CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Exhibit 10.5

Nortel Networks Limited Annual Incentive Plan (AIP)

Section 1:  Introduction

     The Nortel Networks Limited Annual Incentive Plan (the “Plan” or “AIP”) is a short-term, incentive bonus plan that provides the potential for “Eligible Employees” (as defined below) to receive cash awards based on their contributions to the success of the “Company”¹, conditioned on the Company meeting its objectives.

     The Plan is intended to drive business performance and customer and shareholder value by rewarding Eligible Employees for their contributions to the Company’s overall success. An Eligible Employee’s contribution is determined by two factors: (1) the impact of that employee’s role on business results and (2) that employee’s achievement of individual performance objectives during the employee’s active service with the Company. The actual award received by an Eligible Employee will reflect (1) an employee’s job scope, complexity, and responsibilities, and that employee’s contribution and achievement, during the Plan Period² and (2) the Company’s performance as indicated by the Nortel Performance Factor (the “Nortel Performance Factor”).

Section 2:  Annual Incentive Plan Eligibility

     Generally, regular full-time and regular part-time³ Company employees are eligible to participate in the Plan (“Eligible Employees”), subject to the following:

(1)

Eligible employees who participate in other incentive plans for a full calendar month or the greater portion of a month, as determined by the Company, are not eligible to participate in the Plan during that calendar month. For purposes of this document, “other incentive plans” mean sales incentive compensation or any other incentive/bonus arrangements which the Company determines have been offered in lieu of the Plan;

	(2)		Subject to applicable law, employees who are covered under a collective labor agreement are not eligible unless that collective labor agreement provides for their participation in the Plan;
	(3)		Individuals determined by the Company to be students, co-op students, interns, temporary4, or non-payroll workers are ineligible for the Plan;
	(4)		The Compensation and Human Resources Committee of the Boards of Directors of Nortel Networks Corporation and Nortel Networks Limited (“CHRC”) and the Board of Directors of Nortel Networks Limited (the “Board of Directors”) may determine that certain Company employees (including employees who are not otherwise eligible for the Plan) may be eligible to receive an award from a Discretionary Bonus Pool created pursuant to Section 5 hereof;
	(5)		Subject to applicable law, to be eligible for either a full or pro-rated award for any given Plan Period: (a) an employee must have been actively employed in a role that is eligible under the Plan or other incentive plan (“Incentive Eligible Role”) for at least three full calendar months in that Plan Period 5and (b) the employee must have been an employee in an Incentive Eligible Role on or before October 1 of that Plan Period6. For purposes of this document, an employee will be considered to be “actively employed” for any calendar month in which the employee actually works for at least one day or as otherwise required under applicable contract or law. Notwithstanding the foregoing and subject to applicable law, employees whose employment terminates before December 31 of a Plan Period are not eligible to receive a Plan award for that Plan Period.
	(6)		Pro-rated awards may be made to employees who transfer into or out of positions covered by other incentive plans, move from or to a job that is ineligible for the Plan or who are on a Company approved leave of absence or on “notice” of termination of employment for part of the Plan Period, provided that the employee meets the other Plan requirements set out above. However, subject to applicable law, an employee is not eligible for a Plan payout for any calendar month in which the employee is not actively employed in a position eligible under the Plan. If an employee meets the above Plan requirements, but is actively employed in a position that is eligible under the Plan for less than the full Plan Period, the employee’s Annual Incentive Plan award will be based on the number of months the employee is

			actively employed in a Plan eligible position divided by the number of months in the Plan Period, with the following exception. For purposes of determining the amount of a pro-rata Annual Incentive Plan award, an employee will not be considered to be actively employed in a Plan eligible position in a calendar month in which (a) the employee participates in another incentive plan for that full calendar month or (b) the employee participates in another incentive plan for the greater portion of the month, each as determined by the Company.
	(7)		Employees who meet all of the Plan eligibility requirements, but who leave employment with the Company between the end of the Plan Period and the related payment date for the award, other than for reasons determined by the Company to be related to inappropriate actions, misconduct, dismissal for cause (where applicable) or unsatisfactory performance, will be eligible for an award for the applicable Plan Period;
	(8)		An employee’s Management Team7 has the right, in consultation with the relevant Human Resources Business prime, to make limited exceptions to the ‘actively employed’ requirements set out in Section 2(5) and (6) above where required by law or where the Management Team determines that circumstances clearly warrant an exception. Exceptional circumstances might include approved leaves where warranted by applicable law (e.g. maternity, paternity, parental, military, family, or medical), disability, outsourcing, divestiture, or death. In such situations, if the employee has, while actively employed in a Plan eligible position, substantially achieved his/her individual objectives, the employee’s Management Team may grant partial awards. If awards are paid in these circumstances, the awards will be pro-rated to reflect the number of months the employee was actively employed in a Plan eligible position, as defined in Section 2(5) above, and will be commensurate with the employee’s contribution and achievement. Notwithstanding anything in the foregoing to the contrary, nothing in the Plan shall preclude the Company paying an employee an award under the Plan for more than the number of months the employee was actively employed in a Plan eligible position pursuant to that individual employee’s employment termination agreement, which the Senior Vice-President, HR has approved; and
	(9)		Company affiliates and joint ventures may choose to offer the Plan or a similar plan subject to the approval of the Senior Vice-President, HR.

