                    |   |     |                 |  |   |      |    |   |      |    |   |      |   |     |      |  |   |      |    



78



---



##### 






(Gain) Loss on Sale of Businesses and Assets













Other Income  Net




|                                          |  |                     |     |  |      |   |     |      |  |   |     | 
|----------------------------------------- |  | ------------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                          |  | For the Years Ended |    
|                                          |  | December 31,        |    
|                                          |  |                     |    
|                                          |  | 2005                |     |  | 2004 |   |     | 2003 | 
|                                          |  |                     |     |  |      |   |     |      | 
|Interest
    income(a)                    |  | $                   | 70  |  |      | $ | 70  |      |  | $ | 84  | 
|Gain on sale or write down of investments |  |                     | 67  |  |      |   | 19  |      |  |   | 143 | 
|Currency exchange
    gains(b)            |  |                     | 72  |  |      |   | 52  |      |  |   | 92  | 
|Other  net                               |  |                     | 96  |  |      |   | 76  |      |  |   | 139 | 
|                                          |  |                     |     |  |      |   |     |      | 
|Other income  net                        |  | $                   | 305 |  |      | $ | 217 |      |  | $ | 458 | 
|                                          |  |                     |     |  |      |   |     |      | 






|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(a) | Interest income on our short-term investments.                                                
|(b) | Currency exchange gains were primarily related to
    day-to-day
    transactional activities.





| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dividend income inclusion of $43 on our short-term investments;                                                                                                                                   
| |  | gain of $21 related to the sale of our remaining Arris Group
    Inc. shares, $45 related to the sale of Axtel S.A. de CV, or
    Axtel, shares and $7 related to the sale of shares of VoltDelta;
| |  | gain of $17 related to a customer exclusivity clause settlement;                                                                                                                                  
| |  | income of $22 related to sub-leases of facilities; and                                                                                                                                            
| |  | gain of $10 on customer financing arrangements; partially offset
    by                                                                                                                           
| |  | loss of $20 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.                                                      





| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dividend income of $22 on our short-term investments;                                                                                                                                                                  
| |  | gain of $52 resulting from a restructured customer financing
    arrangement;                                                                                                                                          
| |  | gain of $18 related to the sale of our remaining 7 million
    common shares of Entrust, Inc. for cash consideration of $33. As
    a result of this transaction, we no longer hold any equity
    interest in Entrust;
| |  | income of $12 related to sub-leases of facilities;                                                                                                                                                                     
| |  | gain of $13 related to the sale of Arris Group shares. For
    additional information on our investment in Arris Group, see
    Results of Operations  Discontinued
    Operations; and                             
| |  | gain of $7 related to a certain customer bankruptcy settlement;
    partially offset by                                                                                                                                
| |  | loss of $24 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting;                                                                          
| |  | loss of $14 related to a write down of our Bookham
    investment; and                                                                                                                                                 

79



---



##### 



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | loss of $7 related to prepaid equity forward purchase contracts
    that were entered into in connection with the issuance of
    restricted stock units.





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | gain of $96 related to the sale of our interest in EADS Telecom
    in conjunction with the changes in ownership of our French and
    German operations;                            
| |  | dividend income inclusion of $20 on our short-term investments;                                                                                                                      
| |  | gain of $31 related to the sale of Arris Group shares. For
    additional information on our investment in Arris Group see
    Results of Operations  Discontinued
    Operations;
| |  | gain of $30 related to a certain customer bankruptcy settlement;                                                                                                                     
| |  | gain of $25 resulting from a settlement related to intellectual
    property use;                                                                                                    
| |  | gain of $22 related to changes in fair value of derivative
    financial instruments that did not meet the criteria for hedge
    accounting;                                        
| |  | income of $15 related to sub-leases of facilities;                                                                                                                                   
| |  | royalty income inclusion of $15 from patented technology;                                                                                                                            
| |  | gain of $11 related to sale of certain minority
    investments; and                                                                                                                 
| |  | gain of $6 related to sale of a portion of our interest in
    Bookham.                                                                                                              




Interest Expense













Income Tax Benefit (Expense)








80



---



##### 








Segment Information






|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          |  |   |      |   |  |   |       |  
|---------------------------------------------- |  | ------------------- | ------ | - | ------------ | - | ----- | ------------ |  | - | -------- | - |  | -------- | ----- | - | -------- | - | ---- | -------- |  | - | ---- | - |  | - | ----- | -
|                                               |  | For the Years Ended |        |   |              |   |      
|                                               |  | December 31,        |        |   | 2005 vs 2004 |   |       | 2004 vs 2003 | 
|                                               |  |                     |        |   |              |   |       |              | 
|                                               |  | 2005                |        |   | 2004         |   |       | 2003         |  |   | $ Change |   |  | % Change |       |   | $ Change |   |      | % Change | 
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Revenues                                       |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          |  |   |      |   |  |   |       |  
|Carrier Packet Networks                        |  | $                   | 2,828  |   |              | $ | 2,589 |              |  | $ | 3,132    |   |  | $        | 239   |   |          |   | 9    |          |  | $ | (543 | ) |  |   | (17   | )
|CDMA Networks                                  |  |                     | 2,321  |   |              |   | 2,216 |              |  |   | 2,356    |   |  |          | 105   |   |          |   | 5    |          |  |   | (140 | ) |  |   | (6    | )
|GSM and UMTS Networks                          |  |                     | 2,799  |   |              |   | 2,411 |              |  |   | 1,882    |   |  |          | 388   |   |          |   | 16   |          |  |   | 529  |   |  |   | 28    |  
|Enterprise Networks                            |  |                     | 2,570  |   |              |   | 2,289 |              |  |   | 2,531    |   |  |          | 281   |   |          |   | 12   |          |  |   | (242 | ) |  |   | (10   | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Total reportable segments                      |  |                     | 10,518 |   |              |   | 9,505 |              |  |   | 9,901    |   |  |          | 1,013 |   |          |   | 11   |          |  |   | (396 | ) |  |   | (4    | )
|Other(a)                                       |  |                     | 5      |   |              |   | 11    |              |  |   | 31       |   |  |          | (6    | ) |          |   | (55  | )        |  |   | (20  | ) |  |   | (65   | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Total revenues                                 |  | $                   | 10,523 |   |              | $ | 9,516 |              |  | $ | 9,932    |   |  | $        | 1,007 |   |          |   | 11   |          |  | $ | (416 | ) |  |   | (4    | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Management EBT                                 |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          |  |   |      |   |  |   |       |  
|Carrier Packet Networks                        |  | $                   | 50     |   |              | $ | (294  | )            |  | $ | (128     | ) |  | $        | 344   |   |          |   | 117  |          |  | $ | (166 | ) |  |   | (130  | )
|CDMA Networks                                  |  |                     | 685    |   |              |   | 688   |              |  |   | 800      |   |  |          | (3    | ) |          |   | (0   | )        |  |   | (112 | ) |  |   | (14   | )
|GSM and UMTS Networks                          |  |                     | (4     | ) |              |   | (196  | )            |  |   | (162     | ) |  |          | 192   |   |          |   | 98   |          |  |   | (34  | ) |  |   | (21   | )
|Enterprise Networks                            |  |                     | 180    |   |              |   | 170   |              |  |   | 279      |   |  |          | 10    |   |          |   | 6    |          |  |   | (109 | ) |  |   | (39   | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Total reportable segments                      |  |                     | 911    |   |              |   | 368   |              |  |   | 789      |   |  |          | 543   |   |          |   | 148  |          |  |   | (421 | ) |  |   | (53   | )
|Other(a)                                       |  |                     | (733   | ) |              |   | (402  | )            |  |   | (241     | ) |  |          | (331  | ) |          |   | (82  | )        |  |   | (161 | ) |  |   | (67   | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Total management EBT                           |  | $                   | 178    |   |              | $ | (34   | )            |  | $ | 548      |   |  | $        | 212   |   |          |   | 624  |          |  | $ | (582 | ) |  |   | (106  | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Amortization of intangibles                    |  | $                   | (17    | ) |              | $ | (9    | )            |  | $ | (3       | ) |  | $        | (8    | ) |          | $ | (89  | )        |  | $ | (6   | ) |  | $ | (200  | )
|Special charges                                |  |                     | (170   | ) |              |   | (181  | )            |  |   | (290     | ) |  |          | 11    |   |          |   | 6    |          |  |   | 109  |   |  |   | 38    |  
|Gain (loss) on sale of businesses and assets   |  |                     | (47    | ) |              |   | 91    |              |  |   | 4        |   |  |          | (138  | ) |          |   | (152 | )        |  |   | 87   |   |  |   | 2,175 |  
|Income tax benefit                             |  |                     | 55     |   |              |   | 30    |              |  |   | 36       |   |  |          | 25    |   |          |   | 83   |          |  |   | (6   | ) |  |   | (17   | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 
|Net earnings (loss) from continuing operations |  | $                   | (1     | ) |              | $ | (103  | )            |  | $ | 295      |   |  | $        | 102   |   |          |   | 99   |          |  | $ | (398 | ) |  |   | (135  | )
|                                               |  |                     |        |   |              |   |       |              |  |   |          |   |  |          |       |   |          |   |      |          | 

81



---



##### 








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



|                          |  |              |     |   |              |   |       |     |  |         |          |   |       |        |    |   |        |       |      |      |         |   |      |   |  |          |      |   |        |   |     |   |  |   |      |   |  |   |      |  
|------------------------- |  | ------------ | --- | - | ------------ | - | ----- | --- |  | ------- | -------- | - | ----- | ------ | -- | - | ------ | ----- | ---- | ---- | ------- | - | ---- | - |  | -------- | ---- | - | ------ | - | --- | - |  | - | ---- | - |  | - | ---- | -
|                          |  | 2005 vs 2004 |     |   | 2004 vs 2003 |  
|                          |  |              |     |   |              |  
|                          |  | 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   |  | $            | 230 |   |              | $ | (9    | )   |  | $       | 111      |   |       | $      | 12 |   |        | $     | 344  |      |         | $ | (152 | ) |  | $        | 24   |   |        | $ | 38  |   |  | $ | (76  | ) |  | $ | (166 | )
|CDMA Networks             |  |              | (17 | ) |              |   | 13    |     |  |         | 8        |   |       |        | (7 | ) |        |       | (3   | )    |         |   | (61  | ) |  |          | (5   | ) |        |   | (50 | ) |  |   | 4    |   |  |   | (112 | )
|GSM and UMTS Networks     |  |              | 101 |   |              |   | 13    |     |  |         | 52       |   |       |        | 26 |   |        |       | 192  |      |         |   | 30   |   |  |          | (49  | ) |        |   | (4  | ) |  |   | (11  | ) |  |   | (34  | )
|Enterprise Networks       |  |              | 80  |   |              |   | (53   | )   |  |         | (29      | ) |       |        | 12 |   |        |       | 10   |      |         |   | (91  | ) |  |          | (26  | ) |        |   | 7   |   |  |   | 1    |   |  |   | (109 | )
|                          |  |              |     |   |              |   |       |     |  |         |          |   |       |        |    |   |        |       |      |      |         |   |      |   |  |          |      |   |        |  
|Total reportable segments |  |              | 394 |   |              |   | (36   | )   |  |         | 142      |   |       |        | 43 |   |        |       | 543  |      |         |   | (274 | ) |  |          | (56  | ) |        |   | (9  | ) |  |   | (82  | ) |  |   | (421 | )
|Other(a)                  |  |              | (83 | ) |              |   | (247  | )   |  |         | (38      | ) |       |        | 37 |   |        |       | (331 | )    |         |   | 30   |   |  |          | (106 | ) |        |   | 22  |   |  |   | (107 | ) |  |   | (161 | )
|                          |  |              |     |   |              |   |       |     |  |         |          |   |       |        |    |   |        |       |      |      |         |   |      |   |  |          |      |   |        |  
|Total change              |  | $            | 311 |   |              | $ | (283  | )   |  | $       | 104      |   |       | $      | 80 |   |        | $     | 212  |      |         | $ | (244 | ) |  | $        | (162 | ) |        | $ | 13  |   |  | $ | (189 | ) |  | $ | (582 | )
|                          |  |              |     |   |              |   |       |     |  |         |          |   |       |        |    |   |        |       |      |      |         |   |      |   |  |          |      |   |        |  






|    |                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.








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



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








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





82



---



##### 





| |              
| | -------------
| | 2004 vs. 2003











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





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





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | recovery in inventory provisions due to sale of optical
    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 during the first half of 2005; partially
    offset by                                                                                                                                              
| |  | increased expenses related to our employee bonus plan during the
    first half of 2005;                                                                                                                                 
| |  | 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 than our
    traditional solutions; and
| |  | continued pricing pressures on certain of our products due to
    increased competition.                                                                                                                                 





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





| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
| |  | 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 against the
    U.S. dollar.                              



| |              
| | -------------
| | 2004 vs. 2003





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing;                                                                                 
| |  | absence of significant inventory provision costs that had been
    incurred in prior years as a result of excess inventories due to
    a decline in revenues of our business; and
| |  | lower warranty costs as a result of improved product quality;
    partially offset by                                                                                             

83



---



##### 



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 than our
    traditional solutions;
| |  | a one-time reduction in accruals of $53 associated with a
    certain customer bankruptcy settlement in the third quarter of
    2003 not repeated in 2004; 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 impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar;                                                           
| |  | planned investment in strategic businesses; 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
| |  | continued investment in the accelerated development of certain
    new voice and data products; and                                                                          
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar.                                          





| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | release of accruals of $30 from a certain customer bankruptcy
    settlement in 2003 not repeated in 2004; and
| |  | a gain of $25 in 2003 resulting from a settlement related to
    intellectual property not repeated in 2004.  






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



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








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





| |              
| | -------------
| | 2004 vs. 2003





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



84



---



##### 





| |              
| | -------------
| | 2005 vs. 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                                                     
| |  | 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
| |  | increased expenses related to our employee bonus plan.                                  





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |              
| | -------------
| | 2004 vs. 2003





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improvement in cost structure; partially offset by                                                                                                                                
| |  | pricing pressures on certain of our products due to increased
    competition for service provider customers; and                                                                 
| |  | 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.





| |   |                                                            
| | - | -----------------------------------------------------------
| |  | increases in employee related expenses; partially offset by
| |  | lower bad debt expense in 2004.                            





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | continued investment in the development of new products; and                                                                       
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar.

85



---



##### 








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



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








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







| |              
| | -------------
| | 2004 vs. 2003





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





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





| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimated project loss of approximately $148 in 2005 compared to
    an estimated project loss of $160 in 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; substantially offset by                                         
| |  | 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
| |  | decreases in employee related expenses; partially offset by                                                                                                         
| |  | increased expenses related to our employee bonus plan.                                                                                                              





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of lower spending on certain R&D initiatives;
    partially offset by                                                   
| |  | increased expenses related to our employee bonus plan; and                                                                         
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar against the
    U.S. dollar.

86



---



##### 







| |              
| | -------------
| | 2004 vs. 2003





| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an estimated project loss of approximately $160 related to our
    contract with BSNL in India recognized in 2004;                                                                                        
| |  | pricing pressures on certain of our products due to increased
    competition for service provider customers; and                                                                                         
| |  | 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
| |  | continued improvements in our cost structure primarily as a
    result of lower material pricing.                                                                                                         





| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | increases in employee related expenses;                                                                                                   
| |  | net trade and customer financing receivable recoveries in 2003
    not repeated in 2004; and                                              
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the euro and British pound against the
    U.S. dollar.





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar and euro against the
    U.S. dollar;
| |  | continued investment in the development of new UMTS
    products; and                                                                       
| |  | acceleration of programs to increase the feature content in our
    GSM product offering.                                                   






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



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








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







| |              
| | -------------
| | 2004 vs. 2003



87



---



##### 









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





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





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | pricing pressures on our data products due to increased
    competition for enterprise customers primarily in EMEA and Asia
    Pacific; and
| |  | increased warranty costs during the second half of 2005;
    partially offset by                                                            
| |  | 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.                                           





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                  





| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | 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                                                      
| |  | more effectively prioritizing investment in data products and
    increased outsourcing to third parties of certain R&D
    functions.



| |              
| | -------------
| | 2004 vs. 2003





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

88



---



##### 







| |   |                                                            
| | - | -----------------------------------------------------------
| |  | increases in sales and marketing expenses; and             
| |  | increases in employee related expenses; partially offset by
| |  | the continued impact of our workforce reductions.          





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






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



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





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





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs associated with our internal control remedial measures,
    investment in our finance processes and restatement related
    activities;                                                                            
| |  | expenses incurred in the fourth quarter of 2005 related to our
    agreement to reimburse Mr. Zafirovski for his settlement
    with Motorola and increased costs associated with the departure
    of senior executives;
| |  | net trade receivable recoveries realized primarily in the second
    half of 2004 not repeated in 2005; and                                                                                                              
| |  | unfavorable foreign exchange rate 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 and
    cost containment initiatives;                                                                                                                           
| |  | lower stock based compensation in 2005 due to the RSU expense
    incurred in the first quarter of 2004 that was not repeated in
    2005 as the program was terminated in 2005.                                         





| |              
| | -------------
| | 2004 vs. 2003





| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs associated with our restatement activities and additional
    investment in our finance organization;                                     
| |  | unfavorable foreign exchange rate impacts associated with the
    strengthening of the Canadian dollar and euro against the
    U.S. dollar; and
| |  | an increase in stock based compensation in 2004 which was not
    allocated to our segments; partially offset by                                
| |  | a reduction in our employee return to profitability and regular
    bonus plans.                                                                







| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | gains related to the sale of our interest in EADS Telecom in
    conjunction with the changes in ownership of our French and
    German operations in 2003 not repeated in 2004;
| |  | losses related to changes in fair value of derivative financial
    instruments that do not meet the criteria for hedge accounting
    compared to a gain in 2003; and          
| |  | a decrease in interest income.                                                                                                                                                  

89



---



##### 






Results of Operations  Discontinued Operations








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a gain of $32 related to the revaluation of a receivable. On
    December 23, 2004, a customer financing arrangement was
    restructured. The notes receivable that were restructured had a
    net carrying amount of $1, net of a provision of $63. The
    arrangement increased the net carrying amount of the receivable
    to $33. On January 25, 2005, we sold this receivable for
    cash proceeds; and
| |  | a net gain of $17 related to our reassessment of our remaining
    provisions for discontinued operations consisting of changes in
    estimates of $13 for liabilities, and $4 for both short-term and
    long-term receivables.                                                                                                                                                                                





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a gain of $14 on the sale of certain assets related to our fixed
    wireless access operations to Airspan Networks, Inc. for cash
    consideration of $13 on December 23, 2003;                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a gain of $17 in the fourth quarter of 2003 associated with a
    cash settlement of $17 related to a certain note receivable
    which had been previously provisioned;                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | a gain of $12 on March 24, 2003 from the sale of
    8 million common shares of Arris Group, back to Arris Group
    for cash consideration of $28 pursuant to a March 11, 2003
    agreement. In addition, on March 18, 2003, we assigned our
    membership interest in Arris Interactive LLC, or Arris, to ANTEC
    Corporation, an Arris Group company, for cash consideration of
    $88, resulting in a loss of $2. Also in connection with these
    transactions, we received $11 upon the settlement of a sales
    representation agreement with Arris Group and recorded a gain of
    $11; and
| |  | a gain of $66 in the first quarter of 2003 from the settlement
    of certain trade and customer financing receivables, the
    majority of which was previously provisioned.                                                                                                                                                                                                                                                                                                                                                                                                                              








Liquidity and Capital Resources





Cash Flow




90



---



##### 





|                                                                            |  |                     |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                            |  | For the Years Ended |      
|                                                                            |  | December 31,        |      
|                                                                            |  |                     |      
|                                                                            |  | 2005                |       |   | 2004 |   |       | 2003 | 
|                                                                            |  |                     |       |   |      |   |       |      | 
|Net cash from (used in) operating activities of continuing
    operations   |  | $                   | (173  | ) |      | $ | (159  | )    |  | $ | (147  | )
|Net cash from (used in) investing activities of continuing
    operations   |  |                     | (423  | ) |      |   | (137  | )    |  |   | 145   |  
|Net cash from (used in) financing activities of continuing
    operations   |  |                     | (65   | ) |      |   | (141  | )    |  |   | (362  | )
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |  |                     | (102  | ) |      |   | 88    |      |  |   | 176   |  
|                                                                            |  |                     |       |   |      |   |       |      | 
|Net cash from (used in) continuing operations                               |  |                     | (763  | ) |      |   | (349  | )    |  |   | (188  | )
|Net cash from (used in) operating activities of discontinued
    operations |  |                     | 33    |   |      |   | 22    |      |  |   | 138   |  
|Net cash from (used in) investing activities of discontinued
    operations |  |                     |      |   |      |   |      |      |  |   | 241   |  
|                                                                            |  |                     |       |   |      |   |       |      | 
|Net increase (decrease) in cash and cash equivalents                        |  |                     | (730  | ) |      |   | (327  | )    |  |   | 191   |  
|Cash and cash equivalents at beginning of period                            |  |                     | 3,606 |   |      |   | 3,933 |      |  |   | 3,742 |  
|                                                                            |  |                     |       |   |      |   |       |      | 
|Cash and cash equivalents at end of period                                  |  | $                   | 2,876 |   |      | $ | 3,606 |      |  | $ | 3,933 |  
|                                                                            |  |                     |       |   |      |   |       |      | 






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













| |                                            
| | -------------------------------------------
| | Changes in Operating Assets and Liabilities







| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | income tax payments of $48 in 2005 compared to $40 in 2004
    primarily due to an increase in taxable income in certain
    taxable jurisdictions; and                                                                         
| |  | a decrease of $31 from other changes in operating assets and
    liabilities primarily due to a decrease in liabilities,
    including the deferred revenue balance and project loss
    associated with the contract with BSNL.



91



---



##### 











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



|                                                  |  |      |     |  |      |  |     |      |  |  |    | 
|------------------------------------------------- |  | ---- | --- |  | ---- |  | --- | ---- |  |  | -- | 
|                                                  |  | 2005 |     |  | 2004 |  |     | 2003 | 
|                                                  |  |      |     |  |      |  |     |      | 
|Days sales outstanding in accounts receivable     |  |      | 86  |  |      |  | 90  |      |  |  | 74 | 
|Net inventory days                                |  |      | 132 |  |      |  | 151 |      |  |  | 92 | 
|Days of purchases outstanding in accounts payable |  |      | 58  |  |      |  | 63  |      |  |  | 45 | 
|                                                  |  |      |     |  |      |  |     |      | 



LG-Nortel




92



---



##### 




















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










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







93



---



##### 












Future Uses and Sources of Liquidity







Future Uses of Liquidity






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | repayment of $150 of notes due in June 2006;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | costs in relation to the restatement and remedial measure
    activities, regulatory and other legal proceedings, including
    the proposed $575 cash payment payable by NNC related to the
    Proposed Class Action Settlement. The cash amount bears
    interest commencing March 23, 2006 at a prescribed rate and
    is to be held in escrow on June 1, 2006 pending
    satisfactory completion of all conditions to the Proposed
    Class Action Settlement. In addition, the resolution of
    other matters not encompassed by the Proposed Class Action
    Settlement, including regulatory matters, is uncertain and NNC
    may be subject to substantial additional payments, judgments,
    settlements, fines or penalties;
| |  | capital expenditures of approximately $380;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | pension and post-retirement and post-employment benefit funding
    of approximately $372;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | costs related to workforce reduction and other restructuring
    activities of approximately $110;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | investment in certain businesses including approximately $100
    for the acquisition of Tasman Networks paid in February
    2006; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | our finance transformation project which will include, among
    other things, implementing SAP to provide an integrated global
    financial system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



94



---



##### 








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

|                                                           |  |              |       |  |       |   |     |      |  |   |      |  |  |      |     |  |            |   |     |             |  |   |       |  |  |   |       | 
|---------------------------------------------------------- |  | ------------ | ----- |  | ----- | - | --- | ---- |  | - | ---- |  |  | ---- | --- |  | ---------- | - | --- | ----------- |  | - | ----- |  |  | - | ----- | 
|                                                           |  | Payments Due |       |  |      
|                                                           |  |              |       |  | Total |  
|Contractual Cash Obligations(a)                            |  | 2006         |       |  | 2007  |   |     | 2008 |  |   | 2009 |  |  | 2010 |     |  | Thereafter |   |     | Obligations | 
|                                                           |  |              |       |  |       |   |     |      |  |   |      |  |  |      |     |  |            |   |     |             | 
|Long-term
    debt(b)                                      |  | $            | 1,446 |  |       | $ | 19  |      |  | $ | 15   |  |  | $    | 15  |  |            | $ | 15  |             |  | $ | 575   |  |  | $ | 2,085 | 
|Operating
    leases(c)                                    |  |              | 97    |  |       |   | 89  |      |  |   | 72   |  |  |      | 50  |  |            |   | 58  |             |  |   | 339   |  |  |   | 705   | 
|Purchase obligations                                       |  |              | 320   |  |       |   | 56  |      |  |   | 10   |  |  |      |    |  |            |   |    |             |  |   |      |  |  |   | 386   | 
|Outsourcing contracts                                      |  |              | 29    |  |       |   | 17  |      |  |   | 17   |  |  |      | 14  |  |            |   |    |             |  |   |      |  |  |   | 77    | 
|Obligations under special charges                          |  |              | 71    |  |       |   | 52  |      |  |   | 45   |  |  |      | 40  |  |            |   | 41  |             |  |   | 200   |  |  |   | 449   | 
|Pension, post-retirement and post- employment obligations  |  |              | 372   |  |       |   |    |      |  |   |     |  |  |      |    |  |            |   |    |             |  |   |      |  |  |   | 372   | 
|Other long-term liabilities reflected on the balance sheet |  |              | 8     |  |       |   | 10  |      |  |   | 8    |  |  |      | 2   |  |            |   | 4   |             |  |   | 30    |  |  |   | 62    | 
|                                                           |  |              |       |  |       |   |     |      |  |   |      |  |  |      |     |  |            |   |     |             | 
|Total contractual cash obligations                         |  | $            | 2,343 |  |       | $ | 243 |      |  | $ | 167  |  |  | $    | 121 |  |            | $ | 118 |             |  | $ | 1,144 |  |  | $ | 4,136 | 
|                                                           |  |              |       |  |       |   |     |      |  |   |      |  |  |      |     |  |            |   |     |             | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Amounts represent our known, undiscounted, minimum contractual
    payment obligations under our long-term obligations and include
    amounts identified as contractual obligations in current
    liabilities of the accompanying audited consolidated financial
    statements as of December 31, 2005.                                                                                                                                                                                                                                                           
|(b) | Includes principal payments due on long-term debt and $219 of
    capital lease obligations. As described in note 12 to the
    accompanying audited consolidated financial statements, we have
    entered into certain interest rate swap contracts which swap
    fixed rate payments for floating rate payments and therefore,
    interest payments are not included in the above table. For
    additional information, also see note 11 Long-term
    debt, credit and support facilities to the accompanying
    audited consolidated financial statements.
|(c) | For additional information, see note 14,
    Commitments, to the accompanying audited
    consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(d) | On February 14, 2006, we entered into a new one year credit
    facility in the aggregate principal amount of $1,300. This
    facility was drawn down in the full amount on February 14,
    2006 to repay our outstanding $1,275 aggregate principal amount
    of our 6.125% Notes due February 15, 2006 shifting
    $1,300 of contractual cash obligations from 2006 to, at the
    latest, February 2007.                                                                                                                                                      






| |                     
| | --------------------
| | Purchase obligations












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



95



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##### 








| |                                  
| | ---------------------------------
| | Obligations under special charges








| |                                        
| | ---------------------------------------
| | Pension and post-retirement obligations








| |                                                                
| | ---------------------------------------------------------------
| | Other long-term liabilities reflected on the balance
    sheets








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



|                                   |  |              |     |   |      |   |     |  
|---------------------------------- |  | ------------ | --- | - | ---- | - | --- | -
|                                   |  | 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                |  |              | 50  |   |      |   | 69  |  
|                                   |  |              |     |   |      |  
|Total customer financing           |  | $            | 66  |   |      | $ | 149 |  
|                                   |  |              |     |   |      |  






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







96



---



##### 














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








Future Sources of Liquidity








97



---



##### 














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









1 2


98



---



##### 












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





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $300 of committed revolving support for performance bonds or
    similar instruments, of which $142 was outstanding; and                                       
| |  | $450 of uncommitted support for performance bonds or similar
    instruments and/or receivables sales and/or securitizations, of
    which $20 was outstanding.













99



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##### 












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



Credit Ratings


|                                  |  |                          |    |  |                  |  |      |             |  |  |                  | 
|--------------------------------- |  | ------------------------ | -- |  | ---------------- |  | ---- | ----------- |  |  | ---------------- | 
|                                  |  | Rating on Long-Term Debt |    |  | Rating on        |  |      |            
|                                  |  | Issued or Guaranteed by  |    |  | Preferred Shares |  |      |            
|                                  |  | Nortel Networks Limited/ |    |  | Issued by        |  |      |            
|                                  |  | Nortel Networks          |    |  | Nortel Networks  |  |      |            
|Rating Agency                     |  | Corporation              |    |  | Limited          |  |      | Last Update | 
|                                  |  |                          |    |  |                  |  |      |             | 
|Standard & Poors Ratings Service |  |                          | B- |  |                  |  | CCC- |             |  |  | February 8, 2006 | 
|Moodys Investors Service, Inc.   |  |                          | B3 |  |                  |  | Caa3 |             |  |  | February 8, 2006 | 

long-term


100



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##### 



Off-Balance Sheet Arrangements


Bid, Performance Related and Other Bonds






|                                               |  |              |     |  |              |   |     | 
|---------------------------------------------- |  | ------------ | --- |  | ------------ | - | --- | 
|                                               |  | December 31, |     |  | December 31, |  
|                                               |  | 2005         |     |  | 2004         |  
|                                               |  |              |     |  |              |  
|Bid and performance related
    bonds(a)       |  | $            | 222 |  |              | $ | 362 | 
|Other
    bonds(b)                             |  |              | 44  |  |              |   | 68  | 
|                                               |  |              |     |  |              |  
|Total bid, performance related and other bonds |  | $            | 266 |  |              | $ | 430 | 
|                                               |  |              |     |  |              |  






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





Receivables Securitization and Certain Variable Interest
Transactions








101



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##### 

















Other Indemnifications or Guarantees






| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | third party debt agreements;                                                                            
| |  | business sale and business combination agreements;                                                      
| |  | intellectual property indemnification obligations;                                                      
| |  | lease agreements;                                                                                       
| |  | indemnification of banks and agents under credit and support
    facilities and security agreements; and
| |  | other indemnification agreements.                                                                       

102



---



##### 







Application of Critical Accounting Policies and Estimates








Revenue Recognition








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

103



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##### 









81-1, percentage-of percentage-of








104



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##### 











Provisions for Doubtful Accounts






| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | age of the receivables;                                                                
| |  | a customers ability to meet and sustain its financial
    commitments;                
| |  | a customers current and projected financial condition;                                
| |  | collection experience with the customer;                                               
| |  | historical bad debt experience with the customer;                                      
| |  | the positive or negative effects of the current and projected
    industry outlook; and
| |  | the economy in general                                                                 







105



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##### 





|                                                                                  |  |              |       |   |              |   |       |  
|--------------------------------------------------------------------------------- |  | ------------ | ----- | - | ------------ | - | ----- | -
|                                                                                  |  | December 31, |       |   | December 31, |  
|                                                                                  |  | 2005         |       |   | 2004         |  
|                                                                                  |  |              |       |   |              |  
|Gross accounts receivable                                                         |  | $            | 3,303 |   |              | $ | 2,868 |  
|Provision for doubtful accounts                                                   |  |              | (137  | ) |              |   | (109  | )
|                                                                                  |  |              |       |   |              |  
|Accounts receivable  net                                                         |  | $            | 3,166 |   |              | $ | 2,759 |  
|                                                                                  |  |              |       |   |              |  
|Accounts receivable provision as a percentage of gross accounts
    receivables   |  |              | 4     | % |              |   | 4     | %
|Gross long-term receivables                                                       |  | $            | 57    |   |              | $ | 159   |  
|Provision for doubtful accounts                                                   |  |              | (33   | ) |              |   | (65   | )
|                                                                                  |  |              |       |   |              |  
|Net long-term receivables                                                         |  | $            | 24    |   |              | $ | 94    |  
|                                                                                  |  |              |       |   |              |  
|Long-term receivable provision as a percentage of gross
    long-term receivables |  |              | 58    | % |              |   | 41    | %

Provisions for Inventory










|                                                        |  |              |        |   |              |   |        |  
|------------------------------------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | -
|                                                        |  | December 31, |        |   | December 31, |  
|                                                        |  | 2005         |        |   | 2004         |  
|                                                        |  |              |        |   |              |  
|Gross inventory                                         |  | $            | 3,660  |   |              | $ | 3,647  |  
|Inventory provisions                                    |  |              | (1,039 | ) |              |   | (1,143 | )
|                                                        |  |              |        |   |              |  
|Inventories 
    net(a)                                |  | $            | 2,621  |   |              | $ | 2,504  |  
|                                                        |  |              |        |   |              |  
|Inventory provisions as a percentage of gross inventory |  |              | 28     | % |              |   | 31     | %






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



Provisions for Product Warranties




106



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##### 









|                                     |                   |      |     |      |      |   |     |      |  
|------------------------------------ | ----------------- | ---- | --- | ---- | ---- | - | --- | ---- | -
|                                     |                   | 2005 |     |      | 2004 |  
|                                     |                   |      |     |      |      |  
|Balance at the beginning of the year |                   | $    | 268 |      |      | $ | 382 |     
|                                     | Payments          |      |     | (176 | )    |   |     | (267 | )
|                                     | Warranties issued |      |     | 191  |      |   |     | 229  |  
|                                     | Revisions         |      |     | (77  | )    |   |     | (76  | )
|                                     |                   |      |     |      |      |  
|Balance at the end of the year       |                   | $    | 206 |      |      | $ | 268 |     
|                                     |                   |      |     |      |      |  



Income Taxes




| |                    
| | -------------------
| | 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.  





107



---



##### 









| |                  
| | -----------------
| | Tax contingencies















108



---



##### 



Goodwill Valuation






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











| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | DCF model: assumptions regarding revenue growth rates, gross
    margin percentages, discount rates and terminal growth rates;                      
| |  | Revenue Multiple model: estimates of 2006 revenue growth and the
    selection of comparable companies to determine an appropriate
    multiple; and
| |  | EBITDA Multiple model: 2006 projected EBITDA and the selection
    of comparable companies to determine an appropriate multiple.                    







109



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##### 



Pension and Post-retirement Benefits












|                                                             |  |                        |     |                        |                     |  |     | 
|------------------------------------------------------------ |  | ---------------------- | --- | ---------------------- | ------------------- |  | --- | 
|                                                             |  |                        |     | Effect on 2005 Pre-Tax |                    
|                                                             |  | Effect on 2005 Pre-Tax |     |                        | Post-Retirement     | 
|Change in Assumption                                         |  | Pension Expense*       |     |                        | Benefit Expense     | 
|                                                             |  |                        |     |                        |                     | 
|                                                             |  | Increase/(Decrease)    |     |                        | Increase/(Decrease) | 
|1 percentage point increase in the expected return on assets |  | $                      | (58 | )                      |                     |  | N/A | 
|1 percentage point decrease in the expected return on assets |  |                        | 58  |                        |                     |  | N/A | 
|1 percentage point increase in the discount rate             |  |                        | (88 | )                      |                     |  | <1  | 
|1 percentage point decrease in the discount rate             |  |                        | 88  |                        |                     |  | 4   | 






|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|* | excludes settlement costs (lump sum and termination payments to
    participants which discharges our obligations)









110



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##### 









Special Charges










Other Contingencies




111



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##### 











Accounting Changes and Recent Accounting Pronouncements


Accounting Changes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consolidation of VIEs  the adoption of new
    accounting guidance for VIEs resulted in the inclusion of $83 in
    long-term debt and $82 of plant and equipment  net as
    of December 31, 2005. These amounts represented both the
    collateral and maximum exposure to loss as a result of our
    involvement with VIEs.                                                                                                                                                                                       
| |  | 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 in 2003 did not have a material
    impact on our results of operations and financial condition.                                                                                                                                                                     
| |  | Implicit variable interests  in March 2005,
    the FASB issued FSP FIN 46(R)-5, Implicit Variable
    Interests under FASB Interpretation No., or FIN, 46 (revised
    December 2003), Consolidation of Variable Interest
    Entities, or FSP FIN 46R-5. This FSP is effective in
    the first period beginning after March 3, 2005 in
    accordance with the transition provisions of FIN 46. The
    adoption of FSP FIN 46R-5 had no material impact on our
    results of operations and financial condition.
| |  | Accounting for electronic equipment waste
    obligation  the adoption of the FSP FAS
    143-1, Accounting
    for Electronic Equipment Waste Obligations, did not have a
    material impact on our results of operations and financial
    condition for the fiscal year ended December 31, 2005. Due
    to the fact that certain EU-member countries have not yet
    enacted country-specific laws, we cannot estimate the impact of
    applying this guidance in future periods.                              

Recent Accounting Pronouncements


03-1, 03-1). 03-1 03-1


112



---



##### 



03-1 03-1, 03-1








04-13). 04-13 work-in 04-13 04-13




113



---



##### 





Canadian Supplement








Accounting Changes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Determining whether an arrangement contains a
    lease  effective January 1, 2005, we adopted
    EIC 150, Determining Whether an Arrangement Contains a
    Lease (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. Equivalent guidance in U.S. GAAP has
    already been adopted by us. The adoption of EIC 150 did not have
    any material impact on our results of operations and financial
    condition.                                                                                                                                                                                                                                                                                                                                                      
| |  | Financial Instruments  presentation and
    disclosure  effective January 1, 2005, we
    adopted amendments to CICA Handbook Section 3860,
    Financial Instruments  Presentation and
    Disclosure (Section 3860). 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 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. We adopted the amendment effective retroactively for
    periods commencing on or after February 15, 2005. The
    adoption of the new amendment did not have a material impact on
    our results of operations and financial condition.
| |  | 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 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                                                                                

114



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | accounting change, which has been recorded prospectively as of
    January 1, 2004, was an increase to investments and other
    income of $23 during the year ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Revenue recognition  In December 2003, the EIC
    issued abstract 142, Accounting for Revenue Arrangements
    with Multiple Deliverables, or EIC 142. EIC 142 was
    applicable to us beginning January 1, 2004 and was applied
    prospectively. The application of EIC 142 did not have a
    material impact on our results of operations and financial
    condition. In December 2003, the EIC issued abstract 141,
    Revenue Recognition, or EIC 141. EIC 141 was
    applicable to us beginning January 1, 2004 and was applied
    prospectively. The application of EIC 141 did not have a
    material impact on our results of operations and financial
    condition.                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Asset retirement obligations  Under
    U.S. GAAP, we adopted SFAS 143 effective
    January 1, 2003, and recorded a cumulative effect of
    accounting change, net of tax, within net earnings (loss) on the
    date of adoption. We adopted similar Canadian guidance, CICA
    Handbook Section 3110, Asset Retirement
    Obligations, effective January 1, 2004, with
    retroactive restatement of prior periods. Under Canadian GAAP,
    the cumulative effect of adoption as of January 1, 2003 was
    recorded as an adjustment to opening accumulated deficit, as
    opposed to an adjustment within net earnings (loss) under
    U.S. GAAP, resulting in a difference of $12. The
    retroactive adjustment to earnings for the year ended
    December 31, 2003 and 2002 under Canadian GAAP was not
    significant. Plant and equipment  net, other
    liabilities and accumulated deficit as of December 31, 2003
    have been increased by $4, $16 and $12, respectively, to reflect
    the retroactive restatement.                                       
| |  | Stock-based compensation  In November 2001,
    the CICA issued Handbook Section 3870, Stock-based
    Compensation and Other Stock-based Payments, or
    Section 3870, which was revised in November 2003.
    Section 3870 outlines a fair value based method of
    accounting required for certain stock-based transactions,
    effective January 1, 2002, and applied to awards granted on
    or after that date. Prior to October 1, 2003, as permitted
    by Section 3870, we did not adopt the provisions in respect
    of the fair value based method of accounting for our employee
    stock-based transactions. On October 1, 2003, we elected to
    expense employee stock-based compensation using the fair value
    based method prospectively for all awards granted, modified, or
    settled on or after January 1, 2003, in accordance with the
    transitional provisions of Section 3870 and concurrent with
    the adoption of expense recognition under the fair value based
    method for U.S. GAAP.                                                 
| |  | Restructuring charges  Under U.S. GAAP,
    effective January 1, 2003, we adopted SFAS 146.
    SFAS 146 requires that costs associated with an exit or
    disposal activity be recognized when the liability is incurred.
    Under Canadian GAAP, EIC 134, Accounting for Severance and
    Termination Benefits, or EIC 134, and EIC 135,
    Accounting for Costs Associated with Exit and Disposal
    Activities (Including Costs Incurred in a Restructuring),
    or EIC 135, were issued to harmonize the Canadian GAAP
    requirement with SFAS 146. Effective April 1, 2003, we
    adopted EIC 134 and EIC 135.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Impairment and disposal of long-lived assets 
    In May 2003, the CICA issued an updated Section 3475
    Disposal of Long-Lived Assets and Discontinued
    operations, or Section 3475. In April 2003, the CICA
    issued Handbook Section 3063, Impairment of
    Long-Lived Assets, or Section 3063. The adoption of
    Sections 3475 and 3063, which are substantially consistent
    with U.S. GAAP, did not have a material impact on our
    results of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Guarantees  In February 2003, the CICA issued
    AcG-14,
    Disclosure of Guarantees, or AcG-14.
    AcG-14 expands on
    previously issued accounting guidance and requires additional
    disclosure by a guarantor of information about each guarantee,
    or each group of similar guarantees, even when the likelihood of
    the guarantor having to make any payments under the guarantee is
    slight. AcG-14 does not
    address the recognition or measurement of a guarantors
    liability for obligations under a guarantee. We adopted the
    requirements of AcG-14
    effective January 1, 2003 which are substantially
    consistent with the disclosure requirements under U.S. GAAP
    for guarantees.                                                                                                                                                                                                                                                                                                                                                   
| |  | Consolidation of VIEs  In June 2003, the CICA
    issued AcG-15, which is
    consistent with FASB Interpretation No. 46,
    Consolidation of Variable Interest Entities.
    AcG-15 clarifies the
    application of consolidation guidance to those entities defined
    as VIEs (which includes, but is not limited to, special purpose
    entities, trusts, partnerships, certain joint ventures and other
    legal structures) in which equity investors do not have the
    characteristics of a controlling financial interest
    or there is not sufficient equity at risk for the entity to
    finance its activities without additional subordinated financial
    support. The requirements of AcG-15 were effective for all
    annual and interim periods beginning on or after
    November 1, 2004. Earlier application was encouraged and
    effective July 1, 2003, we adopted AcG-15 at the same time
    as equivalent guidance under U.S. GAAP and prospectively
    began consolidating two VIEs for which we were considered the
    primary beneficiary.

115



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##### 



Outstanding Share Data




Market Risk
















116



---



##### 





Equity Price Risk






Environmental Matters








Legal Proceedings









|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk



117



---



##### 





|        |                                                         
|------- | --------------------------------------------------------
|ITEM 8. | Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                 |                                                 |      |     |     | 
|-------------------------------------------------------------------------------- | ----------------------------------------------- | ---- | --- | --- | 
|                                                                                 |                                                 | Page |    
|                                                                                 |                                                 |      |    
|Report of Independent Registered Chartered Accountants                           |                                                 |      | 119 |    
|Consolidated Statements of Operations                                            |                                                 |      | 120 |    
|Consolidated Balance Sheets                                                      |                                                 |      | 121 |    
|Consolidated Statements of Changes in Equity and Comprehensive
    Income (Loss) |                                                 |      | 122 |    
|Consolidated Statements of Cash Flows                                            |                                                 |      | 123 |    
|Notes to Consolidated Financial Statements                                       |                                                 |      | 124 |    
|*********                                                                       
|Quarterly Financial Data (Unaudited)                                             |                                                 |      | 206 |    
|                                                                                 | Consolidated Statements of Operations           |      |     | 206 | 
|                                                                                 | Consolidated Balance Sheets                     |      |     | 212 | 
|                                                                                 | Condensed Consolidated Statements of Cash Flows |      |     | 213 | 
|                                                                                 | Supplemental information                        |      |     | 215 | 

118



---



##### 






REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS






















COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
ON


CANADIAN-U.S. REPORTING DIFFERENCES












119



---



##### 






NORTEL NETWORKS LIMITED


Consolidated Statements of Operations for the years ended
December 31


|                                                                                                                                                     |                |                            |        |              |      |   |              |      |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ------ | ------------ | ---- | - | ------------ | ---- | - | - | ----- | --- | -
|                                                                                                                                                     |                | 2005                       |        |              | 2004 |   |              | 2003 |  
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|                                                                                                                                                     |                |                            |        | As restated* |      |   | As restated* |     
|                                                                                                                                                     |                |                            |        |              |      |   |              |     
|                                                                                                                                                     |                | (Millions of U.S. dollars) |       
|Revenues                                                                                                                                             |                | $                          | 10,523 |              |      | $ | 9,516        |      |   | $ | 9,932 |    
|Cost of revenues                                                                                                                                     |                |                            | 6,256  |              |      |   | 5,560        |      |   |   | 5,732 |    
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Gross profit                                                                                                                                         |                |                            | 4,267  |              |      |   | 3,956        |      |   |   | 4,200 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 2,401  |              |      |   | 2,118        |      |   |   | 1,956 |    
|Research and development expense                                                                                                                     |                |                            | 1,856  |              |      |   | 1,960        |      |   |   | 1,973 |    
|Amortization of intangibles                                                                                                                          |                |                            | 17     |              |      |   | 9            |      |   |   | 3     |    
|Special charges                                                                                                                                      |                |                            | 170    |              |      |   | 181          |      |   |   | 290   |    
|(Gain) loss on sale of businesses and
    assets(a)                                                                                                  |                |                            | 47     |              |      |   | (91          | )    |   |   | (4    | )  
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Operating earnings (loss)                                                                                                                            |                |                            | (224   | )            |      |   | (221         | )    |   |   | (18   | )  
|Other income  net                                                                                                                                   |                |                            | 305    |              |      |   | 217          |      |   |   | 458   |    
|Interest expense                                                                                                                                     |                |                            |        |              |      |   |              |      |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |        | (123         | )    |   |              | (108 | ) |   |       | (95 | )
|                                                                                                                                                     | Other          |                            |        | (6           | )    |   |              | (8   | ) |   |       | (26 | )
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (48    | )            |      |   | (120         | )    |   |   | 319   |    
|Income tax benefit                                                                                                                                   |                |                            | 55     |              |      |   | 30           |      |   |   | 36    |    
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|                                                                                                                                                     |                |                            | 7      |              |      |   | (90          | )    |   |   | 355   |    
|Minority interests  net of tax                                                                                                                      |                |                            | (12    | )            |      |   | (13          | )    |   |   | (24   | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 4      |              |      |   |             |      |   |   | (36   | )  
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (1     | )            |      |   | (103         | )    |   |   | 295   |    
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                    |                |                            | 1      |              |      |   | 49           |      |   |   | 183   |    
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Net earnings (loss) before cumulative effect of accounting change                                                                                    |                |                            |       |              |      |   | (54          | )    |   |   | 478   |    
|Cumulative effect of accounting change  net of tax                                                                                                  |                |                            |       |              |      |   |             |      |   |   | (12   | )  
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Net earnings (loss)                                                                                                                                  |                |                            |       |              |      |   | (54          | )    |   |   | 466   |    
|Dividends on preferred shares                                                                                                                        |                |                            | 38     |              |      |   | 33           |      |   |   | 35    |    
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (38    | )            |      | $ | (87          | )    |   | $ | 431   |    
|                                                                                                                                                     |                |                            |        |              |      |   |              |      |  






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



| |   |           
| | - | ----------
| | * | See note 4

The accompanying notes are an integral part of these
consolidated financial statements


120



---



##### 






NORTEL NETWORKS LIMITED


Consolidated Balance Sheets as of December 31


|                                                                                                                                                              |                                         |                            |         |              |      |   |         |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | -------------------------- | ------- | ------------ | ---- | - | ------- | ----- | 
|                                                                                                                                                              |                                         | 2005                       |         |              | 2004 |  
|                                                                                                                                                              |                                         |                            |         |              |      |  
|                                                                                                                                                              |                                         |                            |         | As restated* |     
|                                                                                                                                                              |                                         | (Millions of U.S. dollars, |        
|                                                                                                                                                              |                                         | except for share amounts)  |        
|ASSETS                                                                                                                                                       
|Current assets                                                                                                                                                |                                         |                            |         |              |      |   |         |      
|                                                                                                                                                              | Cash and cash equivalents               |                            | $       | 2,876        |      |   | $       | 3,606 | 
|                                                                                                                                                              | Restricted cash and cash equivalents    |                            |         | 77           |      |   |         | 80    | 
|                                                                                                                                                              | Accounts receivable  net               |                            |         | 3,166        |      |   |         | 2,759 | 
|                                                                                                                                                              | Inventories  net                       |                            |         | 1,804        |      |   |         | 1,962 | 
|                                                                                                                                                              | Deferred income taxes  net             |                            |         | 377          |      |   |         | 255   | 
|                                                                                                                                                              | Other current assets                    |                            |         | 567          |      |   |         | 357   | 
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total current assets                                                                                                                                          |                                         |                            | 8,867   |              |      |   | 9,019   |      
|Investments                                                                                                                                                   |                                         |                            | 244     |              |      |   | 299     |      
|Plant and equipment  net                                                                                                                                     |                                         |                            | 1,559   |              |      |   | 1,636   |      
|Goodwill                                                                                                                                                      |                                         |                            | 2,412   |              |      |   | 2,123   |      
|Intangible assets  net                                                                                                                                       |                                         |                            | 172     |              |      |   | 78      |      
|Deferred income taxes  net                                                                                                                                   |                                         |                            | 3,629   |              |      |   | 3,738   |      
|Other assets                                                                                                                                                  |                                         |                            | 1,026   |              |      |   | 843     |      
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total assets                                                                                                                                                  |                                         | $                          | 17,909  |              |      | $ | 17,736  |      
|                                                                                                                                                              |                                         |                            |         |              |      |  
|                                                                                                                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         
|Current liabilities                                                                                                                                           |                                         |                            |         |              |      |   |         |      
|                                                                                                                                                              | Trade and other accounts payable        |                            | $       | 1,178        |      |   | $       | 988   | 
|                                                                                                                                                              | Payroll and benefit-related liabilities |                            |         | 799          |      |   |         | 513   | 
|                                                                                                                                                              | Contractual liabilities                 |                            |         | 346          |      |   |         | 571   | 
|                                                                                                                                                              | Restructuring liabilities               |                            |         | 95           |      |   |         | 254   | 
|                                                                                                                                                              | Other accrued liabilities               |                            |         | 3,365        |      |   |         | 3,556 | 
|                                                                                                                                                              | Long-term debt due within one year      |                            |         | 1,446        |      |   |         | 14    | 
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total current liabilities                                                                                                                                     |                                         |                            | 7,229   |              |      |   | 5,896   |      
|Long-term debt                                                                                                                                                |                                         |                            | 639     |              |      |   | 2,052   |      
|Deferred income taxes  net                                                                                                                                   |                                         |                            | 104     |              |      |   | 143     |      
|Other liabilities                                                                                                                                             |                                         |                            | 4,037   |              |      |   | 3,578   |      
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total liabilities                                                                                                                                             |                                         |                            | 12,009  |              |      |   | 11,669  |      
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Minority interests in subsidiary companies                                                                                                                    |                                         |                            | 244     |              |      |   | 90      |      
|Guarantees, commitments and contingencies (notes 13, 14
    and 21)                                                                                           |                                         |                            |         |              |      |   |         |      
|                                                                                                                                                             
|SHAREHOLDERS EQUITY                                                                                                                                         
|Preferred shares, without par value  Authorized
    shares: unlimited;
    Issued and outstanding shares: 30,000,000 for 2005 and
    30,000,000 for 2004    |                                         |                            | 536     |              |      |   | 536     |      
|Common shares, without par value  Authorized shares:
    unlimited;
    Issued and outstanding shares: 1,460,978,638 for 2005 and
    1,460,978,638 for 2004 |                                         |                            | 1,211   |              |      |   | 1,211   |      
|Additional paid-in capital                                                                                                                                    |                                         |                            | 22,193  |              |      |   | 22,107  |      
|Accumulated deficit                                                                                                                                           |                                         |                            | (17,397 | )            |      |   | (17,359 | )    
|Accumulated other comprehensive loss                                                                                                                          |                                         |                            | (887    | )            |      |   | (518    | )    
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total shareholders equity                                                                                                                                    |                                         |                            | 5,656   |              |      |   | 5,977   |      
|                                                                                                                                                              |                                         |                            |         |              |      |  
|Total liabilities and shareholders equity                                                                                                                    |                                         | $                          | 17,909  |              |      | $ | 17,736  |      
|                                                                                                                                                              |                                         |                            |         |              |      |  






|  |           
|- | ----------
|* | See note 4

The accompanying notes are an integral part of these
consolidated financial statements


