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Nortel: Nortel Reports Financial Results for the Second Quarter 2009

TORONTO, ONTARIO--(Marketwire - Aug. 10, 2009) - Nortel(1) Networks Corporation (OTCBB:NRTLQ) announced its results for the second quarter 2009. Results were prepared in accordance with United States generally accepted accounting principles (GAAP) in U.S. dollars.

Commenting on the results of the second quarter of 2009, Nortel President and Chief Executive Officer Mike Zafirovski said, "While we continue to be impacted by the economic environment and the Creditor Protection Proceedings, we have successfully stabilized the business since filing for creditor protection. Despite these challenges, our revenue is up quarter over quarter by 14 percent overall while our corresponding operating costs are down 15 percent resulting in strong margins. At the same time, our customer service levels remain strong. These operating and customer results are a real tribute to the professionalism and dedication of the Nortel employees and the outstanding support from our customers, partners and suppliers for which I'm deeply appreciative."

Zafirovski continued:"Throughout this process, we remain focused on serving our customers. We are pleased with the feedback we have received from our customers and we continue to remain focused on maintaining the high service/product performance levels that customers are accustomed to."

2009 Financial Summary

Nortel's overall financial performance in the second quarter of 2009 continued to be impacted by ongoing negative economic conditions and the uncertainty created by the Company's Creditor Protection Proceedings, which resulted in a decrease in customers' spending levels.

- Revenues in the second quarter of $1,972 million, decreased by 25 percent year over year, with declines in all segments and regions and increased by 14 percent from the previous quarter

- Gross margin of 38.2 percent in the quarter, a decrease of 4.9 percentage points from the year ago quarter, and an increase of 2.1 percentage points from the previous quarter, includes charges related to workforce and other cost reduction activities that historically would have been recorded in special charges. Excluding these charges, gross margin in the second quarter of 2009 would have been 40.4 percent.

- Although costs have been significantly reduced across the Company, the revenue declines and gross margin pressure resulted in Management Operating Margin (a) in the second quarter of $16 million or 0.8 percent, a decrease of $98 million or 3.5 percentage points year over year and an increase of $260 million from the previous quarter, resulting from revenue declines and gross margin pressure, partially offset by lower operating expenses. Excluding $101 million related to workforce and other cost reduction activities that historically would have been recorded in special charges, management operating margin for the second quarter of 2009 would have been 5.9 percent (b) of revenues.

- Cash balance at June 30, 2009, of $2.56 billion, compared to $2.48 billion at March 31, 2009

Revenues

Revenues were $1,972 million for the second quarter of 2009 compared to $2,622 million for the second quarter of 2008, reflecting a reduction of 25 percent due to declines across all business segments. The reduction was primarily a result of the continuing economic downturn and the uncertainty created by the Creditor Protection Proceedings.

 Revenues B/(W)

---------------------------------------------------------------
---------------------------------------------------------------
 Q2 2009 YoY QoQ
---------------------------------------------------------------
Carrier Networks $ 920 (20%) 25%
Enterprise Solutions $ 465 (28%) 18%
Metro Ethernet Networks $ 333 (27%) (8%)
LGN $ 199 (37%) 6%
Other $ 55 (8%) 4%
---------------------------------------------------------------
 Total $ 1,972 (25%) 14%
---------------------------------------------------------------
---------------------------------------------------------------

CN revenues in the second quarter of 2009 were $920 million, a decrease of 20 percent compared with the year ago quarter with declines in the GSM and UMTS solutions and Circuit packet voice solutions businesses, while the CDMA solutions business was essentially flat. The wireless segment benefited in the second quarter from the network expansion of a certain customer, however, in addition to the factors above, was negatively impacted by a reduction in spending by certain customers as a result of their change in technology migration plans.

ES revenues in the second quarter of 2009 were $465 million, a decrease of 28 percent compared with the year ago quarter as a result of the factors noted above, namely decreased customer spending due to the economic conditions and the uncertainty created from the Company's Creditor Protection Proceedings. ES had strong growth sequentially due to increased spending by customers compared to the first quarter of 2009 when delays in spending were experienced and an increase in the recognition of deferred revenues in the second quarter of 2009.