Section 3:  Award Elements

     An Eligible Employee’s cash award for a Plan Period under the Plan will be based on the following formula:

100%⁸ of Annual Base Salary x (# Months actively employed in a Plan eligible position / # Months in Plan Period) [“Pro-Ration Factor”] x Award % x Nortel Performance Factor.

Annual Base Salary means the annualized regular compensation paid to an Eligible Employee, excluding any other compensation, such as, but not limited to, bonuses, commissions, overtime, and relocation benefits. The Annual Base Salary for these purposes will be measured for all Eligible Employees at a uniform time on or after October 1^st of the applicable Plan Period to be determined in the sole discretion of the Senior Vice-President, HR.

Award % is the percentage of Annual Base Salary that is used to compute the Plan award for each Eligible Employee. For Job Complexity Indicator (“JCI”) 1-6, the Award % ranges from 0% to 40% of Annual Base Salary. For JCI 55, the Award % ranges from 0% to 400% of Annual Base Salary. The JCI level for these purposes will be measured concurrently with Annual Base Salary as described above. For each JCI, the Senior Vice-President, HR may set a suggested narrower award range, intended to reflect a market trend to give certain Eligible Employees with higher levels of responsibility a higher incentive potential as a percentage of Annual Base Salary. Within the ranges approved by the CHRC and the Board of Directors, an Eligible Employee’s Management Team will determine the recommended Award % for that employee for each Plan Period based on the employee’s job scope, complexity and responsibilities and the employees’ contributions and achievements during the Plan Period. An Eligible Employee’s recommended Award % is subject to review, modification and approval by the Senior Management Team as provided in Section 4.⁹

The total Plan award for all Eligible Employees for a Plan Period (reflecting the Nortel Performance Factor) is recommended by the Senior Management Team for approval by the CHRC and the Board of Directors after the end of the Plan Period.

Nortel Performance Factor is calculated based on the achievement by the Company of key corporate objectives for the Plan Period. The objectives are approved by the CHRC and the Board of Directors for each Plan Period. The Nortel Performance Factor may be based on one or more performance metrics, each with specific targets. The performance metrics may have equal or different weightings. Performance metrics are the general corporate goals for the Plan Period, such as profitability, market momentum, or customer loyalty. Targets shall be based on objective and/or subjective criteria established to measure, directly or indirectly, the performance metrics. Weightings shall be the relative

weight or percentage accorded in the Nortel Performance Factor for achieving each specific target. After approval by the CHRC and the Board of Directors, the Company’s objectives for the Plan Period will be communicated to Eligible Employees. The Nortel Performance Factor is deemed to be 1.0 (achievement) throughout the Plan Period and is then adjusted by the CHRC and the Board of Directors based on their determination of corporate performance. The President and Chief Executive Officer may, in his sole discretion, recommend to the CHRC and the Board of Directors that the Nortel Performance Factor be adjusted with respect to certain business units, JCI levels or any other groups of employees and the CHRC and the Board can approve such adjustment to the Nortel Performance Factor, in their sole discretion, based on additional factors that the President/CEO and the CHRC and Board determine in their sole discretion are relevant to the award including without limitation, collective relative contribution to achievement of the key Company objectives during the Plan Period.

Section 4:  Annual Incentive Plan Awards

Awards for each Plan Period are calculated based on 100%¹⁰ of an Eligible Employee’s Annual Base Salary, the Pro-Ration Factor, the Eligible Employee’s Award % (which reflects the employee’s job scope, complexity and responsibilities, and that employee’s contribution and achievement, during the Plan Period), and the Nortel Performance Factor (that is, the Company’s business performance for the Plan Period as determined by the CHRC and the Board of Directors). When warranted, cash awards will be made as soon as practicable following the close of the applicable Plan Period and the calculation of any award.

Any award under the Plan to an Eligible Employee is subject to the discretion of the Eligible Employee’s Management Team and Senior Management Team and the CHRC and the Board of Directors. That is, an Eligible Employee’s Management Team determines, in its discretion, the Award % for an Eligible Employee subject to review, modification and approval by the Senior Management Team. Specifically, the Senior Management Team reserves the right, in its discretion, to review and adjust Eligible Employees’ Award percentages, which are assigned to those Eligible Employees by their Management Team to reflect its assessment of the employees’ contributions to the business or the achievement of the Company’s key objectives, as well as to ensure that the final payouts, if any, are within appropriate budgetary guidelines. The CHRC and the Board of Directors determine, in their discretion, the achievement of the targets for the performance metrics and the final calculation of the Nortel Performance Factor (which may include a determination of a Nortel Performance Factor of zero, even if certain of the performance metrics targets are achieved, and/or an adjustment to the relative weighting of the performance metrics.) During the Plan Period, the CHRC and the Board of Directors can review Company objectives, performance measures, weightings, and targets to determine whether they remain appropriate. The CHRC and the Board of Directors may, at their sole discretion, adjust the Company objectives, performance

measures, weightings, targets, and/or plan payouts for the Plan Period, as they deem necessary, to reflect changes in business conditions or other circumstances.