121



---



##### 






NORTEL NETWORKS LIMITED


Consolidated Statements of Changes in Equity and
Comprehensive Income (Loss)


|                                               |                                      |                                                                 |       |              |      |   |              |         |      |   |       |         |      |  
|---------------------------------------------- | ------------------------------------ | --------------------------------------------------------------- | ----- | ------------ | ---- | - | ------------ | ------- | ---- | - | ----- | ------- | ---- | -
|                                               |                                      | 2005                                                            |       |              | 2004 |   |              | 2003    |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               |                                      |                                                                 |       | As restated* |      |   | As restated* |        
|                                               |                                      |                                                                 |       |              |      |   |              |        
|                                               |                                      | (Millions of U.S. dollars)                                      |      
|Preferred shares                               |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Balance at the beginning of the year |                                                                 | $     | 536          |      |   | $            | 536     |      |   | $     | 536     |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Balance at the end of the year       |                                                                 |       | 536          |      |   |              | 536     |      |   |       | 536     |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Common shares                                  |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Balance at the beginning of the year |                                                                 |       | 1,211        |      |   |              | 1,211   |      |   |       | 1,211   |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Balance at the end of the year       |                                                                 |       | 1,211        |      |   |              | 1,211   |      |   |       | 1,211   |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Additional paid-in capital                     |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Balance at the beginning of the year |                                                                 |       | 22,107       |      |   |              | 22,032  |      |   |       | 22,006  |     
|                                               |                                      | Stock option compensation                                       |       |              | 84   |   |              |         | 76   |   |       |         | 27   |  
|                                               |                                      | Restricted stock unit expense                                   |       |              | 1    |   |              |         |     |   |       |         |     |  
|                                               |                                      | Other                                                           |       |              | 1    |   |              |         | (1   | ) |       |         | (1   | )
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Balance at the end of the year       |                                                                 |       | 22,193       |      |   |              | 22,107  |      |   |       | 22,032  |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Accumulated deficit                            |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Balance at the beginning of the year |                                                                 |       | (17,359      | )    |   |              | (17,272 | )    |   |       | (17,633 | )   
|                                               |                                      | Adjustments as of January 1, 2003 due to restatement*           |       |              |     |   |              |         |     |   |       |         | (70  | )
|                                               |                                      | Net earnings (loss)                                             |       |              |     |   |              |         | (54  | ) |       |         | 466  |  
|                                               |                                      | Dividends on preferred shares                                   |       |              | (38  | ) |              |         | (33  | ) |       |         | (35  | )
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Balance at the end of the year       |                                                                 |       | (17,397      | )    |   |              | (17,359 | )    |   |       | (17,272 | )   
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Accumulated other comprehensive loss           |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Balance at the beginning of the year |                                                                 |       | (518         | )    |   |              | (537    | )    |   |       | (941    | )   
|                                               |                                      | Adjustments as of January 1, 2003 due to restatement*           |       |              |     |   |              |         |     |   |       |         | (10  | )
|                                               |                                      | Foreign currency translation adjustment                         |       |              | (146 | ) |              |         | 187  |   |       |         | 515  |  
|                                               |                                      | Unrealized gain (loss) on investments  net                     |       |              | (2   | ) |              |         | (64  | ) |       |         | 70   |  
|                                               |                                      | Unrealized derivative gain (loss) on cash flow
    hedges  net |       |              | (11  | ) |              |         | 6    |   |       |         | 15   |  
|                                               |                                      | Minimum pension liability adjustment  net                      |       |              | (210 | ) |              |         | (110 | ) |       |         | (186 | )
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Other comprehensive income (loss)    |                                                                 |       | (369         | )    |   |              | 19      |      |   |       | 414     |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|                                               | Balance at the end of the year       |                                                                 |       | (887         | )    |   |              | (518    | )    |   |       | (537    | )   
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Total shareholders equity                     |                                      | $                                                               | 5,656 |              |      | $ | 5,977        |         |      | $ | 5,970 |        
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Total comprehensive income (loss) for the year |                                      |                                                                 |       |              |      |   |              |         |      |   |       |        
|                                               | Net earnings (loss)                  |                                                                 | $     |             |      |   | $            | (54     | )    |   | $     | 466     |     
|                                               | Other comprehensive income (loss)    |                                                                 |       | (369         | )    |   |              | 19      |      |   |       | 414     |     
|                                               |                                      |                                                                 |       |              |      |   |              |         |     
|Total comprehensive income (loss) for the year |                                      | $                                                               | (369  | )            |      | $ | (35          | )       |      | $ | 880   |        
|                                               |                                      |                                                                 |       |              |      |   |              |         |     






|  |           
|- | ----------
|* | See note 4

The accompanying notes are an integral part of these
consolidated financial statements


122



---



##### 






NORTEL NETWORKS LIMITED


Consolidated Statements of Cash Flows for the years ended
December 31


|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |      |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ------------ | ---- | - | ------------ | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                            |                                                                                                                                                                                                   | 2005                                                                        |       |              | 2004 |   |              | 2003 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       | As restated* |      |   | As restated* |     
|                                                                            |                                                                                                                                                                                                   | (Millions of U.S. dollars)                                                  |      
|Cash flows from (used in) operating activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |      |   |       |     
|                                                                            | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $     | (1           | )    |   | $            | (103 | )    |   | $     | 295  |     
|                                                                            | 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                                               |       |              | 301  |   |              |      | 340  |   |       |      | 439  |  
|                                                                            |                                                                                                                                                                                                   | Non-cash portion of special charges and related asset write downs           |       |              | 27   |   |              |      | 6    |   |       |      | 87   |  
|                                                                            |                                                                                                                                                                                                   | Equity in net (earnings) loss of associated companies                       |       |              | (4   | ) |              |      |     |   |       |      | 36   |  
|                                                                            |                                                                                                                                                                                                   | Stock option compensation                                                   |       |              | 86   |   |              |      | 75   |   |       |      | 26   |  
|                                                                            |                                                                                                                                                                                                   | Deferred income taxes                                                       |       |              | (77  | ) |              |      | (46  | ) |       |      | (11  | )
|                                                                            |                                                                                                                                                                                                   | Other liabilities                                                           |       |              | 294  |   |              |      | 270  |   |       |      | 163  |  
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on repurchases of outstanding debt securities                   |       |              |     |   |              |      |     |   |       |      | (4   | )
|                                                                            |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |       |              | (20  | ) |              |      | (110 | ) |       |      | (147 | )
|                                                                            |                                                                                                                                                                                                   | Other  net                                                                 |       |              | 65   |   |              |      | 157  |   |       |      | (90  | )
|                                                                            |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |       |              | (844 | ) |              |      | (748 | ) |       |      | (941 | )
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|                                                                            | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |       | (173         | )    |   |              | (159 | )    |   |       | (147 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Cash flows from (used in) investing activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |      |   |       |     
|                                                                            | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |       | (256         | )    |   |              | (275 | )    |   |       | (169 | )   
|                                                                            | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |       | 10           |      |   |              | 10   |      |   |       | 38   |     
|                                                                            | Restricted cash and cash equivalents                                                                                                                                                              |                                                                             |       | 4            |      |   |              | (17  | )    |   |       | 200  |     
|                                                                            | Acquisitions of investments and businesses  net of
    cash acquired                                                                                                                             |                                                                             |       | (651         | )    |   |              | (5   | )    |   |       | (31  | )   
|                                                                            | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |       | 470          |      |   |              | 150  |      |   |       | 107  |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|                                                                            | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |       | (423         | )    |   |              | (137 | )    |   |       | 145  |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Cash flows from (used in) financing activities                              |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |      |   |       |     
|                                                                            | Dividends paid                                                                                                                                                                                    |                                                                             |       | (43          | )    |   |              | (33  | )    |   |       | (35  | )   
|                                                                            | Increase in notes payable                                                                                                                                                                         |                                                                             |       | 70           |      |   |              | 92   |      |   |       | 80   |     
|                                                                            | Decrease in notes payable                                                                                                                                                                         |                                                                             |       | (83          | )    |   |              | (84  | )    |   |       | (125 | )   
|                                                                            | Repayments of long-term debt                                                                                                                                                                      |                                                                             |       |             |      |   |              | (107 | )    |   |       | (270 | )   
|                                                                            | Repayments of capital leases payable                                                                                                                                                              |                                                                             |       | (9           | )    |   |              | (9   | )    |   |       | (12  | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|                                                                            | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |       | (65          | )    |   |              | (141 | )    |   |       | (362 | )   
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                                                                                                                                                                   |                                                                             | (102  | )            |      |   | 88           |      |      |   | 176   |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Net cash from (used in) continuing operations                               |                                                                                                                                                                                                   |                                                                             | (763  | )            |      |   | (349         | )    |      |   | (188  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             | 33    |              |      |   | 22           |      |      |   | 138   |     
|Net cash from (used in) investing activities of discontinued
    operations |                                                                                                                                                                                                   |                                                                             |      |              |      |   |             |      |      |   | 241   |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                                                                                                   |                                                                             | (730  | )            |      |   | (327         | )    |      |   | 191   |     
|Cash and cash equivalents at beginning of year                              |                                                                                                                                                                                                   |                                                                             | 3,606 |              |      |   | 3,933        |      |      |   | 3,742 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     
|Cash and cash equivalents at end of year                                    |                                                                                                                                                                                                   | $                                                                           | 2,876 |              |      | $ | 3,606        |      |      | $ | 3,933 |     
|                                                                            |                                                                                                                                                                                                   |                                                                             |       |              |      |   |              |      |     






|  |           
|- | ----------
|* | See note 4

The accompanying notes are an integral part of these
consolidated financial statements


123



---



##### 






NORTEL NETWORKS LIMITED


Notes to Consolidated Financial Statements


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




|   |                        
|-- | -----------------------
|1. | Nortel Networks Limited







|   |                                
|-- | -------------------------------
|2. | Significant accounting policies



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





|    |                            
|--- | ---------------------------
|(a) | Principles of consolidation





|    |                 
|--- | ----------------
|(b) | Use of estimates





|    |                                  
|--- | ---------------------------------
|(c) | Translation of foreign currencies



124



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|    |                    
|--- | -------------------
|(d) | Revenue recognition



97-2, 97-2),


00-21, 00-21), 00-21,


97-2


125



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


97-2 off-the


97-2


percentage-of percentage-of












97-2. 97-2


97-2,


126



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






|    |                         
|--- | ------------------------
|(e) | Research and development





|    |             
|--- | ------------
|(f) | Income taxes







|    |                                 
|--- | --------------------------------
|(g) | Earnings (loss) per common share

10-K




|    |                          
|--- | -------------------------
|(h) | Cash and cash equivalents





|    |                                     
|--- | ------------------------------------
|(i) | Restricted cash and cash equivalents





|    |                                
|--- | -------------------------------
|(j) | Provision for doubtful accounts





127



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|    |            
|--- | -----------
|(k) | Inventories

first-in,






|    |                  
|--- | -----------------
|(l) | Receivables sales









|    |            
|--- | -----------
|(m) | Investments









|    |                    
|--- | -------------------
|(n) | Plant and equipment





|    |                                                          
|--- | ---------------------------------------------------------
|(o) | Software development and business reengineering
    costs



| |                           
| | --------------------------
| | Software development costs



128



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






| |                             
| | ----------------------------
| | Business reengineering costs





|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(p) | Impairment or disposal of long-lived assets (plant and
    equipment and acquired technology)



| |                                
| | -------------------------------
| | Long-lived assets held and used







| |                                
| | -------------------------------
| | Long-lived assets held for sale







| |                                                       
| | ------------------------------------------------------
| | Long-lived assets to be disposed of other than by sale









|    |         
|--- | --------
|(q) | Goodwill



129



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|    |                  
|--- | -----------------
|(r) | Intangible assets





|    |               
|--- | --------------
|(s) | Warranty costs





|    |                                                          
|--- | ---------------------------------------------------------
|(t) | Pension, post-retirement and post-employment
    benefits







|    |                                 
|--- | --------------------------------
|(u) | Derivative financial instruments



130



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


















|    |                         
|--- | ------------------------
|(v) | Stock-based compensation





131



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










| |              
| | -------------
| | Stock Options





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Restricted Stock Units (RSUs), Deferred Stock
    Units (DSUs) and Stock Appreciation Rights
    (SARs)











| |                              
| | -----------------------------
| | Employee Stock Purchase Plans



132



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


Pro
forma disclosure required due to a change in accounting
policy




|                                                                |                                             |      |     |     |      |   |      |      |   |   |     |      |  
|--------------------------------------------------------------- | ------------------------------------------- | ---- | --- | --- | ---- | - | ---- | ---- | - | - | --- | ---- | -
|                                                                |                                             | 2005 |     |     | 2004 |   |      | 2003 |  
|                                                                |                                             |      |     |     |      |   |      |      |  
|Net earnings (loss) applicable to common shares 
    reported  |                                             | $    | (38 | )   |      | $ | (87  | )    |   | $ | 431 |     
|                                                                | Stock-based compensation  reported         |      |     | 89  |      |   |      | 116  |   |   |     | 54   |  
|                                                                | Stock-based compensation  pro
    forma(a) |      |     | (96 | )    |   |      | (166 | ) |   |     | (308 | )
|                                                                |                                             |      |     |     |      |   |      |      |  
|Net earnings (loss) applicable to common shares  pro
    forma |                                             | $    | (45 | )   |      | $ | (137 | )    |   | $ | 177 |     
|                                                                |                                             |      |     |     |      |   |      |      |  






|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Stock-based compensation  pro forma expense for the
    years ended December 31, 2005, 2004 and 2003 was net of tax
    of nil, nil and nil, respectively.



|    |                                 
|--- | --------------------------------
|(w) | Recent accounting pronouncements



|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | In March 2004, the EITF reached consensus on Issue
    No. 03-1,
    The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments
    (EITF 03-1).
    EITF 03-1 provides
    guidance on determining when an investment is considered
    impaired, whether that impairment is other than temporary and
    the measurement of an impairment loss.
    EITF 03-1 is
    applicable to marketable debt and equity securities within the
    scope of SFAS No. 115, Accounting for Certain
    Investments in Debt and Equity Securities
    (SFAS 115), and SFAS No. 124,
    Accounting for Certain Investments Held by Not-for-Profit
    Organizations, and equity securities that are not subject
    to the scope of SFAS 115 and not accounted for under the
    equity method of accounting. The FASB, at its June 29, 2005
    Board meeting, decided not to provide additional guidance on the
    meaning of other-than-temporary impairment, but instead issued
    proposed FASB Staff Position (FSP)
    EITF 03-1-a,
    Implementation Guidance for the Application of
    Paragraph 16 of EITF Issue
    No. 03-1, as
    final, superseding
    EITF 03-1 and EITF
    Topic No. D-44,
    Recognition of Other-Than- Temporary Impairment upon the
    Planned Sale of a Security Whose Cost Exceeds Fair Value.
    The final FSP, retitled FSP
    FAS 115-1 and
    FAS 124-1,
    The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments (FSP
    FAS 115-1 and
    FAS 124-1),
    will be applied prospectively and the effective date is for
    reporting periods beginning after December 15, 2005. The
    adoption of FSP
    FAS 115-1 and
    FAS 124-1 is not
    expected to have a material impact on Nortels results of
    operations and financial condition.
|     
|(ii)  | In November 2004, the FASB issued SFAS No. 151,
    Inventory Costs (SFAS 151).
    SFAS 151 requires that abnormal amounts of idle facility
    expense, freight, handling costs and wasted material
    (spoilage) be recognized as current period charges rather
    than capitalized as a component of inventory costs. In addition,
    SFAS 151 requires allocation of fixed production overheads
    to inventory based on the normal capacity of the production
    facilities. This statement is effective for inventory costs
    incurred during fiscal years beginning after June 15, 2005.
    The guidance should be applied prospectively. The adoption of
    SFAS 151 is not expected to have a material impact on
    Nortels results of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     
|(iii) | In December 2004, the FASB issued SFAS No. 123
    (Revised 2004), Share-Based Payment
    (SFAS 123R), which requires all share-based
    payments to employees, including grants of employee stock
    options, to be recognized as compensation expense in the
    consolidated financial statements based on their fair values.
    SFAS 123R also modifies certain measurement and expense
    recognition provisions of SFAS 123 that will impact Nortel,
    including the requirement to estimate employee forfeitures each
    period when recognizing compensation expense and requiring that
    the initial and subsequent measurement of the cost of
    liability-based awards each period be based on the fair value
    (instead of the intrinsic value) of the award. This statement is
    effective for Nortel as of January 1, 2006. Nortel
    previously elected to expense employee stock-based compensation
    using the fair value method prospectively for all awards granted
    or modified on or after January 1, 2003 in accordance with
    SFAS 148. SAB 107, Share-Based Payment
    (SAB 107), was issued by the SEC in March 2005,
    and provides supplemental SFAS 123R application guidance
    based on the views of the SEC. The adoption of SFAS 123R is
    not expected to have a material impact on Nortels results
    of operations and financial condition for the 2006 fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                 

133



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(iv) | In May 2005, the FASB issued SFAS No. 154,
    Accounting Changes and Error Corrections
    (SFAS 154), which replaces APB Opinion
    No. 20, Accounting Changes, and
    SFAS No. 3, Reporting Accounting Changes in
    Interim Financial Statements  An Amendment of APB
    Opinion No. 28. SFAS 154 provides guidance on
    the accounting for and reporting of changes in accounting
    principles and error corrections. SFAS 154 requires
    retrospective application to prior period financial statements
    of voluntary changes in accounting principles and changes
    required by new accounting standards when the standard does not
    include specific transition provisions, unless it is
    impracticable to do so. SFAS 154 also requires certain
    disclosures for restatements due to correction of an error.
    SFAS 154 is effective for accounting changes and
    corrections of errors made in respect of fiscal years beginning
    after December 15, 2005, and is required to be adopted by
    Nortel as of January 1, 2006. The impact that the adoption
    of SFAS 154 will have on Nortels consolidated results
    of operations and financial condition will depend on the nature
    of future accounting changes adopted by Nortel and the nature of
    transitional guidance provided in future accounting
    pronouncements.
|    
|(v)  | In September 2005, the EITF reached consensus on Issue No.
    04-13, Accounting for Purchases and Sales of Inventory
    with the Same Counterparty
    (EITF 04-13).
    EITF 04-13
    provides guidance on the purchase and sale of inventory to
    another entity that operates in the same line of business. The
    purchase and sale transactions may be pursuant to a single
    contractual arrangement or separate contractual arrangements and
    the inventory purchased or sold may be in the form of raw
    materials,
    work-in-process or
    finished goods.
    EITF 04-13 applies
    to new arrangements entered into, or modifications or renewals
    of existing arrangements, in reporting periods beginning after
    March 15, 2006. The impact of the adoption of
    EITF 04-13 on
    Nortels consolidated results of operations and financial
    condition will depend on the nature of future arrangements
    entered into, or modifications or renewals of existing
    arrangements, by Nortel.                                                                                                                                                                                                                                                                                                                                               
|    
|(vi) | In November 2005, the FASB issued FSP FAS 123R-3,
    Transition Election Related to Accounting for the Tax
    Effects of Share-Based Payment Awards (FSP
    FAS 123R-3). FSP FAS 123R-3 provides an elective
    alternative transition method, to SFAS 123R, in accounting
    for the tax effects of share-based payment awards to employees.
    The elective method comprises a computational component that
    establishes a beginning balance of the Additional Paid In
    Capital (APIC) pool related to employee compensation
    and a simplified method to determine the subsequent impact on
    the APIC pool of employee awards that are fully vested and
    outstanding upon the adoption of SFAS 123R. The impact on
    the APIC pool of awards partially vested upon, or granted after,
    the adoption of SFAS 123R should be determined in
    accordance with the guidance in SFAS 123R, if adopted. The
    guidance in FSP FAS 123R-3 is effective for Nortel in the
    first quarter of 2006. Nortel is currently assessing whether it
    will adopt the transition election of FSP FAS 123R-3 and
    what the impact would be on Nortels results of operations
    and financial condition.                                                                                                                                                        



|   |                   
|-- | ------------------
|3. | Accounting changes



|    |                                            
|--- | -------------------------------------------
|(a) | Consolidation of Variable Interest Entities





134



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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







|    |                            
|--- | ---------------------------
|(c) | Implicit Variable Interests





|    |                                                          
|--- | ---------------------------------------------------------
|(d) | Accounting for Electronic Equipment Waste
    Obligations

143-1, 143-1). 143-1 143-1, 143-1 143-1 143-1 143-1 EU-member




|   |                                                      
|-- | -----------------------------------------------------
|4. | Restatement of previously issued financial statements



135



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






97-2.






| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain complex arrangements with multiple deliverables were
    previously fully accounted for under the
    percentage-of-completion method of SOP 81-1, but elements
    outside of the scope of SOP 81-1 should have been examined
    for separation under the guidance in
    EITF 00-21;and
| |  | Certain complex arrangements accounted for under the
    percentage-of-completion method did not meet the criteria for
    this treatment in
    SOP 81-1 and
    should instead have been accounted for using completed contract
    accounting under
    SOP 81-1.                              





136



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






| |                                                                              
| | -----------------------------------------------------------------------------
| | Consolidated Statement of Operations for the year ended
    December 31, 2004

|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |   |  |   |       |      |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------------- | ----- | ----------------- | ----------- | - | ---- | ----------- |  | - | ----------- | - |  | - | ----- | ---- | -
|                                                                                                                                                     |                |               |       | Revenues and Cost |             |   |      |             | 
|                                                                                                                                                     |                | As Previously |       |                   | of Revenues |   |      | Other       |  |   |            
|                                                                                                                                                     |                | Reported      |       |                   | Adjustments |   |      | Adjustments |  |   | As Restated |  
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Revenues                                                                                                                                             |                | $             | 9,828 |                   |             | $ | (312 | )           |  | $ |            |   |  | $ | 9,516 |     
|Cost of revenues                                                                                                                                     |                |               | 5,735 |                   |             |   | (179 | )           |  |   | 4           |   |  |   | 5,560 |     
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Gross profit                                                                                                                                         |                |               | 4,093 |                   |             |   | (133 | )           |  |   | (4          | ) |  |   | 3,956 |     
|Selling, general and administrative expense                                                                                                          |                |               | 2,124 |                   |             |   |     |             |  |   | (6          | ) |  |   | 2,118 |     
|Research and development expense                                                                                                                     |                |               | 1,959 |                   |             |   |     |             |  |   | 1           |   |  |   | 1,960 |     
|Amortization of intangibles                                                                                                                          |                |               | 10    |                   |             |   |     |             |  |   | (1          | ) |  |   | 9     |     
|Special charges                                                                                                                                      |                |               | 180   |                   |             |   |     |             |  |   | 1           |   |  |   | 181   |     
|(Gain) loss on sale of businesses and assets                                                                                                         |                |               | (98   | )                 |             |   |     |             |  |   | 7           |   |  |   | (91   | )   
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Operating earnings (loss)                                                                                                                            |                |               | (82   | )                 |             |   | (133 | )           |  |   | (6          | ) |  |   | (221  | )   
|Other income  net                                                                                                                                   |                |               | 240   |                   |             |   |     |             |  |   | (23         | ) |  |   | 217   |     
|Interest expense                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |   |  |   |       |     
|                                                                                                                                                     | Long-term debt |               |       | (108              | )           |   |      |            |  |   |             |  |  |   |       | (108 | )
|                                                                                                                                                     | Other          |               |       | (8                | )           |   |      |            |  |   |             |  |  |   |       | (8   | )
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |               | 42    |                   |             |   | (133 | )           |  |   | (29         | ) |  |   | (120  | )   
|Income tax benefit                                                                                                                                   |                |               | 29    |                   |             |   | 1    |             |  |   |            |   |  |   | 30    |     
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|                                                                                                                                                     |                |               | 71    |                   |             |   | (132 | )           |  |   | (29         | ) |  |   | (90   | )   
|Minority interests  net of tax                                                                                                                      |                |               | (13   | )                 |             |   |     |             |  |   |            |   |  |   | (13   | )   
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) from continuing operations                                                                                                       |                |               | 58    |                   |             |   | (132 | )           |  |   | (29         | ) |  |   | (103  | )   
|Net earnings from discontinued operations  net of tax                                                                                               |                |               | 49    |                   |             |   |     |             |  |   |            |   |  |   | 49    |     
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) before cumulative effect of accounting change                                                                                    |                |               | 107   |                   |             |   | (132 | )           |  |   | (29         | ) |  |   | (54   | )   
|Cumulative effect of accounting change  net of tax                                                                                                  |                |               |      |                   |             |   |     |             |  |   |            |   |  |   |      |     
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Net earnings (loss)                                                                                                                                  |                |               | 107   |                   |             |   | (132 | )           |  |   | (29         | ) |  |   | (54   | )   
|Dividends on preferred shares                                                                                                                        |                |               | 33    |                   |             |   |     |             |  |   |            |   |  |   | 33    |     
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) applicable to common shares                                                                                                      |                | $             | 74    |                   |             | $ | (132 | )           |  | $ | (29         | ) |  | $ | (87   | )   
|                                                                                                                                                     |                |               |       |                   |             |   |      |             |  |   |             |  

137



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                                                                              
| | -----------------------------------------------------------------------------
| | Consolidated Statement of Operations for the year ended
    December 31, 2003

|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |   |  |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------------- | ------ | ----------------- | ----------- | - | ---- | ----------- |  | - | ----------- | - |  | - | ----- | --- | -
|                                                                                                                                                     |                |               |        | Revenues and Cost |             |   |      |             | 
|                                                                                                                                                     |                | As Previously |        |                   | of Revenues |   |      | Other       |  |   |            
|                                                                                                                                                     |                | Reported      |        |                   | Adjustments |   |      | Adjustments |  |   | As Restated |  
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Revenues                                                                                                                                             |                | $             | 10,193 |                   |             | $ | (261 | )           |  | $ |            |   |  | $ | 9,932 |    
|Cost of revenues                                                                                                                                     |                |               | 5,861  |                   |             |   | (139 | )           |  |   | 10          |   |  |   | 5,732 |    
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Gross profit                                                                                                                                         |                |               | 4,332  |                   |             |   | (122 | )           |  |   | (10         | ) |  |   | 4,200 |    
|Selling, general and administrative expense                                                                                                          |                |               | 1,931  |                   |             |   |     |             |  |   | 25          |   |  |   | 1,956 |    
|Research and development expense                                                                                                                     |                |               | 1,965  |                   |             |   |     |             |  |   | 8           |   |  |   | 1,973 |    
|Amortization of intangibles                                                                                                                          |                |               | 3      |                   |             |   |     |             |  |   |            |   |  |   | 3     |    
|Special charges                                                                                                                                      |                |               | 285    |                   |             |   |     |             |  |   | 5           |   |  |   | 290   |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |               | (4     | )                 |             |   |     |             |  |   |            |   |  |   | (4    | )  
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Operating earnings (loss)                                                                                                                            |                |               | 152    |                   |             |   | (122 | )           |  |   | (48         | ) |  |   | (18   | )  
|Other income  net                                                                                                                                   |                |               | 433    |                   |             |   | (10  | )           |  |   | 35          |   |  |   | 458   |    
|Interest expense                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |   |  |   |       |    
|                                                                                                                                                     | Long-term debt |               |        | (98               | )           |   |      |            |  |   |             | 3 |  |   |       | (95 | )
|                                                                                                                                                     | Other          |               |        | (26               | )           |   |      |            |  |   |             |  |  |   |       | (26 | )
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |               | 461    |                   |             |   | (132 | )           |  |   | (10         | ) |  |   | 319   |    
|Income tax benefit                                                                                                                                   |                |               | 33     |                   |             |   | 3    |             |  |   |            |   |  |   | 36    |    
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|                                                                                                                                                     |                |               | 494    |                   |             |   | (129 | )           |  |   | (10         | ) |  |   | 355   |    
|Minority interests  net of tax                                                                                                                      |                |               | (28    | )                 |             |   | 4    |             |  |   |            |   |  |   | (24   | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |               | (36    | )                 |             |   |     |             |  |   |            |   |  |   | (36   | )  
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) from continuing operations                                                                                                       |                |               | 430    |                   |             |   | (125 | )           |  |   | (10         | ) |  |   | 295   |    
|Net earnings from discontinued operations  net of tax                                                                                               |                |               | 184    |                   |             |   |     |             |  |   | (1          | ) |  |   | 183   |    
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) before cumulative effect of accounting change                                                                                    |                |               | 614    |                   |             |   | (125 | )           |  |   | (11         | ) |  |   | 478   |    
|Cumulative effect of accounting change  net of tax                                                                                                  |                |               | (12    | )                 |             |   |     |             |  |   |            |   |  |   | (12   | )  
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Net earnings (loss)                                                                                                                                  |                |               | 602    |                   |             |   | (125 | )           |  |   | (11         | ) |  |   | 466   |    
|Dividends on preferred shares                                                                                                                        |                |               | 35     |                   |             |   |     |             |  |   |            |   |  |   | 35    |    
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  
|Net earnings (loss) applicable to common shares                                                                                                      |                | $             | 567    |                   |             | $ | (125 | )           |  | $ | (11         | ) |  | $ | 431   |    
|                                                                                                                                                     |                |               |        |                   |             |   |      |             |  |   |             |  

Revenues and cost of revenues adjustments




138



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ---------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | Revenues |       |   | Cost of Revenues |  
|                                                                          |  |          |       |   |                  |  
|                                                                          |  | 2004     |       |   | 2003             |   |        | 2004 |  |   | 2003  |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As previously reported                                                    |  | $        | 9,828 |   |                  | $ | 10,193 |      |  | $ | 5,735 |   |  | $ | 5,861 |  
|Adjustments:                                                              |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  | $        | (84   | ) |                  | $ | (118   | )    |  | $ | (55   | ) |  | $ | (103  | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (174  | ) |                  |   | (49    | )    |  |   | (127  | ) |  |   | (26   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (38   | ) |                  |   | (84    | )    |  |   | 14    |   |  |   | (36   | )
|Other revenue recognition adjustments                                     |  |          | (16   | ) |                  |   | (10    | )    |  |   | (11   | ) |  |   | 26    |  
|Other
    adjustments(a)                                                  |  |          |      |   |                  |   |       |      |  |   | 4     |   |  |   | 10    |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As restated                                                               |  | $        | 9,516 |   |                  | $ | 9,932  |      |  | $ | 5,560 |   |  | $ | 5,732 |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  






|    |                                                                
|--- | ---------------------------------------------------------------
|(a) | For further details see explanation of Other
    adjustments.



| |                        
| | -----------------------
| | Application of SOP 81-1

percentage-of percentage-of


percentage-of percentage-of 81-1. percentage-of




| |                                                                          
| | -------------------------------------------------------------------------
| | Interaction between multiple revenue recognition
    accounting standards

97-2 00-21.


percentage-of 97-2.


00-21 97-2 00-21 97-2 97-2 81-1. 97-2


139



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




percentage-of 97-2




| |                                        
| | ---------------------------------------
| | Application of SAB 104 and
    SOP 97-2

97-2


97-2,








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A cumulative correction previously recorded in the third quarter
    of 2004 has now been recorded primarily in 2003, and prior
    periods resulting in an increase to revenue of $89 in the third
    quarter of 2004. The adjustment was to correct for previously
    recognized revenue relating to past sales of Optical Networks
    equipment which we determined should have been deferred and
    recognized with the delivery of future contractual PCS and other
    services over the term of the PCS.
| |  | A cumulative correction in the fourth quarter of 2004 has now
    been recorded in the appropriate prior periods resulting in an
    increase to revenue of $40 in the fourth quarter of 2004. The
    adjustment was to correct for previously recognized revenue
    related to an EMEA contract which should have been deferred
    until the delivery of certain undelivered elements such as
    services.                                                                                                    

140



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                                      
| | -------------------------------------
| | Other revenue recognition adjustments



Other adjustments






| |                         
| | ------------------------
| | Health and Welfare Trust





| |                 
| | ----------------
| | Foreign exchange







141



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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







| |   |                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2004, Nortel had recorded a cumulative correction to
    reclassify an operating lease to a capital lease. These
    adjustments have now been recorded to the appropriate prior
    periods which resulted in a decrease in selling, general and
    administrative expense in the year ended December 31, 2004
    of $16 and an increase in the year ended December 31, 2003
    of $5.
| |  | Nortel had previously recorded the release of a customer
    financing provision of $9 in 2004 that should have been recorded
    in 2003. As a result, selling, general and administrative
    expense has increased by $9 for the year ended December 31,
    2004 and decreased by $9 for the year ended December 31,
    2003.                                                               
| |  | Nortel has corrected the useful lives of various leasehold
    improvement assets, included in plant and equipment 
    net, which resulted in a decrease to depreciation expense for
    the year ended December 31, 2004 of $6 and an increase for
    the year ended December 31, 2003 of $3.                                                                                                



| |                  
| | -----------------
| | Reclassifications





142



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


Balance sheet






| |                                                       
| | ------------------------------------------------------
| | Consolidated Balance Sheet as of December 31,
    2004

|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |    |   |   |         |       | 
|------------------------------------------ | --------------------------------------- | ------------- | ------- | ----------------- | ----------- | - | ----- | ----------- | - | - | ----------- | -- | - | - | ------- | ----- | 
|                                           |                                         |               |         | Revenues and Cost |             |   |       |             |  
|                                           |                                         | As Previously |         |                   | of Revenues |   |       | Other       |   |   |            
|                                           |                                         | Reported      |         |                   | Adjustments |   |       | Adjustments |   |   | As Restated |   
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|ASSETS                                     |                                         |               |         |                   |             |   |       |             |   |   |             |    |   |   |         |      
|Current assets                             |                                         |               |         |                   |             |   |       |             |   |   |             |    |   |   |         |      
|                                           | Cash and cash equivalents               |               | $       | 3,607             |             |   | $     |            |   |   | $           | (1 | ) |   | $       | 3,606 | 
|                                           | Restricted cash and cash equivalents    |               |         | 80                |             |   |       |            |   |   |             |   |   |   |         | 80    | 
|                                           | Accounts receivable  net               |               |         | 2,800             |             |   |       | (43         | ) |   |             | 2  |   |   |         | 2,759 | 
|                                           | Inventories  net                       |               |         | 1,414             |             |   |       | 548         |   |   |             |   |   |   |         | 1,962 | 
|                                           | Deferred income taxes  net             |               |         | 255               |             |   |       |            |   |   |             |   |   |   |         | 255   | 
|                                           | Other current assets                    |               |         | 355               |             |   |       | 3           |   |   |             | (1 | ) |   |         | 357   | 
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total current assets                       |                                         |               | 8,511   |                   |             |   | 508   |             |   |   |            |    |   |   | 9,019   |      
|Investments                                |                                         |               | 159     |                   |             |   |      |             |   |   | 140         |    |   |   | 299     |      
|Plant and equipment  net                  |                                         |               | 1,646   |                   |             |   |      |             |   |   | (10         | )  |   |   | 1,636   |      
|Goodwill                                   |                                         |               | 2,123   |                   |             |   |      |             |   |   |            |    |   |   | 2,123   |      
|Intangible assets  net                    |                                         |               | 78      |                   |             |   |      |             |   |   |            |    |   |   | 78      |      
|Deferred income taxes  net                |                                         |               | 3,736   |                   |             |   |      |             |   |   | 2           |    |   |   | 3,738   |      
|Other assets                               |                                         |               | 691     |                   |             |   | 172   |             |   |   | (20         | )  |   |   | 843     |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total assets                               |                                         | $             | 16,944  |                   |             | $ | 680   |             |   | $ | 112         |    |   | $ | 17,736  |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY      
|Current liabilities                        |                                         |               |         |                   |             |   |       |             |   |   |             |    |   |   |         |      
|                                           | Trade and other accounts payable        |               | $       | 995               |             |   | $     |            |   |   | $           | (7 | ) |   | $       | 988   | 
|                                           | Payroll and benefit-related liabilities |               |         | 512               |             |   |       |            |   |   |             | 1  |   |   |         | 513   | 
|                                           | Contractual liabilities                 |               |         | 568               |             |   |       | 1           |   |   |             | 2  |   |   |         | 571   | 
|                                           | Restructuring liabilities               |               |         | 254               |             |   |       |            |   |   |             |   |   |   |         | 254   | 
|                                           | Other accrued liabilities               |               |         | 2,788             |             |   |       | 771         |   |   |             | (3 | ) |   |         | 3,556 | 
|                                           | Long-term debt due within one year      |               |         | 15                |             |   |       |            |   |   |             | (1 | ) |   |         | 14    | 
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total current liabilities                  |                                         |               | 5,132   |                   |             |   | 772   |             |   |   | (8          | )  |   |   | 5,896   |      
|Long-term debt                             |                                         |               | 2,062   |                   |             |   |      |             |   |   | (10         | )  |   |   | 2,052   |      
|Deferred income taxes  net                |                                         |               | 143     |                   |             |   |      |             |   |   |            |    |   |   | 143     |      
|Other liabilities                          |                                         |               | 3,189   |                   |             |   | 240   |             |   |   | 149         |    |   |   | 3,578   |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total liabilities                          |                                         |               | 10,526  |                   |             |   | 1,012 |             |   |   | 131         |    |   |   | 11,669  |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Minority interests in subsidiary companies |                                         |               | 94      |                   |             |   | (4    | )           |   |   |            |    |   |   | 90      |      
|SHAREHOLDERS EQUITY                       |                                         |               |         |                   |             |   |       |             |   |   |             |    |   |   |         |      
|Preferred shares, without par value        |                                         |               | 536     |                   |             |   |      |             |   |   |            |    |   |   | 536     |      
|Common shares, without par value           |                                         |               | 1,211   |                   |             |   |      |             |   |   |            |    |   |   | 1,211   |      
|Additional paid-in capital                 |                                         |               | 22,107  |                   |             |   | 1     |             |   |   | (1          | )  |   |   | 22,107  |      
|Accumulated deficit                        |                                         |               | (16,992 | )                 |             |   | (324  | )           |   |   | (43         | )  |   |   | (17,359 | )    
|Accumulated other comprehensive loss       |                                         |               | (538    | )                 |             |   | (5    | )           |   |   | 25          |    |   |   | (518    | )    
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total shareholders equity                 |                                         |               | 6,324   |                   |             |   | (328  | )           |   |   | (19         | )  |   |   | 5,977   |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   
|Total liabilities and shareholders equity |                                         | $             | 16,944  |                   |             | $ | 680   |             |   | $ | 112         |    |   | $ | 17,736  |      
|                                           |                                         |               |         |                   |             |   |       |             |   |   |             |   



|   |                                         
|-- | ----------------------------------------
|5. | Consolidated financial statement details



143



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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



| |                  
| | -----------------
| | Cost of revenues:







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





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

|                                              |  |      |       |  |      |   |       |      |  |   |       | 
|--------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                              |  | 2005 |       |  | 2004 |   |       | 2003 | 
|                                              |  |      |       |  |      |   |       |      | 
|R&D expense                                   |  | $    | 1,856 |  |      | $ | 1,960 |      |  | $ | 1,973 | 
|R&D costs incurred on behalf of
    others(a) |  |      | 28    |  |      |   | 40    |      |  |   | 72    | 
|                                              |  |      |       |  |      |   |       |      | 
|Total                                         |  | $    | 1,884 |  |      | $ | 2,000 |      |  | $ | 2,045 | 
|                                              |  |      |       |  |      |   |       |      | 






|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | These costs included R&D costs charged to customers of
    Nortel pursuant to contracts that provided for full recovery of
    the estimated cost of development, material, engineering,
    installation and other applicable costs, which were accounted
    for as contract costs.



| |                    
| | -------------------
| | Other income  net:

|                                          |  |      |     |  |      |   |     |      |  |   |     | 
|----------------------------------------- |  | ---- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                          |  | 2005 |     |  | 2004 |   |     | 2003 | 
|                                          |  |      |     |  |      |   |     |      | 
|Interest income                           |  | $    | 70  |  |      | $ | 70  |      |  | $ | 84  | 
|Write down or gain on sale of investments |  |      | 67  |  |      |   | 19  |      |  |   | 143 | 
|Currency exchange gains                   |  |      | 72  |  |      |   | 52  |      |  |   | 92  | 
|Other  net                               |  |      | 96  |  |      |   | 76  |      |  |   | 139 | 
|                                          |  |      |     |  |      |   |     |      | 
|Other income  net                        |  | $    | 305 |  |      | $ | 217 |      |  | $ | 458 | 
|                                          |  |      |     |  |      |   |     |      | 



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



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

|                                      |  |      |       |   |      |   |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                      |  | 2005 |       |   | 2004 |  
|                                      |  |      |       |   |      |  
|Trade receivables                     |  | $    | 2,570 |   |      | $ | 2,253 |  
|Notes receivable                      |  |      | 122   |   |      |   | 41    |  
|Contracts in process                  |  |      | 611   |   |      |   | 574   |  
|                                      |  |      |       |   |      |  
|                                      |  |      | 3,303 |   |      |   | 2,868 |  
|Less: provision for doubtful accounts |  |      | (137  | ) |      |   | (109  | )
|                                      |  |      |       |   |      |  
|Accounts receivable  net             |  | $    | 3,166 |   |      | $ | 2,759 |  
|                                      |  |      |       |   |      |  

144



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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

|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                      |  | 2005 |        |   | 2004 |  
|                                      |  |      |        |   |      |  
|Raw materials                         |  | $    | 777    |   |      | $ | 933    |  
|Work in process                       |  |      | 50     |   |      |   | 123    |  
|Finished goods                        |  |      | 819    |   |      |   | 1,079  |  
|Deferred costs                        |  |      | 2,014  |   |      |   | 1,512  |  
|                                      |  |      |        |   |      |  
|                                      |  |      | 3,660  |   |      |   | 3,647  |  
|Less: provision for inventory         |  |      | (1,039 | ) |      |   | (1,143 | )
|                                      |  |      |        |   |      |  
|Inventories  net                     |  |      | 2,621  |   |      |   | 2,504  |  
|Less: long-term deferred
    costs(a) |  |      | (817   | ) |      |   | (542   | )
|                                      |  |      |        |   |      |  
|Current inventories  net             |  | $    | 1,804  |   |      | $ | 1,962  |  
|                                      |  |      |        |   |      |  






|    |                                                                 
|--- | ----------------------------------------------------------------
|(a) | Long-term portion of deferred costs is included in other assets.



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

|                                                    |  |      |     |  |      |   |     | 
|--------------------------------------------------- |  | ---- | --- |  | ---- | - | --- | 
|                                                    |  | 2005 |     |  | 2004 |  
|                                                    |  |      |     |  |      |  
|Prepaid expenses                                    |  | $    | 198 |  |      | $ | 177 | 
|Income taxes recoverable                            |  |      | 68  |  |      |   | 38  | 
|Current assets of discontinued operations (note 19) |  |      |    |  |      |   | 14  | 
|Other                                               |  |      | 301 |  |      |   | 128 | 
|                                                    |  |      |     |  |      |  
|Other current assets                                |  | $    | 567 |  |      | $ | 357 | 
|                                                    |  |      |     |  |      |  



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

|                                 |                         |      |        |        |      |   |        |        |  
|-------------------------------- | ----------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | -
|                                 |                         | 2005 |        |        | 2004 |  
|                                 |                         |      |        |        |      |  
|Cost:                            |                         |      |        |        |      |   |        |       
|                                 | Land                    |      | $      | 45     |      |   | $      | 48     |  
|                                 | Buildings               |      |        | 1,265  |      |   |        | 1,278  |  
|                                 | Machinery and equipment |      |        | 2,180  |      |   |        | 2,429  |  
|                                 | Capital lease assets    |      |        | 213    |      |   |        | 176    |  
|                                 | Sale lease-back assets  |      |        | 80     |      |   |        | 59     |  
|                                 |                         |      |        |        |      |  
|                                 |                         |      | 3,783  |        |      |   | 3,990  |       
|                                 |                         |      |        |        |      |  
|Less accumulated depreciation:   |                         |      |        |        |      |   |        |       
|                                 | Buildings               |      |        | (455   | )    |   |        | (399   | )
|                                 | Machinery and equipment |      |        | (1,674 | )    |   |        | (1,873 | )
|                                 | Capital lease assets    |      |        | (78    | )    |   |        | (66    | )
|                                 | Sale lease-back assets  |      |        | (17    | )    |   |        | (16    | )
|                                 |                         |      |        |        |      |  
|                                 |                         |      | (2,224 | )      |      |   | (2,354 | )     
|                                 |                         |      |        |        |      |  
|Plant and equipment 
    net(a) |                         | $    | 1,559  |        |      | $ | 1,636  |       
|                                 |                         |      |        |        |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included assets held for sale with a carrying value of $136 and
    $29 as of December 31, 2005 and 2004, respectively, related
    to owned facilities that were being actively marketed. These
    assets were written down in previous periods 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 during 2006.

145



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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



|                                  |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |       |     |   |   |       |     |  
|--------------------------------- | ------------------- | -------- | --- | --- | -------- | - | ------- | -------- | - | - | ---------- | - |  | ----- | ----- | --- | - | - | ----- | --- | -
|                                  |                     | Carrier  |     |     |          |   | GSM and |          |   |   |            |  
|                                  |                     | Packet   |     |     | CDMA     |   |         | UMTS     |   |   | Enterprise |   |  |      
|                                  |                     | Networks |     |     | Networks |   |         | Networks |   |   | Networks   |   |  | Total |      
|                                  |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |      
|Balance  as of December 31, 2003 |                     | $        | 535 |     |          | $ | 26      |          |   | $ | 9          |   |  | $     | 1,557 |     |   | $ | 2,127 |    
|Change:                           |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |       |     |   |   |       |    
|                                  | Disposal            |          |     | (13 | )        |   |         |         |   |   |            |  |  |       |       | (2  | ) |   |       | (15 | )
|                                  | Foreign exchange    |          |     | 6   |          |   |         | 2        |   |   |            |  |  |       |       | 3   |   |   |       | 11  |  
|                                  |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |      
|Balance  as of December 31, 2004 |                     |          | 528 |     |          |   | 28      |          |   |   | 9          |   |  |       | 1,558 |     |   |   | 2,123 |    
|Change:                           |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |       |     |   |   |       |    
|                                  | Additions (note 10) |          |     | 11  |          |   |         | 14       |   |   |            | 9 |  |       |       | 308 |   |   |       | 342 |  
|                                  | Disposal            |          |     | (38 | )        |   |         |         |   |   |            |  |  |       |       |    |   |   |       | (38 | )
|                                  | Foreign exchange    |          |     | (8  | )        |   |         | (3       | ) |   |            |  |  |       |       | (4  | ) |   |       | (15 | )
|                                  |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |      
|Balance  as of December 31, 2005 |                     | $        | 493 |     |          | $ | 39      |          |   | $ | 18         |   |  | $     | 1,862 |     |   | $ | 2,412 |    
|                                  |                     |          |     |     |          |   |         |          |   |   |            |   |  |       |      



Intangible
assets  net:


|                                   |  |      |     |  |      |   |    | 
|---------------------------------- |  | ---- | --- |  | ---- | - | -- | 
|                                   |  | 2005 |     |  | 2004 |  
|                                   |  |      |     |  |      |  
|Other intangible
    assets(a)     |  | $    | 135 |  |      | $ | 38 | 
|Pension intangible assets (note 9) |  |      | 37  |  |      |   | 40 | 
|                                   |  |      |     |  |      |  
|Intangible assets 
    net(b)     |  | $    | 172 |  |      | $ | 78 | 
|                                   |  |      |     |  |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other intangible assets are being amortized over a weighted
    average period of approximately nine years ending in 2014.
    Amortization expense for the next five years commencing in 2006
    is expected to be $28, $26, $19, $17 and $14, respectively. The
    majority of amortization expense is denominated in a foreign
    currency and may fluctuate due to changes in foreign exchange
    rates.
|(b) | The increase related primarily to intangible assets acquired in
    the PEC Solutions, Inc. acquisition and the formation of, the
    joint venture with LG Electronics Inc., see note 10.                                                                                                                                                                                                                      



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

|                                                                           |  |      |       |  |      |   |       | 
|-------------------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                                           |  | 2005 |       |  | 2004 |  
|                                                                           |  |      |       |  |      |  
|Outsourcing and selling, general and administrative related
    provisions |  | $    | 255   |  |      | $ | 320   | 
|Customer deposits                                                          |  |      | 38    |  |      |   | 28    | 
|Product related provisions                                                 |  |      | 42    |  |      |   | 57    | 
|Warranty provisions (note 13)                                              |  |      | 206   |  |      |   | 268   | 
|Deferred revenue                                                           |  |      | 1,289 |  |      |   | 1,420 | 
|Miscellaneous taxes                                                        |  |      | 65    |  |      |   | 52    | 
|Income taxes payable                                                       |  |      | 81    |  |      |   | 110   | 
|Interest payable                                                           |  |      | 40    |  |      |   | 37    | 
|Advance billings in excess of revenues recognized to date on
    contracts |  |      | 1,194 |  |      |   | 1,146 | 
|Other                                                                      |  |      | 155   |  |      |   | 118   | 
|                                                                           |  |      |       |  |      |  
|Other accrued liabilities                                                  |  | $    | 3,365 |  |      | $ | 3,556 | 
|                                                                           |  |      |       |  |      |  

146



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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

|                                                                  |  |      |       |  |      |   |       | 
|----------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                                  |  | 2005 |       |  | 2004 |  
|                                                                  |  |      |       |  |      |  
|Pension, post-employment and post-retirement benefits liabilities |  | $    | 2,459 |  |      | $ | 2,350 | 
|Restructuring liabilities (note 7)                                |  |      | 203   |  |      |   | 209   | 
|Deferred revenue                                                  |  |      | 1,073 |  |      |   | 783   | 
|Other long-term provisions                                        |  |      | 302   |  |      |   | 236   | 
|                                                                  |  |      |       |  |      |  
|Other liabilities                                                 |  | $    | 4,037 |  |      | $ | 3,578 | 
|                                                                  |  |      |       |  |      |  



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



| |                                            
| | -------------------------------------------
| | Change in operating assets and liabilities:

|                                                      |  |      |      |   |      |   |      |      |  |   |      |  
|----------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                      |  | 2005 |      |   | 2004 |   |      | 2003 | 
|                                                      |  |      |      |   |      |   |      |      | 
|Accounts receivable  net                             |  |      | (303 | ) |      |   | (162 | )    |  |   | (268 | )
|Inventories  net                                     |  |      | (266 | ) |      |   | (692 | )    |  |   | 360  |  
|Income taxes                                          |  |      | (57  | ) |      |   | (63  | )    |  |   | 25   |  
|Restructuring liabilities                             |  |      | (138 | ) |      |   | (56  | )    |  |   | (223 | )
|Accounts payable, payroll and contractual liabilities |  |      | (288 | ) |      |   | 258  |      |  |   | (627 | )
|Other operating assets and liabilities                |  |      | 208  |   |      |   | (33  | )    |  |   | (208 | )
|                                                      |  |      |      |   |      |   |      |      | 
|Change in operating assets and liabilities            |  | $    | (844 | ) |      | $ | (748 | )    |  | $ | (941 | )
|                                                      |  |      |      |   |      |   |      |      | 



| |                           
| | --------------------------
| | Cash and cash equivalents:

|                                         |  |      |       |  |      |   |       |      |  |   |       | 
|---------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                         |  | 2005 |       |  | 2004 |   |       | 2003 | 
|                                         |  |      |       |  |      |   |       |      | 
|Cash on hand and balances with banks     |  | $    | 761   |  |      | $ | 732   |      |  | $ | 734   | 
|Short-term investments                   |  |      | 2,115 |  |      |   | 2,874 |      |  |   | 3,199 | 
|                                         |  |      |       |  |      |   |       |      | 
|Cash and cash equivalents at end of year |  | $    | 2,876 |  |      | $ | 3,606 |      |  | $ | 3,933 | 
|                                         |  |      |       |  |      |   |       |      | 



| |                                                                       
| | ----------------------------------------------------------------------
| | Acquisitions of investments and businesses  net of
    cash acquired:

|                                                                      |                                                                                              |      |      |    |      |   |     |      |  |   |      |    | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---- | ---- | -- | ---- | - | --- | ---- |  | - | ---- | -- | 
|                                                                      |                                                                                              | 2005 |      |    | 2004 |   |     | 2003 | 
|                                                                      |                                                                                              |      |      |    |      |   |     |      | 
|Cash acquired                                                         |                                                                                              | $    | (26  | )  |      | $ | (6  | )    |  | $ | (5   | ) 
|Total net assets acquired other than cash                             |                                                                                              |      | (651 | )  |      |   | (5  | )    |  |   | (114 | ) 
|                                                                      |                                                                                              |      |      |    |      |   |     |      | 
|Total purchase price                                                  |                                                                                              |      | (677 | )  |      |   | (11 | )    |  |   | (119 | ) 
|Less:                                                                 |                                                                                              |      |      |    |      |   |     |      |  |   |      |   
|                                                                      | Cash acquired                                                                                |      |      | 26 |      |   |     | 6    |  |   |      | 5  | 
|                                                                      | Non-cash consideration paid other than common share options and
    contingent consideration |      |      |   |      |   |     |     |  |   |      | 83 | 
|                                                                      |                                                                                              |      |      |    |      |   |     |      | 
|Acquisitions of investments and businesses  net of
    cash acquired |                                                                                              | $    | (651 | )  |      | $ | (5  | )    |  | $ | (31  | ) 
|                                                                      |                                                                                              |      |      |    |      |   |     |      | 



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

|                                         |  |      |     |  |      |   |     |      |  |   |     | 
|---------------------------------------- |  | ---- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                         |  | 2005 |     |  | 2004 |   |     | 2003 | 
|                                         |  |      |     |  |      |   |     |      | 
|Cash interest paid                       |  | $    | 122 |  |      | $ | 110 |      |  | $ | 110 | 
|Cash taxes paid (recovered) 
    net(a) |  | $    | 48  |  |      | $ | 40  |      |  | $ | 2   | 






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | During the year ended December 31, 2005, Nortel paid
    Canadian tax on preferred dividends of $11. This amount is
    included in the $38 of dividends on preferred shares in the
    consolidated statements of cash flows.

