TORONTO -- Nortel Networks(xx) Corporation (NYSE/TSX: NT) today announced that it and its principal operating subsidiary Nortel Networks Limited (NNL) have reported their unaudited financial results for the second quarter of 2006 prepared in accordance with accounting principles generally accepted in the United States. All dollar amounts included are in U.S. dollars.

Second Quarter 2006 Results

Revenues were $2.74 billion for the second quarter of 2006 compared to $2.62 billion for the second quarter of 2005 and $2.38 billion for the first quarter of 2006. The Company reported net earnings in the second quarter of 2006 of $366 million, or $0.08 per common share on a diluted basis, compared to a net loss of $33 million, or ($0.01) per common share on a diluted basis, in the second quarter of 2005 and a net loss of $167 million, or ($0.04) per common share on a diluted basis, in the first quarter of 2006.

Net earnings in the second quarter of 2006 included a shareholder litigation recovery of $510 million reflecting a mark-to-market adjustment of the share portion of the global class action settlement, special charges of $45 million for restructuring and a loss of $10 million on the sale of assets. Net loss in the second quarter of 2005 included special charges of $92 million related to restructuring activities and $11 million of costs related to the sale of businesses and assets. Net loss in the first quarter of 2006 included a benefit of $35 million in gains on the sale of businesses and assets and a shareholder litigation expense of $19 million reflecting a mark-to-market adjustment.

"Our second quarter performance underscores both the challenges and good progress we are making with Nortel's transformation. On the plus side we saw strong order growth of 22% and increased sales momentum but gross margin was up only modestly and not at the 40% target we have set for ourselves," said Mike Zafirovski, president and chief executive officer, Nortel. "We remain intensely focused on delivering improved financial performance and there's solid traction on significant business transformation initiatives including the go-to-market supporting our Enterprise business, the development of our Services business, our strategic alliance with Microsoft, and across the board cost management programs. Together, these efforts are enabling us to deliver greater customer value and substantially enhance Nortel's competitiveness."

Breakdown of Second Quarter 2006 Revenues

Mobility and Converged Core Networks revenues were $1.59 billion, an increase of 7 percent compared with the year-ago quarter and an increase of 12 percent sequentially. Enterprise Solutions and Packet Networks revenues were $1.07 billion, a decrease of 1 percent compared with the year-ago quarter and an increase of 23 percent sequentially. Deferred revenues decreased sequentially by $14 million and backlog increased by approximately $194 million.

Gross margin

Gross margin was 39 percent of revenue in the second quarter of 2006, primarily impacted by geographic and product mix, and competitive pricing pressures. This compares to gross margin of 43 percent for the second quarter of 2005 and 38 percent for the first quarter of 2006. Compared to the second quarter of 2005, gross margin was impacted primarily by pricing pressures and unfavourable product mix, which was partially offset by higher sales volumes.

Selling, general and administrative (SG&A)

SG&A expenses were $596 million in the second quarter of 2006, reflecting incremental costs related to our acquisition of PEC and the LG-Nortel joint venture and unfavorable foreign exchange impacts, offset by cost containment initiatives. This compares to SG&A expenses of $588 million for the second quarter of 2005, and $595 million for the first quarter of 2006.

Research and development (R&D)

R&D expenses were $489 million in the second quarter of 2006, reflecting increased investment in targeted product areas, the consolidation of the LG-Nortel joint venture and unfavorable foreign exchange impacts, offset by the favorable impact of the savings associated with our 2004 restructuring program. This compares to $488 million for the second quarter of 2005 and $478 million for the first quarter of 2006.

Special Charges

Special charges in the second quarter of 2006 of $45 million included $43 million for the restructuring program announced June 27, 2006.

Other income (expense) - net

Other income (expense) - net was net income of $51 million for the second quarter of 2006, which primarily related to investment income of $29 million and foreign exchange gains of $16 million.

Cash

Cash balance at the end of the second quarter of 2006 was $1.90 billion, down from $2.70 billion at the end of the first quarter of 2006. This decrease in cash was primarily driven by an outflow of $580 million ($575 million plus accrued interest of $5 million) deposited into escrow on June 1, 2006 pursuant to the global class action settlement (pending satisfactory completion of all conditions) and $150 million for the repayment at maturity of the outstanding aggregate principal amount of the 7.40% Notes due June 15, 2006 and a cash outflow from operations of $108 million, partially offset by cash proceeds of $70 million related to the Flextronics transfer.

On July 5, 2006, Nortel announced the closing of the offering of $2 billion aggregate principal amount of senior notes and that it has used $1.3 billion of the proceeds to prepay the $1.3 billion one-year credit facility that it entered into in February 2006.

First Half 2006 Results

For the first half of 2006, revenues were $5.13 billion compared to $5.01 billion for the same period in 2005. The Company reported net earnings for the first half of 2006 of $199 million, or $0.05 per common share on a diluted basis, compared to a net loss of $137 million, or ($0.03) per common share on a diluted basis, for the same period in 2005.

Net earnings in the first half of 2006 included a shareholder litigation recovery of $491 million reflecting a mark-to-market adjustment of the share portion of the global class action settlement, special charges of $50 million related to restructuring activities and a benefit of $25 million related to the sale of businesses and assets. The first half 2005 results included special charges of $106 million related to restructuring activities and $33 million of costs related to the sale of businesses and assets.

Outlook

Commenting on the Company's financial expectations, Peter Currie, executive vice president and chief financial officer, Nortel, said, "For the full year 2006, we continue to expect strong revenue momentum for the rest of 2006, resulting in high single digit growth for the full year 2006 compared to 2005, gross margin to be around 40% as a percentage of revenue and operating expenses to be flat to up slightly from 2005, with foreign exchange and growth related expenses offsetting productivity and efficiencies. For the third quarter of 2006, we expect revenue growth in excess of 10 percent compared to the third quarter of 2005 and gross margin and operating expenses to be in-line with our full year guidance."

Nortel Networks Ltd.