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.

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

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.

Nortel Networks Ltd.