NORTEL NETWORKS CORPORATION KEY EXECUTIVE INCENTIVE PLAN

I.

PLAN OBJECTIVE

The Nortel Networks Corporation Key Executive Incentive Plan (the “ Plan ”) is designed to provide cash incentive awards (the “ Bonuses ”) to certain key executives of Nortel Networks Corporation (“ NNC ”) and certain of its direct and indirect subsidiaries and affiliates participating in the Plan (each a “ Participating Employer ” and, collectively with NNC, the “ Company ”) to strive for the achievement of milestones important to a successful reorganization pursuant to the proceedings under the Companies’ Creditors Arrangement Act (Canada) and the US Bankruptcy Code (the “ Proceedings ”).

II.

PARTICIPATING EMPLOYERS AND EMPLOYEES

(a)

The Participating Employers and the employees of the Participating Employers who may participate in the Plan have been selected in accordance with the criteria approved by the Board of Directors of NNC and the Board of Directors of Nortel Networks Limited (“ NNL ”) (collectively, the “ Boards ”) upon the recommendation of the Compensation and Human Resources Committee of the Boards (“ Committee ”).

(b)

Each employee of a Participating Employer selected for participation in the Plan shall receive a letter (each, a “ Bonus Letter ”) that sets forth the Bonus that he or she may be eligible to receive under the Plan and requires such employee to (i) waive any payments or benefits for which he or she may be eligible under the Nortel Networks Corporation Change in Control Plan, other change in control arrangements or any other retention plan or arrangement with the Company as of the Effective Date of the Plan (defined below) and (ii) agree that he or she will not file or make any claim against the Company for any such payments or benefits under the Proceedings or otherwise. Upon execution and timely return of the Bonus Letter in accordance with its terms, such employee shall become a participant in the Plan (a “ KEIP Participant ”) and will be eligible to receive a Bonus.

III.

BONUSES

(a)

Each KEIP Participant will be eligible to receive a Bonus in an amount set forth in the Bonus Letter determined in accordance with the criteria approved by the Boards upon the recommendation of the Committee, pursuant to the guidelines established by the Committee from time to time.

(b)

Except as required by applicable law or the terms of Company benefit plans or programs, Bonuses will not be taken into account for purposes of the Company benefits in which a KEIP Participant may participate and will not be included in “eligible earnings” for purposes of capital accumulation and retirement plans offered in various jurisdictions by the Company. Where required, deductions will be made from the Bonus Awards, as defined below, in accordance with the specific capital accumulation and retirement plan in which the KEIP Participant participates.

IV.

VESTING AND PAYMENT OF BONUS AWARDS

(a)

Subject to Section VI, each KEIP Participant’s Bonus will vest in the amounts and on the dates (each a “ Scheduled Vesting Date ”) set forth below so long as such KEIP Participant is actively employed by a Participating Employer on the applicable Scheduled Vesting Date:

(i)

25% of such Bonus (the “ First Bonus Award ”) upon the date of achievement of the First Milestone (as defined below);

(ii)

25% of such Bonus (the “ Second Bonus Award ”) upon the date of achievement of the Second Milestone (as defined below); and

(iii)

50% of such Bonus (the “ Third Bonus Award ,” and together with the First Bonus Award and the Second Bonus Award, the “ Bonus Awards ”) upon the date of achievement of the Third Milestone (as defined below).

(b)

Subject to Section VI and IX(b), each Bonus Award that vests under this Section IV of the Plan will be made to a KEIP Participant by his or her Participating Employer in a lump sum cash payment as soon as practicable following the applicable Scheduled Vesting Date.

(c)

For purposes of the Plan, a KEIP Participant will be considered to be “actively employed” on those days when he or she is classified as “active” on the applicable Participating Employer’s payroll.

(d)

The “ First Milestone ” is the achievement of North American objectives of the Company’s cost reduction plan. The “ Second Milestone ” is the achievement of certain parameters approved by the Boards upon recommendation of the Committee designed to result in a leaner and more focused organization. The “ Third Milestone ” is the later of the confirmation by the US court of a plan of reorganization in the United States or the confirmation by the Canadian court of a plan or plans of restructuring and/or arrangement in Canada.

(e)

Notwithstanding anything in the Plan to the contrary, if the Committee, in its sole discretion, upon consideration of facts and circumstances determined by the Committee to be relevant, concludes that a KEIP Participant has committed intentional misconduct, as defined in the Committee Policy Regarding Recoupment of Incentive Compensation relating to the forfeiture and/or recoupment of incentive compensation, the KEIP Participant will forfeit any earned but unpaid Bonus Awards and/or reimburse his or her Participating Employer the amount of the Bonus Awards received, as determined by the Committee.

V.

PLAN ADMINISTRATION

The Committee shall have full discretionary authority to administer the Plan, including discretionary authority to interpret and construe any and all provisions of the Plan and to determine the achievement of each of the Milestones set forth in Section IV(d) above.

VI.

ELIGIBILITY TO RECEIVE BONUS PAYMENTS

(a)

Upon the involuntary termination of employment of a KEIP Participant for any reason (other than in connection with a divestiture (as described below)) by a Participating Employer, resignation of employment by a KEIP Participant or termination of employment due to death or disability, each unvested Bonus Award of such KEIP Participant (the “ Unvested Awards ”) will be forfeited on the date of such employment termination or resignation and such KEIP Participant will have no further rights under the Plan.

(b)

If a KEIP Participant is not actively employed by a Participating Employer on a Scheduled Vesting Date as a result of short- or long-term disability or other leaves of absence, whether or not approved by the relevant Participating Employer, the Unvested Award related to that Scheduled Vesting Date will be forfeited on the Scheduled Vesting Date and such KEIP Participant will have no further rights with respect to such Bonus Award, unless otherwise required by applicable law.

(c)

If a KEIP Participant is actively employed by a Participating Employer on a Scheduled Vesting Date, but was not actively employed for the entire period beginning on the day following the immediately pr