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Nortel Reports Financial Results for the Fourth Quarter and Full Year 2010

Financial Presentation and Q4 2010 Results

The presentation of our financial results continues to be significantly impacted by accounting conclusions resulting from developments in the creditor protection process. The fourth quarter loss of $2.2 billion includes non-cash charges of approximately $2.1 billion resulting from the deconsolidation of the U.S. Subsidiaries, and accounting for them under the cost method of accounting, effective October 1, 2010.

TORONTO—Nortel* Networks Corporation [OTC: NRTLQ] announced its results for the fourth quarter and full year 2010. Results were prepared in accordance with United States generally accepted accounting principles (GAAP) in U.S. dollars.

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 under the cost method of accounting as of June 1, 2010. Commencing June 1, 2010, the financial results of the EMEA Subsidiaries are no longer included in Nortel’s financial results. As of October 1, 2010, Nortel determined that the U.S. Subsidiaries would be deconsolidated and accounted for under the cost method of accounting. This change was largely based on Nortel’s work toward standalone debtor estates due to the diminishing interdependency between the estates primarily resulting from the sale of substantially all of Nortel’s global businesses. Commencing October 1, 2010, the financial results of the U.S. Subsidiaries are no longer included in Nortel’s financial results. In the context of the Creditor Protection Proceedings, Nortel continues to evaluate the method of accounting for all of its subsidiaries.

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 and Nortel’s interest in the LGN joint venture in the second quarter of 2010, only the residual contracts related to those businesses were

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included in the respective reportable segments. The MEN reportable segment also continued to include the multiservice switching products and related services (MSS) business. As announced on September 25, 2010, Nortel entered into asset sale agreements with Ericsson, the successful acquirer at auction, for the sale of the MSS business. Nortel and Ericsson are working toward a successful transition and closing of the transaction in the first quarter of 2011. As announced on December 1, 2010, Nortel China and other third parties entered into an asset sale agreement with Ericsson China for the sale of substantially all of the assets of Guangdong-Nortel Telecommunications Equipment Co. Ltd. (GDNT). Nortel, Nortel China and Ericsson China and the other shareholders of GDNT are working toward a successful transition and closing of the transaction in the second quarter of 2011.

The ES and LGN businesses are presented as discontinued operations while the other residual businesses are presented as continuing operations. The discussion below relates to Results from Continuing Operations under U.S. GAAP and excludes the financial results of the EMEA Subsidiaries and includes the financial results of the U.S. Subsidiaries for the first nine months of 2010 only. As a result, the comparative segment information has been recast to reflect this change.

Financial Summary

Nortel’s overall financial performance in the fourth quarter of 2010 was impacted by the sale of substantially all of its businesses in prior quarters.

Segment Revenues

Segment revenues from continuing operations were $28 million in the fourth quarter of 2010 compared to $641 million for the fourth quarter of 2009, reflecting a reduction of 95.6 percent as a result of the business divestitures.

Segment Revenues B/(W)

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Discontinued operations revenues from ES and LGN in the fourth quarter of 2010 were nil, a decrease of 100 percent compared with the year ago quarter as a result of the divestiture of the ES, NGS and DiamondWare businesses in the fourth quarter of 2009 and the sale of NNL’s interest in LGN in the second quarter of 2010.

Gross Margin

Gross margin declined to negative 42.9 percent of revenues in the fourth quarter of 2010 compared to 41.5 percent for the fourth 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.

Operating Expenses

Operating Expenses B/(W)

A focus on reducing costs and the business divestitures resulted in lower operating expenses compared to the year ago quarter. Operating expenses were $107 million in the fourth quarter of 2010 compared to $268 million for the fourth quarter of 2009. Operating expenses were also impacted by a change in the methodology of allocating certain SG&A expenses related to corporate overhead costs to R&D expense and cost of revenues.

SG&A expense was $106 million in the fourth quarter of 2010, compared to $139 million for the fourth quarter of 2009. R&D expense was $1 million in the fourth quarter of 2010, compared to $129 million for the fourth quarter of 2009. These reductions were a result of the reasons described above.