MEN revenues in the second quarter of 2009 were $333 million, a decrease of 27 percent compared with the year ago quarter with impacts across all businesses. In addition to the factors above, revenues from certain customers in the second quarter of 2008 that did not repeat to the same extent in the second quarter of 2009 also impacted the year over year decline.

LGN revenues in the second quarter of 2009 were $199 million, a decrease of 37 percent compared with the year ago quarter. In addition to the factors described above, a majority of the decline was in LGN Carrier, primarily due to the recognition of certain deferred revenues in the second quarter of 2008 not repeated in the second quarter of 2009 and high sales volumes related to our 3G wireless products in the second quarter of 2008 not repeated to the same extent in the second quarter of 2009, as well as a significant foreign exchange impact due to the devaluation of the Korean WON against the US dollar. The decrease was partially offset by the completion of network expansions related to certain customers in the second quarter of 2009.

Deferred Revenues

Deferred revenues balances decreased by $205 million during the second quarter of 2009 compared to a decrease of $314 million in the second quarter of 2008.

Gross Margin

Gross margin was 38.2 percent of revenues in the second quarter of 2009. Excluding charges related to workforce and other cost reduction activities that historically would have been recorded in special charges, gross margin in the second quarter of 2009 would have been 40.4 percent (b) of revenues. This compared to gross margin of 43.1 percent for the second quarter of 2008. Compared to the second quarter of 2008, in addition to the items already noted, gross margin declined primarily as a result of the unfavorable impact of foreign exchange fluctuations and the unfavorable impacts of product mix and price erosion, partially offset by a decrease in warranty costs.

Operating Expenses

 Operating Expenses B/(W)

---------------------------------------------------------------
---------------------------------------------------------------
 Q2 2009 YoY QoQ
---------------------------------------------------------------
 SG&A $ 437 24% 17%
 R&D $ 301 32% 12%
---------------------------------------------------------------
Total Operating Expenses $ 738 27% 15%
---------------------------------------------------------------
---------------------------------------------------------------

A focus on reducing costs resulted in lower operating expenses compared to the year ago quarter. Operating expenses were $738 million in the second quarter of 2009. This compares to operating expenses of $1,016 million for the second quarter of 2008 and $869 for the first quarter of 2009.

SG&A expenses were $437 million in the second quarter of 2009, compared to $575 million for the second quarter of 2008. Excluding charges related to workforce and other cost reduction activities that historically would have been recorded in special charges, SG&A expenses for the second quarter of 2009 would have been $393 million (b). Compared to the second quarter of 2008, in addition to the items already noted, SG&A was favorably impacted primarily by headcount reductions and lower spending levels across all categories including a reduction in sales and marketing investment in maturing technologies.

R&D expenses were $301 million in the second quarter of 2009, compared to $441 million for the second quarter of 2008. Excluding charges related to workforce and other cost reduction activities that historically would have been recorded in special charges, R&D expenses for the second quarter of 2009 would have been $286 million (b). Compared to the second quarter of 2008, in addition to the items already noted, R&D was favorably impacted primarily by headcount reductions and the cancellation of certain R&D programs.

Management Operating Margin (a)

Management operating margin was 0.8 percent of revenues in the second quarter of 2009 compared to 4.3 percent for the second quarter of 2008, a decrease of 354 basis points. The decline was due to lower gross margin and a decline in revenues that outpaced reductions in operating expenses. Excluding $101 million related to workforce and other cost reduction activities that historically would have been recorded in special charges, management operating margin for the second quarter of 2009 would have been 5.9 percent (b) of revenues.

Net Loss

The Company reported a net loss in the second quarter of 2009 of $274 million, or $0.55 per common share on a basic and diluted basis, compared to net loss of $113 million, or $0.23 per common share on a basic and diluted basis, in the second quarter of 2008.

The net loss in the second quarter of 2009 of $274 million included reorganization costs of $130 million related to the Creditor Protection Proceedings and the application of American Institute of Certified Public Accountants Statement of Position (SOP) No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", Other expense - net of $14 million, comprised in part of a currency exchange loss of $8 million, interest expense of $74 million, $62 million in income tax expense and an expense of $11 million for earnings attributable to non-controlling interests (formerly minority interests).

