Nortel Reports Financial Results for the Second Quarter 2010

As previously announced, beginning with January 14, 2009 (being the date that Nortel commenced its creditor protection proceedings), Nortel accounted for the results of its Europe, Middle East and Africa (EMEA) Subsidiaries by the equity method of accounting in its consolidated results. As of May 31, 2010, Nortel determined that it no longer had significant influence over the operating and financial policies of the EMEA Subsidiaries primarily due to the significance of the completed business divestitures. As a result, Nortel accounted for the EMEA Subsidiaries as an investment using the cost method as of June 1, 2010. The fair value of the EMEA Subsidiaries investment was determined to be nil, resulting in a charge in the second quarter of approximately $760 million due to the recognition in income of pension charges previously deferred in shareholders' equity and of intercompany payables offset by the write-off of the net liabilities of the EMEA Subsidiaries. A related charge of approximately $650 million was recorded to reflect Nortel's guarantees of the U.K. pension funding. Commencing June 1, 2010, the financial results of the EMEA Subsidiaries are no longer included in Nortel's financial results.

Result of the divestitures of

As a result of the divestitures of: (1) the Code Division Multiple Access (CDMA)/LTE Access and Enterprise Solutions (ES) businesses in the fourth quarter of 2009; (2) the Optical Networking and Carrier Ethernet, and Global System for Mobile communications (GSM)/GSM for Railways (GSM-R) businesses in the first quarter of 2010; and (3) the Carrier VoIP and Application Solutions (CVAS) business in the second quarter of 2010, only the residual contracts related to those businesses were included in the respective reportable segments. The Metro Ethernet Networks (MEN) reportable segment also continued to include the multiservice switching products and related services (MSS) business.

The ES and LGN businesses were presented as Discontinued Operations while the other residual businesses were presented as Continuing Operations. Except in the Segment Revenues section, the discussion below relates to Results from Continuing Operations under U.S. GAAP and excludes the financial results of the EMEA Subsidiaries. Notwithstanding the change in accounting for the EMEA Subsidiaries as an investment using the cost method, Nortel continues to manage its business segments globally. The financial information in the Segment Revenues section includes the results of the EMEA Subsidiaries for the entire second quarter within each segment, but does not include the results of discontinued operations. Therefore, in order to reconcile the financial information for the business segments discussed below to Nortel's consolidated financial information, the net financial results of the EMEA Subsidiaries must be removed.

The second quarter of 2010 compared to $1

Segment revenues from continuing operations were $237 million in the second quarter of 2010 compared to $1.3 billion for the second quarter of 2009, reflecting a reduction of 81.1 percent primarily as a result of the business divestitures.

Discontinued operations revenues in the second quarter of 2010 were $95 million, a decrease of 87 percent compared with the year ago quarter. ES revenues were $7 million, a decrease of 99 percent as a result of the divestiture of the ES, NGS and DiamondWare businesses in the fourth quarter of 2009. LGN revenues were $88 million, a decrease of 56 percent compared with the year ago quarter mainly related to volumes related to its 3G wireless products in the second quarter of 2009 not repeated to the same extent in 2010.

The third quarter of 2010

In the third quarter of 2010, Nortel's reportable segments will be: WN, consisting of residual CDMA and GSM/GSM-R contracts; MEN, consisting of the MSS business and residual contracts not included in the sale to Ciena; and CVAS, consisting of residual contracts not included in the sale to GENBAND.

Gross margin declined to 4.1 percent of revenues in the second quarter of 2010 compared to 46.5 percent for the second quarter of 2009, primarily as a result of the business divestitures. Gross margin was also impacted by the ongoing costs related to delivery of the transition services agreements, the recovery of which is recorded in other operating income.

Focus on reducing costs

A focus on reducing costs, and the business divestitures resulted in lower operating expenses compared to the year ago quarter. Operating expenses were $156 million in the second quarter of 2010 compared to $316 million for the second quarter of 2009. Operating expenses were also impacted by a change in methodology resulting in ceasing of the allocation of certain SG&A expenses related to corporate overhead costs to R&D expense and cost of revenues.

The net loss included reorganization costs of $1.4 billion, interest expense of $75 million and other expense of $28 million, partially offset by other operating income of $96 million comprised primarily of billings under transition services agreements, $41 million in income tax recovery and earnings from discontinued operations of $35 million related primarily to a gain on the divestiture of NNL's interest in LGN. The $1.4 billion in reorganization costs primarily related to the impact of accounting for the EMEA Subsidiaries as an investment using the cost method of $763 million, guarantees related to the funding of the U.K. defined benefit pension plan of $634 million and asset impairments of $113 million, partially offset by gains on the divestiture of the CVAS business of $196 million. Other expense of $28 million was comprised primarily of a currency exchange loss of $44 million partially offset by rental income of $16 million.