147



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|   |                    
|-- | -------------------
|6. | Segment information



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





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Carrier Packet Networks provides: (i) circuit and packet
    voice solutions, (ii) data networking and security
    solutions and (iii) optical networking solutions. Together,
    these solutions provide 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, cable operators and other
    communication service providers.                 
| | CDMA Networks provides communication network solutions to
    Nortels wireless service provider customers based on CDMA
    and Time Division Multiple Access (TDMA)
    technologies to enable those service providers 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.                   





148



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








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



|                                               |  |      |        |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | 2005 |        |   | 2004 |   |       | 2003 | 
|                                               |  |      |        |   |      |   |       |      | 
|Revenues                                       |  |      |        |   |      |   |       |      |  |   |       |  
|Carrier Packet Networks                        |  | $    | 2,828  |   |      | $ | 2,589 |      |  | $ | 3,132 |  
|CDMA Networks                                  |  |      | 2,321  |   |      |   | 2,216 |      |  |   | 2,356 |  
|GSM and UMTS Networks                          |  |      | 2,799  |   |      |   | 2,411 |      |  |   | 1,882 |  
|Enterprise Networks                            |  |      | 2,570  |   |      |   | 2,289 |      |  |   | 2,531 |  
|                                               |  |      |        |   |      |   |       |      | 
|Total reportable segments                      |  |      | 10,518 |   |      |   | 9,505 |      |  |   | 9,901 |  
|Other(a)                                       |  |      | 5      |   |      |   | 11    |      |  |   | 31    |  
|                                               |  |      |        |   |      |   |       |      | 
|Total revenues                                 |  | $    | 10,523 |   |      | $ | 9,516 |      |  | $ | 9,932 |  
|                                               |  |      |        |   |      |   |       |      | 
|Management EBT                                 |  |      |        |   |      |   |       |      |  |   |       |  
|Carrier Packet Networks                        |  | $    | 50     |   |      | $ | (294  | )    |  | $ | (128  | )
|CDMA Networks                                  |  |      | 685    |   |      |   | 688   |      |  |   | 800   |  
|GSM and UMTS Networks                          |  |      | (4     | ) |      |   | (196  | )    |  |   | (162  | )
|Enterprise Networks                            |  |      | 180    |   |      |   | 170   |      |  |   | 279   |  
|                                               |  |      |        |   |      |   |       |      | 
|Total reportable segments                      |  |      | 911    |   |      |   | 368   |      |  |   | 789   |  
|Other(b)                                       |  |      | (733   | ) |      |   | (402  | )    |  |   | (241  | )
|                                               |  |      |        |   |      |   |       |      | 
|Total management EBT                           |  |      | (178   | ) |      |   | (34   | )    |  |   | 548   |  
|                                               |  |      |        |   |      |   |       |      | 
|Amortization of intangibles                    |  |      | (17    | ) |      |   | (9    | )    |  |   | (3    | )
|Special charges                                |  |      | (170   | ) |      |   | (181  | )    |  |   | (290  | )
|Gain (loss) on sale of businesses and assets   |  |      | (47    | ) |      |   | 91    |      |  |   | 4     |  
|Income tax benefit                             |  |      | 55     |   |      |   | 30    |      |  |   | 36    |  
|                                               |  |      |        |   |      |   |       |      | 
|Net earnings (loss) from continuing operations |  | $    | (1     | ) |      | $ | (103  | )    |  | $ | 295   |  
|                                               |  |      |        |   |      |   |       |      | 






|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other represents miscellaneous revenues that do not
    correspond to any individual reportable segment.                                                  
|(b) | Other represents miscellaneous business activities,
    corporate functions, non-operating costs and includes interest
    attributable to long-term debt.



| |                 
| | ----------------
| | Product revenues



|                                       |  |      |        |  |      |   |       |      |  |   |       | 
|-------------------------------------- |  | ---- | ------ |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                       |  | 2005 |        |  | 2004 |   |       | 2003 | 
|                                       |  |      |        |  |      |   |       |      | 
|CDMA solutions                         |  | $    | 2,321  |  |      | $ | 2,216 |      |  | $ | 2,356 | 
|GSM and UMTS solutions                 |  |      | 2,799  |  |      |   | 2,411 |      |  |   | 1,882 | 
|Circuit and packet voice solutions     |  |      | 2,748  |  |      |   | 2,582 |      |  |   | 2,989 | 
|Optical networking solutions           |  |      | 1,186  |  |      |   | 958   |      |  |   | 1,172 | 
|Data networking and security solutions |  |      | 1,321  |  |      |   | 1,338 |      |  |   | 1,501 | 
|Other                                  |  |      | 148    |  |      |   | 11    |      |  |   | 32    | 
|                                       |  |      |        |  |      |   |       |      | 
|Total                                  |  | $    | 10,523 |  |      | $ | 9,516 |      |  | $ | 9,932 | 
|                                       |  |      |        |  |      |   |       |      | 

149



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






| |                       
| | ----------------------
| | Geographic information



|             |  |      |        |  |      |   |       |      |  |   |       | 
|------------ |  | ---- | ------ |  | ---- | - | ----- | ---- |  | - | ----- | 
|             |  | 2005 |        |  | 2004 |   |       | 2003 | 
|             |  |      |        |  |      |   |       |      | 
|U.S.         |  | $    | 5,206  |  |      | $ | 4,646 |      |  | $ | 5,329 | 
|EMEA         |  |      | 2,725  |  |      |   | 2,496 |      |  |   | 2,253 | 
|Canada       |  |      | 576    |  |      |   | 553   |      |  |   | 599   | 
|Asia Pacific |  |      | 1,405  |  |      |   | 1,261 |      |  |   | 1,258 | 
|CALA         |  |      | 611    |  |      |   | 560   |      |  |   | 493   | 
|             |  |      |        |  |      |   |       |      | 
|Total        |  | $    | 10,523 |  |      | $ | 9,516 |      |  | $ | 9,932 | 
|             |  |      |        |  |      |   |       |      | 



| |                  
| | -----------------
| | Long-lived assets



|                     |  |      |       |  |      |   |       | 
|-------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                     |  | 2005 |       |  | 2004 |  
|                     |  |      |       |  |      |  
|U.S.                 |  | $    | 2,741 |  |      | $ | 2,399 | 
|EMEA                 |  |      | 475   |  |      |   | 607   | 
|Canada               |  |      | 702   |  |      |   | 744   | 
|Other
    regions(a) |  |      | 225   |  |      |   | 87    | 
|                     |  |      |       |  |      |  
|Total                |  | $    | 4,143 |  |      | $ | 3,837 | 
|                     |  |      |       |  |      |  






|    |                                   
|--- | ----------------------------------
|(a) | The Asia Pacific and CALA regions.



|   |                
|-- | ---------------
|7. | Special charges







150



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   |   |     |     |  
|---------------------------------------------------------- | -------------------------------------- | --------- | --- | ---------- | --------- | - | --------- | ----------- | - | - | ----- | --- | - | ----- | ------- | -- | ------- | - | --- | ---- | - | - | --- | --- | -
|                                                           |                                        |           |     | Contract   |           |   |           |             |   |   |       |     |  
|                                                           |                                        |           |     | Settlement |           |   | Plant and |             |   |   |       |     |   |      
|                                                           |                                        | Workforce |     |            | and Lease |   |           | Equipment   |   |   |       |     |   |       | Special |   
|                                                           |                                        | Reduction |     |            | Costs     |   |           | Write Downs |   |   | Other |     |   | Total |         |    | Charges |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|2004 Restructuring Plan                                    |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   |   |     |    
|Provision balance as of January 1, 2004                    |                                        | $         |    |            |           | $ |          |             |   | $ |      |     |   | $     |        |    |         | $ |    |      |   |   |     |    
|                                                           | Other special charges                  |           |     | 163        |           |   |           |            |   |   |       | 2   |   |       |         |   |         |   |     | 165  |   |   | $   | 165 |  
|                                                           | Cash drawdowns                         |           |     | (38        | )         |   |           |            |   |   |       |    |   |       |         |   |         |   |     | (38  | ) |   |     |     |  
|                                                           | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | (2  | ) |       |         |   |         |   |     | (2   | ) |   |     |     |  
|                                                           | Foreign exchange and other adjustments |           |     | (1         | )         |   |           |            |   |   |       |    |   |       |         |   |         |   |     | (1   | ) |   |     |     |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Provision balance as of December 31, 2004                  |                                        | $         | 124 |            |           | $ |          |             |   | $ |      |     |   | $     |        |    |         | $ | 124 |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total special charges for the year ended December 31, 2004 |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   | $ | 165 |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|                                                           | Other special charges                  |           | $   | 68         |           |   | $         | 72          |   |   | $     | 30  |   |       | $       |   |         |   | $   | 170  |   |   | $   | 170 |  
|                                                           | Revisions to prior accruals            |           |     |           |           |   |           | 6           |   |   |       | 1   |   |       |         |   |         |   |     | 7    |   |   |     | 7   |  
|                                                           | Cash drawdowns                         |           |     | (167       | )         |   |           | (13         | ) |   |       |    |   |       |         |   |         |   |     | (180 | ) |   |     |     |  
|                                                           | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | (30 | ) |       |         |   |         |   |     | (30  | ) |   |     |     |  
|                                                           | Foreign exchange and other adjustments |           |     | (4         | )         |   |           | (4          | ) |   |       | (1  | ) |       |         |   |         |   |     | (9   | ) |   |     |     |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Provision balance as of December 31, 2005                  |                                        | $         | 21  |            |           | $ | 61        |             |   | $ |      |     |   | $     |        |    |         | $ | 82  |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total special charges for the year ended December 31, 2005 |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   | $ | 177 |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|2001 Restructuring Plan                                    |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   |   |     |    
|Provision balance as of January 1, 2003                    |                                        | $         | 205 |            |           | $ | 621       |             |   | $ |      |     |   | $     | 9       |    |         | $ | 835 |      |   |   |     |    
|                                                           | Other special charges                  |           |     | 198        |           |   |           | 68          |   |   |       | 74  |   |       |         |   |         |   |     | 340  |   |   | $   | 340 |  
|                                                           | Revisions to prior accruals            |           |     | (42        | )         |   |           | 20          |   |   |       | (28 | ) |       |         |   |         |   |     | (50  | ) |   |     | (50 | )
|                                                           | Cash drawdowns                         |           |     | (267       | )         |   |           | (275        | ) |   |       |    |   |       |         | (9 | )       |   |     | (551 | ) |   |     |     |  
|                                                           | Non-cash drawdowns                     |           |     | (41        | )         |   |           |            |   |   |       | (46 | ) |       |         |   |         |   |     | (87  | ) |   |     |     |  
|                                                           | Foreign exchange and other adjustments |           |     | 13         |           |   |           | 25          |   |   |       |    |   |       |         |   |         |   |     | 38   |   |   |     |     |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Provision balance as of December 31, 2003                  |                                        | $         | 66  |            |           | $ | 459       |             |   | $ |      |     |   | $     |        |    |         | $ | 525 |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total special charges for the year ended December 31, 2003 |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   | $ | 290 |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|                                                           | Other special charges                  |           | $   | 7          |           |   | $         |            |   |   | $     |    |   |       | $       |   |         |   | $   | 7    |   |   | $   | 7   |  
|                                                           | Revisions to prior accruals            |           |     | (4         | )         |   |           | 13          |   |   |       |    |   |       |         |   |         |   |     | 9    |   |   |     | 9   |  
|                                                           | Cash drawdowns                         |           |     | (49        | )         |   |           | (167        | ) |   |       |    |   |       |         |   |         |   |     | (216 | ) |   |     |     |  
|                                                           | Non-cash drawdowns                     |           |     | (4         | )         |   |           |            |   |   |       |    |   |       |         |   |         |   |     | (4   | ) |   |     |     |  
|                                                           | Foreign exchange and other adjustments |           |     | (1         | )         |   |           | 19          |   |   |       |    |   |       |         |   |         |   |     | 18   |   |   |     |     |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Provision balance as of December 31, 2004                  |                                        | $         | 15  |            |           | $ | 324       |             |   | $ |      |     |   | $     |        |    |         | $ | 339 |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total special charges for the year ended December 31, 2004 |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   | $ | 16  |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|                                                           | Revisions to prior accruals            |           | $   | (5         | )         |   | $         | 1           |   |   | $     | (3  | ) |       | $       |   |         |   | $   | (7   | ) |   | $   | (7  | )
|                                                           | Cash drawdowns                         |           |     | (6         | )         |   |           | (107        | ) |   |       |    |   |       |         |   |         |   |     | (113 | ) |   |     |     |  
|                                                           | Non-cash drawdowns                     |           |     |           |           |   |           |            |   |   |       | 3   |   |       |         |   |         |   |     | 3    |   |   |     |     |  
|                                                           | Foreign exchange and other adjustments |           |     | (1         | )         |   |           | (5          | ) |   |       |    |   |       |         |   |         |   |     | (6   | ) |   |     |     |  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Provision balance as of December 31, 2005                  |                                        | $         | 3   |            |           | $ | 213       |             |   | $ |      |     |   | $     |        |    |         | $ | 216 |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total special charges for the year ended December 31, 2005 |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |   |     |      |   | $ | (7  | )  
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  
|Total provision balance as of December 31, 2005
    (a)    |                                        | $         | 24  |            |           | $ | 274       |             |   | $ |      |     |   | $     |        |    |         | $ | 298 |      |   |   |     |    
|                                                           |                                        |           |     |            |           |   |           |             |   |   |       |     |   |       |         |    |         |  






|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of December 31, 2005 and 2004, the short-term provision
    balance was $95 and $254, respectively, and the long-term
    provision balance was $203 and $209, respectively.

151



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                                           |             |           |     |     |             |  |       |       |  |  |       |       | 
|-------------------------------------------------------------------------- | ----------- | --------- | --- | --- | ----------- |  | ----- | ----- |  |  | ----- | ----- | 
|                                                                           |             | Direct(a) |     |     | Indirect(b) |  |       | Total | 
|                                                                           |             |           |     |     |             |  |       |       | 
|Employees (Approximate) RFT employee notifications by period:              |             |           |     |     |             |  |       |       |  |  |       |      
|                                                                           | During 2003 |           |     | 400 |             |  |       | 1,300 |  |  |       | 1,700 | 
|                                                                           | During 2004 |           |     | 200 |             |  |       | 1,700 |  |  |       | 1,900 | 
|                                                                           | During 2005 |           |     | 61  |             |  |       | 893   |  |  |       | 954   | 
|                                                                           |             |           |     |     |             |  |       |       | 
|RFT employee notifications for the three years ended
    December 31, 2005 |             |           | 661 |     |             |  | 3,893 |       |  |  | 4,554 |      
|                                                                           |             |           |     |     |             |  |       |       | 






|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Direct employees included employees performing manufacturing,
    assembly, test 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.      



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

Year
ended December 31, 2005










Year
ended December 31, 2004










152



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Notes to Consolidated Financial
Statements  (Continued)


2004
Restructuring Plan  by Segment




|                                                           |                         |           |     |            |           |   |           |             |  |   |       |    |  |   |     |     | 
|---------------------------------------------------------- | ----------------------- | --------- | --- | ---------- | --------- | - | --------- | ----------- |  | - | ----- | -- |  | - | --- | --- | 
|                                                           |                         |           |     | Contract   |           |   |           |             | 
|                                                           |                         |           |     | Settlement |           |   | Plant and |             |  |  
|                                                           |                         | Workforce |     |            | and Lease |   |           | Equipment   |  |   |      
|                                                           |                         | Reduction |     |            | Costs     |   |           | Write Downs |  |   | Total |   
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|2004 Restructuring Plan                                    |                         |           |     |            |           |   |           |             |  |   |       |    |  |   |     |    
|                                                           | Carrier Packet Networks |           | $   | 83         |           |   | $         |            |  |   | $     |   |  |   | $   | 83  | 
|                                                           | CDMA Networks           |           |     | 14         |           |   |           |            |  |   |       |   |  |   |     | 14  | 
|                                                           | GSM and UMTS Networks   |           |     | 21         |           |   |           |            |  |   |       |   |  |   |     | 21  | 
|                                                           | Enterprise Networks     |           |     | 26         |           |   |           |            |  |   |       |   |  |   |     | 26  | 
|                                                           | Other                   |           |     | 19         |           |   |           |            |  |   |       | 2  |  |   |     | 21  | 
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|Total special charges for the year ended December 31, 2004 |                         | $         | 163 |            |           | $ |          |             |  | $ | 2     |    |  | $ | 165 |    
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|                                                           | Carrier Packet Networks |           | $   | 40         |           |   | $         | 49          |  |   | $     | 17 |  |   | $   | 106 | 
|                                                           | CDMA Networks           |           |     | 5          |           |   |           | 4           |  |   |       | 2  |  |   |     | 11  | 
|                                                           | GSM and UMTS Networks   |           |     | 14         |           |   |           | 11          |  |   |       | 7  |  |   |     | 32  | 
|                                                           | Enterprise Networks     |           |     | 9          |           |   |           | 14          |  |   |       | 5  |  |   |     | 28  | 
|                                                           | Other                   |           |     |           |           |   |           |            |  |   |       |   |  |   |     |    | 
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|Total special charges for the year ended December 31, 2005 |                         | $         | 68  |            |           | $ | 78        |             |  | $ | 31    |    |  | $ | 177 |    
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   



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

Year
ended December 31, 2005










Year
ended December 31, 2004










153



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Notes to Consolidated Financial
Statements  (Continued)




|                   |  |               |    |                 |  |             |   |             |  |                 |    |   |  |   |    |   |  |   |    | 
|------------------ |  | ------------- | -- | --------------- |  | ----------- | - | ----------- |  | --------------- | -- | - |  | - | -- | - |  | - | -- | 
|                   |  | Accrued       |    |                 |  |             |   |             |  | Accrued        
|                   |  | Balance as of |    | Costs           |  | Payments    |   | Adjustments |  | Balance as at  
|                   |  | December 31,  |    | Incurred During |  | Made During |   | Made During |  | of December 31,
|                   |  | 2004          |    | 2005            |  | 2005        |   | 2005        |  | 2005           
|                   |  |               |    |                 |  |             |   |             |  |                
|Lease
    costs(a) |  | $             | 31 |                 |  | $           |  |             |  | $               | (1 | ) |  | $ | (5 | ) |  | $ | 25 | 
|                   |  |               |    |                 |  |             |   |             |  |                 |    |   |  |   |    |   |  |   |    | 






|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 non-cash adjustments of $(2)
    prior to January 1, 2005.

Year
ended December 31, 2003










154



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


2001
Restructuring Plan  by Segment




|                                                           |                         |           |     |            |           |   |           |             |  |   |       |    |   |   |     |     |  
|---------------------------------------------------------- | ----------------------- | --------- | --- | ---------- | --------- | - | --------- | ----------- |  | - | ----- | -- | - | - | --- | --- | -
|                                                           |                         |           |     | Contract   |           |   |           |             | 
|                                                           |                         |           |     | Settlement |           |   | Plant and |             |  |  
|                                                           |                         | Workforce |     |            | and Lease |   |           | Equipment   |  |   |      
|                                                           |                         | Reduction |     |            | Costs     |   |           | Write Downs |  |   | Total |   
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|2001 Restructuring Plan                                    |                         |           |     |            |           |   |           |             |  |   |       |    |   |   |     |    
|                                                           | Carrier Packet Networks |           | $   | 61         |           |   | $         | 34          |  |   | $     | 28 |   |   | $   | 123 |  
|                                                           | CDMA Networks           |           |     | 6          |           |   |           | 4           |  |   |       | 1  |   |   |     | 11  |  
|                                                           | GSM and UMTS Networks   |           |     | 42         |           |   |           | 24          |  |   |       | 8  |   |   |     | 74  |  
|                                                           | Enterprise Networks     |           |     | 31         |           |   |           | 18          |  |   |       | 6  |   |   |     | 55  |  
|                                                           | Other                   |           |     | 16         |           |   |           | 8           |  |   |       | 3  |   |   |     | 27  |  
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|Total special charges for the year ended December 31, 2003 |                         | $         | 156 |            |           | $ | 88        |             |  | $ | 46    |    |   | $ | 290 |    
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|                                                           | Carrier Packet Networks |           | $   | 3          |           |   | $         | 6           |  |   | $     |   |   |   | $   | 9   |  
|                                                           | CDMA Networks           |           |     |           |           |   |           | 2           |  |   |       |   |   |   |     | 2   |  
|                                                           | GSM and UMTS Networks   |           |     |           |           |   |           | 2           |  |   |       |   |   |   |     | 2   |  
|                                                           | Enterprise Networks     |           |     |           |           |   |           | 2           |  |   |       |   |   |   |     | 2   |  
|                                                           | Other                   |           |     |           |           |   |           | 1           |  |   |       |   |   |   |     | 1   |  
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|Total special charges for the year ended December 31, 2004 |                         | $         | 3   |            |           | $ | 13        |             |  | $ |      |    |   | $ | 16  |    
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|                                                           | Carrier Packet Networks |           | $   | (2         | )         |   | $         | 1           |  |   | $     | (2 | ) |   | $   | (3  | )
|                                                           | CDMA Networks           |           |     |           |           |   |           |            |  |   |       |   |   |   |     |    |  
|                                                           | GSM and UMTS Networks   |           |     | (2         | )         |   |           |            |  |   |       | (1 | ) |   |     | (3  | )
|                                                           | Enterprise Networks     |           |     | (1         | )         |   |           |            |  |   |       |   |   |   |     | (1  | )
|                                                           | Other                   |           |     |           |           |   |           |            |  |   |       |   |   |   |     |    |  
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   
|Total special charges for the year ended December 31, 2005 |                         | $         | (5  | )          |           | $ | 1         |             |  | $ | (3    | )  |   | $ | (7  | )  
|                                                           |                         |           |     |            |           |   |           |             |  |   |       |   



8.     Income taxes










155



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










156



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |      |   |        |        |      |  
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | -
|                                                                                                               |                                                                                                                                            | 2005                                                                       |        |        | 2004 |   |        | 2003   |     
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Income taxes at Canadian rates (2005  34.5%,
    2004  33.3%, 2003  35.8%)                                  |                                                                                                                                            | $                                                                          | 17     |        |      | $ | 40     |        |      | $ | (114   | )     
|Difference between Canadian rates and rates applicable to
    subsidiaries in the U.S. and other jurisdictions |                                                                                                                                            |                                                                            | 34     |        |      |   | (4     | )      |      |   | (25    | )     
|Valuation allowances on tax benefits                                                                           |                                                                                                                                            |                                                                            | (116   | )      |      |   | (180   | )      |      |   | 20     |       
|Utilization of losses                                                                                          |                                                                                                                                            |                                                                            | 16     |        |      |   | 2      |        |      |   | 86     |       
|Tax benefit of investment tax credits, net of valuation allowance                                              |                                                                                                                                            |                                                                            | 39     |        |      |   | 43     |        |      |   | 41     |       
|Adjustments to provisions and reserves                                                                         |                                                                                                                                            |                                                                            | 140    |        |      |   | 25     |        |      |   | 29     |       
|Foreign witholding and other taxes                                                                             |                                                                                                                                            |                                                                            | (13    | )      |      |   | (14    | )      |      |   | (13    | )     
|Corporate minimum taxes                                                                                        |                                                                                                                                            |                                                                            | (14    | )      |      |   | (8     | )      |      |   | (8     | )     
|Impact of non-taxable/(non-deductible) items and other
    differences                                         |                                                                                                                                            |                                                                            | (48    | )      |      |   | 126    |        |      |   | 20     |       
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Income tax benefit (expense)                                                                                   |                                                                                                                                            | $                                                                          | 55     |        |      | $ | 30     |        |      | $ | 36     |       
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Details of Nortels income (loss):                                                                             |                                                                                                                                            |                                                                            |        |        |      |   |        |        |      |   |        |       
|                                                                                                               | Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net loss of associated
    companies: |                                                                            |        |        |      |   |        |        |      |   |        |        |     
|                                                                                                               |                                                                                                                                            | Canadian, excluding gain (loss) on sale of businesses and assets           |        | $      | (61  | ) |        | $      | (179 | ) |        | $      | (116 | )
|                                                                                                               |                                                                                                                                            | U.S. and other, excluding gain (loss) on sale of businesses and
    assets |        |        | 60   |   |        |        | (32  | ) |        |        | 431  |  
|                                                                                                               |                                                                                                                                            | Gain (loss) on sale of businesses and assets                               |        |        | (47  | ) |        |        | 91   |   |        |        | 4    |  
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|                                                                                                               |                                                                                                                                            | $                                                                          | (48    | )      |      | $ | (120   | )      |      | $ | 319    |       
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Income tax benefit (expense):                                                                                  |                                                                                                                                            |                                                                            |        |        |      |   |        |        |      |   |        |       
|                                                                                                               |                                                                                                                                            | Canadian, excluding gain (loss) on sale of businesses and assets           |        | $      | 21   |   |        | $      | 16   |   |        | $      | 184  |  
|                                                                                                               |                                                                                                                                            | U.S. and other, excluding gain (loss) on sale of businesses and
    assets |        |        | 34   |   |        |        | 14   |   |        |        | (148 | )
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|                                                                                                               |                                                                                                                                            | $                                                                          | 55     |        |      | $ | 30     |        |      | $ | 36     |       
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Income tax benefit (expense):                                                                                  |                                                                                                                                            |                                                                            |        |        |      |   |        |        |      |   |        |       
|                                                                                                               | Current                                                                                                                                    |                                                                            | $      | (22    | )    |   | $      | (16    | )    |   | $      | 25     |     
|                                                                                                               | Deferred                                                                                                                                   |                                                                            |        | 77     |      |   |        | 46     |      |   |        | 11     |     
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Income tax benefit (expense)                                                                                   |                                                                                                                                            | $                                                                          | 55     |        |      | $ | 30     |        |      | $ | 36     |       
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Details of movement in valuation allowance                                                                     |                                                                                                                                            |                                                                            |        |        |      |   |        |        |      |   |        |       
|                                                                                                               | Opening Valuation Allowance                                                                                                                |                                                                            | $      | (3,516 | )    |   | $      | (3,180 | )    |   | $      | (2,864 | )   
|                                                                                                               | Amounts charged to income tax benefit (expense)                                                                                            |                                                                            |        | (100   | )    |   |        | (178   | )    |   |        | 106    |     
|                                                                                                               | Amounts charged to other comprehensive loss                                                                                                |                                                                            |        | (72    | )    |   |        | (57    | )    |   |        | (20    | )   
|                                                                                                               | Other (additions)/
    deductions(a)                                                                                                       |                                                                            |        | 523    |      |   |        | (101   | )    |   |        | (402   | )   
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     
|Closing Valuation Allowance                                                                                    |                                                                                                                                            | $                                                                          | (3,165 | )      |      | $ | (3,516 | )      |      | $ | (3,180 | )     
|                                                                                                               |                                                                                                                                            |                                                                            |        |        |      |   |        |        |     






|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Other additions and deductions represent the net impacts of
    foreign exchange, deferred tax assets that expired during the
    period, tax rate changes, and tax return and other adjustments.

157



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                               |                                                       |      |        |       |      |   |        |       | 
|------------------------------ | ----------------------------------------------------- | ---- | ------ | ----- | ---- | - | ------ | ----- | 
|                               |                                                       | 2005 |        |       | 2004 |  
|                               |                                                       |      |        |       |      |  
|Assets:                        |                                                       |      |        |       |      |   |        |      
|                               | Tax benefit of loss carryforwards                     |      | $      | 4,092 |      |   | $      | 4,727 | 
|                               | Investment tax credits, net of deferred tax liability |      |        | 1,174 |      |   |        | 1,123 | 
|                               | Provisions and reserves                               |      |        | 761   |      |   |        | 729   | 
|                               | Post-retirement benefits other than pensions          |      |        | 306   |      |   |        | 255   | 
|                               | Plant and equipment                                   |      |        | 96    |      |   |        | 133   | 
|                               | Pension plan liabilities                              |      |        | 610   |      |   |        | 442   | 
|                               | Deferred compensation                                 |      |        | 256   |      |   |        | 208   | 
|                               |                                                       |      |        |       |      |  
|                               |                                                       |      | 7,295  |       |      |   | 7,617  |      
|Valuation allowance            |                                                       |      | (3,165 | )     |      |   | (3,516 | )    
|                               |                                                       |      |        |       |      |  
|                               |                                                       |      | 4,130  |       |      |   | 4,101  |      
|                               |                                                       |      |        |       |      |  
|Liabilities:                   |                                                       |      |        |       |      |   |        |      
|                               | Provisions and reserves                               |      |        | 109   |      |   |        | 156   | 
|                               | Plant and equipment                                   |      |        | 34    |      |   |        |      | 
|                               | Unrealized foreign exchange and other                 |      |        | 85    |      |   |        | 95    | 
|                               |                                                       |      |        |       |      |  
|                               |                                                       |      | 228    |       |      |   | 251    |      
|                               |                                                       |      |        |       |      |  
|Net deferred income tax assets |                                                       | $    | 3,902  |       |      | $ | 3,850  |      
|                               |                                                       |      |        |       |      |  





|             |  |           |       |  |           |   |       |            |  |   |       |  |  |   |        | 
|------------ |  | --------- | ----- |  | --------- | - | ----- | ---------- |  | - | ----- |  |  | - | ------ | 
|             |  | Net       |       |  |           |   |       |            | 
|             |  | Operating |       |  | Capital   |   |       | Tax        |  |   |      
|             |  | Losses    |       |  | Losses(a) |   |       | Credits(b) |  |   | Total | 
|             |  |           |       |  |           |   |       |            |  |   |       | 
|2006 - 2008  |  | $         | 79    |  |           | $ | 1     |            |  | $ | 322   |  |  | $ | 402    | 
|2009 - 2011  |  |           | 1,233 |  |           |   |      |            |  |   | 643   |  |  |   | 1,876  | 
|2012 - 2018  |  |           | 545   |  |           |   | 11    |            |  |   | 366   |  |  |   | 922    | 
|2019 - 2025  |  |           | 2,367 |  |           |   |      |            |  |   | 221   |  |  |   | 2,588  | 
|Indefinitely |  |           | 2,670 |  |           |   | 4,436 |            |  |   | 33    |  |  |   | 7,139  | 
|             |  |           |       |  |           |   |       |            |  |   |       | 
|             |  | $         | 6,894 |  |           | $ | 4,448 |            |  | $ | 1,585 |  |  | $ | 12,927 | 
|             |  |           |       |  |           |   |       |            |  |   |       | 






|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The capital losses related primarily to the U.K. and may only be
    used to offset future capital gains. Nortel has recorded a full
    valuation allowance against this future tax benefit.                                                  
|(b) | Global investment tax credits of $39, $43 and $41 have been
    applied against the income tax provision in 2005, 2004 and 2003,
    respectively. Unused tax credits can be utilized to offset
    deferred taxes payable primarily in Canada.



|   |                       
|-- | ----------------------
|9. | Employee benefit plans





158



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










159



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |   |  |   |      |  
|---------------------------------------------------------------------------------- |  | --------------------- | ------ | --------------- | -------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                                   |  |                       |        | Post-Retirement |         
|                                                                                   |  | Defined Benefit Plans |        |                 | Benefits |  
|                                                                                   |  |                       |        |                 |          |  
|                                                                                   |  | 2005                  |        |                 | 2004     |   |        | 2005 |  |   | 2004 |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Change in benefit obligation:                                                      |  |                       |        |                 |          |   |        |      |  |   |      |   |  |   |      |  
|Benefit obligation  beginning                                                     |  | $                     | 8,311  |                 |          | $ | 7,378  |      |  | $ | 719  |   |  | $ | 754  |  
|Service cost                                                                       |  |                       | 123    |                 |          |   | 122    |      |  |   | 8    |   |  |   | 9    |  
|Interest cost                                                                      |  |                       | 458    |                 |          |   | 422    |      |  |   | 42   |   |  |   | 43   |  
|Plan participants contributions                                                   |  |                       | 6      |                 |          |   | 8      |      |  |   | 8    |   |  |   | 8    |  
|Plan amendments                                                                    |  |                       | 3      |                 |          |   | 1      |      |  |   |     |   |  |   | (22  | )
|Actuarial loss (gain)                                                              |  |                       | 835    |                 |          |   | 398    |      |  |   | 82   |   |  |   | (57  | )
|Acquisitions/divestitures/settlements                                              |  |                       | 9      |                 |          |   |       |      |  |   |     |   |  |   |     |  
|Special and contractual termination benefits                                       |  |                       | 21     |                 |          |   | 7      |      |  |   |     |   |  |   |     |  
|Curtailments                                                                       |  |                       | 9      |                 |          |   |       |      |  |   | (1   | ) |  |   |     |  
|Benefits paid                                                                      |  |                       | (541   | )               |          |   | (506   | )    |  |   | (43  | ) |  |   | (43  | )
|Foreign exchange                                                                   |  |                       | (282   | )               |          |   | 481    |      |  |   | 19   |   |  |   | 27   |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Benefit obligation  ending                                                        |  | $                     | 8,952  |                 |          | $ | 8,311  |      |  | $ | 834  |   |  | $ | 719  |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Change in plan assets:                                                             |  |                       |        |                 |          |   |        |      |  |   |      |   |  |   |      |  
|Fair value of plan assets  beginning                                              |  | $                     | 6,105  |                 |          | $ | 5,415  |      |  | $ |     |   |  | $ |     |  
|Actual return on plan assets                                                       |  |                       | 919    |                 |          |   | 542    |      |  |   |     |   |  |   |     |  
|Employer contributions                                                             |  |                       | 174    |                 |          |   | 284    |      |  |   | 35   |   |  |   | 35   |  
|Plan participants contributions                                                   |  |                       | 6      |                 |          |   | 8      |      |  |   | 8    |   |  |   | 8    |  
|Acquisitions/divestitures/settlements                                              |  |                       | (4     | )               |          |   |       |      |  |   |     |   |  |   |     |  
|Special termination benefits                                                       |  |                       |       |                 |          |   | 2      |      |  |   |     |   |  |   |     |  
|Benefits paid                                                                      |  |                       | (541   | )               |          |   | (506   | )    |  |   | (43  | ) |  |   | (43  | )
|Foreign exchange                                                                   |  |                       | (203   | )               |          |   | 360    |      |  |   |     |   |  |   |     |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Fair value of plan assets  ending                                                 |  | $                     | 6,456  |                 |          | $ | 6,105  |      |  | $ |     |   |  | $ |     |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Unfunded status of the plans                                                       |  | $                     | (2,496 | )               |          | $ | (2,206 | )    |  | $ | (834 | ) |  | $ | (719 | )
|Unrecognized prior service cost (credit)                                           |  |                       | 16     |                 |          |   | 18     |      |  |   | (44  | ) |  |   | (48  | )
|Unrecognized net actuarial losses (gains)                                          |  |                       | 2,125  |                 |          |   | 1,955  |      |  |   | 129  |   |  |   | 44   |  
|Contributions after measurement date                                               |  |                       | 40     |                 |          |   | 34     |      |  |   | 4    |   |  |   | 8    |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Net amount recognized                                                              |  | $                     | (315   | )               |          | $ | (199   | )    |  | $ | (745 | ) |  | $ | (715 | )
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Amounts recognized in the accompanying consolidated balance
    sheets consist of: |  |                       |        |                 |          |   |        |      |  |   |      |   |  |   |      |  
|Other liabilities  long-term                                                      |  | $                     | (1,533 | )               |          | $ | (1,508 | )    |  | $ | (725 | ) |  | $ | (686 | )
|Other liabilities  current                                                        |  |                       | (332   | )               |          |   | (93    | )    |  |   | (20  | ) |  |   | (29  | )
|Intangible assets  net                                                            |  |                       | 37     |                 |          |   | 40     |      |  |   |     |   |  |   |     |  
|Other assets                                                                       |  |                       | 2      |                 |          |   | 1      |      |  |   |     |   |  |   |     |  
|Foreign currency translation adjustment                                            |  |                       | 163    |                 |          |   | 229    |      |  |   |     |   |  |   |     |  
|Accumulated other comprehensive loss                                               |  |                       | 1,348  |                 |          |   | 1,132  |      |  |   |     |   |  |   |     |  
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  
|Net amount recognized                                                              |  | $                     | (315   | )               |          | $ | (199   | )    |  | $ | (745 | ) |  | $ | (715 | )
|                                                                                   |  |                       |        |                 |          |   |        |      |  |   |      |  



|                               |  |      |       |  |      |   |       | 
|------------------------------ |  | ---- | ----- |  | ---- | - | ----- | 
|                               |  | 2005 |       |  | 2004 |  
|                               |  |      |       |  |      |  
|Projected benefit obligation   |  | $    | 8,938 |  |      | $ | 8,293 | 
|Accumulated benefit obligation |  | $    | 8,312 |  |      | $ | 7,692 | 
|Fair value of plan assets      |  | $    | 6,438 |  |      | $ | 6,086 | 

160



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                                                                    |                                              |      |     |      |      |   |     |      |   |   |     |      |  
|--------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---- | --- | ---- | ---- | - | --- | ---- | - | - | --- | ---- | -
|                                                                                                    |                                              | 2005 |     |      | 2004 |   |     | 2003 |  
|                                                                                                    |                                              |      |     |      |      |   |     |      |  
|Pension expense:                                                                                    |                                              |      |     |      |      |   |     |      |   |   |     |     
|                                                                                                    | Service cost                                 |      | $   | 123  |      |   | $   | 122  |   |   | $   | 122  |  
|                                                                                                    | Interest cost                                |      |     | 458  |      |   |     | 422  |   |   |     | 401  |  
|                                                                                                    | Expected return on plan assets               |      |     | (427 | )    |   |     | (411 | ) |   |     | (395 | )
|                                                                                                    | Amortization of prior service cost           |      |     | 2    |      |   |     | 4    |   |   |     | 9    |  
|                                                                                                    | Amortization of net losses                   |      |     | 97   |      |   |     | 77   |   |   |     | 50   |  
|                                                                                                    | Settlement losses                            |      |     |     |      |   |     |     |   |   |     | 41   |  
|                                                                                                    | Curtailment losses                           |      |     | 12   |      |   |     |     |   |   |     |     |  
|                                                                                                    | Special and contractual termination benefits |      |     | 21   |      |   |     | 7    |   |   |     | 8    |  
|                                                                                                    |                                              |      |     |      |      |   |     |      |  
|Net pension expense                                                                                 |                                              | $    | 286 |      |      | $ | 221 |      |   | $ | 236 |     
|                                                                                                    |                                              |      |     |      |      |   |     |      |  
|Weighted-average assumptions used to determine benefit
    obligations as of December 31:           |                                              |      |     |      |      |   |     |      |   |   |     |     
|Discount rate                                                                                       |                                              |      | 5.1 | %    |      |   | 5.7 | %    |   |   | 5.8 | %   
|Rate of compensation increase                                                                       |                                              |      | 4.4 | %    |      |   | 4.5 | %    |   |   | 4.2 | %   
|Weighted-average assumptions used to determine net pension
    expense for years ended December 31: |                                              |      |     |      |      |   |     |      |   |   |     |     
|Discount rate                                                                                       |                                              |      | 5.7 | %    |      |   | 5.8 | %    |   |   | 6.3 | %   
|Expected rate of return on plan assets                                                              |                                              |      | 7.4 | %    |      |   | 7.4 | %    |   |   | 7.8 | %   
|Rate of compensation increase                                                                       |                                              |      | 4.5 | %    |      |   | 4.2 | %    |   |   | 4.2 | %   



|                                                                                                   |  |                 |     |  |      |   |     | 
|-------------------------------------------------------------------------------------------------- |  | --------------- | --- |  | ---- | - | --- | 
|                                                                                                   |  | Defined Benefit |    
|                                                                                                   |  | Plans           |    
|                                                                                                   |  |                 |    
|                                                                                                   |  | 2005            |     |  | 2004 |  
|                                                                                                   |  |                 |     |  |      |  
|Increase in minimum pension liability adjustment included in
    other comprehensive income (loss) |  | $               | 216 |  |      | $ | 117 | 



|                                                                                                                     |                                    |      |     |    |      |   |     |      |   |   |     |    |  
|-------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | --- | -- | ---- | - | --- | ---- | - | - | --- | -- | -
|                                                                                                                     |                                    | 2005 |     |    | 2004 |   |     | 2003 |  
|                                                                                                                     |                                    |      |     |    |      |   |     |      |  
|Post-retirement benefit cost:                                                                                        |                                    |      |     |    |      |   |     |      |   |   |     |   
|                                                                                                                     | Service cost                       |      | $   | 8  |      |   | $   | 9    |   |   | $   | 9  |  
|                                                                                                                     | Interest cost                      |      |     | 42 |      |   |     | 43   |   |   |     | 40 |  
|                                                                                                                     | Expected return on plan assets     |      |     |   |      |   |     | 2    |   |   |     | (1 | )
|                                                                                                                     | Amortization of prior service cost |      |     | (4 | )    |   |     | (3   | ) |   |     | (3 | )
|                                                                                                                     |                                    |      |     |    |      |   |     |      |  
|Net post-retirement benefit cost                                                                                     |                                    | $    | 46  |    |      | $ | 51  |      |   | $ | 45  |   
|                                                                                                                     |                                    |      |     |    |      |   |     |      |  
|Weighted-average assumptions used to determine benefit
    obligations as at December 31:                            |                                    |      |     |    |      |   |     |      |   |   |     |   
|Discount rate                                                                                                        |                                    |      | 5.4 | %  |      |   | 5.9 | %    |   |   | 6.0 | % 
|Weighted-average assumptions used to determine net
    post-retirement benefit cost for years ended
    December 31: |                                    |      |     |    |      |   |     |      |   |   |     |   
|Discount rate                                                                                                        |                                    |      | 5.9 | %  |      |   | 6.0 | %    |   |   | 6.8 | % 
|Weighted-average health care cost trend rate                                                                         |                                    |      | 7.8 | %  |      |   | 8.3 | %    |   |   | 8.5 | % 
|Weighted-average ultimate health care cost trend rate                                                                |                                    |      | 4.8 | %  |      |   | 4.8 | %    |   |   | 4.8 | % 

161



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                          |             |      |   |     |      |  |   |      |   |  |   |     |  
|--------------------------------------------------------- | ----------- | ---- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                          |             | 2005 |   |     | 2004 |  |   | 2003 |  
|                                                          |             |      |   |     |      |  |   |      |  
|Effect on aggregate of service and interest costs         |             |      |   |     |      |  |   |      |   |  |   |    
|                                                          | 1% increase |      | $ | 5   |      |  | $ | 5    |   |  | $ | 5   |  
|                                                          | 1% decrease |      | $ | (4  | )    |  | $ | (4   | ) |  | $ | (4  | )
|Effect on accumulated post-retirement benefit obligations |             |      |   |     |      |  |   |      |   |  |   |    
|                                                          | 1% increase |      | $ | 86  |      |  | $ | 67   |   |  | $ | 66  |  
|                                                          | 1% decrease |      | $ | (70 | )    |  | $ | (55  | ) |  | $ | (55 | )



|            |  |               |       |       |               |   |                        |                          |  |   |    |  
|----------- |  | ------------- | ----- | ----- | ------------- | - | ---------------------- | ------------------------ |  | - | -- | -
|            |  |               |       | Post- |               |   | Expected MPDIM subsidy |                         
|            |  | Defined       |       |       | Retirement    |   |                        | (Post-Retirement Benefit | 
|            |  | Benefit Plans |       |       | Benefit Plans |   |                        | Plans)                   | 
|            |  |               |       |       |               |   |                        |                          | 
|2006        |  | $             | 490   |       |               | $ | 41                     |                          |  | $ | (1 | )
|2007        |  |               | 459   |       |               |   | 43                     |                          |  |   | (1 | )
|2008        |  |               | 470   |       |               |   | 45                     |                          |  |   | (1 | )
|2009        |  |               | 485   |       |               |   | 46                     |                          |  |   | (1 | )
|2010        |  |               | 501   |       |               |   | 48                     |                          |  |   | (1 | )
|2011 - 2015 |  |               | 2,797 |       |               |   | 253                    |                          |  |   | (8 | )



|                  |  |        |     |  |        |  |     |        |  |  |        |  |  |  |     | 
|----------------- |  | ------ | --- |  | ------ |  | --- | ------ |  |  | ------ |  |  |  | --- | 
|                  |  | 2005   |     |  | 2004   | 
|                  |  |        |     |  |        | 
|                  |  | Target |     |  | Actual |  |     | Target |  |  | Actual | 
|                  |  |        |     |  |        |  |     |        |  |  |        | 
|Debt instruments  |  |        | 43% |  |        |  | 41% |        |  |  | 41%    |  |  |  | 40% | 
|Equity securities |  |        | 56% |  |        |  | 57% |        |  |  | 59%    |  |  |  | 59% | 
|Other             |  |        | 1%  |  |        |  | 2%  |        |  |  | 0%     |  |  |  | 1%  | 







162



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)














|    |                                        
|--- | ---------------------------------------
|10. | Acquisitions, divestitures and closures



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



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









163



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                  |                                         |   |     |     | 
|--------------------------------- | --------------------------------------- | - | --- | --- | 
|Purchase price                    |                                         | $ | 449 |    
|                                  |                                         |   |    
|Assets acquired:                  |                                         |   |     |    
|                                  | Cash and cash equivalents               |   | $   | 26  | 
|                                  | Accounts receivable  net               |   |     | 65  | 
|                                  | Other current assets                    |   |     | 34  | 
|                                  | Investments                             |   |     | 8   | 
|                                  | Plant and equipment-net                 |   |     | 32  | 
|                                  | Intangible assets-net                   |   |     | 84  | 
|                                  | Goodwill                                |   |     | 278 | 
|                                  | Other long-term assets                  |   |     | 5   | 
|                                  |                                         |   |    
|                                  |                                         |   | 532 |    
|                                  |                                         |   |    
|Less liabilities assumed:         |                                         |   |     |    
|                                  | Trade and other accounts payable        |   |     | 6   | 
|                                  | Payroll and benefit-related liabilities |   |     | 24  | 
|                                  | Other accrued liabilities               |   |     | 17  | 
|                                  | Long-term debt                          |   |     | 33  | 
|                                  | Other liabilities                       |   |     | 3   | 
|                                  |                                         |   |    
|                                  |                                         |   | 83  |    
|                                  |                                         |   |    
|Fair value of net assets acquired |                                         | $ | 449 |    
|                                  |                                         |   |    





|                                     |  |            |    |              |                |  |    | 
|------------------------------------ |  | ---------- | -- | ------------ | -------------- |  | -- | 
|                                     |  |            |    | Amortization |               
|                                     |  | Fair Value |    |              | Period (Years) | 
|                                     |  |            |    |              |                | 
|Trade name                           |  | $          | 3  |              |                |  | 1  | 
|Software licenses                    |  |            | 1  |              |                |  | 5  | 
|Customer contracts and relationships |  |            | 80 |              |                |  | 10 | 
|                                     |  |            |    |              |                | 
|Total other intangible assets        |  | $          | 84 |              |                |  |    | 
|                                     |  |            |    |              |                | 



|                    |  |      |        |   |      |   |       |  
|------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                    |  | 2005 |        |   | 2004 |  
|                    |  |      |        |   |      |  
|Revenues            |  | $    | 10,632 |   |      | $ | 9,723 |  
|Net earnings (loss) |  | $    | (9     | ) |      | $ | (43   | )
|                    |  |      |        |   |      |  

LG-Nortel
Co. Ltd. Joint Venture


LG-Nortel (LG-Nortel). LG-Nortel LG-Nortel, two-year LG-Nortel


164



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)


LG-Nortel LG-Nortel


LG-Nortel LG-Nortel.