The net loss in the second quarter of 2008 of $113 million included interest expense of $76 million, special charges of $67 million for headcount and other cost reduction activities, $61 million in income tax expense, an expense of $55 million for earnings attributable to non-controlling interests (formerly minority interests) and Other income- net of $3 million, comprised primarily of a gain of $34 million due to changes in foreign exchange rates partially offset by a loss of $21 million from mark-to-market gains on interest rate swaps.

Cash

Cash balance at the end of the second quarter of 2009 was $2.56 billion, up from $2.48 billion at the end of the first quarter of 2009. The increase in cash was primarily due to cash from investing activities of $75 million, mainly due to proceeds from the sale of the Calgary facility, and the net favorable foreign exchange impacts of $109 million, partially offset by cash used in operating activities of $59 million and cash used in financing activities of $42 million.

(a) Management Operating Margin is a non-GAAP measure defined as Gross Profit less SG&A and R&D expenses. Management Operating Margin percentage is a non-GAAP measure defined as Management Operating Margin divided by Revenue. Nortel's management believes that these measures are meaningful measurements of operating performance and provides greater transparency to investors with respect to Nortel's performance and supplemental information used by management in its financial and operational decision making. These non-GAAP measures may also facilitate comparisons to Nortel's historical performance and competitors' operating results. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information contained in Nortel's financial statements prepared in accordance with GAAP. These measures may not be synonymous to similar measurement terms used by other companies.

(b) Each of Management Operating Margin, Gross Margin, SG&A Expense and R&D Expense, excluding the impact of charges in relation to headcount and other cost reduction activities that historically would have been recorded in special charges, are non-GAAP measures. Nortel's management believes that these measures are meaningful measurements of operating performance and provides greater transparency to investors with respect to Nortel's performance and supplemental information used by management in its financial and operational decision making. These non-GAAP measures may also facilitate comparisons to Nortel's historical performance and competitors' operating results. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information contained in Nortel's financial statements prepared in accordance with GAAP. These measures may not be synonymous to similar measurement terms used by other companies.

About Nortel

Nortel delivers communications capabilities that make the promise of Business Made Simple a reality for our customers. Our next generation technologies, for both service provider and enterprise networks, support multimedia and business critical applications. Nortel's technologies are designed to help eliminate today's barriers to efficiency, speed and performance by simplifying networks and connecting people to the information they need, when they need it. For more information, visit Nortel on the Web at [ www.nortel.com ]. For the latest Nortel news, visit [ www.nortel.com/news ].

Certain statements in this press release may contain words such as "could", "expects", "may", "should", "will", "anticipates", "believes", "intends", "estimates", "targets", "plans", "envisions", "seeks" and other similar language and are considered forward-looking statements or information under applicable securities laws. These statements are based on Nortel's current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Nortel operates. These statements are subject to important assumptions, risks and uncertainties that are difficult to predict, and the actual outcome may be materially different. Nortel's assumptions, although considered reasonable by Nortel at the date of this report, may prove to be inaccurate and consequently Nortel's actual results could differ materially from the expectations set out herein.

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; 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; attract and retain customers or avoid reduction in, or delay or suspension of, customer orders as a result of the uncertainty caused by the Creditor Protection Proceedings; maintain market share, as competitors move to capitalize on customer concerns; operate Nortel's business effectively 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 current or planned 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; any material, adverse affects on Nortel's performance if its expectations regarding market demand for particular products prove to be wrong; potential higher operational and financial risks associated with Nortel's international operations; 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; changes in regulation of the Internet or other regulatory changes; and Nortel's potential inability to maintain an effective risk management strategy.

For additional information with respect to certain of these and other factors, see Nortel's Annual Report on Form10-K, Quarterly Reports on Form 10-Q and other securities filings with the SEC. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

(1) Nortel, the Nortel logo and the Globemark are trademarks of Nortel Networks.

Note that Nortel will not be hosting a teleconference/audio webcast to discuss second quarter 2009 results.