Subject to applicable law, the Senior Vice-President, HR, may approve the reduction of Plan awards payable to Eligible Employees for a Plan Period by the full or partial amount of other bonuses or similar payments, including, without limitation, Company performance related payments required by applicable law, that are payable to such employees in respect of any part of such Plan Period. The Senior Vice-President, HR, will have sole discretion to determine those bonuses or payments that are subject to the preceding sentence and the amount of any such reduction to the Plan award.

Plan awards are considered income and are therefore subject to national, state/provincial, and/or local taxes. All appropriate taxes and other withholdings will be deducted from any such awards and payments as required by applicable law.

Depending on local laws and policies, Plan awards may have an impact on some benefits and may or may not be included in the “eligible earnings” for purposes of capital accumulation and retirement plans offered in the various regions by the Company. Where appropriate, deductions may be made from Plan awards in accordance with the specific capital accumulation and retirement plan in which the Eligible Employee participates.

If the CHRC, in its sole discretion, upon consideration of facts and circumstances determined by the CHRC to be relevant, concludes that an Eligible Employee has committed an intentional misconduct, as defined in the CHRC Policy Regarding Recoupment of Incentive Compensation (the “Recoupment Policy”) relating to the forfeiture and/or recoupment of incentive compensation, including Annual Incentive Plan award payments, the Eligible Employee shall forfeit any planned but unpaid Plan award and/or reimburse the Company the amount of the Plan award received, as determined by the CHRC.

Section 5:  Discretionary Bonus Pool

During a Plan Period, the CHRC and the Board of Directors may consider the creation of a separate Discretionary Bonus Pool under the Plan to provide discretionary, incremental bonus awards. These awards may be made to all employees of the Company or employees of the Company who individually or in groups made a relative contribution that significantly added to the overall success of the Company, whether or not the employees are eligible to participate in the Plan under the criteria set out in Section 2 of this document. The determination that a Company employee is eligible for a Discretionary Bonus Pool award does not otherwise entitle that employee to generally participate in the Plan. The CHRC and the Board of Directors have complete discretion to determine: the establishment of the Discretionary Bonus Pool; the eligibility criteria for participation; any performance metrics, weightings and targets; the achievement, if any, of the targets for the performance metrics; and the amount of the awards, if any, paid from the Discretionary Bonus Pool. Whether or not an Eligible Employee receives a Plan

award shall have no effect on that employee’s eligibility to receive a Discretionary Bonus Pool award.

Discretionary Bonus Pool awards will be considered income and therefore subject to national, state/provincial, and/or local taxes. All appropriate taxes and other withholdings will be deducted from the award as required by applicable law.

Depending on local laws and policies, Discretionary Bonus Pool awards may have an impact on some benefits and may or may not be included in the “eligible earnings” for purposes of capital accumulation and retirement plans offered in the various regions by the Company. Where appropriate, deductions may be made from the Discretionary Bonus Pool awards in accordance with the specific capital accumulation and retirement plan in which the employee participates.

Section 6:  Interpretations and Amendments

This document, as amended from time to time, constitutes the “Nortel Networks Limited Annual Incentive Plan”. In the event of any conflicts or inconsistencies between the provisions of the Plan and any other document or communication, written or oral, concerning the Plan, the provisions of this document, as amended from time to time, shall govern.

The Senior Vice-President, HR, subject to approval of the CHRC and the Board of Directors in certain cases shall interpret the provisions of the Plan, which shall be final and binding on the Company and all Plan participants. This document is also subject to interpretation to comply with applicable laws. It is not and shall not be construed as either an employment contract or as a contract concerning the subject matter contained herein. There is no guarantee that any award under the Plan will actually be paid. Any award is determined at the discretion of an Eligible Employee’s Management Team, the Senior Management Team and the CHRC and the Board of Directors, as the case may be. If such awards, however, are paid, they shall be determined and paid in accordance with the provisions herein.

The Plan can only be terminated or amended by the Board of Directors, which shall have the full authority, at any time, to terminate the Plan or to delete, modify and/or add to any and all terms, conditions, and provisions of the Plan.

As adopted by the Board of Directors of Nortel Networks Limited on July 25, 2002, as amended on January 23, 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, as amended on March 9, 2006 with effect from January 1, 2006, and as amended on March 15, 2007 with effect from January 1, 2007