TORONTO -- Nortel(x) (NYSE/TSX: NT) today announced that, as a result of the previously announced mediation process entered into by the Company with the lead plaintiffs in two significant class action lawsuits pending in the Southern District of New York and based on the recommendation of a senior Federal Judge, the Company and the lead plaintiffs have reached an agreement in principle to settle these lawsuits.

"Our intent is to achieve a fair resolution of these lawsuits and avoid a prolonged, uncertain and costly litigation process," said Harry Pearce, chairman of the Board of Directors, Nortel. "A final settlement would remove a significant impediment to Nortel's future success and allow Mike Zafirovski and the Nortel team to move forward."

Dealing with the outstanding litigation and regulatory issues facing the Company and effective corporate governance has been and continues to be a key priority of Nortel. "Resolving these important issues will enhance the Company's ability to focus on our transformation and renewal priorities and our customers," said Mike Zafirovski, president and CEO, Nortel. The proposed settlement would be part of, and is conditioned on, the Company reaching a global settlement encompassing all pending shareholder class actions and proposed shareholder class actions commenced against the Company and certain other defendants following the Company's announcement of revised financial guidance during 2001, and the Company's revision of its 2003 financial results and restatement of other prior periods. The proposed settlement is also conditioned on Nortel and the lead plaintiffs reaching agreement on corporate governance related matters and the resolution of insurance related issues.

Nortel is committed to benchmarking its corporate governance practices to those of companies ranked in the top quartile by Institutional Shareholder Services. "The Board of Directors strongly believes that sound and responsible corporate governance is integral to Nortel's future," said Harry Pearce.

Under the terms of the proposed global settlement contemplated by the agreement in principle, the Company would make a payment of US$575 million in cash, issue 628,667,750 of its common shares (representing 14.5% of its current equity), and contribute one-half of any recovery in the existing litigation by Nortel against Messrs. Frank Dunn, Douglas Beatty and Michael Gollogly, the Company's former senior officers who were terminated for cause in April 2004. The agreement in principle is also conditioned on the contribution of available insurance, which has yet to be resolved. The total settlement amount will include all plaintiffs' court-approved attorneys' fees. Nortel has agreed to respond to the corporate governance proposals of the lead plaintiffs and enter into a dialogue to review the Company's corporate governance.

The proposed global settlement would also be conditioned on the receipt of all required court, securities regulatory and stock exchange approvals. The Company and the lead plaintiffs are continuing discussions towards a definitive settlement agreement. At this time, there can be no assurance that such an agreement can be reached, that each of the actions noted above can be brought into, or otherwise bound by, the proposed settlement, if finalized, or that the proposed settlement would receive the required court and other approvals in all applicable jurisdictions. These settlement discussions are being mediated by United States District Court Judge, the Honourable Robert W. Sweet, who is not presiding over any of the actions that are the subject of the proposed settlement.

The proposed settlement would contain no admission of wrongdoing by the Company or any of the other defendants.

"Today's agreement in principle is an important milestone for Nortel," said Mike Zafirovski. "We continue to work vigorously on the implementation of our remediation plan and addressing our outstanding regulatory matters. In addition, we continue to improve our governance provisions and financials systems and controls. These are critically important for the Company. We remain fully committed to rebuilding value for the benefit of all stakeholders."

As a result of the agreement in principle, the Company expects to establish a litigation reserve and record a charge to its full-year 2005 financial results, applicable to the fourth quarter of 2005. The cash portion of the settlement is expected to result in a pre-tax charge of US$575 million, while the equity component of the settlement will result in a non-cash charge based on the fair value of the common shares issuable. Based on a closing price of US$3.02 as of February 7, 2006, this charge would be approximately US$1.898 billion. This charge would be adjusted in connection with the issuance of Nortel's 2005 year-end financial statements and in future quarters until the finalization of the settlement. On an after-tax basis, and based on the February 7, 2006 share valuation, the Company expects to record a total charge of US$2.473 billion, or US$.57 per share. The Company expects it would fund its cash contribution to the settlement fund out of its then available cash balances.

The Company will continue to cooperate fully with the U.S. and Canadian securities regulators and law enforcement authorities in their ongoing investigations relating to the Company's accounting restatements, and the proposed settlement does not relate to these ongoing investigations. The proposed settlement also does not encompass a related ERISA action and the pending application in Canada for leave to commence a derivative action against certain current and former officers and directors of Nortel. No additional reserves have been taken by the Company at this time for any potential judgments, fines, penalties or settlements that may arise from these pending investigations or actions.

Nortel Networks Ltd.