NORTEL NETWORKS CORPORATION
(Under Creditor Protection Proceedings as of January 14, 2009)
Condensed Combined and Consolidated Statements of Operations
(unaudited)
(U.S. GAAP; Millions of U.S. dollars, except per share amounts)


 Three months ended Three months ended
 ------------------------------ ---------------------
 June March June
 30, 31, 30,
 2009 2009 2008
 ------------------------------ ---------------------
 U.S. GAAP Adjust- Non-GAAP
 Results ments Results
 ------------------------------

Revenues:
 Products $ 1,703 $ 1,703 $ 1,470 $ 2,288
 Services 269 269 263 334
 ------------------------------ ---------------------
 1,972 1,972 1,733 2,622
 ------------------------------ ---------------------

Cost of revenues
 Products 1,075 1,075 966 1,320
 Services 143 143 142 172
 ------------------------------ ---------------------
 1,218 1,218 1,108 1,492
 ------------------------------ ---------------------

Gross profit 754 42 796 625 1,130
 38.2% 40.4% 36.1% 43.1%

Selling, general and
 administrative
 expense 437 (44) 393 528 575
Research and
 development expense 301 (15) 286 341 441
 ------------------------------ ---------------------
Management operating
 margin 16 101 117 (244) 114
 0.8% 5.9% -14.1% 4.3%

Amortization of
 intangible assets 11 10 11
Special charges - - 67
Gain on sale
 of businesses
 and assets (15) (15) (2)
Goodwill impairment - 48 -
Other operating
 expense (income)
 - net 4 (12) (7)
 ---------- ---------------------
Total operating
 expenses 738 900 1,085
 ---------- ---------------------

Operating earnings
 (loss) 16 (275) 45
Other income
 (expense) net (14) (70) 3
Interest and
 dividend income - - 30
Interest expense
 Long-term debt (74) (76) (73)
 Other - (1) (3)
 ---------- ---------------------
Loss from operations
 before reorganization
 items, income taxes
 and equity in net
 earnings of
 associated companies (72) (422) 2
Reorganization
 items - net (130) (52) -
 ---------- ---------------------
Loss from operations
 before incomes taxes
 and equity in net
 earnings of
 associated companies (202) (474) 2
Income tax expense (62) (7) (61)
 ---------- ---------------------
Loss from operations
 before equity in net
 earnings of
 associated
 companies (264) (481) (59)
Equity in net
 earnings of
 associated companies
 - net of tax 1 - 1
 ---------- ---------------------
Net loss including
 noncontrolling
 interests (263) (481) (58)
Income attributable
 to noncontrolling
 interests (11) (26) (55)
 ---------- ---------------------
Net loss
 attributable to
 Nortel Networks
 Corporation $ (274) $ (507) $ (113)
 ---------- ---------------------
 ---------- ---------------------

Average shares
 outstanding
 (millions) - Basic 499 499 498
Average shares
 outstanding
 (millions) - Diluted 499 499 498

Basic and diluted
 loss per
 common share ($0.55) ($1.02) ($0.23)
 ---------- ---------------------
 ---------- ---------------------


 Six months ended
 ------------------------------
 June 30, 2009 June 30, 2008
 ------------------------------

Revenues:
 Products $ 3,173 $ 4,759
 Services 532 621
 ------------------------------
 3,705 5,380
 ------------------------------

Cost of revenues
 Products 2,041 2,779
 Services 285 325
 ------------------------------
 2,326 3,104
 ------------------------------

Gross profit 1,379 2,276
 37.2% 42.3%

Selling, general and administrative expense 965 1,172
Research and development expense 642 861
 ------------------------------
Management operating margin (228) 243
 -6.2% 4.5%

Amortization of intangible assets 21 23
Special charges - 155
Gain on sale of businesses and assets (30) (4)
Goodwill impairment 48 -
Other operating expense (income) - net (8) 6
 ------------------------------
Total operating expenses 1,638 2,213
 ------------------------------