The consolidated cash balance as of June 30

The consolidated cash balance as of June 30, 2010 was $1.7 billion and restricted cash was $3.2 billion primarily related to the business divestiture proceeds, compared to a consolidated cash balance of $1.9 billion and restricted cash of $2.7 billion primarily related to the divestiture proceeds as of March 31, 2010. The decrease in the consolidated cash balance was primarily due to cash used in operating activities of $110 million, cash used in financing activities of $78 million primarily related to dividends paid by subsidiaries to non controlling interests, cash used in investing activities of $53 million, which included proceeds from sales of businesses largely offset by proceeds from those sales recorded as restricted cash, and a net unfavorable foreign exchange impact of $14 million. The consolidated cash balance excluded the EMEA Subsidiaries cash of $829 million no longer included in Nortel's consolidated balance sheet as of May 31, 2010.

Actual results or events could differ materially from those contemplated in forward-looking statements as a result of the following: (i) risks and uncertainties relating to the Creditor Protection Proceedings including: (a) risks associated with Nortel's ability to: stabilize the business and maximize the value of Nortel's businesses; obtain required approvals and successfully consummate pending and future divestitures; ability to satisfy transition services agreement obligations in connection with divestiture of operations; successfully conclude ongoing discussions for the sale of Nortel's other assets or businesses; develop, obtain required approvals for, and implement a court approved plan; resolve ongoing issues with creditors and other third parties whose interests may differ from Nortel's; generate cash from operations and maintain adequate cash on hand in each of its jurisdictions to fund operations within the jurisdiction during the Creditor Protection Proceedings; access the EDC Facility given the current discretionary nature of the facility, or arrange for alternative funding; if necessary, arrange for sufficient debtor-in-possession or other financing; continue to have cash management arrangements and obtain any further required approvals from the Canadian Monitor, the U.K. Administrators, the French Administrator, the Israeli Administrators, the U.S. Creditors' Committee, or other third parties; raise capital to satisfy claims, including Nortel's ability to sell assets to satisfy claims against Nortel; maintain R&D investments; realize full or fair value for any assets or business that are divested; utilize net operating loss carryforwards and certain other tax attributes in the future; avoid the substantive consolidation of NNI's assets and liabilities with those of one or more other U.S. Debtors;

The new organizational structure

operate Nortel's business effectively under the new organizational structure, and in consultation with the Canadian Monitor, and the U.S. Creditors' Committee and work effectively with the U.K. Administrators, French Administrator and Israeli Administrators in their respective administration of the EMEA businesses subject to the Creditor Protection Proceedings; continue as a going concern; actively and adequately communicate on and respond to events, media and rumors associated with the Creditor Protection Proceedings that could adversely affect Nortel's relationships with customers, suppliers, partners and employees; retain and incentivize key employees and attract new employees as may be needed; retain, or if necessary, replace major suppliers on acceptable terms and avoid disruptions in Nortel's supply chain; maintain current relationships with reseller partners, joint venture partners and strategic alliance partners; obtain court orders or approvals with respect to motions filed from time to time; resolve claims made against Nortel in connection with the Creditor Protection Proceedings for amounts not exceeding Nortel's recorded liabilities subject to compromise; prevent third parties from obtaining court orders or approvals that are contrary to Nortel's interests; reject, repudiate or terminate contracts;

and (b) risks and uncertainties associated with: limitations on actions against any Debtor during the Creditor Protection Proceedings; the values, if any, that will be prescribed pursuant to any court approved plan to outstanding Nortel securities and, in particular, that Nortel does not expect that any value will be prescribed to the NNC common shares or the NNL preferred shares in any such plan; the delisting of NNC common shares from the NYSE; and the delisting of NNC common shares and NNL preferred shares from the TSX; and (ii) risks and uncertainties relating to Nortel's business including: the sustained economic downturn and volatile market conditions and resulting negative impact on Nortel's business, results of operations and financial position and its ability to accurately forecast its results and cash position; cautious capital spending by customers as a result of factors including current economic uncertainties; fluctuations in foreign currency exchange rates; any requirement to make larger contributions to defined benefit plans in the future; a high level of debt, arduous or restrictive terms and conditions related to accessing certain sources of funding; the sufficiency of workforce and cost reduction initiatives; any negative developments associated with Nortel's suppliers and contract manufacturers including Nortel's reliance on certain suppliers for key optical networking solutions components and on one supplier for most of its manufacturing and design functions;

potential penalties, damages or cancelled customer contracts from failure to meet contractual obligations including delivery and installation deadlines and any defects or errors in Nortel's products; significant competition, competitive pricing practices, industry consolidation, rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles, and other trends and industry characteristics affecting the telecommunications industry; a failure to protect Nortel's intellectual property rights; any adverse legal judgments, fines, penalties or settlements related to any significant pending or future litigation actions; failure to maintain integrity of Nortel's information systems; and changes in regulation of the Internet or other regulatory changes.