LG-Nortel.


|                                  |                                            |   |     |     | 
|--------------------------------- | ------------------------------------------ | - | --- | --- | 
|Purchase price                    |                                            | $ | 155 |    
|                                  |                                            |   |    
|Assets acquired:                  |                                            |   |     |    
|                                  | Accounts receivable  net                  |   | $   | 186 | 
|                                  | Other current assets                       |   |     | 5   | 
|                                  | Investments                                |   |     | 9   | 
|                                  | Plant and equipment                        |   |     | 20  | 
|                                  | Intangible assets                          |   |     | 26  | 
|                                  | Goodwill                                   |   |     | 64  | 
|                                  | Other assets                               |   |     | 37  | 
|                                  |                                            |   |    
|                                  |                                            |   | 347 |    
|                                  |                                            |   |    
|Less liabilities assumed:         |                                            |   |     |    
|                                  | Trade and other accounts payable           |   |     | 20  | 
|                                  | Payroll and benefit-related liabilities    |   |     | 12  | 
|                                  | Other accrued liabilities                  |   |     | 14  | 
|                                  | Minority interests in subsidiary companies |   |     | 146 | 
|                                  |                                            |   |    
|                                  |                                            |   | 192 |    
|                                  |                                            |   |    
|Fair value of net assets acquired |                                            | $ | 155 |    
|                                  |                                            |   |    



|        |  |            |    |              |                |  |    | 
|------- |  | ---------- | -- | ------------ | -------------- |  | -- | 
|        |  |            |    | Amortization |               
|        |  | Fair Value |    |              | Period (Years) | 
|        |  |            |    |              |                | 
|Patents |  | $          | 26 |              |                |  | 10 | 
|        |  |            |    |              |                | 

LG-Nortel LG-Nortel LG-Nortel


Nortel
Networks Germany and Nortel Networks France






165



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




in-kind






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



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









166



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








| |                                         
| | ----------------------------------------
| | Directory and operator services business







| |                                     
| | ------------------------------------
| | Sale of Arris Group, Inc. investment









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





167



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)












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







|    |                                              
|--- | ---------------------------------------------
|11. | Long-term debt, credit and support facilities

Long-term
debt




|                                                                                                                                       |  |      |       |  |      |   |       | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                                                                                                       |  | 2005 |       |  | 2004 |  
|                                                                                                                                       |  |      |       |  |      |  
|6.125% Notes due February 15, 2006                                                                                                     |  | $    | 1,275 |  |      | $ | 1,275 | 
|7.40% Notes due June 15,
    2006(a)                                                                                                   |  |      | 150   |  |      |   | 150   | 
|6.875% Notes due September 1, 2023                                                                                                     |  |      | 200   |  |      |   | 200   | 
|7.875% Notes due June 15,
    2026(a)                                                                                                  |  |      | 150   |  |      |   | 150   | 
|Other long-term debt with various repayment terms and a
    weighted-average interest rate of 5.65% for 2005 and 5.65% for
    2004    |  |      | 7     |  |      |   | 3     | 
|Fair value adjustment attributable to hedged debt obligations                                                                          |  |      | 1     |  |      |   | 13    | 
|Obligations associated with consolidated VIE with
    weighted-average interest rate of 3.1% for 2005 and 2.9% for 2004                |  |      | 83    |  |      |   | 100   | 
|Obligations under capital leases and sale leasebacks and a
    weighted-average interest rate of 8.98% for 2005 and 9.49% for
    2004 |  |      | 219   |  |      |   | 175   | 
|                                                                                                                                       |  |      |       |  |      |  
|                                                                                                                                       |  |      | 2,085 |  |      |   | 2,066 | 
|Less: Long-term debt due within one year                                                                                               |  |      | 1,446 |  |      |   | 14    | 
|                                                                                                                                       |  |      |       |  |      |  
|Long-term debt                                                                                                                         |  | $    | 639   |  |      | $ | 2,052 | 
|                                                                                                                                       |  |      |       |  |      |  






|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Notes were issued by Nortel Networks Capital Corporation, an
    indirect wholly owned finance subsidiary of Nortel, and are
    fully and unconditionally guaranteed by Nortel.

168



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|2006                         |  | $ | 1,446 | 
|2007                         |  |   | 19    | 
|2008                         |  |   | 15    | 
|2009                         |  |   | 15    | 
|2010                         |  |   | 15    | 
|Thereafter                   |  |   | 575   | 
|                             |  |   |      
|Total long-term debt payable |  | $ | 2,085 | 
|                             |  |   |      





10-K 10-Q 10-K 10-Q 10-K






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







169



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|    |                                             
|--- | --------------------------------------------
|12. | Financial instruments and hedging activities



| |                
| | ---------------
| | Risk management





| |                      
| | ---------------------
| | Foreign currency risk





|         |              |                     |  |     |         |   |  |            |      |   |     |  |       |      |  |  |            |   |  |  |     |   |  |  |      |   
|-------- | ------------ | ------------------- |  | --- | ------- | - |  | ---------- | ---- | - | --- |  | ----- | ---- |  |  | ---------- | - |  |  | --- | - |  |  | ---- | --
|         |              | 2005(a)             |  |     | 2004(b) |  
|         |              |                     |  |     |         |  
|         |              |                     |  | Net |         |   |  |            | Net  |  
|         |              | Buy                 |  |     | Sell    |   |  | Buy/(Sell) |      |   | Buy |  |       | Sell |  |  | Buy/(Sell) |  
|         |              |                     |  |     |         |   |  |            |      |   |     |  |       |      |  |  |            |  
|Currency |              |                     |  |     |         |   |  |            |      |   |     |  |       |      |  |  |            |   |  |  |     |   |  | 
|         | Options(c):  |                     |  |     |         |   |  |            |      |   |     |  |       |      |  |  |            |   |  |  |     |   |  |  |     
|         |              | Canadian dollar     |  |     | $22     |   |  |            | $22  |   |     |  | $0    |      |  |  | $50        |   |  |  | $51 |   |  |  | ($1  | ) 
|         | Forwards(c): |                     |  |     |         |   |  |            |      |   |     |  |       |      |  |  |            |   |  |  |     |   |  |  |     
|         |              | Canadian dollar     |  |     | $302    |   |  |            | $799 |   |     |  | ($497 | )    |  |  | $344       |   |  |  | $16 |   |  |  | $328 |   
|         |              | British pound       |  |     | £597    |   |  |            | £27  |   |     |  | £570  |      |  |  | £370       |   |  |  | £0  |   |  |  | £370 |   
|         |              | Euro                |  |     | 37      |  |  |            | 96   |  |     |  | (59   | )   |  |  | 40         |  |  |  | 130 |  |  |  | (90  | )
|         |              | Other (U.S. dollar) |  |     | $49     |   |  |            | $95  |   |     |  | ($46  | )    |  |  | $4         |   |  |  | $55 |   |  |  | ($51 | ) 






|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(a) | All notional amounts of option and forward contracts will mature
    no later than the end of 2006.
|(b) | All notional amounts of option and forward contracts matured no
    later than the end of 2005.    
|(c) | All amounts are stated in source currency.                                                         

170



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








| |                   
| | ------------------
| | Interest rate risk





|                              |                                        |      |   |     |      |  |   |     |  
|----------------------------- | -------------------------------------- | ---- | - | --- | ---- |  | - | --- | -
|                              |                                        | 2005 |   |     | 2004 | 
|                              |                                        |      |   |     |      | 
|Interest rate swap contracts: |                                        |      |   |     |      |  |   |    
|                              | Received-fixed swaps  notional amount |      | $ | 875 |      |  | $ | 875 |  
|                              | Average fixed rate received            |      |   | 6.3 | %    |  |   | 6.3 | %
|                              | Average floating rate paid             |      |   | 3.9 | %    |  |   | 2.5 | %



| |                  
| | -----------------
| | Equity price risk





| |           
| | ----------
| | Fair value



171



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                                     |                                     |          |   |       |       |  |   |          |   |  |       |       |  |  |   |       | 
|-------------------------------------------------------------------- | ----------------------------------- | -------- | - | ----- | ----- |  | - | -------- | - |  | ----- | ----- |  |  | - | ----- | 
|                                                                     |                                     | 2005     |   |       | 2004  | 
|                                                                     |                                     |          |   |       |       | 
|                                                                     |                                     | Carrying |   |       | Fair  |  |   | Carrying |   |  | Fair  |      
|                                                                     |                                     | Amount   |   |       | Value |  |   | Amount   |   |  | Value |      
|                                                                     |                                     |          |   |       |       |  |   |          |   |  |       |      
|Financial liabilities:                                               |                                     |          |   |       |       |  |   |          |   |  |       |       |  |  |   |      
|                                                                     | Long-term debt due within one year  |          | $ | 1,446 |       |  | $ | 1,442    |   |  | $     | 14    |  |  | $ | 14    | 
|                                                                     | Long-term debt                      |          | $ | 639   |       |  | $ | 616      |   |  | $     | 2,052 |  |  | $ | 2,066 | 
|Derivative financial instruments net asset
    (liability) position: |                                     |          |   |       |       |  |   |          |   |  |       |       |  |  |   |      
|                                                                     | Interest rate swap
    contracts(a) |          | $ | 3     |       |  | $ | 3        |   |  | $     | 15    |  |  | $ | 15    | 
|                                                                     | Forward and option
    contracts(b) |          | $ | (12   | )     |  | $ | (12      | ) |  | $     | 5     |  |  | $ | 5     | 






|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Recorded in other assets.                                                                                                                                                   
|(b) | Comprised of other assets of $14 and other liabilities of $26 as
    of December 31, 2005, and other assets of $31 and other
    liabilities of $26 as of December 31, 2004.



| |            
| | -----------
| | Credit risk





| |                  
| | -----------------
| | Other derivatives







| |                         
| | ------------------------
| | Transfers of receivables







172



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|                                                                       |  |      |     |  |      |   |     |      |  |   |     | 
|---------------------------------------------------------------------- |  | ---- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                                                       |  | 2005 |     |  | 2004 |   |     | 2003 | 
|                                                                       |  |      |     |  |      |   |     |      | 
|Proceeds from new transfers of financial assets                        |  | $    | 298 |  |      | $ | 137 |      |  | $ | 651 | 
|Proceeds from collections reinvested in revolving period
    transfers |  | $    | 260 |  |      | $ | 373 |      |  | $ | 52  | 



|    |           
|--- | ----------
|13. | Guarantees





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











173



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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







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







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







|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(e) | Indemnification of banks and agents under credit
    facilities and EDC Support Facility







174



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










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









175



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                   
| | ------------------
| | Product warranties



|                                     |                   |      |     |      |      |   |     |      |  
|------------------------------------ | ----------------- | ---- | --- | ---- | ---- | - | --- | ---- | -
|                                     |                   | 2005 |     |      | 2004 |  
|                                     |                   |      |     |      |      |  
|Balance at the beginning of the year |                   | $    | 268 |      |      | $ | 382 |     
|                                     | Payments          |      |     | (176 | )    |   |     | (267 | )
|                                     | Warranties issued |      |     | 191  |      |   |     | 229  |  
|                                     | Revisions         |      |     | (77  | )    |   |     | (76  | )
|                                     |                   |      |     |      |      |  
|Balance at the end of the year       |                   | $    | 206 |      |      | $ | 268 |     
|                                     |                   |      |     |      |      |  



|    |            
|--- | -----------
|14. | Commitments



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



|                                               |  |      |     |  |      |   |     | 
|---------------------------------------------- |  | ---- | --- |  | ---- | - | --- | 
|                                               |  | 2005 |     |  | 2004 |  
|                                               |  |      |     |  |      |  
|Bid and performance related
    bonds(a)       |  | $    | 222 |  |      | $ | 362 | 
|Other
    bonds(b)                             |  |      | 44  |  |      |   | 68  | 
|                                               |  |      |     |  |      |  
|Total bid, performance related and other bonds |  | $    | 266 |  |      | $ | 430 | 
|                                               |  |      |     |  |      |  






|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(a) | Net of restricted cash and cash equivalent amounts of $36 and
    $36 as of December 31, 2005 and 2004, respectively.
|(b) | Net of restricted cash and cash equivalent amounts of $31 and
    $28 as of December 31, 2005 and 2004, respectively.



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

start-ups




| |                     
| | --------------------
| | Purchase commitments





176



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






|                     |  |      |     |      |  |      |    |            |  |             |    |  |  |   |   |  |  |   |     | 
|-------------------- |  | ---- | --- | ---- |  | ---- | -- | ---------- |  | ----------- | -- |  |  | - | - |  |  | - | --- | 
|                     |  |      |     |      |  |      |    |            |  | Total      
|                     |  | 2006 |     | 2007 |  | 2008 |    | Thereafter |  | Obligations
|                     |  |      |     |      |  |      |    |            |  |            
|Purchase commitments |  | $    | 320 |      |  | $    | 56 |            |  | $           | 10 |  |  | $ |  |  |  | $ | 386 | 
|                     |  |      |     |      |  |      |    |            |  |             |    |  |  |   |   |  |  |   |     | 





| |                                       
| | --------------------------------------
| | Operating leases and other commitments



|                              |  |           |     |  |             |   |    |         |  |   |          |  |  |   |     |  
|----------------------------- |  | --------- | --- |  | ----------- | - | -- | ------- |  | - | -------- |  |  | - | --- | -
|                              |  | Operating |     |  | Outsourcing |   |    | Special |  |   | Sublease | 
|                              |  | Leases    |     |  | Contracts   |   |    | Charges |  |   | Income   | 
|                              |  |           |     |  |             |   |    |         |  |   |          | 
|2006                          |  | $         | 97  |  |             | $ | 29 |         |  | $ | 71       |  |  | $ | (20 | )
|2007                          |  |           | 89  |  |             |   | 17 |         |  |   | 52       |  |  |   | (15 | )
|2008                          |  |           | 72  |  |             |   | 17 |         |  |   | 45       |  |  |   | (13 | )
|2009                          |  |           | 50  |  |             |   | 14 |         |  |   | 40       |  |  |   | (11 | )
|2010                          |  |           | 58  |  |             |   |   |         |  |   | 41       |  |  |   | (11 | )
|Thereafter                    |  |           | 339 |  |             |   |   |         |  |   | 200      |  |  |   | (25 | )
|                              |  |           |     |  |             |   |    |         |  |   |          | 
|Total future minimum payments |  | $         | 705 |  |             | $ | 77 |         |  | $ | 449      |  |  | $ | (95 | )
|                              |  |           |     |  |             |   |    |         |  |   |          | 









|    |                                                      
|--- | -----------------------------------------------------
|15. | Financing arrangements and variable interest entities



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



177



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                   |  |      |     |   |      |   |     |  
|---------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                   |  | 2005 |     |   | 2004 |  
|                                   |  |      |     |   |      |  
|Drawn and outstanding  gross      |  | $    | 51  |   |      | $ | 118 |  
|Provisions for doubtful accounts   |  |      | (35 | ) |      |   | (38 | )
|                                   |  |      |     |   |      |  
|Drawn and outstanding 
    net(a) |  |      | 16  |   |      |   | 80  |  
|Undrawn commitments                |  |      | 50  |   |      |   | 69  |  
|                                   |  |      |     |   |      |  
|Total customer financing           |  | $    | 66  |   |      | $ | 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



178



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)
















|    |              
|--- | -------------
|16. | Capital stock



| |                 
| | ----------------
| | Preferred shares



|                                                                                |  |             |        |  |   |     
|------------------------------------------------------------------------------- |  | ----------- | ------ |  | - | ----
|                                                                                |  | Number of   |        |  |  
|                                                                                |  | shares      |        |  | $
|                                                                                |  |             |        |  |  
|                                                                                |  | (thousands) |        |  |  
|Series 5, issued November 26, 1996 for consideration
    of Canadian (C) $400 |  |             | 16,000 |  |   | $294
|Series 7, issued November 28, 1997 for consideration
    of C$350               |  |             | 14,000 |  |   | $242





179



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








| |              
| | -------------
| | Common shares



|                                |  |           |           |  |      |   |        |           |  |  |           |        |  |           |       |  |   |  |           |  |  |   |       | 
|------------------------------- |  | --------- | --------- |  | ---- | - | ------ | --------- |  |  | --------- | ------ |  | --------- | ----- |  | - |  | --------- |  |  | - | ----- | 
|                                |  | 2005      |           |  | 2004 |   |        | 2003      | 
|                                |  |           |           |  |      |   |        |           | 
|                                |  | Number    |           |  |      |   | Number |           |  |  |           | Number |  |           |      
|                                |  | of shares |           |  | $    |   |        | of shares |  |  | $         |        |  | of shares |       |  | $ | 
|                                |  |           |           |  |      |   |        |           |  |  |           |        |  |           |       |  |   | 
|(Number of shares in thousands) |  |           |           |  |      |   |        |           |  |  |           |        |  |           |       |  |   |  |           |  |  |   |       | 
|Balance at beginning of year    |  |           | 1,460,979 |  |      | $ | 1,211  |           |  |  | 1,460,979 |        |  | $         | 1,211 |  |   |  | 1,460,979 |  |  | $ | 1,211 | 
|                                |  |           |           |  |      |   |        |           |  |  |           |        |  |           |       |  |   | 
|Balance at end of year          |  |           | 1,460,979 |  |      | $ | 1,211  |           |  |  | 1,460,979 |        |  | $         | 1,211 |  |   |  | 1,460,979 |  |  | $ | 1,211 | 
|                                |  |           |           |  |      |   |        |           |  |  |           |        |  |           |       |  |   | 

180



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NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|    |                                     
|--- | ------------------------------------
|17. | Accumulated other comprehensive loss



|                                                                |                                       |                                                                        |      |        |      |   |      |      |      |   |      |      |      |  
|--------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------- | ---- | ------ | ---- | - | ---- | ---- | ---- | - | ---- | ---- | ---- | -
|                                                                |                                       | 2005                                                                   |      |        | 2004 |   |      | 2003 |     
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|Accumulated foreign currency translation adjustment             |                                       |                                                                        |      |        |      |   |      |      |      |   |      |     
|                                                                | Balance at the beginning of the year  |                                                                        | $    | 368    |      |   | $    | 181  |      |   | $    | (334 | )   
|                                                                |                                       | Change in foreign currency translation
    adjustment(a)               |      |        | (146 | ) |      |      | 187  |   |      |      | 515  |  
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|                                                                | Balance at the end of the year        |                                                                        |      | 222    |      |   |      | 368  |      |   |      | 181  |     
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|Unrealized gain (loss) on investments  net                     |                                       |                                                                        |      |        |      |   |      |      |      |   |      |     
|                                                                | Balance at the beginning of the year  |                                                                        |      | 30     |      |   |      | 94   |      |   |      | 24   |     
|                                                                |                                       | Change in unrealized gain (loss) on investments                        |      |        | (2   | ) |      |      | (64  | ) |      |      | 70   |  
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|                                                                | Balance at the end of the
    year(b) |                                                                        |      | 28     |      |   |      | 30   |      |   |      | 94   |     
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|Unrealized derivative gain (loss) on cash flow
    hedges  net |                                       |                                                                        |      |        |      |   |      |      |      |   |      |     
|                                                                | Balance at the beginning of the year  |                                                                        |      | 18     |      |   |      | 12   |      |   |      | (3   | )   
|                                                                |                                       | Change in unrealized derivative gain (loss) on cash flow
    hedges(c) |      |        | (11  | ) |      |      | 6    |   |      |      | 15   |  
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|                                                                | Balance at the end of the year        |                                                                        |      | 7      |      |   |      | 18   |      |   |      | 12   |     
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|Minimum pension
    liability(d)                                |                                       |                                                                        |      |        |      |   |      |      |      |   |      |     
|                                                                | Balance at the beginning of the year  |                                                                        |      | (934   | )    |   |      | (824 | )    |   |      | (638 | )   
|                                                                |                                       | Change in minimum pension liability adjustment                         |      |        | (210 | ) |      |      | (110 | ) |      |      | (186 | )
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|                                                                | Balance at the end of the year        |                                                                        |      | (1,144 | )    |   |      | (934 | )    |   |      | (824 | )   
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     
|Accumulated other comprehensive loss                            |                                       | $                                                                      | (887 | )      |      | $ | (518 | )    |      | $ | (537 | )   
|                                                                |                                       |                                                                        |      |        |      |   |      |      |     






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(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 loss
    until realized. Unrealized gain (loss) on investments was net of
    tax of nil, for each of the years ended December 31, 2005,
    2004 and 2003. During the years ended December 31, 2005,
    2004 and 2003, realized (gains) losses on investments of
    $(9), $(14) and $(6), respectively, were reclassified to other
    income (expense)  net in the consolidated statements
    of operations.
|(c) |  | During the years ended December 31, 2005, 2004 and 2003,
    net derivative gains of $18, $14 and $32 were reclassified to
    other income (expense)  net. Unrealized derivative
    gain (loss) on cash flow hedges is net of tax of nil, nil and
    nil for the years ended December 31, 2005, 2004 and 2003,
    respectively. Nortel estimates that $7 of net derivative gains
    (losses) included in accumulated other comprehensive loss will
    be reclassified into net earnings (loss) within the next
    12 months.                                                                                                                                        
|(d) |  | Represents non-cash charges to shareholders equity related
    to the increase in the minimum required recognizable liability
    associated with Nortels pension plans (see note 9).
    The change in minimum pension liability adjustment is presented
    net of tax of $6, $7 and $31 for the years ended
    December 31, 2005, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                        



|    |                               
|--- | ------------------------------
|18. | Stock-based compensation plans



| |              
| | -------------
| | Stock options

1 3


181



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)














| |                            
| | ---------------------------
| | Restricted stock unit plans





182



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)












| |                                             
| | --------------------------------------------
| | Directors deferred share compensation plans





| |                              
| | -----------------------------
| | Employee stock purchase plans







| |                           
| | --------------------------
| | December 31, 2005 Purchase





|                                                           |  |                      |      |  |      |   |      |  |  |   |        | 
|---------------------------------------------------------- |  | -------------------- | ---- |  | ---- | - | ---- |  |  | - | ------ | 
|                                                           |  | 2005                 |      |  | 2004 |   | 2003 | 
|                                                           |  |                      |      |  |      |   |      | 
|                                                           |  | (Number of shares in |     
|                                                           |  | thousands)           |     
|Nortel Networks Corporation common shares
    purchased(a) |  |                      | 776  |  |      |   |     |  |  |   | 11,532 | 
|Weighted-average price of shares purchased                 |  | $                    | 3.08 |  |      | $ |     |  |  | $ | 3.10   | 






|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Compensation expense was recognized for Nortels portion of
    the contributions. Nortel contributed an amount equal to the
    difference between the market price and the purchase price.

183



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






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







|                                                     |                                  |      |    |    |      |   |     |      |   |   |    |    | 
|---------------------------------------------------- | -------------------------------- | ---- | -- | -- | ---- | - | --- | ---- | - | - | -- | -- | 
|                                                     |                                  | 2005 |    |    | 2004 |   |     | 2003 |  
|                                                     |                                  |      |    |    |      |   |     |      |  
|Stock-based compensation:                            |                                  |      |    |    |      |   |     |      |   |   |    |   
|                                                     | Stock option expense             |      | $  | 87 |      |   | $   | 76   |   |   | $  | 26 | 
|                                                     | Employer portion of
    ESPPs(a) |      |    |   |      |   |     |     |   |   |    | 6  | 
|                                                     | RSU
    expense(a)               |      |    | 1  |      |   |     | 41   |   |   |    | 19 | 
|                                                     | DSU
    expense(a)               |      |    | 1  |      |   |     | (1   | ) |   |    | 3  | 
|                                                     |                                  |      |    |    |      |   |     |      |  
|Total stock-based compensation reported  net of tax |                                  | $    | 89 |    |      | $ | 116 |      |   | $ | 54 |   
|                                                     |                                  |      |    |    |      |   |     |      |  






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





|                                                                |                               |      |      |       |      |   |      |       |   |   |      |       |  
|--------------------------------------------------------------- | ----------------------------- | ---- | ---- | ----- | ---- | - | ---- | ----- | - | - | ---- | ----- | -
|                                                                |                               | 2005 |      |       | 2004 |   |      | 2003  |  
|                                                                |                               |      |      |       |      |   |      |       |  
|Black-Scholes weighted-average assumptions                      |                               |      |      |       |      |   |      |       |   |   |      |      
|                                                                | Expected dividend yield       |      |      | 0.00  | %    |   |      | 0.00  | % |   |      | 0.00  | %
|                                                                | Expected volatility           |      |      | 86.26 | %    |   |      | 94.47 | % |   |      | 92.49 | %
|                                                                | Risk-free interest rate       |      |      | 4.11  | %    |   |      | 2.96  | % |   |      | 2.81  | %
|                                                                | Expected option life in years |      |      | 4     |      |   |      | 4     |   |   |      | 4     |  
|Weighted-average stock option fair value per option
    granted |                               | $    | 1.88 |       |      | $ | 5.21 |       |   | $ | 1.57 |      



|    |                        
|--- | -----------------------
|19. | Discontinued operations





184



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






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

|                                                                  |  |      |   |  |      |   |    |      |  |   |     | 
|----------------------------------------------------------------- |  | ---- | - |  | ---- | - | -- | ---- |  | - | --- | 
|                                                                  |  | 2005 |   |  | 2004 |   |    | 2003 | 
|                                                                  |  |      |   |  |      |   |    |      | 
|Revenues                                                          |  | $    |  |  |      | $ | 4  |      |  | $ | 14  | 
|                                                                  |  |      |   |  |      |   |    |      | 
|Net gain (loss) on disposal of operations  net of tax
    (a)    |  | $    | 1 |  |      | $ | 49 |      |  | $ | 183 | 
|                                                                  |  |      |   |  |      |   |    |      | 
|Net earnings (loss) from discontinued operations  net
    of tax |  | $    | 1 |  |      | $ | 49 |      |  | $ | 183 | 
|                                                                  |  |      |   |  |      |   |    |      | 






|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Net gain (loss) on disposal of operations was net of an
    applicable income tax expense (benefit) of nil, nil and $1 for
    the years ended December 31, 2005, 2004 and 2003,
    respectively.



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

|                                                  |                      |      |    |    |      |   |    |      |  |   |     |     | 
|------------------------------------------------- | -------------------- | ---- | -- | -- | ---- | - | -- | ---- |  | - | --- | --- | 
|                                                  |                      | 2005 |    |    | 2004 |   |    | 2003 | 
|                                                  |                      |      |    |    |      |   |    |      | 
|Cash flows from (used in) discontinued operations |                      |      |    |    |      |   |    |      |  |   |     |    
|                                                  | Operating activities |      | $  | 33 |      |   | $  | 22   |  |   | $   | 138 | 
|                                                  | Investing activities |      |    |   |      |   |    |     |  |   | $   | 241 | 
|                                                  |                      |      |    |    |      |   |    |      | 
|Net cash from discontinued operations             |                      | $    | 33 |    |      | $ | 22 |      |  | $ | 379 |    
|                                                  |                      |      |    |    |      |   |    |      | 



| |              
| | -------------
| | 2005 Activity





| |              
| | -------------
| | 2004 Activity









| |              
| | -------------
| | 2003 Activity









185



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##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|    |                           
|--- | --------------------------
|20. | Related party transactions





|                                      |                                  |                                              |   |    |      |  |   |      |    |  |   |    |    | 
|------------------------------------- | -------------------------------- | -------------------------------------------- | - | -- | ---- |  | - | ---- | -- |  | - | -- | -- | 
|                                      |                                  | 2005                                         |   |    | 2004 |  |   | 2003 |   
|                                      |                                  |                                              |   |    |      |  |   |      |   
|Consolidated statements of operations |                                  |                                              |   |    |      |  |   |      |    |  |   |   
|                                      | Revenues                         |                                              | $ | 4  |      |  | $ | 2    |    |  | $ | 3  |   
|                                      |                                  |                                              |   |    |      |  |   |      |   
|                                      | Purchases:                       |                                              |   |    |      |  |   |      |    |  |   |    |   
|                                      |                                  | Bookham                                      |   | $  | 20   |  |   | $    | 73 |  |   | $  | 84 | 
|                                      |                                  | LG Electronics
    Inc.(a)                   |   |    | 41   |  |   |      |   |  |   |    |   | 
|                                      |                                  | Sasken Communications technology
    Ltd.(b) |   |    | 18   |  |   |      |   |  |   |    |   | 
|                                      |                                  | Other                                        |   |    | 11   |  |   |      |   |  |   |    | 15 | 
|                                      |                                  |                                              |   |    |      |  |   |      |   
|                                      | Total                            |                                              | $ | 90 |      |  | $ | 73   |    |  | $ | 99 |   
|                                      |                                  |                                              |   |    |      |  |   |      |   
|                                      | Research and development expense |                                              | $ | 18 |      |  | $ | 20   |    |  | $ | 30 |   
|                                      |                                  |                                              |   |    |      |  |   |      |   






|    |                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | LG is a minority interest holder of LG-Nortel. Nortels
    purchases relate primarily to certain inventory related items.
    As of December 31, 2005, accounts payable to LG were $18.                                                                                                
|(b) | Nortel currently owns a minority interest in Sasken
    Communications Technology Ltd (Sasken).
    Nortels purchases from Sasken relate primarily to software
    and other software development related purchases. As of
    December 31, 2005, accounts payable to Sasken were $2.



|                            |  |      |     |   |      |   |     |  
|--------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                            |  | 2005 |     |   | 2004 |  
|                            |  |      |     |   |      |  
|Consolidated balance sheets |  |      |     |   |      |   |     |  
|Owing from NNC              |  | $    | 206 |   |      | $ | 134 |  
|Owing from NNC subsidiaries |  |      | 98  |   |      |   | 114 |  
|Other related parties       |  |      | (18 | ) |      |   | (5  | )
|                            |  |      |     |   |      |  
|Related party receivables   |  | $    | 286 |   |      | $ | 243 |  
|                            |  |      |     |   |      |  



186



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










|    |              
|--- | -------------
|21. | Contingencies



187



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










188



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)
















189



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)
















190



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








191



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)










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



192



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)








de minimis de minimis de
minimis






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





|    |                  
|--- | -----------------
|22. | Subsequent events



| |                          
| | -------------------------
| | Sale of Brampton facility



193



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                     
| | --------------------
| | Bookham transactions







| |                              
| | -----------------------------
| | Credit and Support Facilities







194



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                                 
| | --------------------------------
| | Proposed Class Action Settlement











| |                            
| | ---------------------------
| | Tasman Networks Acquisition



195



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                                            
| | -------------------------------------------
| | Partial termination of outsourcing contract





| |                                                                 
| | ----------------------------------------------------------------
| | Nortel Restatement of previously issued financial
    statements

10-K




| |                                              
| | ---------------------------------------------
| | 2006 Credit Facility and EDC Support Facility









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



196



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




| |                
| | ---------------
| | Stock exchanges





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





|    |                                               
|--- | ----------------------------------------------
|23. | Reconciliation from U.S. GAAP to Canadian GAAP





197



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                 |               |                                                                  |         |              |         |   |              |      |         |   |         |     |         |  
|-------------------------------- | ------------- | ---------------------------------------------------------------- | ------- | ------------ | ------- | - | ------------ | ---- | ------- | - | ------- | --- | ------- | -
|                                 |               | 2005                                                             |         |              | 2004    |   |              | 2003 |        
|                                 |               |                                                                  |         |              |         |   |              |      |        
|                                 |               |                                                                  |         | As restated* |         |   | As restated* |     
|Net earnings (loss)              |               |                                                                  |         |              |         |   |              |      |         |   |         |    
|                                 | U.S. GAAP     |                                                                  | $       |             |         |   | $            | (54  | )       |   | $       | 466 |        
|                                 |               | Derivative
    accounting(b)((j)(iv))                            |         |              | (14     | ) |              |      | 31      |   |         |     | (22     | )
|                                 |               | Financial
    instruments(c)                                     |         |              | (10     | ) |              |      | 2       |   |         |     | (16     | )
|                                 |               | Stock option
    expense(f)                                      |         |              | (4      | ) |              |      | (8      | ) |         |     | (5      | )
|                                 |               | Cumulative effect of accounting change  net of
    tax((j)(vi)) |         |              |        |   |              |      |        |   |         |     | 12      |  
|                                 |               | Other                                                            |         |              | 13      |   |              |      | (9      | ) |         |     | (42     | )
|                                 |               |                                                                  |         |              |         |   |              |      |        
|                                 | Canadian GAAP |                                                                  | $       | (15          | )       |   | $            | (38  | )       |   | $       | 393 |        
|                                 |               |                                                                  |         |              |         |   |              |      |        
|Canadian GAAP:                   |               |                                                                  |         |              |         |   |              |      |         |   |         |    
|Accumulated deficit              |               |                                                                  |         |              |         |   |              |      |         |   |         |    
|                                 |               | Deficit at the beginning of the
    period(c)((j)(vi))           |         | $            | (18,962 | ) |              | $    | (18,891 | ) |         | $   | (19,179 | )
|                                 |               | Adjustment as of January 1, 2003 due restatement*                |         |              |        |   |              |      |        |   |         |     | (70     | )
|                                 |               | Net earnings (loss)                                              |         |              | (15     | ) |              |      | (38     | ) |         |     | 393     |  
|                                 |               | Dividends on preferred shares                                    |         |              | (38     | ) |              |      | (33     | ) |         |     | (35     | )
|                                 |               |                                                                  |         |              |         |   |              |      |        
|Deficit at the end of the period |               | $                                                                | (19,015 | )            |         | $ | (18,962      | )    |         | $ | (18,891 | )  
|                                 |               |                                                                  |         |              |         |   |              |      |        






|  |                      
|- | ---------------------
|* | See notes 4 and 23(i)



|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |   |        |   |  |   |        | 
|--------------------------------------------- |  | ---- | ------ | ------------ | ----------- | - | -------- | ---- |  | ---- | ------ |  |  | ----------- | -------- |  | ---- | - | ------ | - |  | - | ------ | 
|                                              |  | 2005 |        |              | 2004        |  
|                                              |  |      |        |              |             |  
|                                              |  |      |        | As restated* |            
|                                              |  | U.S. |        |              |             |   | Canadian |      |  | U.S. |        |  |  |             | Canadian | 
|                                              |  | GAAP |        |              | Adjustments |   |          | GAAP |  |      | GAAP   |  |  | Adjustments |          |  | GAAP |  
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|ASSETS                                       
|Current
    assets(g)                         |  | $    | 8,867  |              |             | $ | 4        |      |  | $    | 8,871  |  |  | $           | 9,019    |  |      | $ | 6      |   |  | $ | 9,025  | 
|Investments(d)(g)                             |  |      | 244    |              |             |   | (34      | )    |  |      | 210    |  |  |             | 299      |  |      |   | (35    | ) |  |   | 264    | 
|Plant and equipment  net                     |  |      | 1,559  |              |             |   |         |      |  |      | 1,559  |  |  |             | 1,636    |  |      |   | (2     | ) |  |   | 1,634  | 
|Goodwill(a)                                   |  |      | 2,412  |              |             |   | (895     | )    |  |      | 1,517  |  |  |             | 2,123    |  |      |   | (910   | ) |  |   | 1,213  | 
|Intangible assets  net
    (h)               |  |      | 172    |              |             |   | (37      | )    |  |      | 135    |  |  |             | 78       |  |      |   | (40    | ) |  |   | 38     | 
|Deferred income taxes 
    net(h)            |  |      | 3,629  |              |             |   | (197     | )    |  |      | 3,432  |  |  |             | 3,738    |  |      |   | (218   | ) |  |   | 3,520  | 
|Other
    assets(b)(h)                        |  |      | 1,026  |              |             |   | 35       |      |  |      | 1,061  |  |  |             | 843      |  |      |   | (9     | ) |  |   | 834    | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total assets                                  |  | $    | 17,909 |              |             | $ | (1,124   | )    |  | $    | 16,785 |  |  | $           | 17,736   |  |      | $ | (1,208 | ) |  | $ | 16,528 | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|                                             
|LIABILITIES AND SHAREHOLDERS EQUITY         
|Current liabilities
    (g)((i)(v))           |  | $    | 7,229  |              |             | $ | (112     | )    |  | $    | 7,117  |  |  | $           | 5,896    |  |      | $ | (41    | ) |  | $ | 5,855  | 
|Long-term
    debt(b)                         |  |      | 639    |              |             |   |         |      |  |      | 639    |  |  |             | 2,052    |  |      |   | (16    | ) |  |   | 2,036  | 
|Deferred income taxes 
    net(h)            |  |      | 104    |              |             |   | 12       |      |  |      | 116    |  |  |             | 143      |  |      |   | 14     |   |  |   | 157    | 
|Other liabilities
    (b)(c)(h)               |  |      | 4,037  |              |             |   | (1,303   | )    |  |      | 2,734  |  |  |             | 3,578    |  |      |   | (1,281 | ) |  |   | 2,297  | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total liabilities                             |  |      | 12,009 |              |             |   | (1,403   | )    |  |      | 10,606 |  |  |             | 11,669   |  |      |   | (1,324 | ) |  |   | 10,345 | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|Minority interests in subsidiary companies    |  |      | 244    |              |             |   | (57      | )    |  |      | 187    |  |  |             | 90       |  |      |   | (47    | ) |  |   | 43     | 
|Total shareholders
    equity(b)(c)(d)(g)(h) |  |      | 5,656  |              |             |   | 336      |      |  |      | 5,992  |  |  |             | 5,977    |  |      |   | 163    |   |  |   | 6,140  | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  
|Total liabilities and shareholders equity    |  | $    | 17,909 |              |             | $ | (1,124   | )    |  | $    | 16,785 |  |  | $           | 17,736   |  |      | $ | (1,208 | ) |  | $ | 16,528 | 
|                                              |  |      |        |              |             |   |          |      |  |      |        |  |  |             |          |  |      |  






|  |                      
|- | ---------------------
|* | See notes 4 and 23(i)

198



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






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









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





199



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|    |                      
|--- | ---------------------
|(c) | Financial instruments







|    |            
|--- | -----------
|(d) | Investments





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





|    |      
|--- | -----
|(f) | Other







|    |               
|--- | --------------
|(g) | Joint ventures



200



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




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





|    |                                      
|--- | -------------------------------------
|(i) | Canadian GAAP Restatement Adjustments





|    |                   
|--- | ------------------
|(j) | Accounting changes



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





| |                                                             
| | ------------------------------------------------------------
| | (ii) Financial Instruments  disclosure and
    presentation





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





| |                           
| | --------------------------
| | (iv) Derivative accounting

(AcG-13), AcG-13.


AcG-13,


201



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






| |                        
| | -----------------------
| | (v) Revenue recognition







| |                                  
| | ---------------------------------
| | (vi) Asset retirement obligations





| |                               
| | ------------------------------
| | (vii) Stock-based compensation









| |                             
| | ----------------------------
| | (viii) Restructuring charges



202



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)






| |                                                  
| | -------------------------------------------------
| | (ix) Impairment and disposal of long-lived assets















| |               
| | --------------
| | (x) Guarantees

AcG-14 AcG-14




| |                                                 
| | ------------------------------------------------
| | (xi) Consolidation of variable interest entities

AcG-15 AcG-15 AcG-15


203



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|    |                        
|--- | -----------------------
|(k) | Comparative information





|                                                                                                                                                 |                |               |        |     |              |   |       |     |  
|------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | ------------- | ------ | --- | ------------ | - | ----- | --- | -
|                                                                                                                                                 |                | 2003          |        |     | 2003         |  
|                                                                                                                                                 |                |               |        |     |              |  
|                                                                                                                                                 |                | As previously |        |     | As restated* |  
|                                                                                                                                                 |                | reported      |        |     |             
|Revenues                                                                                                                                         |                | $             | 10,193 |     |              | $ | 9,932 |    
|Cost of revenues                                                                                                                                 |                |               | 5,860  |     |              |   | 5,732 |    
|                                                                                                                                                 |                |               |        |     |              |  
|Gross profit                                                                                                                                     |                |               | 4,333  |     |              |   | 4,200 |    
|Selling, general and administrative expense                                                                                                      |                |               | 1,941  |     |              |   | 1,969 |    
|Research and development expense                                                                                                                 |                |               | 1,927  |     |              |   | 1,936 |    
|Amortization of intangibles                                                                                                                      |                |               | 3      |     |              |   | 3     |    
|Special charges                                                                                                                                  |                |               | 289    |     |              |   | 293   |    
|(Gain) loss on sale of businesses and assets                                                                                                     |                |               | (7     | )   |              |   | (7    | )  
|                                                                                                                                                 |                |               |        |     |              |  
|Operating earnings (loss)                                                                                                                        |                |               | 180    |     |              |   | 6     |    
|Other income (expense)  net                                                                                                                     |                |               | 397    |     |              |   | 398   |    
|Interest expense                                                                                                                                 |                |               |        |     |              |   |       |    
|                                                                                                                                                 | Long-term debt |               |        | (98 | )            |   |       | (95 | )
|                                                                                                                                                 | Other          |               |        | (26 | )            |   |       | (26 | )
|                                                                                                                                                 |                |               |        |     |              |  
|Earnings (loss) from continuing operations before income taxes,
    non-controlling interests and equity in net loss of associated
    companies |                |               | 453    |     |              |   | 283   |    
|Income tax benefit (expense)                                                                                                                     |                |               | (24    | )   |              |   | (21   | )  
|                                                                                                                                                 |                |               |        |     |              |  
|                                                                                                                                                 |                |               | 429    |     |              |   | 262   |    
|Non-controlling interests  net of tax                                                                                                           |                |               | (28    | )   |              |   | (16   | )  
|Equity in net loss of associated companies  net of tax                                                                                          |                |               | (37    | )   |              |   | (36   | )  
|                                                                                                                                                 |                |               |        |     |              |  
|Net earnings (loss) from continuing operations                                                                                                   |                |               | 364    |     |              |   | 210   |    
|Net earnings (loss) from discontinued operations  net
    of tax                                                                                |                |               | 184    |     |              |   | 183   |    
|                                                                                                                                                 |                |               |        |     |              |  
|Net earnings (loss)                                                                                                                              |                |               | 548    |     |              |   | 393   |    
|Dividends on preferred shares                                                                                                                    |                |               | 35     |     |              |   | 35    |    
|                                                                                                                                                 |                |               |        |     |              |  
|Net earnings (loss) applicable to common shares                                                                                                  |                | $             | 513    |     |              | $ | 358   |    
|                                                                                                                                                 |                |               |        |     |              |  






|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | The adjustments for Canadian GAAP, due to the restatement, did
    not result in any material differences between Canadian and
    U.S. GAAP.

204



---



##### 



NORTEL NETWORKS LIMITED


Notes to Consolidated Financial
Statements  (Continued)




|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |   |       |      |      |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ---- | ------------ | - | ----- | ---- | ---- | -
|                                                     |                                                                                                                                                                                                   | 2003                                                                        |       |      | 2003         |  
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|                                                     |                                                                                                                                                                                                   | As previously                                                               |       |      | As restated* |  
|                                                     |                                                                                                                                                                                                   | reported                                                                    |       |      |             
|Cash flows from (used in) operating activities       |                                                                                                                                                                                                   |                                                                             |       |      |              |   |       |     
|                                                     | Net earnings (loss) from continuing operations                                                                                                                                                    |                                                                             | $     | 364  |              |   | $     | 210  |     
|                                                     | 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                                               |       |      | 432          |   |       |      | 437  |  
|                                                     |                                                                                                                                                                                                   | Non-cash portion of special charges and related asset write downs           |       |      | 87           |   |       |      | 87   |  
|                                                     |                                                                                                                                                                                                   | Equity in net loss of associated companies                                  |       |      | 37           |   |       |      | 37   |  
|                                                     |                                                                                                                                                                                                   | Stock option compensation                                                   |       |      | 26           |   |       |      | 31   |  
|                                                     |                                                                                                                                                                                                   | Future income taxes                                                         |       |      | 16           |   |       |      | 13   |  
|                                                     |                                                                                                                                                                                                   | Other liabilities                                                           |       |      | 106          |   |       |      | 110  |  
|                                                     |                                                                                                                                                                                                   | (Gain) loss on repurchases of outstanding debt securities                   |       |      | (4           | ) |       |      | (4   | )
|                                                     |                                                                                                                                                                                                   | (Gain) loss on sale or write down of investments, businesses and
    assets |       |      | (150         | ) |       |      | (150 | )
|                                                     |                                                                                                                                                                                                   | Other  net                                                                 |       |      | 22           |   |       |      | 17   |  
|                                                     |                                                                                                                                                                                                   | Change in operating assets and liabilities                                  |       |      | (837         | ) |       |      | (913 | )
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|                                                     | Net cash from (used in) operating activities of continuing
    operations                                                                                                                         |                                                                             |       | 99   |              |   |       | (125 | )   
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|Cash flows from (used in) investing activities       |                                                                                                                                                                                                   |                                                                             |       |      |              |   |       |     
|                                                     | Expenditures for plant and equipment                                                                                                                                                              |                                                                             |       | (170 | )            |   |       | (167 | )   
|                                                     | Proceeds on disposals of plant and equipment                                                                                                                                                      |                                                                             |       | 38   |              |   |       | 38   |     
|                                                     | Restricted cash and cash equivalents, net                                                                                                                                                         |                                                                             |       |     |              |   |       | 200  |     
|                                                     | Acquisitions of investments and businesses  net of
    cash acquired                                                                                                                             |                                                                             |       | (58  | )            |   |       | (31  | )   
|                                                     | Proceeds on sale of investments and businesses                                                                                                                                                    |                                                                             |       | 107  |              |   |       | 107  |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|                                                     | Net cash from (used in) investing activities of continuing
    operations                                                                                                                         |                                                                             |       | (83  | )            |   |       | 147  |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|Cash flows from (used in) financing activities       |                                                                                                                                                                                                   |                                                                             |       |      |              |   |       |     
|                                                     | Dividends on preferred shares                                                                                                                                                                     |                                                                             |       | (35  | )            |   |       | (35  | )   
|                                                     | Increase in notes payable                                                                                                                                                                         |                                                                             |       | (45  | )            |   |       | 80   |     
|                                                     | Decrease in notes payable                                                                                                                                                                         |                                                                             |       |     |              |   |       | (125 | )   
|                                                     | Repayments of long-term debt                                                                                                                                                                      |                                                                             |       | (270 | )            |   |       | (270 | )   
|                                                     | Repayments of capital leases payable                                                                                                                                                              |                                                                             |       | (12  | )            |   |       | (12  | )   
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|                                                     | Net cash from (used in) financing activities of continuing
    operations                                                                                                                         |                                                                             |       | (362 | )            |   |       | (362 | )   
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|                                                     | Effect of foreign exchange rate changes on cash and cash
    equivalents                                                                                                                          |                                                                             |       | 176  |              |   |       | 176  |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|Net cash from (used in) continuing operations        |                                                                                                                                                                                                   |                                                                             | (170  | )    |              |   | (164  | )   
|Net cash from (used in) discontinued operations      |                                                                                                                                                                                                   |                                                                             | 357   |      |              |   | 357   |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                                                   |                                                                             | 187   |      |              |   | 193   |     
|Cash and cash equivalents at beginning of year       |                                                                                                                                                                                                   |                                                                             | 3,745 |      |              |   | 3,745 |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  
|Cash and cash equivalents at end of year             |                                                                                                                                                                                                   | $                                                                           | 3,932 |      |              | $ | 3,938 |     
|                                                     |                                                                                                                                                                                                   |                                                                             |       |      |              |  






|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | The adjustments for Canadian GAAP, due to the restatement, did
    not result in any material differences between Canadian and
    U.S. GAAP.