Operating earnings (loss) (259) 63
Other income (expense) - net (84) 2
Interest and dividend income - 68
Interest expense
 Long-term debt (150) (147)
 Other (1) (9)
 ------------------------------
Loss from operations before
 reorganization items, income taxes and
 equity in net earnings of
 associated companies (494) (23)
Reorganization items - net (182) -
 ------------------------------
Loss from operations before incomes
 taxes and equity in net earnings
 of associated companies (676) (23)
Income tax expense (69) (97)
 ------------------------------
Loss from operations before equity
 in net earnings of associated companies (745) (120)
Equity in net earnings of associated
 companies - net of tax 1 2
 ------------------------------
Net loss including noncontrolling interests (744) (118)
Income attributable to
 noncontrolling interests (37) (133)
 ------------------------------
Net loss attributable to Nortel
 Networks Corporation $ (781) $ (251)
 ------------------------------
 ------------------------------

Average shares outstanding
 (millions) - Basic 499 498
Average shares outstanding
 (millions) - Diluted 499 498

 ------------------------------
Basic and diluted loss per common share ($1.57) ($0.50)
 ------------------------------
 ------------------------------



NORTEL NETWORKS CORPORATION
(Under Creditor Protection Proceedings as of January 14, 2009)
Condensed Combined and Consolidated Balance Sheets (unaudited)
(U.S. GAAP; Millions of U.S. dollars, except per share amounts)

 ----------- ----------- ------------
 June 30, March 31, December 31,
 2009 2009 2008
 ----------- ----------- ------------

ASSETS

Current assets
 Cash and cash equivalents $ 2,562 $ 2,479 $ 2,397
 Short-term investments 6 23 65
 Restricted cash and cash
 equivalents 110 92 36
 Accounts receivable - net 1,521 1,692 2,154
 Inventories - net 1,128 1,419 1,477
 Deferred income taxes - net 17 27 44
 Other current assets 535 489 455
 Assets held for sale 248 - -
 ----------- ----------- ------------
Total current assets 6,127 6,221 6,628

Investments 138 133 127
Plant and equipment - net 1,066 1,172 1,272
Goodwill 131 131 180
Intangible assets - net 123 129 143
Deferred income taxes - net 13 14 12
Other assets 253 303 475
 ----------- ----------- ------------
Total assets $ 7,851 $ 8,103 $ 8,837
 ----------- ----------- ------------
 ----------- ----------- ------------

LIABILITIES AND SHAREHOLDERS'
 DEFICIT

Current liabilities
 Trade and other accounts payable $ 334 $ 420 $ 1,001
 Payroll and benefit-related
 liabilities 423 401 453
 Contractual liabilities 144 177 213
 Restructuring liabilities 87 22 146
 Other accrued liabilities 1,694 2,190 2,674
 Long-term debt due within one year 3 3 19
 Liabilities held for sale 333 - -
 ----------- ----------- ------------
Total current liabilities 3,018 3,213 4,506

Long-term liabilities
Long-term debt 93 91 4,501
Deferred income taxes - net 9 11 11
Other liabilities 736 732 2,948
 ----------- ----------- ------------
Total long-term liabilities 838 834 7,460

Liabilities subject to compromise 7,967 7,691 -

 ----------- ----------- ------------
Total liabilities 11,823 11,738 11,966
 ----------- ----------- ------------

SHAREHOLDERS' DEFICIT

Common shares, without par value - 
 Authorized shares: unlimited;
 Issued and outstanding shares:
 497,941,038 as of March 31, 2009
 498,020,417 as of March 31, 2009
 and 497,893,086 as of
 December 31, 2008 35,597 35,596 35,593
Additional paid-in capital 3,645 3,645 3,547
Accumulated deficit (43,144) (42,872) (42,362)
Accumulated other comprehensive
 income (892) (829) (729)
 ----------- ----------- ------------
Total Nortel Networks Corporation
 shareholders' deficit (4,794) (4,460) (3,951)
 ----------- ----------- ------------

Noncontrolling interest 822 825 822
 ----------- ----------- ------------
Total shareholders' deficit (3,972) (3,635) (3,129)

 ----------- ----------- ------------
Total liabilities and
 shareholders' deficit $ 7,851 $ 8,103 $ 8,837
 ----------- ----------- ------------
 ----------- ----------- ------------



NORTEL NETWORKS
CORPORATION
(Under Creditor Protection Proceedings as of January 14, 2009)
Condensed Combined and Consolidated Statements of Cash Flows
(U.S. GAAP; Millions of U.S. dollars)