Net Loss

The Company reported a net loss in the fourth quarter of 2010 of $2.3 billion compared to net earnings of $1.8 billion in the fourth quarter of 2009.

The net loss included reorganization items of $2.2 billion and interest expense of $79 million, partially offset by other operating income of $31 million comprised primarily of billings under transition services agreements and other income of $69 million.

The $2.2 billion in reorganization items primarily related to a charge of $2.2 billion resulting from the deconsolidation of the U.S. Subsidiaries. Other income of $69 million was comprised primarily of rental income of $9 million and a currency exchange gain of $64 million.

The net earnings in the fourth quarter of 2009 of $1.8 billion included a gain from discontinued operations of $696 million primarily related to the divestiture of the ES business to Avaya of $756 million, reorganization items of $1,261 million primarily related to the gain on the divestiture of the CDMA/LTE Access assets to Ericsson of $1,202, interest expense of $74 million, other charges of $44 million comprised in part by pension curtailment expense, and $80 million in income tax expense, partially offset by other income – net of $19 million, comprised in part of a currency exchange gain of $14 million

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Cash

The cash balance as of December 31, 2010 was $807 million and restricted cash was $3.2 billion primarily related to the business divestiture proceeds, compared to a cash balance of $1.7 billion as of September 30, 2010. The year-end cash balance excludes the cash balance of $966 million related to the U.S. Subsidiaries deconsolidated effective October 1, 2010. The cash balance was also impacted by cash used in financing activities of $75 million primarily related to the repayment of a note to the U.S. Subsidiaries, cash used in operating activities of $53 and a net unfavorable foreign exchange impact of $10 million, partially offset by cash from investing activities of $225 million primarily related to proceeds from the sale of the Carling Facility.

Full Year 2010 Results

For 2010, revenues were $620 million compared to $3.5 billion for 2009. Nortel reported a net loss for 2010 of $4.1 billion, compared to net earnings of $0.5 billion for the year 2009.

Net loss for 2010 included reorganization items of $3.6 billion and interest expense of $306 million, partially offset by other operating income of $281 million comprised primarily of billings under transition services agreements and other income of $83 million.

Net earnings for 2009 included reorganization items of $971 million primarily related to the gain on the divestiture to Ericsson, income tax expense of $101 million, a currency exchange gain of $43 million, and net earnings from discontinued operations of $245 primarily related to the gain on the divestiture to Avaya of $756 million.

As previously announced, Nortel does not expect that the Company’s common shareholders or the NNL preferred shareholders will receive any value from the creditor protection proceedings and expects that the proceedings will result in the cancellation of these equity interests.

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About Nortel

For more information, visit Nortel on the Web at www.nortel.com. For the latest Nortel news, visit www.nortel.com/news.

About Nortel

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 press release, 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; 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; allocation of the sale proceeds of our businesses among the various Nortel entities participating in these sales may take considerable time to 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; continue to have cash management arrangements and obtain any further required approvals from the Canadian Monitor, the U.K. Administrators, the U.S. Principal Officer, 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; 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; 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 regarding our remaining businesses and stranded contracts; 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; 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 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; 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 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 Form 10-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.

*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 fourth quarter 2010 results.

NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009)

Condensed Consolidated Statements of Operations (unaudited)

(U.S. GAAP; Millions of U.S. dollars, except per share amounts)

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NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009)

Condensed Consolidated Balance Sheets (unaudited)

(U.S. GAAP; Millions of U.S. dollars, except per share amounts)

NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009)

Condensed Consolidated Statements of Cash Flows

(U.S. GAAP; Millions of U.S. dollars)

NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009)

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. The financial information for our business segments does not include the results of the EMEA Subsidiaries, which is consistent with the way we manage our business segments.

Geographic revenues

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

Network Solutions revenues

The following table summarizes our revenue by segment. The financial information for our business segments does not include the results of the EMEA Subsidiaries, which is consistent with the way we manage our business segments.