205



---



##### 






Quarterly Financial Data (Unaudited)









Consolidated Statement of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------------ | - | ---------- | -------- | - | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |     | Three Months Ended |  
|                                                                                                                                                     |                | March 31, 2005             |       |     | March 31, 2004     |  
|                                                                                                                                                     |                |                            |       |     |                    |  
|                                                                                                                                                     |                | As                         |       |     |                    |   | As         |          |   |  
|                                                                                                                                                     |                | Previously                 |       |     |                    |   | Previously |          |   |  
|                                                                                                                                                     |                | Reported                   |       |     | As Restated        |   |            | Reported |   |   | As Restated |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,536 |     |                    | $ | 2,389      |          |   | $ | 2,444       |     |   | $ | 2,366 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,477 |     |                    |   | 1,375      |          |   |   | 1,372       |     |   |   | 1,335 |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Gross profit                                                                                                                                         |                |                            | 1,059 |     |                    |   | 1,014      |          |   |   | 1,072       |     |   |   | 1,031 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 570   |     |                    |   | 574        |          |   |   | 538         |     |   |   | 542   |    
|Research and development expense                                                                                                                     |                |                            | 471   |     |                    |   | 471        |          |   |   | 466         |     |   |   | 467   |    
|Amortization of intangibles                                                                                                                          |                |                            | 2     |     |                    |   | 2          |          |   |   | 3           |     |   |   | 2     |    
|Special charges                                                                                                                                      |                |                            | 21    |     |                    |   | 14         |          |   |   | 7           |     |   |   | 7     |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | 1     |     |                    |   | 22         |          |   |   |            |     |   |   | 1     |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Operating earnings (loss)                                                                                                                            |                |                            | (6    | )   |                    |   | (69        | )        |   |   | 58          |     |   |   | 12    |    
|Other income  net                                                                                                                                   |                |                            | 47    |     |                    |   | 55         |          |   |   | 88          |     |   |   | 88    |    
|Interest expense                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (29 | )                  |   |            | (29      | ) |   |             | (24 | ) |   |       | (23 | )
|                                                                                                                                                     | Other          |                            |       | (2  | )                  |   |            | (2       | ) |   |             | (8  | ) |   |       | (8  | )
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 10    |     |                    |   | (45        | )        |   |   | 114         |     |   |   | 69    |    
|Income tax benefit (expense)                                                                                                                         |                |                            | (15   | )   |                    |   | (15        | )        |   |   | 9           |     |   |   | 10    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|                                                                                                                                                     |                |                            | (5    | )   |                    |   | (60        | )        |   |   | 123         |     |   |   | 79    |    
|Minority interests  net of tax                                                                                                                      |                |                            | (5    | )   |                    |   | (5         | )        |   |   | (6          | )   |   |   | (6    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 1     |     |                    |   | 1          |          |   |   | (1          | )   |   |   | (1    | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (9    | )   |                    |   | (64        | )        |   |   | 116         |     |   |   | 72    |    
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | 2     |     |                    |   | 2          |          |   |   | 1           |     |   |   | 1     |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Net earnings (loss)                                                                                                                                  |                |                            | (7    | )   |                    |   | (62        | )        |   |   | 117         |     |   |   | 73    |    
|Dividends on preferred shares                                                                                                                        |                |                            | 9     |     |                    |   | 9          |          |   |   | 9           |     |   |   | 9     |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (16   | )   |                    | $ | (71        | )        |   | $ | 108         |     |   | $ | 64    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |            |          |   |   |             |    

206



---



##### 



Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ---------------- | - | ------------- | -------- | - | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |     | Six Months Ended |  
|                                                                                                                                                     |                | June 30, 2005              |       |     | June 30, 2005    |  
|                                                                                                                                                     |                |                            |       |     |                  |  
|                                                                                                                                                     |                | As Previously              |       |     |                  |   | As Previously |          |   |  
|                                                                                                                                                     |                | Reported                   |       |     | As Restated      |   |               | Reported |   |   | As Restated |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,855 |     |                  | $ | 2,619         |          |   | $ | 5,391       |     |   | $ | 5,008 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,650 |     |                  |   | 1,515         |          |   |   | 3,127       |     |   |   | 2,890 |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Gross profit                                                                                                                                         |                |                            | 1,205 |     |                  |   | 1,104         |          |   |   | 2,264       |     |   |   | 2,118 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 576   |     |                  |   | 585           |          |   |   | 1,146       |     |   |   | 1,159 |    
|Research and development expense                                                                                                                     |                |                            | 474   |     |                  |   | 483           |          |   |   | 945         |     |   |   | 954   |    
|Amortization of intangibles                                                                                                                          |                |                            | 2     |     |                  |   | 2             |          |   |   | 4           |     |   |   | 4     |    
|Special charges                                                                                                                                      |                |                            | 90    |     |                  |   | 92            |          |   |   | 111         |     |   |   | 106   |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | 36    |     |                  |   | 11            |          |   |   | 37          |     |   |   | 33    |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Operating earnings (loss)                                                                                                                            |                |                            | 27    |     |                  |   | (69           | )        |   |   | 21          |     |   |   | (138  | )  
|Other income  net                                                                                                                                   |                |                            | 61    |     |                  |   | 77            |          |   |   | 108         |     |   |   | 132   |    
|Interest expense                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (30 | )                |   |               | (30      | ) |   |             | (59 | ) |   |       | (59 | )
|                                                                                                                                                     | Other          |                            |       |    |                  |   |               |         |   |   |             | (2  | ) |   |       | (2  | )
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 58    |     |                  |   | (22           | )        |   |   | 68          |     |   |   | (67   | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | 7     |     |                  |   | 9             |          |   |   | (8          | )   |   |   | (6    | )  
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|                                                                                                                                                     |                |                            | 65    |     |                  |   | (13           | )        |   |   | 60          |     |   |   | (73   | )  
|Minority interests  net of tax                                                                                                                      |                |                            | (8    | )   |                  |   | (8            | )        |   |   | (13         | )   |   |   | (13   | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 1     |     |                  |   | 1             |          |   |   | 2           |     |   |   | 2     |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | 58    |     |                  |   | (20           | )        |   |   | 49          |     |   |   | (84   | )  
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | (1    | )   |                  |   | (1            | )        |   |   | 1           |     |   |   | 1     |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss)                                                                                                                                  |                |                            | 57    |     |                  |   | (21           | )        |   |   | 50          |     |   |   | (83   | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 10    |     |                  |   | 10            |          |   |   | 19          |     |   |   | 19    |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | 47    |     |                  | $ | (31           | )        |   | $ | 31          |     |   | $ | (102  | )  
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    

207



---



##### 



Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ---------------- | - | ------------- | -------- | - | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |     | Six Months Ended |  
|                                                                                                                                                     |                | June 30, 2004              |       |     | June 30, 2004    |  
|                                                                                                                                                     |                |                            |       |     |                  |  
|                                                                                                                                                     |                | As Previously              |       |     |                  |   | As Previously |          |   |  
|                                                                                                                                                     |                | Reported                   |       |     | As Restated      |   |               | Reported |   |   | As Restated |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,590 |     |                  | $ | 2,478         |          |   | $ | 5,034       |     |   | $ | 4,844 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,538 |     |                  |   | 1,472         |          |   |   | 2,910       |     |   |   | 2,807 |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Gross profit                                                                                                                                         |                |                            | 1,052 |     |                  |   | 1,006         |          |   |   | 2,124       |     |   |   | 2,037 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 538   |     |                  |   | 543           |          |   |   | 1,076       |     |   |   | 1,085 |    
|Research and development expense                                                                                                                     |                |                            | 489   |     |                  |   | 489           |          |   |   | 955         |     |   |   | 956   |    
|Amortization of intangibles                                                                                                                          |                |                            | 2     |     |                  |   | 2             |          |   |   | 5           |     |   |   | 4     |    
|Special charges                                                                                                                                      |                |                            | (1    | )   |                  |   | (1            | )        |   |   | 6           |     |   |   | 6     |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | (75   | )   |                  |   | (75           | )        |   |   | (75         | )   |   |   | (74   | )  
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Operating earnings (loss)                                                                                                                            |                |                            | 99    |     |                  |   | 48            |          |   |   | 157         |     |   |   | 60    |    
|Other income (expense)  net                                                                                                                         |                |                            | (14   | )   |                  |   | (5            | )        |   |   | 74          |     |   |   | 83    |    
|Interest expense                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (22 | )                |   |               | (22      | ) |   |             | (46 | ) |   |       | (45 | )
|                                                                                                                                                     | Other          |                            |       | (6  | )                |   |               | (6       | ) |   |             | (14 | ) |   |       | (14 | )
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 57    |     |                  |   | 15            |          |   |   | 171         |     |   |   | 84    |    
|Income tax benefit (expense)                                                                                                                         |                |                            | (7    | )   |                  |   | (6            | )        |   |   | 2           |     |   |   | 4     |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|                                                                                                                                                     |                |                            | 50    |     |                  |   | 9             |          |   |   | 173         |     |   |   | 88    |    
|Minority interests  net of tax                                                                                                                      |                |                            | (1    | )   |                  |   | (1            | )        |   |   | (7          | )   |   |   | (7    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | (1    | )   |                  |   | (1            | )        |   |   | (2          | )   |   |   | (2    | )  
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | 48    |     |                  |   | 7             |          |   |   | 164         |     |   |   | 79    |    
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | 6     |     |                  |   | 6             |          |   |   | 7           |     |   |   | 7     |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss)                                                                                                                                  |                |                            | 54    |     |                  |   | 13            |          |   |   | 171         |     |   |   | 86    |    
|Dividends on preferred shares                                                                                                                        |                |                            | 7     |     |                  |   | 7             |          |   |   | 16          |     |   |   | 16    |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | 47    |     |                  | $ | 6             |          |   | $ | 155         |     |   | $ | 70    |    
|                                                                                                                                                     |                |                            |       |     |                  |   |               |          |   |   |             |    

208



---



##### 



Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------------ | - | ------------- | -------- | - | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |     | Nine Months Ended  |  
|                                                                                                                                                     |                | September 30, 2005         |       |     | September 30, 2005 |  
|                                                                                                                                                     |                |                            |       |     |                    |  
|                                                                                                                                                     |                | As Previously              |       |     |                    |   | As Previously |          |   |  
|                                                                                                                                                     |                | Reported                   |       |     | As Restated        |   |               | Reported |   |   | As Restated |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,655 |     |                    | $ | 2,518         |          |   | $ | 8,046       |     |   | $ | 7,526 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,660 |     |                    |   | 1,551         |          |   |   | 4,787       |     |   |   | 4,441 |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Gross profit                                                                                                                                         |                |                            | 995   |     |                    |   | 967           |          |   |   | 3,259       |     |   |   | 3,085 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 570   |     |                    |   | 565           |          |   |   | 1,716       |     |   |   | 1,724 |    
|Research and development expense                                                                                                                     |                |                            | 445   |     |                    |   | 438           |          |   |   | 1,390       |     |   |   | 1,392 |    
|Amortization of intangibles                                                                                                                          |                |                            | 6     |     |                    |   | 7             |          |   |   | 10          |     |   |   | 11    |    
|Special charges                                                                                                                                      |                |                            | 37    |     |                    |   | 39            |          |   |   | 148         |     |   |   | 145   |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | 4     |     |                    |   | 3             |          |   |   | 41          |     |   |   | 36    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Operating earnings (loss)                                                                                                                            |                |                            | (67   | )   |                    |   | (85           | )        |   |   | (46         | )   |   |   | (223  | )  
|Other income  net                                                                                                                                   |                |                            | 67    |     |                    |   | 52            |          |   |   | 175         |     |   |   | 184   |    
|Interest expense                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (32 | )                  |   |               | (32      | ) |   |             | (91 | ) |   |       | (91 | )
|                                                                                                                                                     | Other          |                            |       | (2  | )                  |   |               | (2       | ) |   |             | (4  | ) |   |       | (4  | )
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (34   | )   |                    |   | (67           | )        |   |   | 34          |     |   |   | (134  | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | (40   | )   |                    |   | (40           | )        |   |   | (48         | )   |   |   | (46   | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|                                                                                                                                                     |                |                            | (74   | )   |                    |   | (107          | )        |   |   | (14         | )   |   |   | (180  | )  
|Minority interests  net of tax                                                                                                                      |                |                            | (5    | )   |                    |   | (5            | )        |   |   | (18         | )   |   |   | (18   | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 1     |     |                    |   | 1             |          |   |   | 3           |     |   |   | 3     |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (78   | )   |                    |   | (111          | )        |   |   | (29         | )   |   |   | (195  | )  
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | 1     |     |                    |   | 2             |          |   |   | 2           |     |   |   | 3     |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss)                                                                                                                                  |                |                            | (77   | )   |                    |   | (109          | )        |   |   | (27         | )   |   |   | (192  | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 9     |     |                    |   | 9             |          |   |   | 28          |     |   |   | 28    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (86   | )   |                    | $ | (118          | )        |   | $ | (55         | )   |   | $ | (220  | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    

209



---



##### 



Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | --- | ------------------ | - | ------------- | -------- | - | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |     | Nine Months Ended  |  
|                                                                                                                                                     |                | September 30, 2004         |       |     | September 30, 2004 |  
|                                                                                                                                                     |                |                            |       |     |                    |  
|                                                                                                                                                     |                | As Previously              |       |     |                    |   | As Previously |          |   |  
|                                                                                                                                                     |                | Reported                   |       |     | As Restated        |   |               | Reported |   |   | As Restated |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,179 |     |                    | $ | 2,159         |          |   | $ | 7,213       |     |   | $ | 7,003 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,391 |     |                    |   | 1,381         |          |   |   | 4,301       |     |   |   | 4,188 |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Gross profit                                                                                                                                         |                |                            | 788   |     |                    |   | 778           |          |   |   | 2,912       |     |   |   | 2,815 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 509   |     |                    |   | 510           |          |   |   | 1,585       |     |   |   | 1,595 |    
|Research and development expense                                                                                                                     |                |                            | 497   |     |                    |   | 493           |          |   |   | 1,452       |     |   |   | 1,449 |    
|Amortization of intangibles                                                                                                                          |                |                            | 2     |     |                    |   | 2             |          |   |   | 7           |     |   |   | 6     |    
|Special charges                                                                                                                                      |                |                            | 93    |     |                    |   | 94            |          |   |   | 99          |     |   |   | 100   |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | (39   | )   |                    |   | (39           | )        |   |   | (114        | )   |   |   | (113  | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Operating earnings (loss)                                                                                                                            |                |                            | (274  | )   |                    |   | (282          | )        |   |   | (117        | )   |   |   | (222  | )  
|Other income (expense)  net                                                                                                                         |                |                            | 44    |     |                    |   | 13            |          |   |   | 118         |     |   |   | 96    |    
|Interest expense                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (22 | )                  |   |               | (23      | ) |   |             | (68 | ) |   |       | (68 | )
|                                                                                                                                                     | Other          |                            |       | (3  | )                  |   |               | (3       | ) |   |             | (17 | ) |   |       | (17 | )
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | (255  | )   |                    |   | (295          | )        |   |   | (84         | )   |   |   | (211  | )  
|Income tax benefit (expense)                                                                                                                         |                |                            | 30    |     |                    |   | 30            |          |   |   | 32          |     |   |   | 34    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|                                                                                                                                                     |                |                            | (225  | )   |                    |   | (265          | )        |   |   | (52         | )   |   |   | (177  | )  
|Minority interests  net of tax                                                                                                                      |                |                            | 2     |     |                    |   | 2             |          |   |   | (5          | )   |   |   | (5    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            |      |     |                    |   |              |          |   |   | (2          | )   |   |   | (2    | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | (223  | )   |                    |   | (263          | )        |   |   | (59         | )   |   |   | (184  | )  
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | 5     |     |                    |   | 5             |          |   |   | 12          |     |   |   | 12    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss)                                                                                                                                  |                |                            | (218  | )   |                    |   | (258          | )        |   |   | (47         | )   |   |   | (172  | )  
|Dividends on preferred shares                                                                                                                        |                |                            | 8     |     |                    |   | 8             |          |   |   | 24          |     |   |   | 24    |    
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | (226  | )   |                    | $ | (266          | )        |   | $ | (71         | )   |   | $ | (196  | )  
|                                                                                                                                                     |                |                            |       |     |                    |   |               |          |   |   |             |    

210



---



##### 



Consolidated Statements of Operations (unaudited)


|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |   |   |       |     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----- | ------------- | ------------------ | - | ----------- | --- | - | - | ----- | --- | -
|                                                                                                                                                     |                | Three Months Ended         |       |               | Three Months Ended |  
|                                                                                                                                                     |                | December 31, 2005(a)       |       |               | December 31, 2004  |  
|                                                                                                                                                     |                |                            |       |               |                    |  
|                                                                                                                                                     |                |                            |       | As Previously |                    |   |            
|                                                                                                                                                     |                |                            |       | Reported(b)   |                    |   | As Restated |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |    
|                                                                                                                                                     |                | (Millions of U.S. dollars) |      
|Revenues                                                                                                                                             |                | $                          | 2,997 |               |                    | $ | 2,615       |     |   | $ | 2,513 |    
|Cost of revenues                                                                                                                                     |                |                            | 1,815 |               |                    |   | 1,434       |     |   |   | 1,372 |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Gross profit                                                                                                                                         |                |                            | 1,182 |               |                    |   | 1,181       |     |   |   | 1,141 |    
|Selling, general and administrative expense                                                                                                          |                |                            | 677   |               |                    |   | 539         |     |   |   | 523   |    
|Research and development expense                                                                                                                     |                |                            | 464   |               |                    |   | 507         |     |   |   | 511   |    
|Amortization of intangibles                                                                                                                          |                |                            | 6     |               |                    |   | 3           |     |   |   | 3     |    
|Special charges                                                                                                                                      |                |                            | 25    |               |                    |   | 81          |     |   |   | 81    |    
|(Gain) loss on sale of businesses and assets                                                                                                         |                |                            | 11    |               |                    |   | 16          |     |   |   | 22    |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Operating earnings (loss)                                                                                                                            |                |                            | (1    | )             |                    |   | 35          |     |   |   | 1     |    
|Other income (expense)  net                                                                                                                         |                |                            | 121   |               |                    |   | 122         |     |   |   | 121   |    
|Interest expense                                                                                                                                     |                |                            |       |               |                    |   |             |     |   |   |       |    
|                                                                                                                                                     | Long-term debt |                            |       | (32           | )                  |   |             | (40 | ) |   |       | (40 | )
|                                                                                                                                                     | Other          |                            |       | (2            | )                  |   |             | 9   |   |   |       | 9   |  
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Earnings (loss) from continuing operations before income taxes,
    minority interests and equity in net earnings (loss) of
    associated companies |                |                            | 86    |               |                    |   | 126         |     |   |   | 91    |    
|Income tax benefit (expense)                                                                                                                         |                |                            | 101   |               |                    |   | (3          | )   |   |   | (4    | )  
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|                                                                                                                                                     |                |                            | 187   |               |                    |   | 123         |     |   |   | 87    |    
|Minority interests  net of tax                                                                                                                      |                |                            | 6     |               |                    |   | (8          | )   |   |   | (8    | )  
|Equity in net earnings (loss) of associated
    companies  net of tax                                                                               |                |                            | 1     |               |                    |   | 2           |     |   |   | 2     |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Net earnings (loss) from continuing operations                                                                                                       |                |                            | 194   |               |                    |   | 117         |     |   |   | 81    |    
|Net earnings from discontinued operations  net of tax                                                                                               |                |                            | (2    | )             |                    |   | 37          |     |   |   | 37    |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Net earnings (loss)                                                                                                                                  |                |                            | 192   |               |                    |   | 154         |     |   |   | 118   |    
|Dividends on preferred shares                                                                                                                        |                |                            | 10    |               |                    |   | 9           |     |   |   | 9     |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  
|Net earnings (loss) applicable to common shares                                                                                                      |                | $                          | 182   |               |                    | $ | 145         |     |   | $ | 109   |    
|                                                                                                                                                     |                |                            |       |               |                    |   |             |     |  






|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(a) | The fourth quarter ended December 31, 2005 had not been
    previously reported.                                     
|   
|(b) | Previously reported in the Unaudited Quarterly Financial Data
    section of the 2004 Annual Report on
    Form 10-K.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2005, Nortel recorded a tax benefit
    of approximately $140 related to the release of a liability
    attributed to the retroactive application of the APA.                                                                                                                                                                                                                                                                                                                                                                                   
| |  | During the fourth quarter of 2004, bad debt recoveries of $80,
    which related primarily to customer financing notes receivable
    that were restructured and subsequently sold for cash proceeds
    in the first quarter of 2005, were recorded as a reduction to
    SG&A expense. Other income (expense) included foreign
    exchange gains of $43 related to
    day-to-day
    transactional activities and a gain of $53 related to the
    restructured customer financing arrangement for which Nortel
    received cash proceeds in the fourth quarter of 2004.

211



---



##### 






Consolidated Balance Sheets (unaudited)


|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |   |         |       |  |   |         |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | -------------------------- | ------- | ----- | ------------- | - | ------------- | ------------------ |  | - | ----------- | ------------- |  | -------- | ------- | ----- | ----------- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                                                                                                               |                                         | March 31, 2005             |         |       | June 30, 2005 |   |               | September 30, 2005 | 
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    | 
|                                                                                                                                                               |                                         | As Previously              |         |       |               |   | As Previously |                    |  |   |             | As Previously |  |          |        
|                                                                                                                                                               |                                         | Reported                   |         |       | As Restated   |   |               | Reported           |  |   | As Restated |               |  | Reported |         |       | As Restated |  
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|                                                                                                                                                               |                                         | (Millions of U.S. dollars) |        
|ASSETS                                                                                                                                                        
|Current assets                                                                                                                                                 |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |   |         |       |  |   |         |      
|                                                                                                                                                               | Cash and cash equivalents               |                            | $       | 3,390 |               |   | $             | 3,389              |  |   | $           | 2,979         |  |          | $       | 2,979 |             |   | $       | 2,920 |  |   | $       | 2,919 | 
|                                                                                                                                                               | Restricted cash and cash equivalents    |                            |         | 81    |               |   |               | 81                 |  |   |             | 73            |  |          |         | 73    |             |   |         | 73    |  |   |         | 73    | 
|                                                                                                                                                               | Accounts receivable  net               |                            |         | 3,039 |               |   |               | 2,883              |  |   |             | 3,017         |  |          |         | 2,784 |             |   |         | 2,929 |  |   |         | 2,660 | 
|                                                                                                                                                               | Inventories  net                       |                            |         | 1,316 |               |   |               | 1,975              |  |   |             | 1,315         |  |          |         | 2,077 |             |   |         | 1,232 |  |   |         | 1,932 | 
|                                                                                                                                                               | Deferred income taxes  net             |                            |         | 248   |               |   |               | 248                |  |   |             | 259           |  |          |         | 259   |             |   |         | 371   |  |   |         | 371   | 
|                                                                                                                                                               | Other current assets                    |                            |         | 423   |               |   |               | 427                |  |   |             | 519           |  |          |         | 506   |             |   |         | 580   |  |   |         | 573   | 
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total current assets                                                                                                                                           |                                         |                            | 8,497   |       |               |   | 9,003         |                    |  |   | 8,162       |               |  |          | 8,678   |       |             |   | 8,105   |       |  |   | 8,528   |      
|Investments                                                                                                                                                    |                                         |                            | 148     |       |               |   | 287           |                    |  |   | 154         |               |  |          | 291     |       |             |   | 166     |       |  |   | 311     |      
|Plant and equipment (net of restated accumulated depreciation as
    of March 31, 2005 of $2,349;
    June 30, 2005  $2,285; September 30,
    2005  $2,253) |                                         |                            | 1,591   |       |               |   | 1,582         |                    |  |   | 1,577       |               |  |          | 1,572   |       |             |   | 1,571   |       |  |   | 1,568   |      
|Goodwill                                                                                                                                                       |                                         |                            | 2,080   |       |               |   | 2,080         |                    |  |   | 2,342       |               |  |          | 2,342   |       |             |   | 2,339   |       |  |   | 2,339   |      
|Intangible assets  net                                                                                                                                        |                                         |                            | 75      |       |               |   | 75            |                    |  |   | 154         |               |  |          | 155     |       |             |   | 150     |       |  |   | 147     |      
|Deferred income taxes  net                                                                                                                                    |                                         |                            | 3,706   |       |               |   | 3,707         |                    |  |   | 3,632       |               |  |          | 3,636   |       |             |   | 3,606   |       |  |   | 3,610   |      
|Other assets                                                                                                                                                   |                                         |                            | 671     |       |               |   | 735           |                    |  |   | 557         |               |  |          | 726     |       |             |   | 560     |       |  |   | 932     |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total assets                                                                                                                                                   |                                         | $                          | 16,768  |       |               | $ | 17,469        |                    |  | $ | 16,578      |               |  | $        | 17,400  |       |             | $ | 16,497  |       |  | $ | 17,435  |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|                                                                                                                                                              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                          
|Current liabilities                                                                                                                                            |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |   |         |       |  |   |         |      
|                                                                                                                                                               | Trade and other accounts payable        |                            | $       | 980   |               |   | $             | 972                |  |   | $           | 1,142         |  |          | $       | 1,134 |             |   | $       | 981   |  |   | $       | 967   | 
|                                                                                                                                                               | Payroll and benefit-related liabilities |                            |         | 459   |               |   |               | 457                |  |   |             | 591           |  |          |         | 596   |             |   |         | 534   |  |   |         | 534   | 
|                                                                                                                                                               | Contractual liabilities                 |                            |         | 505   |               |   |               | 517                |  |   |             | 436           |  |          |         | 433   |             |   |         | 396   |  |   |         | 425   | 
|                                                                                                                                                               | Restructuring liabilities               |                            |         | 152   |               |   |               | 144                |  |   |             | 143           |  |          |         | 140   |             |   |         | 131   |  |   |         | 131   | 
|                                                                                                                                                               | Other accrued liabilities               |                            |         | 1,006 |               |   |               | 997                |  |   |             | 876           |  |          |         | 875   |             |   |         | 883   |  |   |         | 872   | 
|                                                                                                                                                               | Deferred revenue and advanced billings  |                            |         | 1,849 |               |   |               | 2,581              |  |   |             | 1,731         |  |          |         | 2,532 |             |   |         | 1,604 |  |   |         | 2,450 | 
|                                                                                                                                                               | Long-term debt due within one year      |                            |         | 1,290 |               |   |               | 1,289              |  |   |             | 1,449         |  |          |         | 1,442 |             |   |         | 1,455 |  |   |         | 1,452 | 
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total current liabilities                                                                                                                                      |                                         |                            | 6,241   |       |               |   | 6,957         |                    |  |   | 6,368       |               |  |          | 7,152   |       |             |   | 5,984   |       |  |   | 6,831   |      
|Long-term debt                                                                                                                                                 |                                         |                            | 771     |       |               |   | 766           |                    |  |   | 638         |               |  |          | 638     |       |             |   | 628     |       |  |   | 628     |      
|Deferred income taxes  net                                                                                                                                    |                                         |                            | 143     |       |               |   | 143           |                    |  |   | 150         |               |  |          | 150     |       |             |   | 226     |       |  |   | 226     |      
|Deferred revenue                                                                                                                                               |                                         |                            | 506     |       |               |   | 787           |                    |  |   | 492         |               |  |          | 817     |       |             |   | 625     |       |  |   | 992     |      
|Other liabilities                                                                                                                                              |                                         |                            | 2,958   |       |               |   | 2,883         |                    |  |   | 2,836       |               |  |          | 2,837   |       |             |   | 2,749   |       |  |   | 2,978   |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total liabilities                                                                                                                                              |                                         |                            | 10,619  |       |               |   | 11,536        |                    |  |   | 10,484      |               |  |          | 11,594  |       |             |   | 10,212  |       |  |   | 11,655  |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Minority interests in subsidiary companies                                                                                                                     |                                         |                            | 93      |       |               |   | 89            |                    |  |   | 100         |               |  |          | 96      |       |             |   | 105     |       |  |   | 101     |      
|Guarantees, commitments and contingencies (refer to
    notes 13, 14 and 21 of this report)                                                                    |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |   |         |       |  |   |         |      
|                                                                                                                                                              
|SHAREHOLDERS EQUITY                                                                                                                                          
|Preferred shares                                                                                                                                               |                                         |                            | 536     |       |               |   | 536           |                    |  |   | 536         |               |  |          | 536     |       |             |   | 536     |       |  |   | 536     |      
|Common shares                                                                                                                                                  |                                         |                            | 1,211   |       |               |   | 1,211         |                    |  |   | 1,211       |               |  |          | 1,211   |       |             |   | 1,211   |       |  |   | 1,211   |      
|Additional paid-in capital                                                                                                                                     |                                         |                            | 22,126  |       |               |   | 22,126        |                    |  |   | 22,144      |               |  |          | 22,144  |       |             |   | 22,164  |       |  |   | 22,165  |      
|Accumulated deficit                                                                                                                                            |                                         |                            | (17,008 | )     |               |   | (17,430       | )                  |  |   | (16,961     | )             |  |          | (17,461 | )     |             |   | (17,047 | )     |  |   | (17,579 | )    
|Accumulated other comprehensive loss                                                                                                                           |                                         |                            | (809    | )     |               |   | (599          | )                  |  |   | (936        | )             |  |          | (720    | )     |             |   | (684    | )     |  |   | (654    | )    
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total shareholders equity                                                                                                                                     |                                         |                            | 6,056   |       |               |   | 5,844         |                    |  |   | 5,994       |               |  |          | 5,710   |       |             |   | 6,180   |       |  |   | 5,679   |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  
|Total liabilities and shareholders equity                                                                                                                     |                                         | $                          | 16,768  |       |               | $ | 17,469        |                    |  | $ | 16,578      |               |  | $        | 17,400  |       |             | $ | 16,497  |       |  | $ | 17,435  |      
|                                                                                                                                                               |                                         |                            |         |       |               |   |               |                    |  |   |             |               |  |          |         |       |             |  

212



---



##### 






Condensed Consolidated Statements of Cash Flows
(unaudited)


|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------- | ----- | --- | ---------------- | - | ----- | ----------------- | - | - | -------- | ---- | - | ---------- | ----- | ---- | -------- | - | ----- | ---- | - | - | ----- | ---- | -
|                                                                            |                                                  | 2005                       |      
|                                                                            |                                                  |                            |      
|                                                                            |                                                  | Three Months Ended         |       |     | Six Months Ended |   |       | Nine Months Ended |  
|                                                                            |                                                  | March 31                   |       |     | June 30          |   |       | September 30      |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |  
|                                                                            |                                                  | As                         |       |     |                  |   | As    |                   |   |   |          | As   |   |            |      
|                                                                            |                                                  | Previously                 |       |     | As               |   |       | Previously        |   |   | As       |      |   | Previously |       |      | As       |  
|                                                                            |                                                  | Reported                   |       |     | Restated         |   |       | Reported          |   |   | Restated |      |   | Reported   |       |      | Restated |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|                                                                            |                                                  | (Millions of U.S. dollars) |      
|Net cash from (used in):                                                    |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|Operating activities of continuing operations                               |                                                  | $                          | (224  | )   |                  | $ | (225  | )                 |   | $ | (160     | )    |   | $          | (154  | )    |          | $ | (299  | )    |   | $ | (293  | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Investing activities of continuing operations                               |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|                                                                            | Expenditures for plant and equipment             |                            |       | (54 | )                |   |       | (54               | ) |   |          | (119 | ) |            |       | (124 | )        |   |       | (166 | ) |   |       | (175 | )
|                                                                            | Proceeds on disposals of plant and equipment     |                            |       |    |                  |   |       |                  |   |   |          | 10   |   |            |       | 10   |          |   |       | 10   |   |   |       | 10   |  
|                                                                            | Restricted cash and cash equivalents             |                            |       |    |                  |   |       | 1                 |   |   |          | 9    |   |            |       | 9    |          |   |       | 9    |   |   |       | 9    |  
|                                                                            | Acquisitions of investments and businesses  net |                            |       | (2  | )                |   |       | (2                | ) |   |          | (448 | ) |            |       | (448 | )        |   |       | (449 | ) |   |       | (449 | )
|                                                                            | Proceeds on sale of investments and businesses   |                            |       | 83  |                  |   |       | 83                |   |   |          | 167  |   |            |       | 167  |          |   |       | 308  |   |   |       | 308  |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Investing activities of continuing operations                               |                                                  |                            | 27    |     |                  |   | 28    |                   |   |   | (381     | )    |   |            | (386  | )    |          |   | (288  | )    |   |   | (297  | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Financing activities of continuing operations                               |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|                                                                            | Dividends paid                                   |                            |       | (14 | )                |   |       | (14               | ) |   |          | (24  | ) |            |       | (24  | )        |   |       | (33  | ) |   |       | (33  | )
|                                                                            | Increase in notes payable                        |                            |       | 20  |                  |   |       | 20                |   |   |          | 38   |   |            |       | 38   |          |   |       | 58   |   |   |       | 59   |  
|                                                                            | Decrease in notes payable                        |                            |       | (26 | )                |   |       | (26               | ) |   |          | (46  | ) |            |       | (46  | )        |   |       | (64  | ) |   |       | (64  | )
|                                                                            | Proceeds from long-term debt                     |                            |       |    |                  |   |       |                  |   |   |          |     |   |            |       |     |          |   |       |     |   |   |       |     |  
|                                                                            | Repayments of long-term debt                     |                            |       |    |                  |   |       |                  |   |   |          |     |   |            |       |     |          |   |       |     |   |   |       |     |  
|                                                                            | Repayments of capital leases payable             |                            |       | (1  | )                |   |       | (1                | ) |   |          | (4   | ) |            |       | (4   | )        |   |       | (8   | ) |   |       | (7   | )
|                                                                            | Issuance of common shares                        |                            |       |    |                  |   |       |                  |   |   |          |     |   |            |       |     |          |   |       |     |   |   |       |     |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Financing activities of continuing operations                               |                                                  |                            | (21   | )   |                  |   | (21   | )                 |   |   | (36      | )    |   |            | (36   | )    |          |   | (47   | )    |   |   | (45   | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                  |                            | (35   | )   |                  |   | (35   | )                 |   |   | (85      | )    |   |            | (85   | )    |          |   | (86   | )    |   |   | (86   | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Net cash from (used in) continuing operations                               |                                                  |                            | (253  | )   |                  |   | (253  | )                 |   |   | (662     | )    |   |            | (661  | )    |          |   | (720  | )    |   |   | (721  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                  |                            | 36    |     |                  |   | 36    |                   |   |   | 34       |      |   |            | 34    |      |          |   | 33    |      |   |   | 34    |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Net decrease in cash and cash equivalents                                   |                                                  |                            | (217  | )   |                  |   | (217  | )                 |   |   | (628     | )    |   |            | (627  | )    |          |   | (687  | )    |   |   | (687  | )   
|Cash and cash equivalents at beginning of period                            |                                                  |                            | 3,607 |     |                  |   | 3,606 |                   |   |   | 3,607    |      |   |            | 3,606 |      |          |   | 3,607 |      |   |   | 3,606 |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Cash and cash equivalents at end of period                                  |                                                  | $                          | 3,390 |     |                  | $ | 3,389 |                   |   | $ | 2,979    |      |   | $          | 2,979 |      |          | $ | 2,920 |      |   | $ | 2,919 |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  

213



---



##### 



Condensed Consolidated Statements of Cash Flows
(unaudited)


|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------- | ----- | --- | ---------------- | - | ----- | ----------------- | - | - | -------- | ---- | - | ---------- | ----- | ---- | -------- | - | ----- | ---- | - | - | ----- | ---- | -
|                                                                            |                                                  | 2004                       |      
|                                                                            |                                                  |                            |      
|                                                                            |                                                  | Three Months Ended         |       |     | Six Months Ended |   |       | Nine Months Ended |  
|                                                                            |                                                  | March 31                   |       |     | June 30          |   |       | September 30      |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |  
|                                                                            |                                                  | As                         |       |     |                  |   | As    |                   |   |   |          | As   |   |            |      
|                                                                            |                                                  | Previously                 |       |     | As               |   |       | Previously        |   |   | As       |      |   | Previously |       |      | As       |  
|                                                                            |                                                  | Reported                   |       |     | Restated         |   |       | Reported          |   |   | Restated |      |   | Reported   |       |      | Restated |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|                                                                            |                                                  | (Millions of U.S. dollars) |      
|Net cash from (used in):                                                    |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|Operating activities of continuing operations                               |                                                  | $                          | (308  | )   |                  | $ | (309  | )                 |   | $ | (220     | )    |   | $          | (220  | )    |          | $ | (431  | )    |   | $ | (431  | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Investing activities of continuing operations                               |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|                                                                            | Expenditures for plant and equipment             |                            |       | (43 | )                |   |       | (43               | ) |   |          | (102 | ) |            |       | (102 | )        |   |       | (194 | ) |   |       | (194 | )
|                                                                            | Proceeds on disposals of plant and equipment     |                            |       | 5   |                  |   |       | 5                 |   |   |          | 10   |   |            |       | 10   |          |   |       | 10   |   |   |       | 10   |  
|                                                                            | Restricted cash and cash equivalents             |                            |       |    |                  |   |       | 1                 |   |   |          | 10   |   |            |       | 10   |          |   |       | (14  | ) |   |       | (14  | )
|                                                                            | Acquisitions of investments and businesses  net |                            |       | (3  | )                |   |       | (3                | ) |   |          | (6   | ) |            |       | (6   | )        |   |       | (7   | ) |   |       | (7   | )
|                                                                            | Proceeds on sale of investments and businesses   |                            |       | 55  |                  |   |       | 55                |   |   |          | 132  |   |            |       | 132  |          |   |       | 143  |   |   |       | 143  |  
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Investing activities of continuing operations                               |                                                  |                            | 14    |     |                  |   | 15    |                   |   |   | 44       |      |   |            | 44    |      |          |   | (62   | )    |   |   | (62   | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Financing activities of continuing operations                               |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |   |       |      |   |   |       |     
|                                                                            | Dividends paid                                   |                            |       | (9  | )                |   |       | (9                | ) |   |          | (16  | ) |            |       | (16  | )        |   |       | (24  | ) |   |       | (24  | )
|                                                                            | Increase in notes payable                        |                            |       | 10  |                  |   |       | 11                |   |   |          | 41   |   |            |       | 52   |          |   |       | 54   |   |   |       | 65   |  
|                                                                            | Decrease in notes payable                        |                            |       | (13 | )                |   |       | (14               | ) |   |          | (26  | ) |            |       | (37  | )        |   |       | (56  | ) |   |       | (67  | )
|                                                                            | Proceeds from long-term debt                     |                            |       |    |                  |   |       |                  |   |   |          |     |   |            |       |     |          |   |       |     |   |   |       |     |  
|                                                                            | Repayments of long-term debt                     |                            |       | (97 | )                |   |       | (97               | ) |   |          | (98  | ) |            |       | (98  | )        |   |       | (107 | ) |   |       | (107 | )
|                                                                            | Repayments of capital leases payable             |                            |       | (3  | )                |   |       | (3                | ) |   |          | (8   | ) |            |       | (8   | )        |   |       | (5   | ) |   |       | (5   | )
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Financing activities of continuing operations                               |                                                  |                            | (112  | )   |                  |   | (112  | )                 |   |   | (107     | )    |   |            | (107  | )    |          |   | (138  | )    |   |   | (138  | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents    |                                                  |                            | 13    |     |                  |   | 13    |                   |   |   | (9       | )    |   |            | (9    | )    |          |   | (6    | )    |   |   | (6    | )   
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Net cash from (used in) continuing operations                               |                                                  |                            | (393  | )   |                  |   | (393  | )                 |   |   | (292     | )    |   |            | (292  | )    |          |   | (637  | )    |   |   | (637  | )   
|Net cash from (used in) operating activities of discontinued
    operations |                                                  |                            | (3    | )   |                  |   | (3    | )                 |   |   | 11       |      |   |            | 11    |      |          |   | 16    |      |   |   | 16    |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Net decrease in cash and cash equivalents                                   |                                                  |                            | (396  | )   |                  |   | (396  | )                 |   |   | (281     | )    |   |            | (281  | )    |          |   | (621  | )    |   |   | (621  | )   
|Cash and cash equivalents at beginning of period                            |                                                  |                            | 3,928 |     |                  |   | 3,933 |                   |   |   | 3,928    |      |   |            | 3,933 |      |          |   | 3,928 |      |   |   | 3,933 |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  
|Cash and cash equivalents at end of period                                  |                                                  | $                          | 3,532 |     |                  | $ | 3,537 |                   |   | $ | 3,647    |      |   | $          | 3,652 |      |          | $ | 3,307 |      |   | $ | 3,312 |     
|                                                                            |                                                  |                            |       |     |                  |   |       |                   |   |   |          |      |   |            |       |      |          |  

214



---



##### 






Supplemental information (Millions of U.S. dollars)
(unaudited)




|    |            
|--- | -----------
|(a) | Adjustments



|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ------- | - | ----- | ------------ |  | - | -------- | - |  | ------- | ----- | - | ------------ | - | ----- | ----------- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | 2005     |       |   | 2004    |  
|                                                                          |  |          |       |   |         |  
|                                                                          |  | Three    |       |   | Three   |   |       | Three        |  |   | Three    |   |  | Three   |       |   | Three        |   |       | Three       | 
|                                                                          |  | Months   |       |   | Months  |   |       | Months       |  |   | Months   |   |  | Months  |       |   | Months       |   |       | Months      | 
|                                                                          |  | Ended    |       |   | Ended   |   |       | Ended        |  |   | Ended    |   |  | Ended   |       |   | Ended        |   |       | Ended       | 
|                                                                          |  | March 31 |       |   | June 30 |   |       | September 30 |  |   | March 31 |   |  | June 30 |       |   | September 30 |   |       | December 31 | 
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as previously reported                                         |  | $        | 2,536 |   |         | $ | 2,855 |              |  | $ | 2,655    |   |  | $       | 2,444 |   |              | $ | 2,590 |             |  | $ | 2,179 |   |  | $ | 2,615 |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 82    |   |         |   | (23   | )            |  |   | (13      | ) |  |         | (22   | ) |              |   | (29   | )           |  |   | (17   | ) |  |   | (16   | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (183  | ) |         |   | (155  | )            |  |   | (70      | ) |  |         | (19   | ) |              |   | (31   | )           |  |   | (49   | ) |  |   | (75   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (53   | ) |         |   | (45   | )            |  |   | (62      | ) |  |         | (37   | ) |              |   | (54   | )           |  |   | 42    |   |  |   | 11    |  
|Other revenue recognition adjustments                                     |  |          | 7     |   |         |   | (13   | )            |  |   | 8        |   |  |         |      |   |              |   | 2     |             |  |   | 4     |   |  |   | (22   | )
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as restated                                                    |  | $        | 2,389 |   |         | $ | 2,619 |              |  | $ | 2,518    |   |  | $       | 2,366 |   |              | $ | 2,478 |             |  | $ | 2,159 |   |  | $ | 2,513 |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as previously reported                              |  | $        | (7    | ) |         | $ | 57    |              |  | $ | (77      | ) |  | $       | 117   |   |              | $ | 54    |             |  | $ | (218  | ) |  | $ | 154   |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 9     |   |         |   | (12   | )            |  |   | (6       | ) |  |         | (3    | ) |              |   | (14   | )           |  |   | (3    | ) |  |   | (8    | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (26   | ) |         |   | (12   | )            |  |   | (7       | ) |  |         | (6    | ) |              |   | (7    | )           |  |   | (10   | ) |  |   | (24   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (26   | ) |         |   | (25   | )            |  |   | (22      | ) |  |         | (23   | ) |              |   | (26   | )           |  |   | 2     |   |  |   | (5    | )
|Other revenue recognition adjustments                                     |  |          | (3    | ) |         |   | (50   | )            |  |   | 6        |   |  |         | (9    | ) |              |   | 3     |             |  |   | 2     |   |  |   |      |  
|(Gain) loss on sale of businesses                                         |  |          | (21   | ) |         |   | 25    |              |  |   |         |   |  |         | (1    | ) |              |   |      |             |  |   |      |   |  |   | (6    | )
|Health and WelfareTrust                                                   |  |          |      |   |         |   |      |              |  |   |         |   |  |         |      |   |              |   |      |             |  |   |      |   |  |   | (1    | )
|Foreign
    exchange(i)                                                   |  |          | 2     |   |         |   | 11    |              |  |   | (5       | ) |  |         |      |   |              |   | 6     |             |  |   | (34   | ) |  |   | (10   | )
|Other                                                                     |  |          | 10    |   |         |   | (15   | )            |  |   | 2        |   |  |         | (2    | ) |              |   | (3    | )           |  |   | 3     |   |  |   | 18    |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as restated                                         |  | $        | (62   | ) |         | $ | (21   | )            |  | $ | (109     | ) |  | $       | 73    |   |              | $ | 13    |             |  | $ | (258  | ) |  | $ | 118   |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 

|                                                                          |  |         |       |   |              |   |       |         |  |   |              |   |  |   |       |  
|------------------------------------------------------------------------- |  | ------- | ----- | - | ------------ | - | ----- | ------- |  | - | ------------ | - |  | - | ----- | -
|                                                                          |  | 2005    |       |   | 2004         |  
|                                                                          |  |         |       |   |              |  
|                                                                          |  | Six     |       |   | Nine         |   |       | Six     |  |   | Nine         |  
|                                                                          |  | Months  |       |   | Months       |   |       | Months  |  |   | Months       |  
|                                                                          |  | Ended   |       |   | Ended        |   |       | Ended   |  |   | Ended        |  
|                                                                          |  | June 30 |       |   | September 30 |   |       | June 30 |  |   | September 30 |  
|                                                                          |  |         |       |   |              |   |       |         |  |   |              |  
|Revenues  as previously reported                                         |  | $       | 5,391 |   |              | $ | 8,046 |         |  | $ | 5,034        |   |  | $ | 7,213 |  
|Adjustments:                                                              |  |         |       |   |              |   |       |         |  |   |              |   |  |   |       |  
|Application of SOP 81-1                                                   |  |         | 59    |   |              |   | 46    |         |  |   | (51          | ) |  |   | (68   | )
|Interaction between multiple revenue recognition accounting
    standards |  |         | (338  | ) |              |   | (408  | )       |  |   | (50          | ) |  |   | (99   | )
|Application of SAB 104 and SOP 97-2                                       |  |         | (98   | ) |              |   | (160  | )       |  |   | (91          | ) |  |   | (49   | )
|Other revenue recognition adjustments                                     |  |         | (6    | ) |              |   | 2     |         |  |   | 2            |   |  |   | 6     |  
|                                                                          |  |         |       |   |              |   |       |         |  |   |              |  
|Revenues  as restated                                                    |  | $       | 5,008 |   |              | $ | 7,526 |         |  | $ | 4,844        |   |  | $ | 7,003 |  
|                                                                          |  |         |       |   |              |   |       |         |  |   |              |  
|Net earnings (loss)  as previously reported                              |  | $       | 50    |   |              | $ | (27   | )       |  | $ | 171          |   |  | $ | (47   | )
|Adjustments:                                                              |  |         |       |   |              |   |       |         |  |   |              |   |  |   |       |  
|Application of SOP 81-1                                                   |  |         | (3    | ) |              |   | (9    | )       |  |   | (17          | ) |  |   | (20   | )
|Interaction between multiple revenue recognition accounting
    standards |  |         | (38   | ) |              |   | (45   | )       |  |   | (13          | ) |  |   | (23   | )
|Application of SAB 104 and SOP 97-2                                       |  |         | (51   | ) |              |   | (73   | )       |  |   | (49          | ) |  |   | (47   | )
|Other revenue recognition adjustments                                     |  |         | (53   | ) |              |   | (47   | )       |  |   | (6           | ) |  |   | (4    | )
|(Gain) loss on sale of businesses                                         |  |         | 4     |   |              |   | 4     |         |  |   | (1           | ) |  |   | (1    | )
|Foreign
    exchange(i)                                                   |  |         | 13    |   |              |   | 8     |         |  |   | 6            |   |  |   | (28   | )
|Other                                                                     |  |         | (5    | ) |              |   | (3    | )       |  |   | (5           | ) |  |   | (2    | )
|                                                                          |  |         |       |   |              |   |       |         |  |   |              |  
|Net earnings (loss)  as restated                                         |  | $       | (83   | ) |              | $ | (192  | )       |  | $ | 86           |   |  | $ | (172  | )
|                                                                          |  |         |       |   |              |   |       |         |  |   |              |  






|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Includes the foreign exchange gains and losses resulting from
    the Third Restatement adjustments, and the correction of certain
    foreign exchange errors as described in note 4 of the
    accompanying consolidated financial statements.

215



---



##### 



Revenue Recognition adjustments:








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A cumulative correction previously recorded in the third quarter
    of 2004 has now been recorded primarily in 2003, and prior
    periods resulting in an increase to revenue of $80 in the third
    quarter of 2004. The adjustment was to correct for previously
    recognized revenue relating to past sales of Optical Networks
    equipment which we determined should have been deferred and
    recognized with the delivery of future contractual PCS and other
    services over the term of the PCS.
| |  | A cumulative correction in the fourth quarter of 2004 has now
    been recorded in the appropriate prior periods resulting in an
    increase to revenue of $40 in the fourth quarter of 2004. The
    adjustment was to correct for previously recognized revenue
    related to an EMEA contract which should have been deferred
    until the delivery of certain undelivered elements such as
    services.                                                                                                    

Other Adjustments:








216



---



##### 





|    |         
|--- | --------
|(b) | Segments



|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |   |       |   |  |   |       |  
|---------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ------------------ |  | - | -------- | -- |  | ---------- | ----- | - | -------- | - | ----- | - |  | - | ----- | -
|                                               |  | 2005               |      
|                                               |  |                    |      
|                                               |  | Three Months Ended |       |   | Three Months Ended |   |       | Three Months Ended | 
|                                               |  | March 31           |       |   | June 30            |   |       | September 30       | 
|                                               |  |                    |       |   |                    |   |       |                    | 
|                                               |  | As                 |       |   |                    |   | As    |                    |  |   |          | As |  |            |      
|                                               |  | Previously         |       |   | As                 |   |       | Previously         |  |   | As       |    |  | Previously |       |   | As       |  
|                                               |  | Reported           |       |   | Restated           |   |       | Reported           |  |   | Restated |    |  | Reported   |       |   | Restated |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Revenues                                       |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $                  | 664   |   |                    | $ | 598   |                    |  | $ | 743      |    |  | $          | 724   |   |          | $ | 754   |   |  | $ | 715   |  
|CDMA Networks                                  |  |                    | 535   |   |                    |   | 535   |                    |  |   | 662      |    |  |            | 625   |   |          |   | 539   |   |  |   | 544   |  
|GSM and UMTS Networks                          |  |                    | 788   |   |                    |   | 713   |                    |  |   | 719      |    |  |            | 566   |   |          |   | 674   |   |  |   | 580   |  
|Enterprise Networks                            |  |                    | 547   |   |                    |   | 542   |                    |  |   | 730      |    |  |            | 703   |   |          |   | 685   |   |  |   | 677   |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Total reportable segments                      |  |                    | 2,534 |   |                    |   | 2,388 |                    |  |   | 2,854    |    |  |            | 2,618 |   |          |   | 2,652 |   |  |   | 2,516 |  
|Other                                          |  |                    | 2     |   |                    |   | 1     |                    |  |   | 1        |    |  |            | 1     |   |          |   | 3     |   |  |   | 2     |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Total revenues                                 |  | $                  | 2,536 |   |                    | $ | 2,389 |                    |  | $ | 2,855    |    |  | $          | 2,619 |   |          | $ | 2,655 |   |  | $ | 2,518 |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Management EBT                                 |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $                  | (30   | ) |                    | $ | (58   | )                  |  | $ | 26       |    |  | $          | 7     |   |          | $ | 47    |   |  | $ | 28    |  
|CDMA Networks                                  |  |                    | 168   |   |                    |   | 155   |                    |  |   | 203      |    |  |            | 172   |   |          |   | 137   |   |  |   | 139   |  
|GSM and UMTS Networks                          |  |                    | 53    |   |                    |   | 51    |                    |  |   | 27       |    |  |            | (6    | ) |          |   | (67   | ) |  |   | (70   | )
|Enterprise Networks                            |  |                    | 32    |   |                    |   | 30    |                    |  |   | 111      |    |  |            | 89    |   |          |   | 44    |   |  |   | 45    |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Total reportable segments                      |  |                    | 223   |   |                    |   | 178   |                    |  |   | 367      |    |  |            | 262   |   |          |   | 161   |   |  |   | 142   |  
|Other                                          |  |                    | (193  | ) |                    |   | (189  | )                  |  |   | (188     | )  |  |            | (186  | ) |          |   | (152  | ) |  |   | (164  | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Total Management EBT                           |  |                    | 30    |   |                    |   | (11   | )                  |  |   | 179      |    |  |            | 76    |   |          |   | 9     |   |  |   | (22   | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Amortization of intangibles                    |  |                    | (2    | ) |                    |   | (2    | )                  |  |   | (2       | )  |  |            | (2    | ) |          |   | (6    | ) |  |   | (7    | )
|Special charges                                |  |                    | (21   | ) |                    |   | (14   | )                  |  |   | (90      | )  |  |            | (92   | ) |          |   | (37   | ) |  |   | (39   | )
|Gain (loss) on sale of businesses and assets   |  |                    | (1    | ) |                    |   | (22   | )                  |  |   | (36      | )  |  |            | (11   | ) |          |   | (4    | ) |  |   | (3    | )
|Income tax benefit (expense)                   |  |                    | (15   | ) |                    |   | (15   | )                  |  |   | 7        |    |  |            | 9     |   |          |   | (40   | ) |  |   | (40   | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Net earnings (loss) from continuing operations |  | $                  | (9    | ) |                    | $ | (64   | )                  |  | $ | 58       |    |  | $          | (20   | ) |          | $ | (78   | ) |  | $ | (111  | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |          |    |  |            |       |   |          |  