 Three months ended Six months ended
 June 30, March 31, June 30, June 30, June 30,
 ------------------------------ --------------------
 2009 2009 2008 2009 2008
 ------------------------------ --------------------

Cash flows from
 (used in) operating
 activities
 Net loss attributable
 to Nortel Networks
 Corporation $ (274) $ (507) $ (113) $ (781) $ (251)
 Adjustments to
 reconcile net
 earnings (loss) to
 net cash from
 (used in) operating
 activities, net of
 effects from
 acquisitions and
 divestitures of
 businesses:
 Amortization and
 depreciation 75 82 86 157 168
 Goodwill impairment - 48 - 48 -
 Non-cash portion of
 special charges - 5 9 5 11
 Equity in net
 earnings of
 associated
 companies
 - net of tax (1) - (1) (1) (2)
 Share-based
 compensation
 expense - 101 21 101 42
 Deferred income
 taxes 16 4 35 20 47
 Pension and other
 accruals 37 46 28 83 60
 Loss (gain) on
 sales or write
 downs of
 investments,
 businesses and
 assets - net (14) (14) - (28) 6
 Non-controlling
 interests 11 26 55 37 133
 Reorganization
 items 82 42 - 124 -
 Other - net (4) 22 (9) 18 (34)
 Change in operating
 assets and 
 liabilities,
 excluding Global
 Class Action
 Settlement - net 13 347 (185) 360 (514)
 ------------------------------ --------------------
 Net cash used in
 operating activities (59) 202 (74) 143 (334)
 ------------------------------ --------------------

Cash flows from
 (used in) investing
 activities
 Expenditures for
 plant and equipment (14) (12) (36) (26) (87)
 Proceeds on
 disposals of
 plant and equipment 86 1 - 87 -
 Change in restricted
 cash and cash
 equivalents (14) (55) (9) (69) 9
 Decrease in
 short-term and
 long-term
 investments 16 24 - 40 -
 Acquisitions of
 investments and
 businesses
 - net of cash
 acquired - - (3) - (32)
 Proceeds from sales
 of investments and
 businesses
 and assets - net 1 24 8 25 26
 ------------------------------ --------------------
 Net cash from
 (used in)
 investing
 activities 75 (18) (40) 57 (84)
 ------------------------------ --------------------

Cash flows from
 (used in) financing
 activities
 Dividends paid by
 subsidiaries to
 non-controlling
 interests (7) - (10) (7) (21)
 Capital repayment
 to minority owners (29) - - (29) -
 Increase in notes
 payable 19 11 50 30 78
 Decrease in notes
 payable (21) (55) (45) (76) (70)
 Proceeds from
 issuance of
 long-term debt - - 668 - 668
 Repayment of
 long-term debt - - (675) - (675)
 Debt issuance Cost - - (13) - (13)
 Decrease in capital
 leases payable (4) (4) (5) (8) (11)
 ------------------------------ --------------------
 Net cash from
 (used in)
 financing
 activities (42) (48) (30) (90) (44)
 ------------------------------ --------------------
Effect of foreign
 exchange rate
 changes on cash and
 cash equivalents 109 (54) (8) 55 1
 ------------------------------ --------------------
Net increase
 (decrease) in
 cash and cash
 equivalents 83 82 (152) 165 (461)
Cash and cash
 equivalents at 
 beginning of period 2,479 2,397 3,223 2,397 3,532
 ------------------------------ --------------------
Cash and cash
 equivalents
 at end of period $ 2,562 $ 2,479 $ 3,071 $ 2,562 $ 3,071
 ------------------------------ --------------------
 ------------------------------ --------------------



NORTEL NETWORKS CORPORATION
(Under Creditor Protection Proceedings as of January 14, 2009)
Combined and Consolidated Financial Information (unaudited)
(U.S. GAAP; Millions of U.S. dollars)

Segmented revenues

The following table summarizes our revenue and management operating margin
 by segment for:

 Three months ended Six months ended
 June 30, March 31, June 30, June 30, June 30,
 ------------------------------- --------------------
 2009 2009 2008 2009 2008
 ------------------------------- --------------------
Revenues
Carrier Networks $ 920 $ 737 $ 1,143 $ 1,657 $ 2,232
Enterprise
 Solutions 465 395 649 860 1,317
Metro Ethernet
 Networks 333 360 455 693 857
LG-Nortel 199 188 315 387 861
 ------------------------------- --------------------
Total reportable
 segments 1,917 1,680 2,562 3,597 5,267
Other 55 53 60 108 113
 ------------------------------- --------------------
Total revenues $ 1,972 $ 1,733 $ 2,622 $ 3,705 $ 5,380
 ------------------------------- --------------------
 ------------------------------- --------------------

Management
 Operating Margin
Carrier Networks 213 42 147 255 290
Enterprise
 Solutions (81) (128) (85) (209) (168)
Metro Ethernet
 Networks 27 42 46 69 48
LG-Nortel 18 48 111 66 285
 ------------------------------- --------------------
Total reportable
 segments 177 4 219 181 455
Other (161) (248) (105) (409) (212)
 ------------------------------- --------------------
Total Management
 Operating Margin 16 (244) 114 (228) 243

Amortization of
 intangible assets 11 10 11 21 23
Special charges - - 67 - 155
Gain on sales of
 businesses and assets (15) (15) (2) (30) (4)
Goodwill impairment - 48 - 48 -
Other operating
 expense (income)
 - net 4 (12) (7) (8) 6
 ------------------------------- --------------------
Total operating
 earnings (loss) 16 (275) 45 (259) 63
Other income
 (expense) -net (14) (70) 3 (84) 2
Interest and
 dividend income - - 30 - 68
Interest expense (74) (77) (76) (151) (156)
Reorganization
 items - net (130) (52) - (182) -
Income tax expense (62) (7) (61) (69) (97)
Noncontrolling
 interests - 
 net of tax (11) (26) (55) (37) (133)
Equity in net earnings
 of associated
 companies - net
 of tax 1 - 1 1 2
 ------------------------------- --------------------
Net loss
 attributable to
 Nortel Networks
 Corporation $ (274) $ (507) $ (113) $ (781) $ (251)
 ------------------------------- --------------------
 ------------------------------- --------------------


Geographic revenues
The following table summarizes our geographic revenues based on the
location of the customer for:

 Three months ended Six months ended
 June 30, March 31, June 30, June 30, June 30,
 ------------------------------- --------------------
 2009 2009 2008 2009 2008
 ------------------------------- --------------------

Revenues

United States $ 987 $ 803 $ 1,039 $ 1,790 $ 2,120
EMEA (a) 376 356 634 732 1,225
Canada 102 114 200 216 366
Asia 428 366 584 794 1,371
CALA (b) 79 94 165 173 298
 ------------------------------- --------------------
Total revenues $ 1,972 $ 1,733 $ 2,622 $ 3,705 $ 5,380
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(a) Europe, Middle East and Africa

(b) Caribbean and Latin America


Network Solutions revenues

The following table summarizes our revenues by category of network 
solutions for each of our reportable segments for:


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 Three months ended Six months ended
 June 30, March 31, June 30, June 30, June 30,
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 2009 2009 2008 2009 2008
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Revenues

Carrier Networks
 CDMA solutions $ 555 $ 393 $ 542 $ 948 $ 1,101
 GSM and UMTS
 solutions 202 175 377 377 697
 Circuit and packet
 voice solutions 163 169 224 332 434
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 920 737 1,143 1,657 2,232

Enterprise Solutions
 Communication
 Solutions 352 301 542 653 1,105
 Services 113 94 107 207 212
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 465 395 649 860 1,317

Metro Ethernet
 Networks
 Optical networking
 solutions 211 222 292 433 533
 Data networking
 and security
 solutions 35 57 62 92 129
 Services 87 81 101 168 195
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 333 360 455 693 857

LG-Nortel
 LGN Carrier 152 155 245 307 711
 LGN Enterprise 47 33 70 80 150
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 199 188 315 387 861

Other 55 53 60 108 113
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Total revenues $ 1,972 $ 1,733 $ 2,622 $ 3,705 $ 5,380
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