217



---



##### 



|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |   |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ------------------ |  | - | ------------------ | -- |  | ---------- | ----- | - | -------- | - | ----- | ------------- |  | -- | -------- | - |  | - | ----- | - |  | - | ----- | -
|                                               |  | 2004               |      
|                                               |  |                    |      
|                                               |  | Three Months Ended |       |   | Three Months Ended |   |       | Three Months Ended |  |   | Three Months Ended |   
|                                               |  | March 31           |       |   | June 30            |   |       | September 30       |  |   | December 31        |   
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |   
|                                               |  | As                 |       |   |                    |   | As    |                    |  |   |                    | As |  |            |       |   |         
|                                               |  | Previously         |       |   | As                 |   |       | Previously         |  |   | As                 |    |  | Previously |       |   | As       |   |       |               |  | As |         
|                                               |  | Reported           |       |   | Restated           |   |       | Reported           |  |   | Restated           |    |  | Reported   |       |   | Restated |   |       | Previously(i) |  |    | Restated |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Revenues                                       |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |   |  |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $                  | 683   |   |                    | $ | 650   |                    |  | $ | 724                |    |  | $          | 698   |   |          | $ | 533   |               |  | $  | 584      |   |  | $ | 685   |   |  | $ | 657   |  
|CDMA Networks                                  |  |                    | 569   |   |                    |   | 568   |                    |  |   | 567                |    |  |            | 566   |   |          |   | 511   |               |  |    | 493      |   |  |   | 616   |   |  |   | 589   |  
|GSM and UMTS Networks                          |  |                    | 656   |   |                    |   | 614   |                    |  |   | 711                |    |  |            | 641   |   |          |   | 543   |               |  |    | 510      |   |  |   | 665   |   |  |   | 646   |  
|Enterprise Networks                            |  |                    | 534   |   |                    |   | 532   |                    |  |   | 578                |    |  |            | 564   |   |          |   | 591   |               |  |    | 571      |   |  |   | 651   |   |  |   | 622   |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Total reportable segments                      |  |                    | 2,442 |   |                    |   | 2,364 |                    |  |   | 2,580              |    |  |            | 2,469 |   |          |   | 2,178 |               |  |    | 2,158    |   |  |   | 2,617 |   |  |   | 2,514 |  
|Other                                          |  |                    | 2     |   |                    |   | 2     |                    |  |   | 10                 |    |  |            | 9     |   |          |   | 1     |               |  |    | 1        |   |  |   | (2    | ) |  |   | (1    | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Total revenues                                 |  | $                  | 2,444 |   |                    | $ | 2,366 |                    |  | $ | 2,590              |    |  | $          | 2,478 |   |          | $ | 2,179 |               |  | $  | 2,159    |   |  | $ | 2,615 |   |  | $ | 2,513 |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Management EBT                                 |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |   |  |   |       |   |  |   |       |  
|Carrier Packet Networks                        |  | $                  | (59   | ) |                    | $ | (85   | )                  |  | $ | (46                | )  |  | $          | (61   | ) |          | $ | (127  | )             |  | $  | (121     | ) |  | $ | (1    | ) |  | $ | (27   | )
|CDMA Networks                                  |  |                    | 224   |   |                    |   | 212   |                    |  |   | 173                |    |  |            | 168   |   |          |   | 140   |               |  |    | 133      |   |  |   | 166   |   |  |   | 175   |  
|GSM and UMTS Networks                          |  |                    | 1     |   |                    |   | (15   | )                  |  |   | (9                 | )  |  |            | (32   | ) |          |   | (179  | )             |  |    | (182     | ) |  |   | 39    |   |  |   | 33    |  
|Enterprise Networks                            |  |                    | 25    |   |                    |   | 26    |                    |  |   | 31                 |    |  |            | 24    |   |          |   | 48    |               |  |    | 39       |   |  |   | 99    |   |  |   | 81    |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Total reportable segments                      |  |                    | 191   |   |                    |   | 138   |                    |  |   | 149                |    |  |            | 99    |   |          |   | (118  | )             |  |    | (131     | ) |  |   | 303   |   |  |   | 262   |  
|Other                                          |  |                    | (74   | ) |                    |   | (66   | )                  |  |   | (168               | )  |  |            | (160  | ) |          |   | (79   | )             |  |    | (105     | ) |  |   | (83   | ) |  |   | (71   | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Total Management EBT                           |  |                    | 117   |   |                    |   | 72    |                    |  |   | (19                | )  |  |            | (61   | ) |          |   | (197  | )             |  |    | (236     | ) |  |   | 220   |   |  |   | 191   |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Amortization of intangibles                    |  |                    | (3    | ) |                    |   | (2    | )                  |  |   | (2                 | )  |  |            | (2    | ) |          |   | (2    | )             |  |    | (2       | ) |  |   | (3    | ) |  |   | (3    | )
|Special charges                                |  |                    | (7    | ) |                    |   | (7    | )                  |  |   | 1                  |    |  |            | 1     |   |          |   | (93   | )             |  |    | (94      | ) |  |   | (81   | ) |  |   | (81   | )
|Gain (loss) on sale of businesses and assets   |  |                    |      |   |                    |   | (1    | )                  |  |   | 75                 |    |  |            | 75    |   |          |   | 39    |               |  |    | 39       |   |  |   | (16   | ) |  |   | (22   | )
|Income tax benefit (expense)                   |  |                    | 9     |   |                    |   | 10    |                    |  |   | (7                 | )  |  |            | (6    | ) |          |   | 30    |               |  |    | 30       |   |  |   | (3    | ) |  |   | (4    | )
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  
|Net earnings (loss) from continuing operations |  | $                  | 116   |   |                    | $ | 72    |                    |  | $ | 48                 |    |  | $          | 7     |   |          | $ | (223  | )             |  | $  | (263     | ) |  | $ | 117   |   |  | $ | 81    |  
|                                               |  |                    |       |   |                    |   |       |                    |  |   |                    |    |  |            |       |   |          |   |       |               |  |    |          |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | During the first quarter of 2005, Nortel changed its reportable
    segments. The first three quarters of 2005 and the related 2004
    comparatives had been previously reported under the new
    reportable segments. Nortel did not previously report financial
    data for the fourth quarter of 2004 reflecting its new
    reportable segments. The amounts for the three months ended
    December 31, 2004 have been reclassified to conform to the
    new reportable segments.



|    |                   
|--- | ------------------
|(c) | Other income  net

|                                                 |  |                    |    |   |                    |   |    |                    |  |   |          |    |  |            |    |  |          |   |    |  |  |   |    | 
|------------------------------------------------ |  | ------------------ | -- | - | ------------------ | - | -- | ------------------ |  | - | -------- | -- |  | ---------- | -- |  | -------- | - | -- |  |  | - | -- | 
|                                                 |  | 2005               |   
|                                                 |  |                    |   
|                                                 |  | Three Months Ended |    |   | Three Months Ended |   |    | Three Months Ended | 
|                                                 |  | March 31           |    |   | June 30            |   |    | September 30       | 
|                                                 |  |                    |    |   |                    |   |    |                    | 
|                                                 |  | As                 |    |   |                    |   | As |                    |  |   |          | As |  |            |   
|                                                 |  | Previously         |    |   | As                 |   |    | Previously         |  |   | As       |    |  | Previously |    |  | As       |  
|                                                 |  | Reported           |    |   | Restated           |   |    | Reported           |  |   | Restated |    |  | Reported   |    |  | Restated |  
|                                                 |  |                    |    |   |                    |   |    |                    |  |   |          |    |  |            |    |  |          |  
|Interest income                                  |  | $                  | 14 |   |                    | $ | 14 |                    |  | $ | 14       |    |  | $          | 14 |  |          | $ | 15 |  |  | $ | 15 | 
|Gain (loss) on sale or write down of investments |  |                    | (5 | ) |                    |   | (5 | )                  |  |   | 21       |    |  |            | 21 |  |          |   |   |  |  |   |   | 
|Currency exchange gains (losses)                 |  |                    | 26 |   |                    |   | 29 |                    |  |   | 9        |    |  |            | 20 |  |          |   | 21 |  |  |   | 16 | 
|Other  net                                      |  |                    | 12 |   |                    |   | 17 |                    |  |   | 17       |    |  |            | 22 |  |          |   | 31 |  |  |   | 21 | 
|                                                 |  |                    |    |   |                    |   |    |                    |  |   |          |    |  |            |    |  |          |  
|Other income  net                               |  | $                  | 47 |   |                    | $ | 55 |                    |  | $ | 61       |    |  | $          | 77 |  |          | $ | 67 |  |  | $ | 52 | 
|                                                 |  |                    |    |   |                    |   |    |                    |  |   |          |    |  |            |    |  |          |  

218



---



##### 



|                                                 |  |                    |    |  |                    |   |    |                    |  |   |          |    |  |            |     |   |          |   |     |   |  |   |     |  
|------------------------------------------------ |  | ------------------ | -- |  | ------------------ | - | -- | ------------------ |  | - | -------- | -- |  | ---------- | --- | - | -------- | - | --- | - |  | - | --- | -
|                                                 |  | 2004               |   
|                                                 |  |                    |   
|                                                 |  | Three Months Ended |    |  | Three Months Ended |   |    | Three Months Ended | 
|                                                 |  | March 31           |    |  | June 30            |   |    | September 30       | 
|                                                 |  |                    |    |  |                    |   |    |                    | 
|                                                 |  | As                 |    |  |                    |   | As |                    |  |   |          | As |  |            |    
|                                                 |  | Previously         |    |  | As                 |   |    | Previously         |  |   | As       |    |  | Previously |     |   | As       |  
|                                                 |  | Reported           |    |  | Restated           |   |    | Reported           |  |   | Restated |    |  | Reported   |     |   | Restated |  
|                                                 |  |                    |    |  |                    |   |    |                    |  |   |          |    |  |            |     |   |          |  
|Interest income                                  |  | $                  | 15 |  |                    | $ | 15 |                    |  | $ | 16       |    |  | $          | 16  |   |          | $ | 16  |   |  | $ | 16  |  
|Gain (loss) on sale or write down of investments |  |                    | 33 |  |                    |   | 33 |                    |  |   | (1       | )  |  |            | (1  | ) |          |   | 1   |   |  |   | 1   |  
|Currency exchange gains (losses)                 |  |                    | 1  |  |                    |   |   |                    |  |   | (1       | )  |  |            | 3   |   |          |   | 55  |   |  |   | 21  |  
|Other  net                                      |  |                    | 39 |  |                    |   | 40 |                    |  |   | (28      | )  |  |            | (23 | ) |          |   | (28 | ) |  |   | (25 | )
|                                                 |  |                    |    |  |                    |   |    |                    |  |   |          |    |  |            |     |   |          |  
|Other income  net                               |  | $                  | 88 |  |                    | $ | 88 |                    |  | $ | (14      | )  |  | $          | (5  | ) |          | $ | 44  |   |  | $ | 13  |  
|                                                 |  |                    |    |  |                    |   |    |                    |  |   |          |    |  |            |     |   |          |  



|    |                           
|--- | --------------------------
|(d) | Accounts receivable  net:

|                                      |  |                |       |   |               |   |       |                    |  |   |          |    |  |            |       |   |          |   |       |   |  |   |       |  
|------------------------------------- |  | -------------- | ----- | - | ------------- | - | ----- | ------------------ |  | - | -------- | -- |  | ---------- | ----- | - | -------- | - | ----- | - |  | - | ----- | -
|                                      |  | March 31, 2005 |       |   | June 30, 2005 |   |       | September 30, 2005 | 
|                                      |  |                |       |   |               |   |       |                    | 
|                                      |  | As             |       |   |               |   | As    |                    |  |   |          | As |  |            |      
|                                      |  | Previously     |       |   | As            |   |       | Previously         |  |   | As       |    |  | Previously |       |   | As       |  
|                                      |  | Reported       |       |   | Restated      |   |       | Reported           |  |   | Restated |    |  | Reported   |       |   | Restated |  
|                                      |  |                |       |   |               |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Trade receivables                     |  | $              | 2,241 |   |               | $ | 2,238 |                    |  | $ | 2,195    |    |  | $          | 2,188 |   |          | $ | 2,267 |   |  | $ | 2,263 |  
|Notes receivable                      |  |                | 198   |   |               |   | 193   |                    |  |   | 140      |    |  |            | 140   |   |          |   | 66    |   |  |   | 66    |  
|Contracts in process                  |  |                | 707   |   |               |   | 559   |                    |  |   | 785      |    |  |            | 559   |   |          |   | 692   |   |  |   | 427   |  
|                                      |  |                |       |   |               |   |       |                    |  |   |          |    |  |            |       |   |          |  
|                                      |  |                | 3,146 |   |               |   | 2,990 |                    |  |   | 3,120    |    |  |            | 2,887 |   |          |   | 3,025 |   |  |   | 2,756 |  
|Less: provision for doubtful accounts |  |                | (107  | ) |               |   | (107  | )                  |  |   | (103     | )  |  |            | (103  | ) |          |   | (96   | ) |  |   | (96   | )
|                                      |  |                |       |   |               |   |       |                    |  |   |          |    |  |            |       |   |          |  
|Accounts receivable  net             |  | $              | 3,039 |   |               | $ | 2,883 |                    |  | $ | 3,017    |    |  | $          | 2,784 |   |          | $ | 2,929 |   |  | $ | 2,660 |  
|                                      |  |                |       |   |               |   |       |                    |  |   |          |    |  |            |       |   |          |  



|    |                   
|--- | ------------------
|(e) | Inventories  net:

|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |   |        |   |  |   |        |  
|------------------------------ |  | -------------- | ------ | - | ------------- | - | ------ | ------------------ |  | - | -------- | -- |  | ---------- | ------ | - | -------- | - | ------ | - |  | - | ------ | -
|                               |  | March 31, 2005 |        |   | June 30, 2005 |   |        | September 30, 2005 | 
|                               |  |                |        |   |               |   |        |                    | 
|                               |  | As             |        |   |               |   | As     |                    |  |   |          | As |  |            |       
|                               |  | Previously     |        |   | As            |   |        | Previously         |  |   | As       |    |  | Previously |        |   | As       |  
|                               |  | Reported       |        |   | Restated      |   |        | Reported           |  |   | Restated |    |  | Reported   |        |   | Restated |  
|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |  
|Raw materials                  |  | $              | 915    |   |               | $ | 914    |                    |  | $ | 843      |    |  | $          | 840    |   |          | $ | 838    |   |  | $ | 832    |  
|Work in progress               |  |                | 64     |   |               |   | 64     |                    |  |   | 69       |    |  |            | 68     |   |          |   | 45     |   |  |   | 48     |  
|Finished goods                 |  |                | 1,003  |   |               |   | 1,136  |                    |  |   | 1,042    |    |  |            | 1,133  |   |          |   | 988    |   |  |   | 797    |  
|Deferred costs                 |  |                | 799    |   |               |   | 1,488  |                    |  |   | 779      |    |  |            | 1,625  |   |          |   | 796    |   |  |   | 2,059  |  
|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |  
|                               |  |                | 2,781  |   |               |   | 3,602  |                    |  |   | 2,733    |    |  |            | 3,666  |   |          |   | 2,667  |   |  |   | 3,736  |  
|Less: provision for inventory  |  |                | (1,087 | ) |               |   | (1,088 | )                  |  |   | (1,041   | )  |  |            | (1,042 | ) |          |   | (1,046 | ) |  |   | (1,049 | )
|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |  
|Inventories  net              |  |                | 1,694  |   |               |   | 2,514  |                    |  |   | 1,692    |    |  |            | 2,624  |   |          |   | 1,621  |   |  |   | 2,687  |  
|Less: long term deferred costs |  |                | (378   | ) |               |   | (539   | )                  |  |   | (377     | )  |  |            | (547   | ) |          |   | (389   | ) |  |   | (755   | )
|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |  
|Current inventories  net      |  | $              | 1,316  |   |               | $ | 1,975  |                    |  | $ | 1,315    |    |  | $          | 2,077  |   |          | $ | 1,232  |   |  | $ | 1,932  |  
|                               |  |                |        |   |               |   |        |                    |  |   |          |    |  |            |        |   |          |  



|    |             
|--- | ------------
|(f) | Acquisitions



|                    |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|------------------- |  | ---------------- | ----- | - | ----------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                    |  | Six Months Ended |       |   | Nine Months Ended |  
|                    |  | June 30,         |       |   | September 30,     |  
|                    |  |                  |       |   |                   |  
|                    |  | 2005             |       |   | 2004              |   |       | 2005 |  |   | 2004  |  
|                    |  |                  |       |   |                   |   |       |      |  |   |       |  
|Revenues            |  | $                | 5,117 |   |                   | $ | 4,933 |      |  | $ | 7,635 |   |  | $ | 7,147 |  
|Net earnings (loss) |  | $                | (90   | ) |                   | $ | 82    |      |  | $ | (201  | ) |  | $ | (164  | )
|                    |  |                  |       |   |                   |   |       |      |  |   |       |  

219



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##### 





|    |                                               
|--- | ----------------------------------------------
|(g) | Reconciliation from U.S. GAAP to Canadian GAAP



|                    |               |                       |   |     |                    |   |   |              |    |   |          |      |     |         |   |    |              |   |   |    |   |  |   |      |   | 
|------------------- | ------------- | --------------------- | - | --- | ------------------ | - | - | ------------ | -- | - | -------- | ---- | --- | ------- | - | -- | ------------ | - | - | -- | - |  | - | ---- | - | 
|                    |               | 2005                  |   |     | 2004               |  
|                    |               | (As restated)         |   |     | (As restated)      |  
|                    |               | Three Months Ended    |   |     | Three Months Ended |  
|                    |               |                       |   |     |                    |  
|                    |               | March 31              |   |     | June 30            |   |   | September 30 |    |   | March 31 |      |     | June 30 |   |    | September 30 |  
|                    |               |                       |   |     |                    |   |   |              |    |   |          |      |     |         |   |    |              |  
|Net earnings (loss) |               |                       |   |     |                    |   |   |              |    |   |          |      |     |         |   |    |              |   |   |    |   |  |   |     
|                    | U.S. GAAP     |                       | $ | (62 | )                  |   | $ | (21          | )  |   | $        | (109 | )   |         | $ | 73 |              |   | $ | 13 |   |  | $ | (258 | )
|                    |               | Derivative accounting |   |     | (4                 | ) |   |              | (7 | ) |          |      | (4  | )       |   |    | 22           |   |   |    |  |  |   |      |  | 
|                    |               | Stock option expense  |   |     | 1                  |   |   |              | 1  |   |          |      | (11 | )       |   |    | (8           | ) |   |    |  |  |   |      |  | 
|                    |               | Other                 |   |     | 2                  |   |   |              | (1 | ) |          |      | 5   |         |   |    | 7            |   |   |    | 2 |  |   |      | 8 | 
|                    |               |                       |   |     |                    |   |   |              |    |   |          |      |     |         |   |    |              |  
|                    | Canadian GAAP |                       | $ | (63 | )                  |   | $ | (28          | )  |   | $        | (119 | )   |         | $ | 94 |              |   | $ | 15 |   |  | $ | (250 | )
|                    |               |                       |   |     |                    |   |   |              |    |   |          |      |     |         |   |    |              |  

220



---



##### 



REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS




10-K.










221



---



##### 



Schedule II


Consolidated


NORTEL NETWORKS LIMITED


Valuation and Qualifying Accounts and Reserves


Provision For
Uncollectibles(a)


|          |  |                            |       |  |            |   |      |               |  |            |         |   |  |   |     | 
|--------- |  | -------------------------- | ----- |  | ---------- | - | ---- | ------------- |  | ---------- | ------- | - |  | - | --- | 
|          |  | Balance at                 |       |  | Charged to |   |      |               |  | Balance at |        
|          |  | Beginning of               |       |  | Costs and  |   |      |               |  | End of     |        
|          |  | Year                       |       |  | Expenses   |   |      | Deductions(b) |  |            | Year(c) |  
|          |  |                            |       |  |            |   |      |               |  |            |         |  
|          |  | U.S. GAAP                  |      
|          |  | (millions of U.S. dollars) |      
|Year 2005 |  | $                          | 175   |  |            | $ | (9   | )             |  | $          | (4      | ) |  | $ | 170 | 
|Year 2004 |  | $                          | 483   |  |            | $ | (178 | )             |  | $          | 130     |   |  | $ | 175 | 
|Year 2003 |  | $                          | 1,282 |  |            | $ | (188 | )             |  | $          | 611     |   |  | $ | 483 | 






|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Excludes Discontinued Operations.                                                                                                                          
|(b) | Includes acquisitions and disposals of subsidiaries and
    divisions and amounts written off, and foreign exchange
    translation adjustments.           
|(c) | Includes provisions for uncollectibles on long-term accounts
    receivable of $33, $65, and $297 as of December 31, 2005,
    2004 and 2003, respectively.

222



---



##### 








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure



223



---



##### 





|         |                        
|-------- | -----------------------
|ITEM 9A. | Controls and Procedures

Management Conclusions Concerning Disclosure Controls and
Procedures




| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | All dollar amounts in this Item 9A are in millions of
    United States, or U.S., dollars unless otherwise
    stated.







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our successive restatements of our financial statements,
    including the Third Restatement;                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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;                                                                                                                                    
| |  | the material weaknesses in our internal control over financial
    reporting that we and our independent registered chartered
    accountants, Deloitte, have identified (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 2005, 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 and this
    report;
| |  | the conclusion of the CEO and CFO that our disclosure controls
    and procedures, as at the end of each quarter in 2005, were not
    effective, included in each 2005 Quarterly Report;                                                                                                                                                                                                                                                                                                 
| |  | the findings of the Revenue Independent Review included in this
    Item 9A;                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | the ongoing Internal Audit Review described more fully below; and                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | the remedial measures we have identified, developed and begun to
    implement to address these issues.                                                                                                                                                                                                                                                                                                                                                                                   





Managements Report on 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.                                                                                                   

224



---



##### 









| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                    









LG-Nortel LG-Nortels




Report of Independent Registered Chartered Accountants




| |                                                                          
| | -------------------------------------------------------------------------
| | To the Shareholders and Board of Directors of Nortel
    Networks Limited



225



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##### 



LG-Nortel (LG-Nortel) LG-Nortel












| |   |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lack of compliance with written Nortel procedures for monitoring
    and adjusting balances relating to certain accruals and
    provisions, including restructuring charges and contract and
    customer accruals;                                                                                                                                                                                                         
| |  | Lack of compliance with Nortel procedures for appropriately
    applying generally accepted accounting principles
    (GAAP) to the initial recording of certain
    liabilities including those described in Statement of Financial
    Accounting Standards (SFAS) No. 5,
    Accounting for Contingencies, and to foreign
    currency translation as described in SFAS No. 52, 
    Foreign Currency Translation;
| |  | 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.                                                                                                                                                                                                                                                                                                 

226



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227



---



##### 



Third Restatement




| |         
| | --------
| | Overview







| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain complex arrangements with multiple deliverables that
    were previously fully accounted for under the
    percentage-of-completion method of SOP 81-1, but where
    elements outside of the scope of SOP 81-1 should have been
    examined for separation under the guidance in EITF 00-21; and
| |  | Certain complex arrangements accounted for under the
    percentage-of-completion method did not meet the criteria for
    this treatment in
    SOP 81-1 and
    should instead have been accounted for using completed contract
    accounting under
    SOP 81-1.                                      









| |                      
| | ---------------------
| | Principal Adjustments



|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ---------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | Revenues |       |   | Cost of Revenues |  
|                                                                          |  |          |       |   |                  |  
|                                                                          |  | 2004     |       |   | 2003             |   |        | 2004 |  |   | 2003  |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As previously reported                                                    |  | $        | 9,828 |   |                  | $ | 10,193 |      |  | $ | 5,735 |   |  | $ | 5,861 |  
|Adjustments:                                                              |  |          |       |   |                  |   |        |      |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  | $        | (84   | ) |                  | $ | (118   | )    |  | $ | (55   | ) |  | $ | (103  | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (174  | ) |                  |   | (49    | )    |  |   | (127  | ) |  |   | (26   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (38   | ) |                  |   | (84    | )    |  |   | 14    |   |  |   | (36   | )
|Other revenue recognition adjustments                                     |  |          | (16   | ) |                  |   | (10    | )    |  |   | (11   | ) |  |   | 26    |  
|Other adjustments                                                         |  |          |      |   |                  |   |       |      |  |   | 4     |   |  |   | 10    |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  
|As restated                                                               |  | $        | 9,516 |   |                  | $ | 9,932  |      |  | $ | 5,560 |   |  | $ | 5,732 |  
|                                                                          |  |          |       |   |                  |   |        |      |  |   |       |  

228



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##### 





|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | - | ------- | - | ----- | ------------ |  | - | -------- | - |  | ------- | ----- | - | ------------ | - | ----- | ----------- |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | 2005     |       |   | 2004    |  
|                                                                          |  |          |       |   |         |  
|                                                                          |  | Three    |       |   | Three   |   |       | Three        |  |   | Three    |   |  | Three   |       |   | Three        |   |       | Three       | 
|                                                                          |  | Months   |       |   | Months  |   |       | Months       |  |   | Months   |   |  | Months  |       |   | Months       |   |       | Months      | 
|                                                                          |  | Ended    |       |   | Ended   |   |       | Ended        |  |   | Ended    |   |  | Ended   |       |   | Ended        |   |       | Ended       | 
|                                                                          |  | March 31 |       |   | June 30 |   |       | September 30 |  |   | March 31 |   |  | June 30 |       |   | September 30 |   |       | December 31 | 
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as previously reported                                         |  | $        | 2,536 |   |         | $ | 2,855 |              |  | $ | 2,655    |   |  | $       | 2,444 |   |              | $ | 2,590 |             |  | $ | 2,179 |   |  | $ | 2,615 |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 82    |   |         |   | (23   | )            |  |   | (13      | ) |  |         | (22   | ) |              |   | (29   | )           |  |   | (17   | ) |  |   | (16   | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (183  | ) |         |   | (155  | )            |  |   | (70      | ) |  |         | (19   | ) |              |   | (31   | )           |  |   | (49   | ) |  |   | (75   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (53   | ) |         |   | (45   | )            |  |   | (62      | ) |  |         | (37   | ) |              |   | (54   | )           |  |   | 42    |   |  |   | 11    |  
|Other revenue recognition adjustments                                     |  |          | 7     |   |         |   | (13   | )            |  |   | 8        |   |  |         |      |   |              |   | 2     |             |  |   | 4     |   |  |   | (22   | )
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Revenues  as restated                                                    |  | $        | 2,389 |   |         | $ | 2,619 |              |  | $ | 2,518    |   |  | $       | 2,366 |   |              | $ | 2,478 |             |  | $ | 2,159 |   |  | $ | 2,513 |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as previously reported                              |  | $        | (7    | ) |         | $ | 57    |              |  | $ | (77      | ) |  | $       | 117   |   |              | $ | 54    |             |  | $ | (218  | ) |  | $ | 154   |  
|Adjustments:                                                              |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             |  |   |       |   |  |   |       |  
|Application of SOP 81-1                                                   |  |          | 9     |   |         |   | (12   | )            |  |   | (6       | ) |  |         | (3    | ) |              |   | (14   | )           |  |   | (3    | ) |  |   | (8    | )
|Interaction between multiple revenue recognition accounting
    standards |  |          | (26   | ) |         |   | (12   | )            |  |   | (7       | ) |  |         | (6    | ) |              |   | (7    | )           |  |   | (10   | ) |  |   | (24   | )
|Application of SAB 104 and SOP 97-2                                       |  |          | (26   | ) |         |   | (25   | )            |  |   | (22      | ) |  |         | (23   | ) |              |   | (26   | )           |  |   | 2     |   |  |   | (5    | )
|Other revenue recognition adjustments                                     |  |          | (3    | ) |         |   | (50   | )            |  |   | 6        |   |  |         | (9    | ) |              |   | 3     |             |  |   | 2     |   |  |   |      |  
|Gain on sale of businesses                                                |  |          | (21   | ) |         |   | 25    |              |  |   |         |   |  |         | (1    | ) |              |   |      |             |  |   |      |   |  |   | (6    | )
|Health and WelfareTrust                                                   |  |          |      |   |         |   |      |              |  |   |         |   |  |         |      |   |              |   |      |             |  |   |      |   |  |   | (1    | )
|Foreign exchange                                                          |  |          | 2     |   |         |   | 11    |              |  |   | (5       | ) |  |         |      |   |              |   | 6     |             |  |   | (34   | ) |  |   | (10   | )
|Other                                                                     |  |          | 10    |   |         |   | (15   | )            |  |   | 2        |   |  |         | (2    | ) |              |   | (3    | )           |  |   | 3     |   |  |   | 18    |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 
|Net earnings (loss)  as restated                                         |  | $        | (62   | ) |         | $ | (21   | )            |  | $ | (109     | ) |  | $       | 73    |   |              | $ | 13    |             |  | $ | (258  | ) |  | $ | 118   |  
|                                                                          |  |          |       |   |         |   |       |              |  |   |          |   |  |         |       |   |              |   |       |             | 





| |                                               
| | ----------------------------------------------
| | Decision Not to Amend Certain Previous Filings

10-Q


10-Q




| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Internal Audit Review of facts and circumstances
    surrounding Third Restatement



229



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##### 





Revenue Independent Review












Remedial Measures






230



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##### 







| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.











| |                                         
| | ----------------------------------------
| | Managements Assessment and Observations





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | While we have invested significantly in improvements to our
    internal control environment, this has been a very difficult
    task, as many of the reasons for weak internal control over
    financial reporting are pervasive and relate to our
    infrastructure and organization.                                                                                                                                               
| |  | Without significant infrastructure changes, including changes to
    the information systems and finance organizational structure, we
    will be utilizing short-term, time-consuming workaround
    solutions to address identified control issues as opposed to
    streamlining and building sustainable processes that involve the
    effective execution of stronger and more efficient monitoring
    and preventative controls.
| |  | In order to fully remediate the identified material weaknesses,
    we will need to put in place a more rigorous management
    assessment process while continuing to remedy deficiencies in
    the process. In addition, we need to ensure that we have
    sufficient resources to make the necessary improvements to
    controls as well as further                                                                               

231



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | strengthen the training and competencies of our finance
    personnel and to invest sufficient time to design and evaluate
    the necessary controls so that they are fully understood,
    implemented and operate effectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | A number of control design deficiencies, including those at the
    entity level, result in a control environment wherein the design
    or operation of the internal control components would not reduce
    to a relatively low level the risk that material misstatements
    caused by error or fraud may occur and may not be detected
    within a timely period in the normal course (entity level
    controls include those controls that have a pervasive effect on
    the organization). Entity level controls will require
    significant attention and improvement before a foundation upon
    which internal controls could be considered effective will exist
    and upon which controls at the transaction process level could
    be considered effective and reliable (i.e., result in a
    sustainable control environment). In general, we noted many
    control deficiencies at the entity level and a high volume of
    deficiencies at the transaction process level.
| |  | At the transaction process level, we need to improve upon the
    balance between detective and preventative controls. We continue
    to rely heavily on manual and detective controls and experience
    a high volume of post-close accounting adjustments, including
    out-of-period adjustments, all in the context of processes that
    are complex and fragmented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       









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Changes in Internal Control Over Financial Reporting






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The formation of the
    LG-Nortel joint venture
    on November 2, 2005, including implementation by the joint
    venture entity of a separate Oracle financial software system
    (including general ledger, accounts payable and accounts
    receivable functions) and an enterprise resource planning
    system. For more information about the
    LG-Nortel joint
    venture, see Developments in 2005 and 2006 
    Significant Business Developments  Joint
    Ventures in the MD&A section of this report and
    note 9 of the accompanying audited consolidated financial
    statements.
| |  | The appointment of a new President and CEO, Chief Legal Officer
    and Vice President, Global Supply Chain and Quality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | As part of the remediation efforts discussed above and to
    compensate for the material weaknesses in our internal control
    over financial reporting, we undertook extensive documentation
    and review of customer contracts for revenue recognized in 2005
    and earlier periods. This contract review was commenced in the
    middle of 2005 following the completion of the Second
    Restatement and the filing of our delayed periodic reports, but
    was conducted substantially in the fourth quarter of 2005 and
    the first quarter of 2006.                                         






|         |                  
|-------- | -----------------
|ITEM 9B. | Other Information



233



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PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | Directors and Executive Officers of the Registrant

Directors of the registrant




|                                          |  |     |    |               |             |                                                    |                   |                                        |                           |                       
|----------------------------------------- |  | --- | -- | ------------- | ----------- | -------------------------------------------------- | ----------------- | -------------------------------------- | ------------------------- | ----------------------
|                                          |  |     |    | Position with |             |                                                    |                   |                                       
|Name                                      |  | Age |    |               | the Company |                                                    | City of Residence |                                        | Director of NNC/NNL Since
|                                          |  |     |    |               |             |                                                    |                   |                                        |                          
|Jalynn Hamilton Bennett
    (1)(2)        |  |     | 63 |               |             | Director                                           |                   | Toronto, Ontario, Canada               |                           | June 29, 2005         
|Dr. Manfred Bischoff
    (2)(4)           |  |     | 64 |               |             | Director                                           |                   | Starnberg, Federal Republic of Germany |                           | April 29, 2004        
|The Hon. James Baxter
    Hunt, Jr.(2)(3) |  |     | 68 |               |             | Director                                           |                   | Raleigh, North Carolina, U.S.A.        |                           | June 29, 2005         
|John Alan MacNaughton
    (1)(4)          |  |     | 61 |               |             | Director                                           |                   | Toronto, Ontario, Canada               |                           | June 29, 2005         
|The Hon. John Paul Manley
    (1)(2)      |  |     | 56 |               |             | Director                                           |                   | Toronto, Ontario, Canada               |                           | May 26, 2004          
|Richard David McCormick
    (1)(3)        |  |     | 65 |               |             | Director                                           |                   | Denver, Colorado, U.S.A.               |                           | January 11, 2005 (NNC)
|                                          |  |     |    |               |             |                                                    |                   |                                        |                           | January 18, 2005 (NNL)
|Claude Mongeau                            |  |     | 44 |               |             | Nominee                                            |                   | Boucherville, Québec, Canada           |                           |                       
|Harry Jonathan Pearce
    (1)(4)          |  |     | 63 |               |             | Director                                           |                   | Bloomfield Hills, Michigan, U.S.A.     |                           | January 11, 2005 (NNC)
|                                          |  |     |    |               |             |                                                    |                   |                                        |                           | January 18, 2005 (NNL)
|John David Watson                         |  |     | 60 |               |             | Nominee                                            |                   | Calgary, Alberta, Canada               |                           |                       
|Mike Svetozar Zafirovski                  |  |     | 52 |               |             | President and Chief Executive Officer and Director |                   | Lake Forest, Illinois, U.S.A.          |                           | November 15, 2005     






|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Member of the compensation and human resources committee
    (formerly the joint leadership resources committee) of the
    Company and Nortel Networks Corporation.      
|(2) | Member of the pension fund policy committee of the board of
    directors of the Company.                                                                                 
|(3) | Member of the audit committees of the boards of directors of the
    Company and Nortel Networks Corporation.                                                             
|(4) | Member of the nominating and governance committee (formerly the
    committee on directors) of the boards of directors of the
    Company and Nortel Networks Corporation.

|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Photo of J.H. Bennett) |  | JALYNN H. BENNETT, C.M.is President of Jalynn H.
    Bennett and Associates Ltd., a consulting firm in strategic
    planning and organizational development in both the public and
    private sectors. Prior to establishing that firm,
    Mrs. Bennett was associated for nearly 25 years with
    The Manufacturers Life Insurance Company. Mrs. Bennett is
    currently a director of the Canadian Imperial Bank of Commerce,
    Cadillac Fairview Corporation Limited and Teck Cominco Ltd. She
    is also a director of The Hospital for Sick Children Foundation.
    She is a member of the Lawrence National Centre for Policy and
    Management Advisory Council, Richard Ivey School of Business;
    the Canada Millennium Scholarship Foundation; the Schulich
    School of Business and International Advisory Board, York
    University; the Toronto Society of Financial Analysts; the
    Toronto Association of Business Economists; the Governance
    Leadership Council of the Ontario Hospital Association; the
    National Advisory Board, Canadas Outstanding CEO of the
    Year and a Member of the Trinity College Endowment Campaign
    Cabinet. She is a fellow of the Institute of Corporate Directors
    in Canada, a past Commissioner of the Ontario Securities
    Commission and was a member of the Toronto Stock Exchange,
    Canadian Stock Exchange and the Canadian Institute of Chartered
    Accountants Joint Committee on Corporate Governance (The
    Saucier Committee).

234



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##### 



|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Photo of (Dr. Manfred Bischoff)       |  | DR. MANFRED BISCHOFFhas been Chairman of the Board
    of European Aeronautic Defence and Space Company EADS N.V., an
    aerospace company, since July 2000, and Delegate for Aerospace
    of DaimlerChrysler AG, an automotive company, since January
    2004. Previously, Dr. Bischoff was a member of the Board of
    Management of DaimlerChrysler AG from May 1995 to December 2003
    and President and Chief Executive Officer of DaimlerChrysler
    Aerospace AG from May 1995 to March 2000. He is
    also Chairman of the Supervisory Board of DaimlerChrysler
    Luft-und Raumfahrt Holding and a member of the Supervisory Board
    of Fraport AG, Gerling-Konzern Versicherungs-Beteiligungs-AG,
    J.M. Voith AG, Royal KPN N.V., SMS GmbH and
    a member of the Board of Unicredit S.p.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                      
|(Photo of Hon. James Baxter Hunt, Jr.) |  | THE HON. JAMES BAXTER HUNT, JR.has been a member of
    the law firm of Womble Carlyle Sandridge & Rice, PLLC,
    since 2001. Prior to that, he was Governor of North Carolina for
    four terms, 1977 to 1985 and 1993 to 2001, where he established
    the Microelectronics Center of North Carolina, the N.C.
    Biotechnology Center and the N.C. School of Science and
    Mathematics. He founded and chaired the National Board for
    Professional Teaching Standards and currently chairs the
    National Center for Public Policy and Higher Education, the Hunt
    Institute for Educational Leadership and Policy, and the
    Institute for Emerging Issues. Mr. Hunt is a trustee of the
    Carnegie Corporation of New York and is a director of BioSignia,
    Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                      
|(Photo of John Alan MacNaughton)       |  | JOHN ALAN MacNAUGHTON, C.M.served as the founding
    President and Chief Executive Officer of the Canada Pension Plan
    Investment Board, a Crown Corporation created by an Act of
    Parliament to invest the assets of the Canada Pension Plan, from
    1999 until his retirement in 2005. He was President of Nesbitt
    Burns Inc., the investment banking arm of Bank of Montreal, from
    1994 to 1999. Mr. MacNaughton is Chairman of Canadian
    Trading and Quotation System Inc. He is a Trustee of the
    University Health Network, an academic health science centre. He
    is a Governor of CCAF-FCVI Inc., a research and education
    foundation focused on governance, accountability, management and
    audit in the public sector. Mr. MacNaughton is Chairman of
    the Canadian Institute of International Affairs.                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      
|(Photo of John P. Manley)              |  | THE HON. JOHN P. MANLEYhas been a senior counsel at
    the law firm of McCarthy Tétrault LLP since
    May 2004. Mr. Manley was previously the Member of
    Parliament for Ottawa South from November 1988 to June 2004 and
    Chairman of the Ontario Power Generation Review Committee, which
    was responsible for reviewing the state of the energy system of
    Ontario, from December 2003 to March 2004. As a Member of
    Parliament, Mr. Manley also held various positions in the
    Canadian federal government, including Deputy Prime Minister of
    Canada from January 2002 to December 2003, Minister of Finance
    from June 2002 to December 2003, Chair of the Cabinet Committee
    on Public Security and Anti-Terrorism from October 2001 to
    December 2003, Minister of Foreign Affairs from October 2000 to
    January 2002 and Minister of Industry prior thereto.
    Mr. Manley is also a director of Canadian Imperial Bank of
    Commerce. He was granted the designation C. Dir (Chartered
    Director) by McMaster University in February 2006.                                                                                                                                                                            
|                                      
|(Photo of Richard David McCormick)     |  | RICHARD DAVID McCORMICKserved as Chairman of US WEST,
    Inc., a telecommunications company, from June 1998 until his
    retirement in May 1999. He was chairman, president and chief
    executive officer of US WEST, Inc. from 1992 until 1998. He is
    also a director of HealthTrio Inc., United Technologies
    Corporation and Wells Fargo and Company. Mr. McCormick is
    also the Honorary Chairman (Past Chairman) of the International
    Chamber of Commerce, Vice Chairman (Past Chairman) of the United
    States Council for International Business. He is a Trustee of
    the Denver Art Museum, Vice President of the Denver Art Museum
    Foundation and Director Emeritus of Creighton University. From
    1994 to 2003, Mr. McCormick was also a director of UAL
    Corporation, the parent holding company and sole shareholder of
    United Air Lines, Inc. On December 9, 2002, UAL
    Corporation, United Air Lines, Inc. and 26 direct and indirect
    wholly owned subsidiaries of UAL Corporation filed voluntary
    petitions to reorganize their businesses under Chapter 11
    of the United States Bankruptcy Code in the United States
    Bankruptcy Court for the Northern District of Illinois, Eastern
    Division.

235



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##### 



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Photo of Claude Mongeau)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | CLAUDE MONGEAUhas been the Executive Vice-President and
    Chief Financial Officer of Canadian National Railway Company, a
    North American railway company, since October 2000. Prior to
    that appointment, Mr. Mongeau was Senior Vice-President and
    Chief Financial Officer from October 1999. Mr. Mongeau is
    also Chairman of the Audit and a member of the Governance
    Committees of SNC-Lavalin Group Inc. He is also a director of
    the Pointe-à-Callière Museum and of Forces Avenir.
    Mr. Mongeau was also a director of 360networks Corporation
    (or 360networks), his tenure ending shortly before that
    companys application under the Companies
    Creditors Arrangement Actfor creditor protection.
    360networks underwent a restructuring in 2002 and its Canadian
    assets were sold in November 2004.                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(Photo of Harry Jonathan Pearce)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | HARRY JONATHAN PEARCEwas Chairman of the Board of Hughes
    Electronics Corporation (now The DIRECTV Group, Inc.), a company
    engaged in digital television entertainment, broadband satellite
    and network services as well as global video and data
    broadcasting, from June 2001 to January 2004. He was a director
    and Vice-Chairman of General Motors Corporation from January
    1996 to June 2001. Mr. Pearce is also a director of
    Marriott International, Inc. and the lead director of MDU
    Resources Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(Photo of John D. Watson)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | JOHN DAVID WATSONhas been Executive Vice-President and
    Chief Financial Officer of EnCana Corporation (or EnCana), an
    Alberta, Canada based oil and gas exploration and production
    company since its formation in 2002 and until his retirement on
    February 28, 2006. Prior to that appointment,
    Mr. Watson was Vice-President Finance and Chief Financial
    Officer of Alberta Energy Company Ltd., a predecessor company to
    EnCana since 1987. Overall, he has been with EnCana for
    30 years. He is also a member of the Audit Committee of the
    Province of Alberta, Chair of the Calgary Police Commission and
    a director of UTS Energy Corporation. In 2005, he was granted
    the designation of ICD.D by the Institute of Corporate Directors.                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(Photo of Mike S. Zafirovski)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | MIKE S. ZAFIROVSKIwas previously employed in the
    telecommunications industry with Motorola, Inc. (or Motorola).
    From July 2002 to February 2005, he was President and Chief
    Operating Officer and a director of Motorola and, prior thereto,
    from June 2000 to July 2002, he was President and Chief
    Executive Officer of Motorolas mobile devices business.
    Prior to his tenure with Motorola, Mr. Zafirovski held a
    number of positions during 25 years with General Electric,
    including 13 years as president and chief executive officer
    of various businesses in the industrial as well as financial and
    insurance sectors. Mr. Zafirovski is also a director of The
    Boeing Company and is the Chair of the Finance Committee and a
    member of the Audit Committee of The Boeing Company. In
    addition, he is a director of the Childrens Hospital of
    Chicago, the Economic Club of Chicago and the United Way of
    Chicago.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|From May 31, 2004 until on or about June 21, 2005,
    certain directors, senior officers and certain current and
    former employees of the Company and Nortel Networks Corporation
    were prohibited from trading in the securities of the Company
    and Nortel Networks Corporation pursuant to management cease
    trade orders issued by the Ontario Securities Commission
    (OSC) and certain other provincial securities regulators in
    connection with the delay in the filing of certain of our
    financial statements. These orders did not at any time apply to
    Mrs. Bennett or Messrs. Hunt and MacNaughton as they
    were elected as directors after such orders were revoked.
    However, following the March 10, 2006 announcement by
    Nortel Networks Corporation of a delay in the filing of certain
    2005 financial statements, the OSC issued a final management
    cease trade order on April 10, 2006 prohibiting all of our
    current directors, as well as certain other insiders, from
    trading in securities of the Company and Nortel Networks
    Corporation until two business days following the receipt by the
    OSC of all filings the Company and Nortel Networks Corporation
    are required to make pursuant to Ontario securities laws. The
    British Columbia Securities Commission and Quebec Securities
    Commission have issued similar orders.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Shareholders who wish to have the nominating and governance
    committee of the board of directors of the Company consider the
    nomination of any person for director at the 2007 annual meeting
    of shareholders should contact our Corporate Secretary at 8200
    Dixie Road, Suite 100, Brampton, Ontario, Canada, L6T 5P6,
    by December 31, 2006. See Statement of Corporate
    Governance Practices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       




Executive officers and certain other non-executive board
appointed officers of the Registrant




236



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##### 



|                                         |  |                                                                |  |             |      | 
|---------------------------------------- |  | -------------------------------------------------------------- |  | ----------- | ---- | 
|                                         |  |                                                                |  | Year of     |     
|Name and Age                             |  | Office and Position Currently Held                             |  | Appointment |     
|                                         |  |                                                                |  |             |     
|Robert John Bartzokas (55)               |  | Chief Compliance Officer                                       |  |             | 2006 | 
|Martha Helena Bejar (44)                 |  | President, CALA and Emerging Markets Strategy                  |  |             | 2005 | 
|Dennis James Carey (59)                  |  | Executive Vice-President, Corporate Operations                 |  |             | 2006 | 
|Tracy Sarah Jane Connelly McGilley (34)* |  | Assistant Secretary                                            |  |             | 2004 | 
|Peter William Currie (55)                |  | Executive Vice-President and Chief Financial Officer           |  |             | 2005 | 
|Gordon Allan Davies (44)*                |  | General Counsel  Corporate and Corporate Secretary            |  |             | 2005 | 
|William John Donovan (49)*               |  | Senior Vice-President, Business Transformation                 |  |             | 2006 | 
|John Marshall Doolittle (42)*            |  | Vice-President, Financial Planning and Analysis                |  |             | 2006 | 
|David William Drinkwater (57)            |  | Chief Legal Officer                                            |  |             | 2005 | 
|Lauren Patricia Flaherty (48)**          |  | Chief Marketing Officer                                        |  |             | 2006 | 
|Jesse Joel Hackney, Jr. (36)             |  | Senior Vice-President, Global Operations and Quality           |  |             | 2006 | 
|Albert Roger Hitchcock (41)              |  | Chief Information Officer                                      |  |             | 2002 | 
|Dion Constandino Joannou (40)            |  | President, North America                                       |  |             | 2005 | 
|Paul Wesley Karr (50)                    |  | Controller                                                     |  |             | 2005 | 
|William Joseph LaSalle (53)*             |  | General Counsel  Operations                                   |  |             | 2005 | 
|Kimberly Susan Lechner (40)*             |  | Assistant Controller                                           |  |             | 2005 | 
|Richard Stephen Lowe (56)                |  | President, Mobility and Converged Core Networks                |  |             | 2005 | 
|Pierre David MacKinnon (44)              |  | Chairman, LG-Nortel JV and President, LG- Nortel Business Unit |  |             | 2006 | 
|Robert Yu Lang Mao (62)                  |  | President and Chief Executive Officer, Greater China           |  |             | 2003 | 
|Michael Walton McCorkle (53)*            |  | Assistant Treasurer                                            |  |             | 2005 | 
|Stephen Charles Pusey (44)               |  | Executive Vice-President and President, Eurasia                |  |             | 2005 | 
|George Andrew Riedel (48)                |  | Chief Strategy Officer                                         |  |             | 2006 | 
|Susan Engelke Shepard (62)               |  | Chief Ethics Officer                                           |  |             | 2006 | 
|Stephen Francis Slattery (46)            |  | President, Enterprise Solutions and Packet Networks            |  |             | 2005 | 
|Katharine Berghuis Stevenson (43)        |  | Treasurer                                                      |  |             | 2000 | 
|Anna Ventresca (41)*                     |  | Assistant Secretary                                            |  |             | 2005 | 
|Dietmar Martin Wendt (46)**              |  | President, Global Services                                     |  |             | 2006 | 
|Mike Svetozar Zafirovski (52)            |  | President and Chief Executive Officer                          |  |             | 2005 | 






| |   |                                       
| | - | --------------------------------------
| | * | Non-executive board appointed officers

|   |                                  
|-- | ---------------------------------
|** | Appointment effective May 1, 2006





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | R.J. Bartzokas was appointed Chief Compliance Officer in January
    2006, prior to which he was Chief Audit and Security Officer
    (October 2005 to January 2006) and Vice-President,
    Audit (July 2005 to October 2005). Mr. Bartzokas
    has over 30 years of accounting and auditing experience,
    including as Vice President, Audit & Compliance of
    Amerada Hess Corporation (January 1995 to June 2005) and as
    Audit Manager with Getty Oil Company (March 1979 to
    October 1984). Prior thereto, Mr. Bartzokas was a
    Senior Auditor with Price Waterhouse;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | D.J. Carey was appointed as Executive Vice-President, Corporate
    Operations effective January 2006. He is responsible for
    Human Resources, the Business Transformation Office, Ethics, and
    Information Services, as well as the Companys Environment,
    Safety and Business Continuity programs, and Diversity. Prior to
    his appointment, Mr. Carey held various leadership
    positions at Motorola, Inc. (or Motorola), the General
    Electric Company (or GE), The Home Depot and AT&T. In
    his most recent assignment, Mr. Carey was Executive
    Vice-President (February 2005 to November 2005) and
    prior thereto was Executive Vice President, President and CEO,
    Integrated Electronic Systems for Motorola (November 2002
    to January 2005). In this role he was responsible for the
    growth and profitability of a portfolio of eight businesses,
    including Automotive Communications and Electronics Systems
    Group, Energy Systems Group, Embedded Communications Computing
    Group, Enterprise Seamless Mobility Division, Canopy Division,
    Secure Asset Solution Division, iRadio Division and Clinical
    Micro Sensors Division. He has also served as Vice President and
    General Manager for Corporate Productivity and
    Mergers & Acquisitions for AT&T, and more recently
    as Executive Vice President for Business Development, Strategy
    and Corporate Operations for The Home Depot after having been
    Executive Vice President and Chief Financial Officer;

237



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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | T.S.J. Connelly McGilley was appointed as Assistant Secretary
    effective in December 2004, in addition to being
    Counsel  Securities in the Companys legal
    department, a position she has held since July 1999;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | P.W. Currie held various finance positions at Nortel from 1979
    to 1992, including general auditor, controller and vice
    president, finance for different business segments, and from
    1994 to early 1997 as senior vice president and chief financial
    officer. He joined Royal Bank of Canada in 1997, most recently
    holding the position of Vice Chairman and Chief Financial
    Officer of RBC Financial Group until September 2004;                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | W.J. Donovan was appointed Senior Vice-President, Business
    Transformation in January 2006, prior to which he had been
    Senior Vice-President, Human Resources since September 2000;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | J.M. Doolittle was, prior to returning to Nortel in September
    1999, Vice President, Finance of The Bank of Montreal, a
    Canadian chartered bank, from August 1997 and Director,
    Treasury, Europe and Asia, Nortel Networks, prior thereto;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | D.W. Drinkwater, prior to his appointment as Chief Legal Officer
    in December 2005, carried on a consulting business and held
    various corporate directorships from August 2004 to December
    2005. Mr. Drinkwater was Executive Vice President and Chief
    Financial Officer of the Ontario Power Generation Inc. (or OPG),
    a generator and seller of electricity, from April 2003 to July
    2004 and prior thereto, was Executive Vice President, Corporate
    Development and Legal Affairs of OPG from December 2000 to April
    2003;                                                                                                                                                                                                                                                                                                                                   
| | L.P. Flaherty was appointed Chief Marketing Officer effective
    May 1, 2006. Prior to joining Nortel, she gained more than
    25 years experience with IBM Corporation (or IBM). At IBM,
    she held various roles that included responsibility for
    long-term business strategy, channel and product marketing, and
    related communications and branding priorities. Most recently,
    Ms. Flaherty was Vice President, Worldwide Marketing,
    Small & Medium Business Segment;                                                                                                                                                                                                                                                                                                                                                                                                  
| | J. Joel Hackney, Jr. was appointed as Senior
    Vice-President, Global Operations and Quality in April 2006.
    Prior to his appointment as Senior Vice-President, Global
    Operations and Quality, he was Senior Vice-President, Supply
    Chain and Quality, a position he held since December 2005.
    Mr. Hackney has a background in general management, supply
    chain, leadership skills, and Six Sigma expertise. He had more
    than 14 years of global leadership experience at GE in
    roles spanning audit, supply chain, operations, product
    management, and general management. Most recently,
    Mr. Hackney was Division General Manager for GE Consumer
    and Industrial, based in Barcelona, Spain (December 2004 to
    December 2005);                                                                                                                   
| | P.W. Karr was appointed as Controller in May 2005, prior to
    which he was Vice President and Financial Controller of
    Bristol-Myers Squibb Company (November 2003 to
    December 2004). Prior thereto, Mr. Karr held numerous
    senior positions with GE from February 1994 to October 2003,
    most recently as Senior Vice President and Chief Accounting
    Officer, GE Capital Market Services during 2003. Prior thereto,
    Mr. Karr spent approximately 16 years with
    Deloitte & Touche, including as National Consultation
    Partner in 1992 and 1993;                                                                                                                                                                                                                                                                                                               
| | K.S. Lechner has been with Nortel for 11 years, holding a
    variety of senior Finance roles across the business. Prior to
    her appointment as Assistant Controller in October 2005, she was
    leader of the FP&A for Carrier Networks North American
    Sales. Prior to joining Nortel, Ms. Lechner held
    progressively senior roles at Ernst and Young Chartered
    Accountants and J. Walter Thompson;                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | R.Y.L. Mao was, prior to returning to Nortel in January 2003,
    Chairman and Chief Executive Officer of Foxconn (Beijing)
    Precision Component Industries, Ltd., a manufacturer of
    mobile communication terminal devices, from November 2002 to
    December 2002, and Chief Executive Officer, Nortel China, prior
    thereto;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | M.W. McCorkle was, prior to his appointment as Assistant
    Treasurer in August 2005, Nortels Director and Team
    Leader, Structured Finance EMEA, based in Nortels United
    Kingdom operations (August 2003 to July 2005). During his time
    with Nortel, Mr. McCorkle has also held the position of
    Director of Customer Finance, North America (March 1997 to July
    2003), where he led the Wireless group within North American
    Customer Finance. Prior to joining Nortel in 1997,
    Mr. McCorkle had extensive experience in the banking
    industry, having held various Vice-President positions at the
    First National Bank of Chicago;                                                                                                                                                                                                                      
| | G.A. Riedel was appointed Chief Strategy Officer in February
    2006. Prior to that, he was Vice President, Strategy and
    Corporate Development at Juniper Networks, Inc. (or Juniper)
    from March 2003 to February 2006. In this role, Mr. Riedel
    was involved in developing and executing a growth strategy to
    expand Junipers portfolio and partnerships. He was heavily
    engaged in a number of Junipers acquisitions and strategic
    partnerships. Prior to his position with Juniper,
    Mr. Riedel held a number of positions during 15 years
    with the Boston-based consulting firm of McKinsey &
    Company (or McKinsey), the most recent being Director,
    Australia & Singapore from November 1987 to December
    2002. His work at McKinsey focused exclusively on high
    technology industries, particularly the telecommunications
    industry;
| | S.E. Shepard was appointed Chief Ethics Officer in January 2006,
    prior to which she had been Chief Ethics and Compliance Officer
    since February 2005. Prior to joining Nortel, she served in a
    number of positions specifically related to ethics and
    compliance. Ms. Shepard has been a Commissioner for the New
    York State Ethics Commission                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

238



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##### 



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | since May 2003. In addition, prior to becoming engaged in
    private practice in 1997, Ms. Shepard was Commissioner of
    Investigation for New York City (1990 to 1994), Chief Counsel to
    the New York State Commission of Investigation (1986 to 1990)
    and an Assistant United States Attorney for the Eastern District
    of New York (1976 to 1986);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | A. Ventresca was appointed as Assistant Secretary in August
    2005, in addition to being Counsel  Securities in the
    Companys legal department, a position she has held since
    September 2000;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | D.M. Wendt was appointed President, Global Services effective
    May 1, 2006. Prior to joining Nortel, he gained more than
    25 years experience with IBM. He held a variety of
    positions internationally with IBM in sales and product
    management. Most recently, Mr. Wendt was Vice President IBM
    Asia Pacific Information Technology Services
    Transformation; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | M.S. Zafirovski was, prior to joining Nortel, previously
    employed in the telecommunications industry with Motorola. From
    July 2002 to February 2005, he was President and Chief Operating
    Officer of Motorola and, prior thereto, from June 2000 to July
    2002, he was President and Chief Executive Officer of
    Motorolas mobile devices business. Prior to his tenure
    with Motorola, Mr. Zafirovski held a number of positions
    during 25 years with GE, including 13 years as
    president and chief executive officer of various businesses in
    the industrial as well as financial and insurance sectors.
    Mr. Zafirovski is also a director of The Boeing Company and
    is the Chair of the Finance Committee and a member of the Audit
    Committee of The Boeing Company. In addition, he is a director
    of the Childrens Hospital of Chicago, the Economic Club of
    Chicago, the Macedonian Arts Council, the Museum of Science and
    Industry in Chicago, and the United Way of Chicago.




Section 16(a) beneficial ownership reporting
compliance







Audit committee financial expert







Audit committee







Code of ethics and other corporate governance matters


Overview








239



---



##### 








Code
of Ethics and Appointment of Chief Ethics Officer


Living the Values: A Guide to Ethical Business Practices at
Nortel Networks















|         |                       
|-------- | ----------------------
|ITEM 11. | Executive Compensation



240



---



##### 






Summary compensation table




|                        |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|----------------------- |  | ---- |  | ------------------- | ------- | ------------ | ---------- |  | ---------- | ---------------------- | ---------- |  | ---------- | -------- | ------- | --------- | --------- | ------- | --------- |  | ------------ |  | ------- | ---- |  |  | ---------- | --------
|                        |  |      |  |                     |         |              |            |  |            | Long-Term Compensation |            |  |           
|                        |  |      |  |                     |         |              |            |  |            |                        |            |  |           
|                        |  |      |  |                     |         | Awards       |            |  | Payouts    |                        |            | 
|                        |  |      |  | Annual Compensation |         |              |            |  |            |                        |            |  |           
|                        |  |      |  |                     |         |              | Restricted |  | Securities |                        |            |  |            |         
|                        |  |      |  |                     |         | Other Annual |            |  | Stock Unit |                        | Underlying |  |            | LTIP     |         |           | All Other |        
|Name and Principal      |  |      |  | Salary              |         |              | Bonus      |  |            | Compensation           |            |  | Awards     |          | Options |           |           | Payouts |           |  | Compensation | 
|Position                |  | Year |  | ($)                 |         |              | ($)(1)     |  |            | ($)(2)                 |            |  | ($)(3)     |          | (#)     |           |           | (#)     |           |  | ($)          | 
|                        |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              | 
|M.S. Zafirovski*        |  | 2005 |  |                     | 252,381 |              |            |  |           |                        |            |  | 11,995,981 | (4)      |         | 6,953,550 |           |         | 5,000,000 |  |              |  |        |      |  |  | 11,690,542 | (5)     
|President and           |  | 2004 |  |                     |        |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  |           |         
|Chief Executive Officer |  | 2003 |  |                     |        |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  |           |         
|P.W. Currie             |  | 2005 |  |                     | 527,500 |              |            |  | 850,000    | (6)                    |            |  |           |          |         | 1,530,000 |           |         | 1,000,000 |  |              |  |        |      |  |  | 26,167     | (7)(8)  
|Executive Vice-         |  | 2004 |  |                     |        |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  |           |         
|President and           |  | 2003 |  |                     |        |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  |           |         
|Chief Financial Officer |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|S.C. Pusey              |  | 2005 |  |                     | 558,904 | (9)          |            |  | 233,227    | (10)(11)               |            |  | 52,335     | (10)(12) |         | 1,520,000 |           |         | 875,000   |  |              |  |        |      |  |  | 71,654     | (10)(13)
|Executive Vice-         |  | 2004 |  |                     | 520,000 |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  | 1,150      | (14)    
|President and           |  | 2003 |  |                     | 501,250 |              |            |  | 546,000    | (11)                   |            |  | 3,633      | (15)     |         |          |           |         |          |  |              |  | 67,500  | (16) |  |  | 2,665      | (14)    
|President,              |  |      |  |                     |         |              |            |  | 1,277,500  | (17)(18)               |            |  |            |          |         |           |           |         |           |  |              |  | 620,000 | (19) |  |  |            |         
|Eurasia                 |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|D.C. Joannou            |  | 2005 |  |                     | 441,667 |              |            |  | 183,150    | (11)                   |            |  | 195        | (20)     |         | 912,000   |           |         | 750,000   |  |              |  |        |      |  |  | 8,885      | (21)    
|President, North        |  | 2004 |  |                     | 375,000 |              |            |  |           |                        |            |  | 45,857     | (20)     |         |          |           |         |          |  |              |  |        |      |  |  | 12,590     | (21)    
|America                 |  | 2003 |  |                     | 300,000 |              |            |  | 374,063    | (11)                   |            |  |           |          |         |          |           |         |          |  |              |  | 300,000 | (19) |  |  | 20,830     | (21)    
|                        |  |      |  |                     |         |              |            |  | 450,000    | (17)(18)               |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|S.F. Slattery           |  | 2005 |  |                     | 445,833 |              |            |  | 158,175    | (11)                   |            |  | 1,383      | (22)     |         | 975,000   |           |         | 750,000   |  |              |  |        |      |  |  | 8,400      | (23)    
|President,              |  | 2004 |  |                     | 350,000 |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  | 7,800      | (23)    
|Enterprise              |  | 2003 |  |                     | 350,000 |              |            |  | 300,000    | (11)                   |            |  |           |          |         |          |           |         |          |  |              |  | 300,000 | (19) |  |  | 7,200      | (23)    
|Solutions and           |  |      |  |                     |         |              |            |  | 525,000    | (17)                   |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|Packet Networks         |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         
|W.A. Owens*             |  | 2005 |  |                     | 886,364 |              |            |  | 518,925    | (24)                   |            |  | 304,497    | (25)     |         |          |           |         | 2,900,000 |  |              |  |        |      |  |  | 5,670,085  | (26)    
|Former Vice-            |  | 2004 |  |                     | 681,818 |              |            |  |           |                        |            |  | 209,355    | (25)     |         |          |           |         |          |  |              |  |        |      |  |  | 70,298     | (26)    
|Chairman and            |  | 2003 |  |                     |        |              |            |  |           |                        |            |  |           |          |         |          |           |         |          |  |              |  |        |      |  |  |           |         
|Chief Executive Officer |  |      |  |                     |         |              |            |  |            |                        |            |  |            |          |         |           |           |         |           |  |              |  |         |      |  |  |            |         






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Mr. Zafirovski was appointed as President and Chief
    Executive Officer of the Company and Nortel Networks Corporation
    effective November 15, 2005. Mr. Owens, who was
    President and Chief Executive Officer of the Company and Nortel
    Networks Corporation from April 27, 2004 until becoming
    Vice-Chairman and Chief Executive Officer effective
    March 15, 2005, retired as an officer and director of the
    Company and Nortel Networks Corporation effective
    November 14, 2005. The compensation for Mr. Zafirovski
    and the terms of Mr. Owens retirement/severance
    agreement are described below under Certain Employment
    Arrangements.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incentive cash awards for each fiscal year under the Nortel
    Networks Limited SUCCESS Incentive Plan (or SUCCESS Plan),
    including payments made in 2003 in connection with the
    Return to Profitability bonus program component of
    that plan, whether or not deferred by the named executive
    officer. See footnotes (17) and (18) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (2) | Where applicable, amounts reported in this column are inclusive
    of perquisites if a named executive officer was paid a total of
    $50,000 or more in perquisites.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (3) | The following time based restricted stock units (or RSUs) were
    awarded to the named executive officers in 2005: 2,265,000
    awarded to Mr. Zafirovski on November 15, 2005;
    500,000 awarded to Mr. Currie on September 6, 2005;
    500,000 awarded to Mr. Pusey on November 22, 2005;
    300,000 awarded to Mr. Joannou on November 22, 2005;
    and 300,000 awarded to Mr. Slattery on September 28,
    2005. Except for Mr. Zafirovskis RSUs, which are
    scheduled to vest in equal annual installments over five years,
    each of the named executive officers RSUs are scheduled to
    vest in equal annual installments over three years. The
    aggregate value as at December 31, 2005 of the RSUs awarded
    to the named executive officers in 2005 was $11,826,900. As
    required by applicable securities laws, the amounts reported in
    this column were determined by multiplying the number of RSUs by
    the closing market price on the dates of the awards.
| | (4) | Amounts paid: (i) by Nortel on behalf of
    Mr. Zafirovski for taxes associated with the reimbursement
    by Nortel of a payment made in connection with the settlement of
    litigation commenced by Motorola, Inc. (or Motorola)
    ($11,902,523) and Company-paid travel expenses incurred prior to
    Mr. Zafirovskis impending relocation to Canada
    ($18,179); and (ii) as perquisites, including the
    incremental cost of the use of the Company aircraft ($75,139).
    It is expected that the amount paid for taxes associated with
    the settlement of the Motorola litigation will be reduced by
    approximately $4.3 million due to a reduction of already
    remitted taxes related to Mr. Zafirovskis employment
    with Motorola. In addition, the amount paid for taxes may be
    further reduced as a result of additional reductions or refunds
    arising out of future related filings with relevant taxing
    authorities. See footnote (5) below.            

241



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##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Represents the reimbursement of a payment made by
    Mr. Zafirovski to Motorola in connection with the
    settlement of litigation ($11.5 million) and the payment of
    Mr. Zafirovskis legal expenses and cash disbursements
    incurred in connection with the Motorola litigation ($169,447)
    and in connection with the agreement on the terms of his
    appointment ($21,095). See Certain Employment
    Arrangements  Current Executives.
| | (6) | Represents a special bonus of $300,000 paid within 60 days
    of the commencement of employment plus a guaranteed 2005 SUCCESS
    Plan bonus paid at the target value of 100% of salary, pro-rated
    for the number of months of active service.                                                                                                                                                                                                         
| | (7) | Represents contributions made under the Nortel Networks Limited
    Investment Plan for Employees  Canada.                                                                                                                                                                                                                                                                                                                                                  
| | (8) | Represents the United States dollar equivalent of payments
    actually earned or paid in Canadian dollars. Amounts have been
    converted using the average of the exchange rates in effect
    during each year equal to US$1.00 = Cdn$1.2113 for
    2005, US$1.00 = Cdn$1.2978 for 2004 and
    US$1.00 = Cdn$1.4048 for 2003.                                                                                                                          
| | (9) | Represents United States dollar salary paid until
    September 1, 2005 and United States dollar equivalent of
    Mr. Puseys salary which was adjusted and set in
    United Kingdom pounds on September 1, 2005. See
    footnote (10) below.                                                                                                                                                                                                             

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Certain payments in United Kingdom pounds have been converted
    and included in this amount. Payments have been converted using
    the average of the exchange rates in effect during each year
    equal to US$1.00 = UK£0.5497 for 2005,
    US$1.00 = UK£0.5470 for 2004 and
    US$1.00 = UK£0.6084 for 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(11) | Represents a SUCCESS Plan annual incentive award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(12) | Represents an auto benefit allowance ($36,977) available to
    certain United Kingdom based employees generally and a corporate
    club membership fee ($15,358).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(13) | Represents a special one-time payment to compensate for
    fluctuations in currency exchange rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(14) | Represents expenses relating to Mr. Puseys prior
    long-term international assignment during the period from 1999
    to 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(15) | Amounts paid by Nortel on behalf of Mr. Pusey for taxes
    associated with the 2001 and 2000 tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(16) | Represents the number of RSUs issued and settled in respect of
    RSUs allocated under the 2001 restricted stock unit program (or
    2001 RSU program) of the Nortel Networks Limited Restricted
    Stock Unit Plan (or RSU Plan). RSUs allocated in 2001 had a
    two-year performance period that was divided into five shorter
    performance segments. The performance criteria included resizing
    activity targets for the first segment, and corporate
    performance objectives under the incentive plan for the
    remaining four segments. Although the compensation and human
    resources committee determined that certain of the distinct
    performance objectives were not achieved, it exercised its
    discretion in May 2003 to authorize the issuance and
    settlement in the form of common shares of Nortel Networks
    Corporation (net of withholding taxes) of 90% of the RSUs
    allocated under the 2001 RSU program based on its
    consideration of the improved financial performance of Nortel
    Networks Corporation during the two-year performance period and
    Nortel Networks Corporations overall performance over that
    period as compared to comparator companies. The total before tax
    value of the RSUs that were issued and settled, using the
    purchase price of our common shares on the date of purchase, was
    $205,538 for Mr. Pusey.               
|(17) | Represents a Return to Profitability program award under the
    SUCCESS Plan. See footnote (18) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(18) | Messrs. Pusey and Joannou have voluntarily undertaken to
    pay to Nortel Networks Corporation over a three-year period an
    amount equal to their Return to Profitability program bonus
    awarded in 2003 (net of any taxes deducted at source).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(19) | Represents the number of RSUs issued and settled in respect of
    RSUs allocated under the 2003 restricted stock unit program (or
    2003 RSU program) of the RSU Plan. Each unit entitled the holder
    to receive one common share of Nortel Networks Corporation or,
    subject to certain conditions, a cash payment equal to the
    common share value. In respect of payments made under the 2003
    program of the RSU Plan, each named executive officer received
    in July 2003 RSUs in connection with the achievement of the
    first performance threshold as at the end of the second fiscal
    quarter of 2003 (100% in the form of common shares) and in
    February 2004 RSUs in connection with the achievement of the
    second performance threshold as at the end of the third fiscal
    quarter of 2003 (50% in the form of common shares and 50% in the
    form of cash). These individuals continue to hold the common
    shares received as a result of the settlement of their RSUs. The
    before tax total value of such RSUs issued and settled was:
    $3,148,887 for Mr. Pusey; $1,523,655 for Mr. Joannou;
    and $1,528,778 for Mr. Slattery. RSUs are valued using the
    purchase price of our common shares on the date of purchase (for
    share settlement) and on the average price for the specified
    20-day trading period
    for cash settlement (where applicable).
|(20) | Amounts paid by Nortel on behalf of Mr. Joannou for taxes
    ($195 for 2005 for Company-paid club membership dues and $45,857
    paid by Nortel in 2004 in respect of the 2002 tax year
    associated with a United Kingdom tax-related refund of $114,938
    paid to Nortel by taxing authorities).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(21) | Represents contributions under the Nortel Networks Long-Term
    Investment Plan ($8,400 in 2005, $7,800 in 2004 and $7,200 in
    2003) and expenses relating to Mr. Joannous prior
    long-term international assignment from 2000 to 2002 ($485 in
    2005, $4,790 in 2004 and $13,630 in 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(22) | Amounts paid by Nortel on behalf of Mr. Slattery for taxes
    associated with Company-paid club membership dues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(23) | Represents contributions under the Nortel Networks Long-Term
    Investment Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(24) | Represents a pro rata payment under the SUCCESS Plan in
    accordance with the terms of a letter agreement with
    Mr. Owens regarding the cessation of his employment. See
    Certain Employment Arrangements  Former
    Executives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(25) | For 2005, consists of: (i) tax reimbursement paid by Nortel
    to Mr. Owens ($1,172) and taxes paid by Nortel on behalf of
    Mr. Owens ($41,523), both incurred in connection with
    Company-paid expatriate expenses; and (ii) amounts paid as
    perquisites, including the incremental cost of the use of the
    Company aircraft ($244,802). For 2004, represents the
    incremental cost of the use of the Company aircraft.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(26) | For 2005, consists of: (i) a severance payment
    ($5,400,000); (ii) vacation entitlement ($173,077);
    (iii) expatriate expenses related to Mr. Owens
    responsibilities as President and Chief Executive Officer
    ($89,687); (iv) retirement gifts ($6,167); and
    (v) contributions under the Nortel Networks Long-Term
    Investment Plan (or NNLTIP) ($1,154). For 2004, consists of:
    (i) expatriate expenses related to Mr. Owens
    responsibilities as President and Chief Executive Officer
    ($43,588);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

242



---



##### 



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) contributions under the
    NNLTIP ($1,038); and (iii) fees earned as a non-employee
    director prior to being appointed as President and Chief
    Executive Officer ($25,672). See Compensation of
    Directors.




Option grants in 2005




|                  |  |             |           |     |            |  |     |          |  |                                          |                 |  |                    |        |                   |  |         |  |                 |  |  |  |                 | 
|----------------- |  | ----------- | --------- | --- | ---------- |  | --- | -------- |  | ---------------------------------------- | --------------- |  | ------------------ | ------ | ----------------- |  | ------- |  | --------------- |  |  |  | --------------- | 
|Individual Grants |  |             |           |     |           
|                  |  |             |           |     |           
|                  |  | % of Total  |           |     |            |  |    
|                  |  | Number of   |           |     | Options    |  |     |          |  | Potential Realizable Value at Assumed    |                
|                  |  | Securities  |           |     | Granted to |  |     |          |  | Annual Rates of Stock Price Appreciation |                
|                  |  | Underlying  |           |     | Employees  |  |     | Exercise |  |                                          |                 |  | for Option Term(1) |       
|                  |  | Options     |           |     | in Fiscal  |  |     | Price    |  |                                          |                 |  |                    |       
|Name              |  | Granted (#) |           |     | Year       |  |     | ($/Sh)   |  |                                          | Expiration Date |  |                    | 5% ($) |                   |  | 10% ($) | 
|                  |  |             |           |     |            |  |     |          |  |                                          |                 |  |                    |        |                   |  |         | 
|M.S. Zafirovski   |  |             | 5,000,000 | (2) |            |  | 7.8 | %        |  |                                          | 3.10            |  |                    |        | November 14, 2015 |  |         |  | 9,750,000       |  |  |  | 24,700,000      | 
|P.W. Currie       |  |             | 1,000,000 | (3) |            |  | 1.6 | %        |  |                                          | 3.78 (Cdn)      |  |                    |        | September 6, 2015 |  |         |  | 2,380,000 (Cdn) |  |  |  | 6,020,000 (Cdn) | 
|S.C. Pusey        |  |             | 875,000   | (4) |            |  | 1.4 | %        |  |                                          | 3.07            |  |                    |        | November 21, 2015 |  |         |  | 1,688,750       |  |  |  | 4,278,750       | 
|D.C. Joannou      |  |             | 750,000   | (4) |            |  | 1.2 | %        |  |                                          | 3.07            |  |                    |        | November 21, 2015 |  |         |  | 1,447,500       |  |  |  | 3,667,500       | 
|S.F. Slattery     |  |             | 750,000   | (5) |            |  | 1.2 | %        |  |                                          | 3.18            |  |                    |        | September 6, 2015 |  |         |  | 1,500,000       |  |  |  | 3,802,500       | 
|W.A. Owens        |  |             | 2,900,000 | (6) |            |  | 4.5 | %        |  |                                          | 3.18            |  |                    |        | November 18, 2008 |  |         |  | 1,450,000(7)    |  |  |  | 3,045,000(7)    | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The dollar amounts shown represent the amount by which the
    market value of Nortel Networks Corporations common shares
    underlying each stock option grant would exceed the exercise
    price of the stock option upon the expiration of the stock
    option if the market value of Nortel Networks Corporations
    common shares appreciates from the market value on the date of
    grant at an annual rate of 5% and 10%, respectively, during the
    stock option term. These assumed rates of appreciation are
    prescribed by the United States Securities and Exchange
    Commission. As the actual value received by a named executive
    officer on the exercise of a stock option is determined by the
    market value of Nortel Networks Corporations common shares
    on the date of exercise, the actual value received by a named
    executive officer may bear no relation to the potential
    realization shown under these columns.
|(2) | Granted on November 15, 2005 under the Nortel Networks
    Corporation 2000 Stock Option Plan (or 2000 Plan), these options
    are scheduled to vest in equal annual installments over five
    years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Granted on September 7, 2005 under the Nortel Networks
    Corporation 1986 Stock Option Plan, As Amended and Restated (or
    1986 Plan), these options are scheduled to vest in equal annual
    installments over four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(4) | Granted November 22, 2005 under the 1986 Plan, these
    options are scheduled to vest in equal annual installments over
    four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(5) | Granted September 7, 2005 under the 1986 Plan, these
    options are scheduled to vest in equal annual installments over
    four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(6) | Granted September 7, 2005 under the 2000 Plan, these
    options, which are due to expire 36 months after
    retirement, are fully vested as a result of an acceleration of
    vesting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(7) | Calculated applying a 36 month term. See footnote (6).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    




Aggregate option exercises in 2005 and year-end option
values




|                |  |             |   |  |          |                      |                        |                       |  |                         |                        |  |  |             |           |  |               |  |   |  |  |  |   | 
|--------------- |  | ----------- | - |  | -------- | -------------------- | ---------------------- | --------------------- |  | ----------------------- | ---------------------- |  |  | ----------- | --------- |  | ------------- |  | - |  |  |  | - | 
|                |  |             |   |  |          | Number of Securities |                        |                       | 
|                |  | Common      |   |  |          |                      | Underlying Unexercised |                       |  | Value of Unexercised    |                       
|                |  | Shares      |   |  |          |                      | Options at Fiscal      |                       |  | In-the-Money Options at |                       
|                |  | Acquired    |   |  | Value    |                      |                        | Year-End (#)(1)(2)(3) |  |                         | Fiscal Year-End ($)(3) | 
|                |  | on Exercise |   |  | Realized |                      |                        |                       |  |                         |                        | 
|Name            |  | (#)         |   |  | ($)      |                      |                        | Exercisable           |  |                         | Unexercisable          |  |  | Exercisable |           |  | Unexercisable | 
|                |  |             |   |  |          |                      |                        |                       |  |                         |                        |  |  |             |           |  |               | 
|M.S. Zafirovski |  |             |  |  |          |                      |                       |                       |  |                         |                       |  |  |             | 5,000,000 |  |               |  |  |  |  |  |  | 
|P.W. Currie     |  |             |  |  |          |                      |                       |                       |  |                         |                       |  |  |             | 1,000,000 |  |               |  |  |  |  |  |  | 
|S.C. Pusey      |  |             |  |  |          |                      |                       |                       |  |                         | 949,254                |  |  |             | 955,000   |  |               |  |  |  |  |  |  | 
|D.C. Joannou    |  |             |  |  |          |                      |                       |                       |  |                         | 140,002                |  |  |             | 750,000   |  |               |  |  |  |  |  |  | 
|S.F. Slattery   |  |             |  |  |          |                      |                       |                       |  |                         | 273,202                |  |  |             | 750,000   |  |               |  |  |  |  |  |  | 
|W.A. Owens      |  |             |  |  |          |                      |                       |                       |  |                         | 2,900,000              |  |  |             |          |  |               |  |  |  |  |  |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 80,000 replacement options for Mr. Pusey, which
    expired in January 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | Nortel Networks Corporation grants both United States dollar and
    Canadian dollar stock options. All options referenced in the
    table are United States dollar options, except for those of
    Mr. Currie.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | As at December 31, 2005, all of the outstanding exercisable
    or unexercisable United States dollar or Canadian dollar stock
    options held by the named executive officers had exercise prices
    that exceeded the closing price of Nortel Networks
    Corporations common shares on the last trading day of the
    year on, respectively, the New York Stock Exchange for United
    States stock options and on the Toronto Stock Exchange for
    Canadian stock options. On December 31, 2005, the closing
    price of Nortel Networks Corporations common shares on the
    New York Stock Exchange and the Toronto Stock Exchange was $3.06
    and Cdn$3.55, respectively. The weighted average exercise price
    of the outstanding exercisable and unexercisable United States
    dollar and

243



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Canadian dollar stock options as
    at December 31, 2005 was: $3.10 for options held by
    Mr. Zafirovski; Cdn$3.78 for options held by
    Mr. Currie; $4.85 for options held by Mr. Pusey; $3.68
    for options held by Mr. Joannou; $3.91 for options held by
    Mr. Slattery; and $3.18 for options held by Mr. Owens.
    Where applicable, the weighted average exercise price has been
    calculated assuming that replacement options that currently do
    not have set exercise prices will have exercise prices equal to
    the exercise prices of the corresponding initial options.




Retirement plans








| |                                      
| | -------------------------------------
| | Defined Benefit Pension Plan  Canada













244



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##### 



Table I


|               |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |         |  |  |   |         | 
|-------------- |  | ---------------- | ------- |  | -- | - | ------- | -- |  | - | ------- |  |  | -- | ------- |  |  | - | ------- | 
|               |  | Years of Service |        
|               |  |                  |        
|Total Earnings |  | 15               |         |  | 20 |   |         | 25 |  |   | 30      |  |  | 35 |        
|               |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |        
|$ 600,000      |  | $                | 117,000 |  |    | $ | 156,000 |    |  | $ | 195,000 |  |  | $  | 234,000 |  |  | $ | 273,000 | 
|700,000        |  |                  | 136,500 |  |    |   | 182,000 |    |  |   | 227,500 |  |  |    | 273,000 |  |  |   | 318,500 | 
|800,000        |  |                  | 156,000 |  |    |   | 208,000 |    |  |   | 260,000 |  |  |    | 312,000 |  |  |   | 364,000 | 
|900,000        |  |                  | 175,500 |  |    |   | 234,000 |    |  |   | 292,500 |  |  |    | 351,000 |  |  |   | 409,500 | 
|1,000,000      |  |                  | 195,000 |  |    |   | 260,000 |    |  |   | 325,000 |  |  |    | 390,000 |  |  |   | 455,000 | 
|1,100,000      |  |                  | 214,500 |  |    |   | 286,000 |    |  |   | 357,500 |  |  |    | 429,000 |  |  |   | 500,500 | 
|1,200,000      |  |                  | 234,000 |  |    |   | 312,000 |    |  |   | 390,000 |  |  |    | 468,000 |  |  |   | 546,000 | 
|1,300,000      |  |                  | 253,500 |  |    |   | 338,000 |    |  |   | 422,500 |  |  |    | 507,000 |  |  |   | 591,500 | 
|1,400,000      |  |                  | 273,000 |  |    |   | 364,000 |    |  |   | 455,000 |  |  |    | 546,000 |  |  |   | 637,000 | 
|1,500,000      |  |                  | 292,500 |  |    |   | 390,000 |    |  |   | 487,500 |  |  |    | 585,000 |  |  |   | 682,500 | 
|1,600,000      |  |                  | 312,000 |  |    |   | 416,000 |    |  |   | 520,000 |  |  |    | 624,000 |  |  |   | 728,000 | 



| |                                                 
| | ------------------------------------------------
| | Defined Benefit Pension Plan  United
    States

















245



---



##### 



Table II


|               |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |         |  |  |   |         | 
|-------------- |  | ---------------- | ------- |  | -- | - | ------- | -- |  | - | ------- |  |  | -- | ------- |  |  | - | ------- | 
|               |  | Years of Service |        
|               |  |                  |        
|Total Earnings |  | 15               |         |  | 20 |   |         | 25 |  |   | 30      |  |  | 35 |        
|               |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |        
|$ 600,000      |  | $                | 84,222  |  |    | $ | 110,765 |    |  | $ | 143,433 |  |  | $  | 166,913 |  |  | $ | 199,581 | 
|700,000        |  |                  | 98,259  |  |    |   | 129,226 |    |  |   | 167,339 |  |  |    | 194,732 |  |  |   | 232,845 | 
|800,000        |  |                  | 112,296 |  |    |   | 147,687 |    |  |   | 191,244 |  |  |    | 222,551 |  |  |   | 266,109 | 
|900,000        |  |                  | 126,334 |  |    |   | 166,148 |    |  |   | 215,150 |  |  |    | 250,370 |  |  |   | 299,372 | 
|1,000,000      |  |                  | 140,371 |  |    |   | 184,609 |    |  |   | 239,055 |  |  |    | 278,189 |  |  |   | 332,636 | 
|1,100,000      |  |                  | 154,408 |  |    |   | 203,069 |    |  |   | 262,961 |  |  |    | 306,008 |  |  |   | 365,899 | 
|1,200,000      |  |                  | 168,445 |  |    |   | 221,530 |    |  |   | 286,866 |  |  |    | 333,827 |  |  |   | 399,163 | 
|1,300,000      |  |                  | 182,482 |  |    |   | 239,991 |    |  |   | 310,772 |  |  |    | 361,646 |  |  |   | 432,426 | 



Table III


|               |  |                  |        |  |    |   |        |    |  |   |        |  |  |    |        |  |    |   |         |    |  |   |         |  |  |   |         | 
|-------------- |  | ---------------- | ------ |  | -- | - | ------ | -- |  | - | ------ |  |  | -- | ------ |  | -- | - | ------- | -- |  | - | ------- |  |  | - | ------- | 
|               |  | Years of Service |       
|               |  |                  |       
|Total Earnings |  | 5                |        |  | 10 |   |        | 15 |  |   | 20     |  |  | 25 |        |  | 30 |   |         | 35 | 
|               |  |                  |        |  |    |   |        |    |  |   |        |  |  |    |        |  |    |   |         |    | 
|$ 600,000      |  | $                | 9,309  |  |    | $ | 18,619 |    |  | $ | 27,928 |  |  | $  | 37,237 |  |    | $ | 46,546  |    |  | $ | 55,856  |  |  | $ | 65,166  | 
|700,000        |  |                  | 10,861 |  |    |   | 21,722 |    |  |   | 32,582 |  |  |    | 43,443 |  |    |   | 54,304  |    |  |   | 65,165  |  |  |   | 76,026  | 
|800,000        |  |                  | 12,412 |  |    |   | 24,825 |    |  |   | 37,237 |  |  |    | 49,649 |  |    |   | 62,062  |    |  |   | 74,474  |  |  |   | 86,887  | 
|900,000        |  |                  | 13,964 |  |    |   | 27,928 |    |  |   | 41,891 |  |  |    | 55,855 |  |    |   | 69,819  |    |  |   | 83,784  |  |  |   | 97,748  | 
|1,000,000      |  |                  | 15,516 |  |    |   | 31,031 |    |  |   | 46,546 |  |  |    | 62,061 |  |    |   | 77,577  |    |  |   | 93,093  |  |  |   | 108,609 | 
|1,100,000      |  |                  | 17,067 |  |    |   | 34,134 |    |  |   | 51,201 |  |  |    | 68,267 |  |    |   | 85,335  |    |  |   | 102,402 |  |  |   | 119,470 | 
|1,200,000      |  |                  | 18,619 |  |    |   | 37,237 |    |  |   | 55,855 |  |  |    | 74,473 |  |    |   | 93,092  |    |  |   | 111,711 |  |  |   | 130,331 | 
|1,300,000      |  |                  | 20,170 |  |    |   | 40,340 |    |  |   | 60,510 |  |  |    | 80,679 |  |    |   | 100,850 |    |  |   | 121,021 |  |  |   | 141,192 | 



| |                                  
| | ---------------------------------
| | Defined Benefit Pension Plan  UK











246



---



##### 



Table IV


|                      |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |         |  |  |   |         | 
|--------------------- |  | ---------------- | ------- |  | -- | - | ------- | -- |  | - | ------- |  |  | -- | ------- |  |  | - | ------- | 
|                      |  | Years of Service |        
|                      |  |                  |        
|Final Pensionable Pay |  | 15               |         |  | 20 |   |         | 25 |  |   | 30      |  |  | 35 |        
|                      |  |                  |         |  |    |   |         |    |  |   |         |  |  |    |        
|$ 300,000             |  | $                | 75,000  |  |    | $ | 100,000 |    |  | $ | 125,000 |  |  | $  | 150,000 |  |  | $ | 175,000 | 
|350,000               |  |                  | 88,000  |  |    |   | 117,000 |    |  |   | 146,000 |  |  |    | 175,000 |  |  |   | 204,000 | 
|400,000               |  |                  | 100,000 |  |    |   | 133,000 |    |  |   | 167,000 |  |  |    | 200,000 |  |  |   | 233,000 | 
|450,000               |  |                  | 113,000 |  |    |   | 150,000 |    |  |   | 188,000 |  |  |    | 225,000 |  |  |   | 263,000 | 
|500,000               |  |                  | 125,000 |  |    |   | 167,000 |    |  |   | 208,000 |  |  |    | 250,000 |  |  |   | 292,000 | 
|550,000               |  |                  | 138,000 |  |    |   | 183,000 |    |  |   | 229,000 |  |  |    | 275,000 |  |  |   | 321,000 | 
|600,000               |  |                  | 150,000 |  |    |   | 200,000 |    |  |   | 250,000 |  |  |    | 300,000 |  |  |   | 350,000 | 
|650,000               |  |                  | 163,000 |  |    |   | 217,000 |    |  |   | 271,000 |  |  |    | 325,000 |  |  |   | 379,000 | 
|700,000               |  |                  | 175,000 |  |    |   | 233,000 |    |  |   | 292,000 |  |  |    | 350,000 |  |  |   | 408,000 | 
|750,000               |  |                  | 188,000 |  |    |   | 250,000 |    |  |   | 313,000 |  |  |    | 375,000 |  |  |   | 438,000 | 
|800,000               |  |                  | 200,000 |  |    |   | 267,000 |    |  |   | 333,000 |  |  |    | 400,000 |  |  |   | 467,000 | 
|850,000               |  |                  | 213,000 |  |    |   | 283,000 |    |  |   | 354,000 |  |  |    | 425,000 |  |  |   | 496,000 | 
|900,000               |  |                  | 225,000 |  |    |   | 300,000 |    |  |   | 375,000 |  |  |    | 450,000 |  |  |   | 525,000 | 
|950,000               |  |                  | 238,000 |  |    |   | 317,000 |    |  |   | 396,000 |  |  |    | 475,000 |  |  |   | 554,000 | 
|1,000,000             |  |                  | 250,000 |  |    |   | 333,000 |    |  |   | 417,000 |  |  |    | 500,000 |  |  |   | 583,000 | 




Supplemental disclosure on retirement arrangements




|                   |  |                     |           |      |                                 |  |           |                        |  |  |                             | 
|------------------ |  | ------------------- | --------- | ---- | ------------------------------- |  | --------- | ---------------------- |  |  | --------------------------- | 
|                   |  | 2005 Annual Pension |           |      | Accrued Pension Liability as at |  |           | Annual Pension         | 
|                   |  | Service Cost(1)     |           |      | December 31, 2005(2)            |  |           | Available at Age 65(3) | 
|                   |  | ($)                 |           |      | ($)                             |  |           | ($)                    | 
|                   |  |                     |           |      |                                 |  |           |                        | 
|M.S. Zafirovski    |  |                     | 167,638   | (4)  |                                 |  | 202,110   | (4)                    |  |  | 500,000(4)                  | 
|P.W.
    Currie(5) |  |                     |          |      |                                 |  |          |                        |  |  |                            | 
|S.C. Pusey         |  |                     | 143,715   | (6)  |                                 |  | 3,138,075 | (6)                    |  |  | 394,033(6)                  | 
|D.C. Joannou       |  |                     | 40,545    |      |                                 |  | 368,991   |                        |  |  | 353,144                     | 
|S.F. Slattery      |  |                     | 56,280    | (7)  |                                 |  | 669,808   | (7)                    |  |  | 326,828(7)                  | 
|                   |  |                     |           |      |                                 |  | 547,208   | (8)(9)                 |  |  | 48,015(8)(9)                | 
|W.A. Owens         |  |                     | 4,762,500 | (10) |                                 |  | 81,145    | (11)                   |  |  | 1,188,876(10)               | 
|                   |  |                     |           |      |                                 |  | 5,187,551 | (10)                   |  |  | (annually for 5 years only) | 






| |     |                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The annual pension service cost was determined based on the
    accounting disclosure assumptions.                                                                                                                                                                                                                                                                            
| | (2) | Accrued pension liability is the value of the projected pension
    earned for service up to December 31, 2005.                                                                                                                                                                                                                                                               
| | (3) | Assumes continued employment through to age 65, except as
    noted below. Calculations: (i) were determined based on
    current salary (no future increases) and bonus paid annually at
    target, where applicable; and (ii) reflect a lifetime
    pension with a 50% or 60% survivor benefit, as applicable.                                                            
| | (4) | Represents Mr. Zafirovskis entitlement to a special
    pension benefit that will accrue after five years of active
    employment. Annual pension of $500,000 is payable monthly
    following retirement on or after age 60.
    Mr. Zafirovski elected to not participate in the Nortel
    pension plans. See Certain Employment
    Arrangements  Current Executives.
| | (5) | Mr. Currie elected to not participate in the Nortel pension
    plans.                                                                                                                                                                                                                                                                                                        
| | (6) | Represents the U.S. dollar equivalent calculated using the
    yearly average of the exchange rate in effect for 2005 equal to
    US$1.00 = UK£0.5497.                                                                                                                                                                                                                       
| | (7) | Represents Mr. Slatterys US pension benefit.                                                                                                                                                                                                                                                                                                                                 
| | (8) | Represents Mr. Slatterys Canadian pension benefit.                                                                                                                                                                                                                                                                                                                           
| | (9) | Represents the U.S. dollar equivalent calculated using the
    yearly average of the exchange rate in effect for 2005 equal to
    US$1.00 = Cdn$1.2113.                                                                                                                                                                                                                      

|     |                                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents Mr. Owens special pension arrangement. The
    annual pension represents the benefit payable over five years
    following his retirement. See Certain Employment
    Arrangements  Former Executives.
|(11) | Represents Mr. Owens pension accrued under the United
    States Cash Balance Plan. This benefit was paid to him at the
    time of his retirement.                                                                 

247



---



##### 






Certain employment arrangements




| |                   
| | ------------------
| | Current executives







248



---



##### 















| |                  
| | -----------------
| | Former executives





249



---



##### 










| |                                                   
| | --------------------------------------------------
| | Executive retention and termination plan (or ERTP)





|                        |  |                   |                |  |                          |   |                | 
|----------------------- |  | ----------------- | -------------- |  | ------------------------ | - | -------------- | 
|                        |  | Payment of        |                |  | Payment of Target Annual |  
|Named Executive Officer |  | Salary Multiplier |                |  | Bonus Multiplier         |  
|                        |  |                   |                |  |                          |  
|M.S. Zafirovski         |  | $                 | 3.6 million    |  |                          | $ | 5.4 million    | 
|P.W. Currie             |  | $                 | 1.25 million   |  |                          | $ | 1.25 million   | 
|S.C. Pusey              |  |                   | UK£0.7 million |  |                          |   | UK£0.7 million | 
|D.C. Joannou            |  | $                 | 1.04 million   |  |                          | $ | 1.04 million   | 
|S.F. Slattery           |  | $                 | 1.0 million    |  |                          | $ | 1.0 million    | 





| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | any party or group acquires beneficial ownership of securities
    of Nortel Networks Corporation representing more than 20% of the
    outstanding securities entitled to vote in the election of
    directors of Nortel Networks Corporation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (ii)  | Nortel Networks Corporation participates in a business
    combination, including, among other things, a merger,
    amalgamation, reorganization, sale of all or substantially all
    of its assets, or plan of arrangement, unless the business
    combination only involves Nortel Networks Corporation and/or its
    affiliates or, following the completion of the business
    combination, Nortel Networks Corporations common
    shareholders beneficially own, directly or indirectly, more than
    50% of the then-outstanding voting shares of the entity
    resulting from the business combination (or of an entity which
    ultimately controls such entity) and a majority of the members
    of the board of directors of the entity resulting from the
    business combination (or the entity ultimately controlling such
    entity) were members of the board of directors of Nortel
    Networks Corporation when the business combination was approved
    or the initial agreement in connection with the business
    combination was executed;
|
| | (iii) | the persons who were directors of Nortel Networks Corporation on
    the effective date of the ERTP cease (for reasons other than
    death or disability) to constitute at least a majority of Nortel
    Networks Corporations board of directors; provided, that
    any person who was not a director on the effective date of the
    ERTP shall be deemed to be an incumbent director if such person
    was elected or appointed to Nortel Networks Corporations
    board of directors by, or on the recommendation of or with the
    approval of, at least two-thirds of the directors who then
    qualify as incumbent directors unless such election,
    appointment, recommendation or approval was the result of any
    actual or publicly threatened proxy contest for the election of
    directors; or                                                                                                                                                                                                                                                   

250



---



##### 





| |      |                                                                                                                                                                                 
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iv) | any other event occurs which Nortel Networks Corporations
    board of directors determines in good faith could reasonably be
    expected to give rise to a change in control.




Total Compensation


|                            |              |      |            |            |      |  |   |      |  |  |   |   | 
|--------------------------- | ------------ | ---- | ---------- | ---------- | ---- |  | - | ---- |  |  | - | - | 
|                            |              | 2005 |            |            | 2004 |  |   | 2003 | 
|M.S. Zafirovski             |              | ($)  |            |            | ($)  |  |   | ($)  | 
|                            |              |      |            |            |      |  |   |      | 
|CASH                        |              |      |            |            |      |  |   |      |  |  |   |  
|Annualized Base Salary      |              |      | 252,381    | (1)        |      |  |  |      |  |  |  |  
|Cash Bonus                  |              |      |           |            |      |  |  |      |  |  |  |  
|                            |              |      |            |            |      |  |   |      | 
|                            | Total Cash   |      |            | 252,381    |      |  |   |     |  |  |   |  | 
|                            |              |      |            |            |      |  |   |      | 
|EQUITY                      |              |      |            |            |      |  |   |      |  |  |   |  
|Restricted Stock Units      |              |      | 6,953,550  | (2)        |      |  |  |      |  |  |  |  
|Stock Options               |              |      | 10,695,000 | (3)        |      |  |  |      |  |  |  |  
|LTIP Payouts                |              |      |           |            |      |  |  |      |  |  |  |  
|                            |              |      |            |            |      |  |   |      | 
|                            | Total Equity |      |            | 17,648,550 |      |  |   |     |  |  |   |  | 
|                            |              |      |            |            |      |  |   |      | 
|Total Direct Compensation   |              |      | 17,900,931 |            |      |  |  |      |  |  |  |  
|Annual Pension Service Cost |              |      | 167,638    | (4)        |      |  |  |      |  |  |  |  
|                            |              |      |            |            |      |  |   |      | 
|Total                       |              |      | 18,068,569 | (5)        |      |  |  |      |  |  |  |  
|                            |              |      |            |            |      |  |   |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Zafirovski was appointed President and Chief Executive
    Officer effective November 15, 2005, with an annual base
    salary of $1,200,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | Represents the value of 2,265,000 restricted stock units (or
    RSUs) awarded as a new hire award pursuant to the Nortel 2005
    Stock Incentive Plan (or SIP) that vest in five equal annual
    installments beginning on November 15, 2006 and that will
    be settled in common shares of Nortel Networks Corporation upon
    vesting, net of tax withholding. As required by applicable
    securities laws, the amount reported in this column was
    determined by multiplying the number of RSUs by the closing
    market price of Nortel Networks Corporations common shares
    on the date of the award.
|(3) | Represents the Black-Scholes value of 5,000,000 options granted
    as a new hire grant pursuant to the Nortel Networks Corporation
    2000 Stock Option Plan. Awards vest in five equal annual
    installments beginning on the first anniversary of the grant
    date.                                                                                                                                                                                                                                                                                                                                               
|(4) | Represents Mr. Zafirovskis special pension benefit,
    as described under Certain Employment
    Arrangements  Current Executives.
    Mr. Zafirovski elected to not participate in the Nortel
    pension plans.                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | See Summary Compensation Table for details regarding
    the settlement involving Motorola, Inc., as amounts related to
    that settlement are not included in this table.                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                   |              |      |           |           |      |  |   |      |  |  |   |   | 
|---------------------------------- | ------------ | ---- | --------- | --------- | ---- |  | - | ---- |  |  | - | - | 
|                                   |              | 2005 |           |           | 2004 |  |   | 2003 | 
|P.W. Currie                        |              | ($)  |           |           | ($)  |  |   | ($)  | 
|                                   |              |      |           |           |      |  |   |      | 
|CASH                               |              |      |           |           |      |  |   |      |  |  |   |  
|Annualized Base Salary             |              |      | 527,500   | (1)       |      |  |  |      |  |  |  |  
|Cash Bonus                         |              |      | 850,000   | (2)       |      |  |  |      |  |  |  |  
|                                   |              |      |           |           |      |  |   |      | 
|                                   | Total Cash   |      |           | 1,377,500 |      |  |   |     |  |  |   |  | 
|                                   |              |      |           |           |      |  |   |      | 
|EQUITY                             |              |      |           |           |      |  |   |      |  |  |   |  
|Restricted Stock Units             |              |      | 1,530,000 | (3)       |      |  |  |      |  |  |  |  
|Stock Options                      |              |      | 2,201,100 | (4)       |      |  |  |      |  |  |  |  
|LTIP Payouts                       |              |      |          |           |      |  |  |      |  |  |  |  
|                                   |              |      |           |           |      |  |   |      | 
|                                   | Total Equity |      |           | 3,731,100 |      |  |   |     |  |  |   |  | 
|                                   |              |      |           |           |      |  |   |      | 
|Total Direct Compensation          |              |      | 5,108,600 |           |      |  |  |      |  |  |  |  
|Annual Pension Service
    Cost(5) |              |      |          |           |      |  |  |      |  |  |  |  
|                                   |              |      |           |           |      |  |   |      | 
|Total                              |              |      | 5,108,600 |           |      |  |  |      |  |  |  |  
|                                   |              |      |           |           |      |  |   |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Currie was hired on February 14, 2005 with an
    annual base salary of $600,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | As part of his employment agreement, Mr. Currie received a
    guaranteed annual bonus under the Nortel Networks Limited
    SUCCESS Incentive Plan (or SUCCESS Plan), pro-rated for the
    number of months of active employment. Also included in this
    amount is a bonus of $300,000 that was paid upon commencing
    employment. See Certain Employment
    Arrangements  Current Executives.                                                                                                                                          
|(3) | Represents the value of 500,000 RSUs awarded as a new hire award
    pursuant to the SIP that vest in three equal annual installments
    beginning on September 6, 2006 and that will be settled in
    common shares of Nortel Networks Corporation upon vesting, net
    of tax withholding. As required by applicable securities laws,
    the amount reported in this column was determined by multiplying
    the number of RSUs by the closing market price of Nortel
    Networks Corporations common shares on the date of the
    award.

251



---



##### 



|    |                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Represents the Black-Scholes value of 1,000,000 options granted
    as a new hire grant pursuant to the Nortel Networks Corporation
    1986 Stock Option Plan. Awards vest in four equal annual
    installments beginning on the first anniversary of the grant
    date.
|(5) | Mr. Currie elected to not participate in the Nortel pension
    plans.                                                                                                                                                                                                     

|                                      |              |      |           |           |      |  |         |         |  |  |           |           | 
|------------------------------------- | ------------ | ---- | --------- | --------- | ---- |  | ------- | ------- |  |  | --------- | --------- | 
|                                      |              | 2005 |           |           | 2004 |  |         | 2003    | 
|S.C. Pusey                            |              | ($)  |           |           | ($)  |  |         | ($)     | 
|                                      |              |      |           |           |      |  |         |         | 
|CASH                                  |              |      |           |           |      |  |         |         |  |  |           |          
|Annualized Base
    Salary(1)         |              |      | 558,904   |           |      |  | 520,000 |         |  |  | 501,250   |          
|Cash Bonus                            |              |      | 233,227   | (2)(3)    |      |  |        |         |  |  | 1,823,500 | (4)      
|                                      |              |      |           |           |      |  |         |         | 
|                                      | Total Cash   |      |           | 792,131   |      |  |         | 520,000 |  |  |           | 2,324,750 | 
|EQUITY                                |              |      |           |           |      |  |         |         |  |  |           |          
|Restricted Stock Units                |              |      | 1,520,000 | (5)       |      |  |        |         |  |  |          |          
|Stock Options                         |              |      | 1,853,513 | (6)       |      |  |        |         |  |  |          |          
|LTIP Payouts                          |              |      |          |           |      |  |        |         |  |  | 3,354,425 | (7)      
|                                      |              |      |           |           |      |  |         |         | 
|                                      | Total Equity |      |           | 3,373,513 |      |  |         |        |  |  |           | 3,354,425 | 
|Total Direct Compensation             |              |      | 4,165,644 |           |      |  | 520,000 |         |  |  | 5,679,175 |          
|Annual Pension Service
    Cost(3)(8) |              |      | 143,715   |           |      |  | 129,799 |         |  |  | 83,826    |          
|                                      |              |      |           |           |      |  |         |         | 
|Total                                 |              |      | 4,309,359 |           |      |  | 649,799 |         |  |  | 5,763,001 |          
|                                      |              |      |           |           |      |  |         |         | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on an annual base salary rate of $520,000 effective
    June 1, 2003 through to September 1, 2005. Effective
    September 1, 2005, Mr. Puseys salary was set at
    £350,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(2) | Represents a SUCCESS Plan annual incentive award. In addition,
    on October 4, 2005, Nortel entered into a letter agreement
    with Mr. Pusey, in support of his continued employment,
    providing for the payment to Mr. Pusey of a special bonus
    of £525,000 in the event he remains with the Company and
    Nortel Networks Corporation for a defined two-year period. This
    special bonus will be paid in two equal installments, the first
    of which will be paid within 30 days of August 1, 2006
    and the second of which will be paid within 30 days of
    August 1, 2007. See Certain Employment
    Arrangements  Current Executives.
|(3) | Represents the United States dollar equivalent calculated using
    the yearly average of the exchange rates in effect for 2005
    equal to US$1.00 = UK£0.5497; 2004 equal to
    US$1.00 = UK£0.5470; 2003 equal to US$1.00 =
    UK£0.6084.                                                                                                                                                                                                                                                                                                                                                                                                                       
|(4) | 2003 Bonus includes $546,000 under the SUCCESS Plan annual
    incentive award and $1,277,500 under the Return to Profitability
    program under the SUCCESS Plan. Mr. Pusey has voluntarily
    undertaken to pay to Nortel over a three-year period an amount
    equal to his Return to Profitability program bonus awarded in
    2003 (net of any taxes deducted at source).                                                                                                                                                                                                                                                                                    
|(5) | 2005 grant represents the value of 500,000 RSUs awarded pursuant
    to the SIP that vest in three equal annual installments
    beginning on November 22, 2006 and that will be settled in
    common shares of Nortel Networks Corporation upon vesting, net
    of tax withholding. As required by applicable securities laws,
    the amount reported in this column was determined by multiplying
    the number of RSUs by the closing market price of Nortel
    Networks Corporations common shares on the date of the
    award.                                                                                                                            
|(6) | Represents the Black-Scholes value of 875,000 options granted
    pursuant to the Nortel Networks Corporation 1986 Stock Option
    Plan. Awards vest in four equal annual installments beginning on
    the first anniversary of the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                     
|(7) | Represents the value of the settlement of RSUs awarded under the
    2001 and 2003 RSU programs of the RSU Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8) | Annual pension service cost was determined based on the
    accounting disclosure assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                   |              |      |           |           |      |  |         |         |  |  |           |           | 
|---------------------------------- | ------------ | ---- | --------- | --------- | ---- |  | ------- | ------- |  |  | --------- | --------- | 
|                                   |              | 2005 |           |           | 2004 |  |         | 2003    | 
|D.C. Joannou                       |              | ($)  |           |           | ($)  |  |         | ($)     | 
|                                   |              |      |           |           |      |  |         |         | 
|CASH                               |              |      |           |           |      |  |         |         |  |  |           |          
|Annualized Base
    Salary(1)      |              |      | 441,667   |           |      |  | 375,000 |         |  |  | 300,000   |          
|Cash Bonus                         |              |      | 183,150   | (2)       |      |  |        |         |  |  | 824,063   | (3)      
|                                   |              |      |           |           |      |  |         |         | 
|                                   | Total Cash   |      |           | 624,817   |      |  |         | 375,000 |  |  |           | 1,124,063 | 
|EQUITY                             |              |      |           |           |      |  |         |         |  |  |           |          
|Restricted Stock Units             |              |      | 912,000   | (4)       |      |  |        |         |  |  |          |          
|Stock Options                      |              |      | 1,588,725 | (5)       |      |  |        |         |  |  |          |          
|LTIP Payouts                       |              |      |          |           |      |  |        |         |  |  | 1,523,655 | (6)      
|                                   |              |      |           |           |      |  |         |         | 
|                                   | Total Equity |      |           | 2,500,725 |      |  |         |        |  |  |           | 1,523,655 | 
|Total Direct Compensation          |              |      | 3,125,542 |           |      |  | 375,000 |         |  |  | 2,647,718 |          
|Annual Pension Service
    Cost(7) |              |      | 40,545    |           |      |  | 15,557  |         |  |  | 8,349     |          
|                                   |              |      |           |           |      |  |         |         | 
|Total                              |              |      | 3,166,087 |           |      |  | 390,557 |         |  |  | 2,656,067 |          
|                                   |              |      |           |           |      |  |         |         | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on an annual base salary rate of $300,000 through to
    December 31, 2003. Mr. Joannous salary was
    increased to $375,000 on January 1, 2004, then increased to
    $400,000 on January 1, 2005 and further increased to
    $500,000 on August 1, 2005.                                                                                                                                                                                                                                                                                                                                      
|(2) | Represents a SUCCESS Plan annual incentive award. In addition,
    on October 4, 2005, Nortel entered into a letter agreement
    with Mr. Joannou, in support of his continued employment,
    providing for the payment to Mr. Joannou of a special bonus
    of $750,000 in the event he remains with the Company and Nortel
    Networks Corporation for a defined two-year period. The special
    bonus will be paid in two equal installments, the first of which
    will be paid within 30 days of August 1, 2006 and the
    second of which will be paid within 30 days of
    August 1, 2007.

252



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | 2003 Bonus includes $374,063 under the SUCCESS Plan annual
    incentive award and $450,000 under the Return to Profitability
    program under the SUCCESS Plan. Mr. Joannou has voluntarily
    undertaken to pay to Nortel over a three-year period an amount
    equal to his Return to Profitability program bonus awarded in
    2003 (net of any taxes deducted at source).                                                                                                                                                        
|(4) | 2005 grant represents the value of 300,000 RSUs awarded pursuant
    to the SIP that vest in three equal annual installments
    beginning on November 22, 2006 and that will be settled in
    common shares of Nortel Networks Corporation upon vesting, net
    of tax withholding. As required by applicable securities laws,
    the amount reported in this column was determined by multiplying
    the number of RSUs by the closing market price of Nortel
    Networks Corporations common shares on the date of the
    award.
|(5) | Represents the Black-Scholes value of 750,000 options granted
    pursuant to the Nortel Networks Corporation 1986 Stock Option
    Plan. Awards vest in four equal annual installments beginning on
    the first anniversary of the grant date.                                                                                                                                                                                                                                                                                         
|(6) | Represents the value of the settlement of RSUs awarded under the
    2003 RSU program of the RSU Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(7) | Annual pension service cost was determined based on the
    accounting disclosure assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                   |              |      |           |           |      |  |         |         |  |  |           |           | 
|---------------------------------- | ------------ | ---- | --------- | --------- | ---- |  | ------- | ------- |  |  | --------- | --------- | 
|                                   |              | 2005 |           |           | 2004 |  |         | 2003    | 
|S.F. Slattery                      |              | ($)  |           |           | ($)  |  |         | ($)     | 
|                                   |              |      |           |           |      |  |         |         | 
|CASH                               |              |      |           |           |      |  |         |         |  |  |           |          
|Annualized Base
    Salary(1)      |              |      | 445,833   |           |      |  | 350,000 |         |  |  | 350,000   |          
|Cash Bonus                         |              |      | 158,175   | (2)       |      |  |        |         |  |  | 825,000   | (2)      
|                                   |              |      |           |           |      |  |         |         | 
|                                   | Total Cash   |      |           | 604,008   |      |  |         | 350,000 |  |  |           | 1,175,000 | 
|EQUITY                             |              |      |           |           |      |  |         |         |  |  |           |          
|Restricted Stock Units             |              |      | 975,000   | (3)       |      |  |        |         |  |  |          |          
|Stock Options                      |              |      | 1,645,650 | (4)       |      |  |        |         |  |  |          |          
|LTIP Payouts                       |              |      |          |           |      |  |        |         |  |  | 1,528,778 | (5)      
|                                   |              |      |           |           |      |  |         |         | 
|                                   | Total Equity |      |           | 2,620,650 |      |  |         |        |  |  |           | 1,528,778 | 
|                                   |              |      |           |           |      |  |         |         | 
|Total Direct Compensation          |              |      | 3,224,658 |           |      |  | 350,000 |         |  |  | 2,703,778 |          
|Annual Pension Service
    Cost(6) |              |      | 56,280    |           |      |  | 17,221  |         |  |  | 12,715    |          
|                                   |              |      |           |           |      |  |         |         | 
|Total                              |              |      | 3,280,938 |           |      |  | 367,221 |         |  |  | 2,716,493 |          
|                                   |              |      |           |           |      |  |         |         | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on an annual base salary rate of $350,000 through
    December 31, 2004. Mr. Slatterys salary was
    increased to $425,000 on January 1, 2005 and $475,000 on
    August 1, 2005.                                                                                                                                                                                                                                                                                                                                                                    
|(2) | 2005 Bonus represents a SUCCESS Plan annual incentive award.
    2003 Bonus includes $300,000 under the SUCCESS Plan annual
    incentive award and $525,000 under the Return to Profitability
    program under the SUCCESS Plan.                                                                                                                                                                                                                                                                                                                           
|(3) | 2005 grant represents the value of 300,000 restricted stock
    units awarded pursuant to the SIP that vest in three equal
    annual installments beginning on September 28, 2006 and
    that will be settled in common shares of Nortel Networks
    Corporation upon vesting, net of tax withholding. As required by
    applicable securities laws, the amount reported in this column
    was determined by multiplying the number of RSUs by the closing
    market price of Nortel Networks Corporations common shares
    on the date of the award.
|(4) | Represents the Black-Scholes value of 750,000 options granted
    pursuant to the Nortel Networks Corporation 1986 Stock Option
    Plan. Awards vest in four equal annual installments beginning on
    the first anniversary of the grant date.                                                                                                                                                                                                                                                                                                            
|(5) | Represents the value of the settlement of RSUs awarded under the
    2003 RSU program of the RSU Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(6) | Annual pension service cost was determined based on the
    accounting disclosure assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                   |              |      |            |           |      |  |         |         |  |  |   |   | 
|---------------------------------- | ------------ | ---- | ---------- | --------- | ---- |  | ------- | ------- |  |  | - | - | 
|                                   |              | 2005 |            |           | 2004 |  |         | 2003    | 
|W.A. Owens                         |              | ($)  |            |           | ($)  |  |         | ($)     | 
|                                   |              |      |            |           |      |  |         |         | 
|CASH                               |              |      |            |           |      |  |         |         |  |  |   |  
|Annualized Base
    Salary(1)      |              |      | 886,364    |           |      |  | 681,818 |         |  |  |  |  
|Cash Bonus                         |              |      | 518,925    | (2)       |      |  |        |         |  |  |  |  
|                                   |              |      |            |           |      |  |         |         | 
|                                   | Total Cash   |      |            | 1,405,289 |      |  |         | 681,818 |  |  |   |  | 
|EQUITY                             |              |      |            |           |      |  |         |         |  |  |   |  
|Restricted Stock Units             |              |      |           |           |      |  |        |         |  |  |  |  
|Stock Options                      |              |      | 6,363,180  | (3)       |      |  |        |         |  |  |  |  
|LTIP Payouts                       |              |      |           |           |      |  |        |         |  |  |  |  
|                                   |              |      |            |           |      |  |         |         | 
|                                   | Total Equity |      |            | 6,363,180 |      |  |         |        |  |  |   |  | 
|Total Direct Compensation          |              |      | 7,768,469  |           |      |  | 681,818 |         |  |  |  |  
|Annual Pension Service
    Cost(4) |              |      | 4,762,500  |           |      |  | 262,500 |         |  |  |  |  
|                                   |              |      |            |           |      |  |         |         | 
|Total                              |              |      | 12,530,969 |           |      |  | 944,318 |         |  |  |  |  
|                                   |              |      |            |           |      |  |         |         | 






|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Owens was appointed President and Chief Executive
    Officer effective April 27, 2004 with an annual base salary
    of $1,000,000.                                                                                                    
|(2) | Represents a pro rata payment under the SUCCESS Plan in
    accordance with the terms of a letter agreement with
    Mr. Owens regarding the cessation of his employment. See
    Certain Employment Arrangements  Former
    Executives.

253



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Represents the Black-Scholes value of 2,900,000 options granted
    pursuant to the Nortel Networks Corporation 2000 Stock Option
    Plan. Awards vest in four equal annual installments beginning on
    the first anniversary of the grant date. The terms of the 2000
    Plan provide that these options will expire 36 months after
    retirement, rather than at the end of the otherwise applicable
    ten-year term.
|(4) | Represents the special pension arrangement, as described under
    Certain Employment Arrangements  Former
    Executives.                                                                                                                                                                                                                                                                                                  




Compensation of directors














254



---



##### 





Canada Business Corporations Act





Compensation committee interlocks and insider
participation













|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial Owners and
    Management




Security ownership of certain beneficial owners




|                                                                 |  |                |                              |  |                      |  |               |            |  |  |     | 
|---------------------------------------------------------------- |  | -------------- | ---------------------------- |  | -------------------- |  | ------------- | ---------- |  |  | --- | 
|                                                                 |  | Title of Class |                              |  | Amount and Nature of |  |               | Percent of | 
|Name and Address of Beneficial Owner                             |  | of Security    |                              |  | Beneficial Ownership |  |               | Class      | 
|                                                                 |  |                |                              |  |                      |  |               |            | 
|Nortel Networks Corporation                                      |  |                | Common shares of the Company |  |                      |  | 1,460,978,638 |            |  |  | 100 | 
|8200 Dixie Road, Suite 100
    Brampton, Ontario, Canada L6T 5P6 |  |                |                              |  |                      |  |               |            |  |  |     | 




Security ownership of directors and management




255



---



##### 









|                                                  |  |                                              |  |                         |           |       
|------------------------------------------------- |  | -------------------------------------------- |  | ----------------------- | --------- | ------
|                                                  |  |                                              |  | Amount and Nature of    |          
|Name of Beneficial Owner                          |  | Title of Class of Security                   |  | Beneficial Ownership(1) |          
|                                                  |  |                                              |  |                         |          
|J.H. Bennett                                      |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         | 35,956    |       
|M. Bischoff                                       |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         | 29,802    |       
|R.E. Brown                                        |  | Common shares of Nortel Networks Corporation |  |                         | 417,281   | (2)(3)
|                                                  |  | Share units                                  |  |                         | 141,231   |       
|J.E. Cleghorn                                     |  | Common shares of Nortel Networks Corporation |  |                         | 29,000    | (2)   
|                                                  |  | Share units                                  |  |                         | 174,584   |       
|J.B. Hunt, Jr.                                    |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         | 32,950    |       
|R.A. Ingram                                       |  | Common shares of Nortel Networks Corporation |  |                         | 10,756    | (2)(4)
|                                                  |  | Share units                                  |  |                         | 191,006   |       
|J.A. MacNaughton                                  |  | Common shares of Nortel Networks Corporation |  |                         | 100,000   |       
|                                                  |  | Share units                                  |  |                         | 35,956    |       
|J.P. Manley                                       |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         | 39,552    |       
|R.D. McCormick                                    |  | Common shares of Nortel Networks Corporation |  |                         | 100,000   |       
|                                                  |  | Share units                                  |  |                         | 39,720    |       
|C. Mongeau                                        |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         |          |       
|R.W. Osborne                                      |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         | 35,956    |       
|H.J. Pearce                                       |  | Common shares of Nortel Networks Corporation |  |                         | 16,000    |       
|                                                  |  | Share units                                  |  |                         | 31,107    |       
|J.D. Watson                                       |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|                                                  |  | Share units                                  |  |                         |          |       
|M.S. Zafirovski                                   |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|P.W. Currie                                       |  | Common shares of Nortel Networks Corporation |  |                         |          |       
|S.C. Pusey                                        |  | Common shares of Nortel Networks Corporation |  |                         | 1,051,915 | (2)   
|D.C. Joannou                                      |  | Common shares of Nortel Networks Corporation |  |                         | 257,225   | (2)   
|S.F. Slattery                                     |  | Common shares of Nortel Networks Corporation |  |                         | 371,155   | (2)   
|W.A. Owens                                        |  | Common shares of Nortel Networks Corporation |  |                         | 2,955,688 | (5)   
|                                                  |  | Share units                                  |  |                         |          |       
|Directors and executive officers as a group       |  | Common shares of Nortel Networks Corporation |  |                         | 5,451,387 | (6)   
|(consisting of 29 persons, comprised of the       |  | Share units                                  |  |                         | 787,820   |       
|current directors and current executive officers) |  | Common shares of Bookham Technology plc      |  |                         |          |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as set forth below, each person has sole investment and
    voting power with respect to the common shares beneficially
    owned by such person. Includes common shares subject to stock
    options exercisable on April 21, 2006 or that become
    exercisable within 60 days after such date (whether or not
    the market price of the underlying common shares is below the
    stock option exercise price). As of April 21, 2006 each
    director and named executive officer individually, and the
    directors and executive officers as a group, beneficially owned
    less than 1.0% of the outstanding common shares of the Company.
|(2) | Includes common shares subject to stock options as follows:
    8,000 for Mr. Brown; 4,000 for Mr. Cleghorn; 8,000 for
    Mr. Ingram; 869,254 for Mr. Pusey; 140,002 for
    Mr. Joannou; and 273,202 for Mr. Slattery.                                                                                                                                                                                                                                                                                                                                                                                                                                     

256



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Excludes 765 common shares beneficially owned by
    Mr. Browns spouse and son, for which Mr. Brown
    disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(4) | Includes 1,800 common shares jointly held with
    Mr. Ingrams spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5) | Includes 2,900,000 stock options which were accelerated upon
    retirement. As Mr. Owens ceased to be an insider effective
    December 1, 2005, disclosure of his holdings of Nortel
    Networks Corporation shares is based on information in our
    corporate records and Mr. Owens filings on the
    Canadian insider reporting system, the System for Electronic
    Disclosure by Insiders, as of November 23, 2005 and reports
    filed pursuant to Section 16(a) of the U.S. Securities
    Exchange Act of 1934. See Certain Employment
    Arrangements  Former Executives.
|(6) | Includes 6,471,736 common shares subject to stock options and
    4,500 common shares as to which investment and voting power is
    shared with one or more other persons and excludes 1,165 common
    shares as to which beneficial ownership is disclaimed.                                                                                                                                                                                                                                                                                                                               






|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | Certain Relationships and Related Transactions




Indebtedness of management






Table of Indebtedness of Directors and Executive Officers


|                                               |  |                |        |                |                   |  |        |                         |                 |  |                    |  |  |  |   | 
|---------------------------------------------- |  | -------------- | ------ | -------------- | ----------------- |  | ------ | ----------------------- | --------------- |  | ------------------ |  |  |  | - | 
|                                               |  |                |        | Largest Amount |                   |  |        |                         |                
|                                               |  |                |        | Outstanding    |                   |  |        |                         | Amount Forgiven | 
|                                               |  | Involvement of |        |                | January 1, 2005  |  |        | Amount Outstanding      |                 |  | January 1, 2005 to | 
|                                               |  | Company or     |        |                | December 31, 2005 |  |        | as at December 31, 2005 |                 |  | December 31, 2005  | 
|Name and PrincipalPosition                     |  | Subsidiary     |        |                | ($)               |  |        | ($)                     |                 |  | ($)                | 
|                                               |  |                |        |                |                   |  |        |                         |                 |  |                    | 
|Kimberly S.
    Lechner(1)Assistant Controller |  |                | Lender |                |                   |  | 50,000 |                         |                 |  | 50,000             |  |  |  | 0 | 






|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | A subsidiary of the Company extended a housing loan to
    Ms. Lechner in February 2000 in connection with a
    relocation. As long as Ms. Lechner remains a Nortel
    employee, the loan is due and payable in full in February 2010.




Related party transactions











|         |                                       
|-------- | --------------------------------------
|ITEM 14. | Principal Accountant Fees and Services





257



---



##### 








Audit Fees


10-Q 10-Q 10-K





Audit-Related Fees







Tax Fees







All Other Fees




258



---



##### 



PART IV




|         |                                        
|-------- | ---------------------------------------
|ITEM 15. | Exhibits, Financial Statement Schedules



|   |                     
|-- | --------------------
|1. | Financial Statements





|   |                              
|-- | -----------------------------
|2. | Financial Statement Schedules

|                                                                                      |                                                            |      |     |     | 
|------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---- | --- | --- | 
|                                                                                      |                                                            | Page |    
|                                                                                      |                                                            |      |    
|Quarterly Financial Data
    (Unaudited)                                              |                                                            |      | 206 |    
|                                                                                      | Report of Independent Registered
    Chartered Accountants |      |     | 221 | 
|II  Valuation and
    Qualifying Accounts and Reserves, Provision for Uncollectibles |                                                            |      | 222 |    
|                                                                                     
|All other schedules are omitted because they are inapplicable or
    not required.   
|                                                                                     
|3.  Other Documents Filed as a Part of This
    Report                               
|                                                                                     
|Managements Report on
    Internal Control over Financial Reporting                  |                                                            |      | 224 |    
|Report of Independent Registered
    Chartered Accountants                            |                                                            |      | 119 |    





|   |              
|-- | -------------
|4. | Exhibit Index

10-K.




|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | *2 |             |  | Amended and Restated Arrangement Agreement involving BCE Inc.,
    Nortel Networks Corporation, formerly known as New Nortel Inc.,
    and Nortel Networks Limited, formerly known as Nortel Networks
    Corporation, made as of January 26, 2000, as amended and
    restated March 13, 2000 (including Plan of Arrangement
    under Section 192 of the Canada Business Corporations Act)
    (filed as Exhibit 2.1 to Nortel Networks Limiteds
    Current Report on Form 8-K dated May 1, 2000).
|        | *3 | .1          |  | Restated Certificate and Articles of Incorporation of Nortel
    Networks Limited (filed as Exhibit 3 to Nortel Networks
    Limiteds Current Report on Form 8-K dated
    October 18, 2000).                                                                                                                                                                                                                                                                                                        
|        | *3 | .2          |  | By-Law No. 1 of Nortel Networks Limited (filed as
    Exhibit 3.2 to Nortel Networks Limiteds Annual Report
    on Form 10-K for the year ended December 31, 2000).                                                                                                                                                                                                                                                                                                                                  
|        | *4 | .1          |  | Indenture dated as of November 30, 1988, between Nortel
    Networks Limited and The Toronto-Dominion Bank Trust Company, as
    trustee, related to debt securities authenticated and delivered
    thereunder, which comprised the 6% Notes due
    September 1, 2003, and the 6.875% Notes due
    September 1, 2023 issued by Nortel Networks Limited (filed
    as Exhibit 4.1 to Nortel Networks Corporations Annual
    Report on Form 10-K for the year ended December 31,
    1999).        

259



---



##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | *4  | .2          |  | Indenture dated as of February 15, 1996, among Nortel
    Networks Limited, as issuer and guarantor, Nortel Networks
    Capital Corporation, formerly Northern Telecom Capital
    Corporation, as issuer, and The Bank of New York, as trustee,
    related to debt securities and guarantees authenticated and
    delivered thereunder, which comprised the 7.40% Notes due
    2006 and the 7.875% Notes due 2026 (filed as
    Exhibit 4.1 to Registration Statement on Form S-3
    (No. 333-1720) of Nortel Networks Limited and Nortel
    Networks Capital Corporation).                                          
|        | *4  | .3          |  | Indenture dated as of December 15, 2000 among Nortel
    Networks Limited, as issuer and guarantor, Nortel Networks
    Capital Corporation, as issuer, and Citibank, N.A., as trustee,
    related to debt securities authenticated and delivered
    thereunder (filed as Exhibit 4.1 to Registration Statement
    on Form S-3 (No. 333-51888) of Nortel Networks Limited
    and Nortel Networks Capital Corporation).                                                                                                                                                                                                  
|        | *4  | .4          |  | First Supplemental Indenture dated as of February 1, 2001
    to Indenture dated as of December 15, 2000 among Nortel
    Networks Limited, as issuer and guarantor, Nortel Networks
    Capital Corporation, as issuer, and Citibank, N.A., as trustee,
    related to 6.125% Notes due 2006 (filed as Exhibit 4.1
    to Nortel Networks Limiteds Current Report on
    Form 8-K dated February 2, 2001).                                                                                                                                                                                                                
|        | *4  | .5          |  | Instrument of Resignation, Appointment and Acceptance entered
    into as of December 19, 2002, effective as of
    January 2, 2003, among Nortel Networks Limited, as issuer
    and guarantor, Nortel Networks Capital Corporation, as issuer,
    Citibank, N.A. and Deutsche Bank Trust Company Americas, with
    respect to the Indenture dated as of December 5, 2000, as
    supplemented by a First Supplemental Indenture dated as of
    February 1, 2001 related to debt securities (filed as
    Exhibit 4.5 to Nortel Networks Limiteds Annual Report
    on Form 10-K for the year ended December 31, 2002).
|        | *4  | .6          |  | Indenture dated as of August 15, 2001 between Nortel
    Networks Corporation, Nortel Networks Limited, as guarantor, and
    Bankers Trust Company, as trustee, related to convertible debt
    securities and guarantees authenticated and delivered
    thereunder, which comprised the 4.25% Convertible Senior
    Notes due 2008 (filed as Exhibit 4 to Nortel Networks
    Corporations Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001).                                                                                                                                                
|        | *10 | .1          |  | Third Amended and Restated Reciprocal Credit Agreement dated as
    of December 19, 2002 between Nortel Networks Corporation,
    Nortel Networks Limited and the other parties who have executed
    the agreement (filed as Exhibit 10.1 to Nortel Networks
    Limiteds Annual Report on Form 10-K for the year
    ended December 31, 2002).                                                                                                                                                                                                                                                                           
|        | *10 | .2          |  | Nortel Networks Supplementary Executive Retirement Plan, as
    amended effective October 18, 2001 and October 23,
    2002 (filed as Exhibit 10.2 to Nortel Networks
    Limiteds Annual Report on Form 10-K for the year
    ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .3          |  | Agreement dated April 29, 1997 related to the remuneration
    of the Chief Legal Officer (termination agreement filed
    September 7, 2005) (filed as Exhibit 10.3 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                 
|        | *10 | .4          |  | Acknowledgement effective as of June 1, 2000 related to the
    remuneration of the Chief Legal Officer (termination agreement
    filed September 7, 2005) (filed as Exhibit 10.4 to
    Nortel Networks Limiteds Annual Report on Form 10-K
    for the year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .5          |  | Statement describing the retirement arrangements of the former
    President and Chief Executive Officer (filed as
    Exhibit 10.5 to Nortel Networks Limiteds Annual
    Report on Form 10-K for the year ended December 31,
    2001).                                                                                                                                                                                                                                                                                                                                                                                  
|        | *10 | .6          |  | Nortel Networks Corporation Executive Retention and Termination
    Plan, as amended and restated, effective from June 26, 2002
    (filed as Exhibit 10.1 to Nortel Networks
    Corporations Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                
|        | *10 | .7          |  | Nortel Networks Corporation Special Retention Plan effective
    August 1, 2001 and expired on June 30, 2003 (filed as
    Exhibit 10.3 to Nortel Networks Corporations
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001).                                                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .8          |  | Assumption Agreement between Nortel Networks Corporation and
    Nortel Networks Limited dated March 5, 2001, regarding the
    assumption and agreement by Nortel Networks Corporation to
    perform certain covenants and obligations of Nortel Networks
    Limited under the Nortel Networks Limited Executive Retention
    and Termination Plan (filed as Exhibit 10.20 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2000).                                                                                                                                       
|        | *10 | .9          |  | U.S. Guarantee and Security Agreement dated as of the first
    day of the Collateral Period (as defined therein)
    among Nortel Networks Limited, Nortel Networks Inc. and certain
    of their subsidiaries and JPMorgan Chase Bank, as Collateral
    Agent as terminated by Letter, Termination Agreement and Full
    and Final Release and Discharge all dated as of October 24,
    2005 (filed as Exhibits 99.1, 99.2 and 99.7 respectively to
    Nortel Networks Limiteds Current Report on Form 8-K
    dated October 28, 2005).                                                                            

260



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##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | *10 | .10         |  | Amendment No. 1 dated as of December 12, 2002 to the
    U.S. Guarantee and Security Agreement dated as of
    April 4, 2002 among Nortel Networks Limited, Nortel
    Networks Inc., the Subsidiary Lien Grantors party thereto and
    JPMorgan Chase Bank, as Collateral Agent, as terminated by
    Letter, Termination Agreement and Full and Final Release and
    Discharge all dated as of October 24, 2005 (filed as
    Exhibits 99.1, 99.2 and 99.7 respectively to Nortel
    Networks Limiteds Current Report on Form 8-K dated
    October 28, 2005).                                                                                                                                                                                                                                                                                                                                  
|        | *10 | .11         |  | Canadian Guarantee and Security Agreement dated as of the first
    day of the Collateral Period (as defined therein)
    among Nortel Networks Limited and certain of its subsidiaries
    and JPMorgan Chase Bank, as Collateral Agent, as terminated by
    Letter, Termination Agreement and Full and Final Release and
    Discharge all dated as of October 24, 2005 (filed as
    Exhibits 99.1, 99.3 and 99.7 respectively to Nortel
    Networks Limiteds Current Report on Form 8-K dated
    October 28, 2005).                                                                                                                                                                                                                                                                                                                                                                         
|        | *10 | .12         |  | Amendment No. 1 dated as of December 12, 2002 to the
    Canadian Guarantee and Security Agreement dated as of
    April 4, 2002 among Nortel Networks Limited, Nortel
    Networks Inc., the Subsidiary Guarantors party thereto and
    JPMorgan Chase Bank, as Collateral Agent, as terminated by
    Letter, Termination Agreement and Full and Final Release and
    Discharge all dated as of October 24, 2005 (filed as
    Exhibits 99.1, 99.3 and 99.7 respectively to Nortel
    Networks Limiteds Current Report on Form 8-K dated
    October 28, 2005).                                                                                                                                                                                                                                                                                                                                 
|        | *10 | .13         |  | Form of Nortel Networks Limited Foreign Subsidiary Guarantee
    dated as of April 4, 2002 and schedule thereto listing the
    specific foreign subsidiary guarantees which are not attached as
    exhibits (filed as Exhibit 10.5 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | *10 | .14         |  | Amendment No. 1 dated as of December 12, 2002 to
    certain Foreign Subsidiary Guarantees dated as of April 4,
    2002 among Nortel Networks (Ireland) Limited, Nortel Networks UK
    Limited, Nortel Networks (Asia) Limited and JPMorgan Chase Bank,
    as Collateral Agent, as terminated by Letter, Termination
    Agreements and Full and Final Release and Discharge all dated as
    of October 24, 2005 (filed as Exhibits 99.1 to 99.7
    respectively to Nortel Networks Limiteds Current Report on
    Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                                                            
|        | *10 | .15         |  | Foreign Pledge Agreement dated as of April 4, 2002 among
    Nortel Networks Limited, the Subsidiary Guarantors party thereto
    and JPMorgan Chase Bank, as Collateral Agent (filed as
    Exhibit 10.6 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .16         |  | Foreign Pledge Agreement dated as of April 4, 2002 among
    Nortel Networks Limited, Nortel Networks International
    Corporation and JPMorgan Chase Bank, as Collateral Agent (filed
    as Exhibit 10.7 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | *10 | .17         |  | Foreign Pledge Agreement dated as of April 4, 2002 among
    Nortel Networks Inc. and JPMorgan Chase Bank, as Collateral
    Agent (filed as Exhibit 10.8 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .18         |  | Pledge Agreement dated as of April 4, 2002 among Nortel
    Networks Limited, Nortel Networks International
    Finance & Holding B.V., Nortel Networks S.A., and
    JPMorgan Chase Bank, as Collateral Agent (filed as
    Exhibit 10.9 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | *10 | .19         |  | Foreign Pledge Agreement dated as of April 4, 2002 among
    Nortel Networks International Finance & Holding B.V.,
    Nortel Communications Holdings (1997) Limited, Nortel
    Networks AB and JPMorgan Chase Bank, as Collateral Agent,
    together with(a) the Supplementing Pledge Agreement dated
    as of April 4, 2002 among Nortel Networks International
    Finance & Holding, B.V. and JPMorgan Chase Bank, as
    Collateral Agent,(b) the Pledge Agreement Supplement dated
    as of April 4, 2002 between Nortel Networks Limited and
    JPMorgan Chase Bank, as Collateral Agent, and(c) the Pledge
    Agreement Supplement dated as of April 4, 2002 between
    Nortel Networks U.K. Limited and JPMorgan Chase Bank, as
    Collateral Agent (filed as Exhibit 10.10 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002).
|        | *10 | .20         |  | Foreign Pledge Agreement dated as of April 4, 2002 between
    Nortel Networks International Finance & Holding B.V.
    and JPMorgan Chase Bank, as Collateral Agent, together
    with(a) the Pledge Agreement Supplement, dated as of
    April 4, 2002 between Nortel Networks Optical Components
    Limited and JPMorgan Chase Bank, as Collateral Agent,
    and(b) the Pledge Agreement Supplement dated as of
    April 4, 2002 between Nortel Networks International
    Finance & Holding B.V., Nortel Networks Optical
    Components Limited and JPMorgan Chase Bank, as Collateral Agent
    (filed as Exhibit 10.11 to Nortel Networks Limiteds
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                                           
|        | *10 | .21         |  | Pledge Agreement Supplement dated as of May 20, 2002
    between Nortel Networks Mauritius Ltd and JPMorgan Chase Bank,
    as Collateral Agent supplementing the Foreign Pledge Agreement
    dated as of April 4, 2002 among Nortel Networks
    International Finance & Holding B.V., Nortel
    Communications Holdings (1997) Limited, Nortel Networks AB
    and JPMorgan Chase Bank, as Collateral Agent (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002).                                                                                                                                                                                                                                                                                                                                                   

261



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##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | *10 | .22         |  | Pledge Agreement Supplement dated as of May 15, 2002
    between Nortel Networks International Finance & Holding
    B.V. and JPMorgan Chase Bank, as Collateral Agent, supplementing
    the Foreign Pledge Agreement dated as of April 4, 2002
    among Nortel Networks International Finance & Holding
    B.V., Nortel Communications Holdings (1997) Limited, Nortel
    Networks AB and JPMorgan Chase Bank, as Collateral Agent (filed
    as Exhibit 10.3 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002).                                                                               
|        | *10 | .23         |  | Pledge Agreement Supplement dated as of June 4, 2002
    between Nortel Networks Singapore Pte Ltd, and JPMorgan Chase
    Bank, as Collateral Agent, supplementing the Foreign Pledge
    Agreement dated as of April 4, 2002 among Nortel Networks
    International Finance & Holding B.V., Nortel
    Communications Holdings (1997) Limited, Nortel Networks AB
    and JPMorgan Chase Bank, as Collateral Agent (filed as
    Exhibit 10.4 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002).                                                                                                 
|        | *10 | .24         |  | Pledge Agreement Supplement dated as of May 15, 2002
    between Nortel Networks Limited and JPMorgan Chase Bank, as
    Collateral Agent, supplementing the Foreign Pledge Agreement
    dated as of April 4, 2002 among Nortel Networks Limited,
    the Subsidiary Guarantors party thereto and JP Morgan Chase
    Bank, as Collateral Agent (filed as Exhibit 10.5 to Nortel
    Networks Limiteds Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002).                                                                                                                                                                          
|        | *10 | .25         |  | Nortel Networks Limited SUCCESS Plan approved on July 25,
    2002, as amended and restated on July 28, 2003 with effect
    from January 1, 2003, as amended on July 28, 2003 with
    effect from January 1, 2003, as amended on
    February 26, 2004 with effect from January 1, 2004
    (filed as Exhibit 10.3 to Nortel Networks Limiteds
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2004).                                                                                                                                                                                                                            
|        | *10 | .26         |  | Supplementary Pension Credits Arrangement (filed as
    Exhibit 10.14 to Nortel Networks Corporations
    Registration Statement on Form S-1 (No. 2-71087)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | *10 | .27         |  | Statements describing the right of certain executives in Canada
    to defer all or part of their short-term and long-term incentive
    awards (filed as Exhibit 10.4 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000).                                                                                                                                                                                                                                                                                                                                                                           
|        | *10 | .28         |  | Statement describing eligibility for the Group Life Insurance
    Plan for directors who are not salaried employees of Nortel
    Networks Corporation (filed as Exhibit 10.30 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                     
|        | *10 | .29         |  | Agreement between a director of Nortel Networks Corporation and
    Nortel Networks Limited and the respective companies dated
    June 22, 2001, setting forth the arrangements with respect
    to serving as non-executive chairman of each of the board of
    directors of Nortel Networks Corporation and Nortel Networks
    Limited (filed as Exhibit 10.1 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2001).                                                                                                                                                                               
|        | *10 | .30         |  | Amended general description of cash bonus for employees and
    executives of Nortel Networks Corporation and Nortel Networks
    Limited as originally filed as Exhibit 10.3 to Nortel
    Networks Corporations Quarterly Report on Form 10-Q
    for the quarter ended September 30, 2002 (filed as
    Exhibit 10.1 to the Nortel Networks Limiteds
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2003).                                                                                                                                                                                                                     
|        | *10 | .31         |  | Nortel Networks Limited Restricted Stock Unit Plan dated as of
    January 30, 1997, as amended effective April 29, 1999,
    September 1, 1999, February 15, 2000, May 1,
    2000, November 15, 2000 and January 23, 2003 (filed as
    Exhibit 10.1 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2003).                                                                                                                                                                                                                                                                                          
|        | *10 | .32         |  | Nortel Networks Limited Directors Deferred Share
    Compensation Plan effective June 30, 1998 and amended and
    restated as of May 1, 2000, as further amended and restated
    effective January 1, 2002, as amended and restated
    May 29, 2003, as amended and restated December 18,
    2003 effective January 1, 2004, as amended June 29,
    2005 effective immediately (filed as Exhibit 10.6 to Nortel
    Networks Limiteds Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2005).                                                                                                                                      
|        | *10 | .33         |  | Nortel Networks U.S. Deferred Compensation Plan (filed as
    Exhibit 4.3 to Post-Effective Amendment No. 1 to
    Nortel Networks Corporations Registration Statement on
    Form S-8 (No. 333-11558)).                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | *10 | .34         |  | Master Facility Agreement dated as of February 14, 2003,
    amended by Amending Agreement No. 1 dated July 10,
    2003, between Nortel Networks Limited and Export Development
    Canada, and as further amended by a letter agreement dated
    March 29, 2004, May 28, 2004, August 20, 2004 and
    September 29, 2004, October 29, 2004,
    November 19, 2004, December 10, 2004, January 14,
    2005, February 15, 2005, March 15, 2005,
    April 29, 2005 and May 31, 2005 and amended and
    restated as of October 24, 2005 (filed as Exhibit 10.1
    to Nortel Networks Limiteds Current Report on
    Form 8-K dated October 28, 2005).
|        | *10 | .35         |  | Master Indemnity Agreement dated as of February 14, 2003
    between Nortel Networks Limited and Export Development Canada
    amended and restated as of October 24, 2005 (filed as
    Exhibit 10.3 to Nortel Networks Limiteds Current
    Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                                                                                

262



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##### 



|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | *10  | .36         |  | Letter dated June 23, 2003 from the former President and
    Chief Executive Officer of Nortel Networks, to the Joint
    Leadership Resources Committee of the Board of Directors of
    Nortel Networks Corporation and Nortel Networks Limited
    regarding the voluntary return for cancellation of certain stock
    options to purchase common shares of Nortel Networks Corporation
    (filed as Exhibit 10.3 to the Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003).                          
|        | *10  | .37         |  | Notice of Blackout to Nortel Networks Corporations Board
    of Directors and Executive Officers Regarding Suspension of
    Trading dated March 10, 2004 (filed as Exhibit 99.2 to
    Nortel Networks Corporations Current Report on
    Form 8-K dated March 10, 2004).                                                                                                                                                                                                                                                                                 
|        | *10  | .38         |  | Summary statement of terms of initial compensation arrangements
    related to the president and chief executive officer approved by
    the Board of Directors of Nortel Networks Corporation and Nortel
    Networks Limited as of April 29, 2004 (filed as
    Exhibit 10.1 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2004).                                                                                                                                                                      
|        | *10  | .39         |  | Asset Purchase Agreement dated June 29, 2004 among Nortel
    Networks Limited, Flextronics International Ltd. and Flextronics
    Telecom Systems, Ltd., amended as of November 1, 2004,
    February 7, 2005 and August 22, 2005 (filed as
    Exhibit 99.1 to Nortel Network Limiteds Current
    Report on Form 8-K dated August 26, 2005).                                                                                                                                                                                                             
|        | **10 | .40         |  | Amended and Restated Master Contract Manufacturing Services
    Agreement dated June 29, 2004 between Nortel Networks
    Limited and Flextronics Telecom Systems, Ltd., amended as of
    November 1, 2004 (filed as Exhibit 10.51 to Nortel
    Networks Limiteds Annual Report on Form 10-K for the
    year ended December 31, 2004).                                                                                                                                                                                                                   
|        | **10 | .41         |  | Master Repair Services Agreement dated June 29, 2004
    between Nortel Networks Limited and Flextronics Telecom Systems
    Limited, amended as of February 8, 2005 (filed as
    Exhibit 10.4 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2005).                                                                                                                                                                                                                                                    
|        | **10 | .42         |  | Master Contract Logistics Services Agreement dated June 29,
    2004 between Nortel Networks Limited and Flextronics Telecom
    Systems, Ltd., amended as of February 8, 2005 (filed as
    Exhibit 10.5 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2005).                                                                                                                                                                                                                                          
|        | **10 | .43         |  | Letter Agreement dated June 29, 2004 among Nortel Networks
    Limited, Flextronics International Ltd. and Flextronics Telecom
    Systems, Ltd. (filed as Exhibit 10.7 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2004).                                                                                                                                                                                                                                                                             
|        | *10  | .44         |  | William A. Owens, President and Chief Executive Officer
    Employment Letter dated as at August 31, 2004 (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2004).                                                                                                                                                                                                                                                                                                           
|        | *10  | .45         |  | Letter, dated January 10, 2005, to Mr. Lynton (Red)
    Wilson, the Chairman of the Board of Nortel Networks
    Corporation, and modified March 1, 2005 and delivered on
    August 11, 2005 from certain officers of Nortel Networks
    Limited (filed as Exhibit 10.1 to Nortel Network
    Limiteds Current Report on Form 8-K dated
    August 18, 2005).                                                                                                                                                                                             
|        | *10  | .46         |  | Peter Currie, Executive Vice-President and Chief Financial
    Officer Employment Letter dated January 20, 2005 (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2005).                                                                                                                                                                                                                                                                                                         
|        | *10  | .47         |  | Gary Daichendt, President and Chief Operating Officer Employment
    Letter dated March 2, 2005 (filed as Exhibit 10.6 to
    Nortel Networks Limiteds Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                                                                                                                                                                             
|        | *10  | .48         |  | Summary statement of terms of the additional special pension
    benefits for the Vice-Chairman and Chief Executive Officer
    approved by the Joint Leadership Resources Committee of the
    Board of Directors of Nortel Networks Corporation and Nortel
    Networks Limited and the Independent members of the Board of
    Directors of Nortel Networks Corporation and Nortel Networks
    Limited on March 22, 2005 (filed as Exhibit 10.8 to
    Nortel Networks Limiteds Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2005).
|        | *10  | .49         |  | Agreement and Plan of Merger dated as of April 25, 2005, by
    and among Nortel Networks Inc., PS Merger Sub, Inc. and PEC
    Solutions, Inc. (filed as Exhibit 99(d)(1) to Nortel
    Networks Inc. Current Report on Form SC TO-T dated
    May 3, 2005 and filed as Exhibit 10.9 to Nortel
    Networks Limiteds Quarterly Report on Form 10-Q for
    the quarter ended March 31, 2005).                                                                                                                                                              
|        | *10  | .50         |  | The Nortel 2005 Stock Incentive Plan (as filed with the 2005
    Proxy Statement), (filed as Exhibit 10.1 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                           

263



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##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | *10 | .51         |  | Summary statement of the interest payable on the special pension
    benefits for the Vice-Chairman and Chief Executive Officer of
    Nortel Networks Corporation and Nortel Networks Limited approved
    by the Joint Leadership Resources Committee of the Board of
    Directors of Nortel Networks Corporation and Nortel Networks
    Limited and the independent members of the Board of Directors of
    Nortel Networks Corporation and Nortel Networks Limited on
    May 27, 2005 (filed as Exhibit 10.2 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2005).
|        | *10 | .52         |  | Form of Indemnity Agreement effective on or as of June 29,
    2005 entered into between Nortel Networks Corporation and each
    of the following Directors: Harry J. Pearce, Ronald W. Osborne,
    Richard D. McCormick, John A. MacNaughton, James B.
    Hunt, Jr. and Jalynn H. Bennett 2005 (filed as
    Exhibit 10.4 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2005).                                                                                                                                                                                       
|        | *10 | .53         |  | Summary of remuneration, retirement compensation and group life
    insurance of the Chairman of the Board, Directors and Chairman
    of Nortel Networks Limited Committees effective June 29,
    2005 (filed as Exhibit 10.5 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2005).                                                                                                                                                                                                                                                                                     
|        | *10 | .54         |  | Nortel Networks Corporation 1986 Stock Option Plan, as Amended
    and Restated, as amended effective April 30, 1992,
    April 27, 1995, December 28, 1995, April 8, 1998,
    February 25, 1999, April 29, 1999, September 1,
    1999, December 16, 1999, May 1, 2000 and
    January 31, 2002 (filed as Exhibit 10.1 to Nortel
    Networks Limiteds Quarterly Report on Form 10-Q for
    the quarter ended March 31, 2002).                                                                                                                                                                                           
|        | *10 | .55         |  | Nortel Networks Corporation 2000 Stock Option Plan as amended
    effective May 1, 2000 and January 31, 2002 (filed as
    Exhibit 10.2 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2002).                                                                                                                                                                                                                                                                                                                                                                            
|        | *10 | .56         |  | Forms of Instruments of Grant generally provided to optionees
    granted options under the Nortel Networks Corporation 1986 Stock
    Option Plan, as Amended and Restated or the Nortel Networks
    Corporation 2000 Stock Option Plan (filed as Exhibit 10.9
    to Nortel Networks Limiteds Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2005).                                                                                                                                                                                                                                                    
|        | *10 | .57         |  | Proxy Agreement effective as of July 29, 2005 with respect
    to Capital Stock of Nortel Government Solutions Incorporated by
    and among Nortel Networks Corporation, Nortel Networks Limited,
    Nortel Networks Inc., Nortel Government Solutions Incorporated,
    James Frey, Thomas McInerney, Gregory Newbold, and the United
    States Department of Defense (filed as Exhibit 10.1 to
    Nortel Networks Limiteds Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2005).                                                                                                               
|        | *10 | .58         |  | 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 (filed as
    Exhibit 10.3 to Nortel Networks Limiteds Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2005).                                                                                                                                                                                                                                                        
|        | *10 | .59         |  | 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 | .60         |  | Termination Agreement dated September 7, 2005 between
    Nicholas DeRoma, Chief Legal Officer and Nortel Networks
    Corporation (filed as Exhibit 10.6 to Nortel Networks
    Limiteds Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2005).                                                                                                                                                                                                                                                                                                                                                      
|        | 10  | .61         |  | William A. Owens letter agreement entered into on
    December 1, 2005, concerning the cessation of
    Mr. Owens responsibilities as Vice-Chairman and Chief
    Executive Officer of Nortel Networks Corporation and Nortel
    Networks Limited effective November 15, 2005.                                                                                                                                                                                                                                                                                                                                             
|        | 10  | .62         |  | Nicholas DeRoma, former Chief Legal Officer, Letter Agreement
    dated December 20, 2005 amending the Termination Agreement
    dated September 7, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10  | .63         |  | Steve Pusey, Executive Vice-President and President, Eurasia,
    Letter Agreement dated September 29, 2005 concerning
    retention bonus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10  | .64         |  | Summary statement of employment terms and conditions for Mike
    Zafirovski, President and Chief Executive Officer effective
    November 15, 2005, as approved by the Joint Leadership
    Resources Committee of the Board of Directors of Nortel Networks
    Corporation and Nortel Networks Limited and the Independent
    members of the Board of Directors of Nortel Networks Corporation
    and Nortel Networks Limited on October 16, 2005.                                                                                                                                                                      
|        | 10  | .65         |  | Mike Zafirovski, President and Chief Executive Officer,
    Indemnity Agreement dated January 18, 2006 with effect from
    October 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10  | .66         |  | Nortel Networks Limited Directors Deferred Share
    Compensation Plan as amended December 7, 2005 and restated
    on June 29, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

264



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .67         |  | Pascal Debon letter agreement dated February 21, 2006,
    concerning the cessation of Mr. Debons
    responsibilities as Senior Advisor of Nortel Networks
    Corporation and Nortel Networks Limited effective
    December 23, 2005.                                   
|        | 10 | .68         |  | Brian McFadden letter agreement dated February 21, 2006,
    concerning the cessation of Mr. McFaddens
    responsibilities as Chief Research Officer of Nortel Networks
    Corporation and Nortel Networks Limited effective
    December 23, 2005.                      
|        | 10 | .69         |  | Notice of Blackout to Nortel Networks Corporations Board
    of Directors and Executive Officers Regarding Suspension of
    Trading dated March 10, 2006 (filed as Exhibit 99.2 to
    Nortel Networks Corporations Current Report on
    Form 8-K dated March 10, 2006).
|        | 21 |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                             
|        | 23 |             |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                           
|        | 24 |             |  | Power of Attorney of certain directors and officers.                                                                                                                                                                                                                        
|        | 31 | .1          |  | Rule 13a  14(a)/15d  14(a)
    Certification of the Vice-Chairman and Chief Executive Officer.                                                                                                                                                                            
|        | 31 | .2          |  | Rule 13a  14(a)/15d  14(a)
    Certification of the Chief Financial Officer                                                                                                                                                                                               
|        | 32 |             |  | Certification of the Vice-Chairman and Chief Executive Officer
    and Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                              






|  |                          
|- | -------------------------
|* | Incorporated by Reference

|   |                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Certain portions of this Exhibit have been omitted based upon a
    request for confidential treatment. These portions have been
    filed separately with the United States Securities and Exchange
    Commission.

265



---



##### 



SIGNATURES


st




| |                        
| | -----------------------
| | NORTEL NETWORKS LIMITED



| |     |                       
| | --- | ----------------------
| | By: | /s/ Mike S. Zafirovski

| |                               
| | ------------------------------
| |                               
| | (Mike S. Zafirovski, President
| | and Chief Executive Officer)  

st


|                                            |  |                                                      
|------------------------------------------- |  | -----------------------------------------------------
|Signature                                   |  | Title                                                
|                                            |  |                                                      
|Principal Executive Officer                 |  |                                                      
|                                           
|                                           
|/s/ Mike S. Zafirovski (Mike S. Zafirovski) |  | President and Chief Executive Officer, and a Director
|Principal Financial Officer                 |  |                                                      
|                                           
|                                           
|/s/ Peter W. Currie (Peter W. Currie)       |  | Executive Vice-President and Chief Financial Officer 
|Principal Accounting Officer                |  |                                                      
|                                           
|                                           
|/s/ Paul W. Karr                            |  | Controller                                           
|                                            |  |                                                      
|(Paul W. Karr)                              |  |                                                      

266



---



##### 



Directors


|                                 |  |                                                                                     
|-------------------------------- |  | ------------------------------------------------------------------------------------
|                                
|J.H. Bennett* (J.H. Bennett)     |  | J.A. MacNaughton* (J.A. MacNaughton)                                                
|                                
|M. Bischoff* (M. Bischoff)       |  | J.P. Manley* (J.P. Manley)                                                          
|                                
|R.E. Brown* (R.E. Brown)         |  | R.D. McCormick* (R.D. McCormick)                                                    
|                                
|J.E. Cleghorn* (J.E. Cleghorn)   |  | R.W. Osborne* (R.W. Osborne)                                                        
|                                
|J.B. Hunt, Jr.* (J.B. Hunt, Jr.) |  | H.J. Pearce* (H.J. Pearce)                                                          
|                                
|R.A. Ingram* (R.A. Ingram)       |  | M.S. Zafirovski* (M.S. Zafirovski)                                                  
|                                
|                                 |  | /s/ Gordon A. DaviesBy:* (Gordon
    A. Davies,as attorney-in-fact
    May 1, 2006.)

267