Nortel Provides Status Update; Nortel Files First and Second Quarter 2

    Business Editors/High-Tech Writers

    TORONTO--(BUSINESS WIRE)--Feb. 1, 2005--Nortel Networks Corporation (NYSE:NT) (TSX:NT) and its principal operating subsidiary, Nortel Networks Limited ("NNL"), today provided a status update pursuant to the alternative information guidelines of the Ontario Securities Commission. These guidelines contemplate that the Company and NNL will normally provide bi-weekly updates on their affairs until such time as they are current with their filing obligations under Canadian securities laws.
    The Company and NNL reported that there have been no material developments in the matters reported in their status updates of June 2, 2004 through January 18, 2005 and the Company's press release "Nortel Appoints Peter Currie as Chief Financial Officer" dated January 27, 2005, with the exception of the matters described below.

    First and Second Quarters of 2004

    The Company and NNL have filed their unaudited financial statements for the first and second quarters of 2004 prepared in accordance with United States generally accepted accounting principles, and related Quarterly Reports on Form 10-Q and corresponding Canadian filings. Annexed to this press release is certain selected financial information of the Company for such quarterly periods prepared in accordance with United States generally accepted accounting principles.
    The Company's and NNL's next bi-weekly status update is expected to be released during the week of February 14, 2005.

    About Nortel

    Nortel is a recognized leader in delivering communications capabilities that enhance the human experience, ignite and power global commerce, and secure and protect the world's most critical information. Serving both service provider and enterprise customers, Nortel delivers innovative technology solutions encompassing end-to-end broadband, Voice over IP, multimedia services and applications, and wireless broadband designed to help people solve the world's greatest challenges. Nortel does business in more than 150 countries. For more information, visit Nortel on the Web at www.nortel.com. For the latest Nortel news, visit www.nortel.com/news.

    Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events.
    Factors which could cause results or events to differ from current expectations include, among other things: the outcome of regulatory and criminal investigations and civil litigation actions related to Nortel's restatements and the impact any resulting legal judgments, settlements, penalties and expenses could have on Nortel's results of operations, financial condition and liquidity; the findings of Nortel's independent review and implementation of recommended remedial measures; the outcome of the independent review with respect to revenues for specific identified transactions, which review will have a particular emphasis on the underlying conduct that led to the initial recognition of these revenues; the restatement or revisions of Nortel's previously announced or filed financial results and resulting negative publicity; the existence of material weaknesses in Nortel's internal controls over financial reporting; the impact of Nortel's and NNL's failure to timely file their financial statements and related periodic reports, including breach of its support facility and public debt obligations and Nortel's inability to access its shelf registration statement filed with the United States Securities and Exchange Commission ("SEC"); ongoing SEC reviews, which may result in changes to our public filings; the potential delisting or suspension of Nortel's and NNL's publicly traded securities; the impact of management changes, including the termination for cause of Nortel's former CEO, CFO and Controller in August 2004; the sufficiency of Nortel's restructuring activities, including the work plan announced on August 19, 2004 as updated on September 30, 2004, including the potential for higher actual costs to be incurred in connection with restructuring actions compared to the estimated costs of such actions;
    cautious or reduced spending by Nortel's customers; fluctuations in Nortel's operating results and general industry, economic and market conditions and growth rates; fluctuations in Nortel's cash flow, level of outstanding debt and current debt ratings; Nortel's ability to recruit and retain qualified employees; the use of cash collateral to support Nortel's normal course business activities; the dependence on Nortel's subsidiaries for funding; the impact of Nortel's defined benefit plans and deferred tax assets on results of operations and Nortel's cash flow; the adverse resolution of class actions, litigation in the ordinary course of business, intellectual property disputes and similar matters; Nortel's dependence on new product development and its ability to predict market demand for particular products; Nortel's ability to integrate the operations and technologies of acquired businesses in an effective manner; the impact of rapid technological and market change; the impact of price and product competition; barriers to international growth and global economic conditions, particularly in emerging markets and including interest rate and currency exchange rate fluctuations; the impact of rationalization in the telecommunications industry; changes in regulation of the Internet; the impact of the credit risks of Nortel's customers and the impact of customer financing and commitments; stock market volatility generally and as a result of acceleration of the settlement date or early settlement, which is currently not available, of Nortel's forward purchase contracts; the impact of Nortel's supply and outsourcing contracts that contain delivery and installation provisions, which, if not met, could result in the payment of substantial penalties or liquidated damages; and the future success of Nortel's strategic alliances. For additional information with respect to certain of these and other factors, see the most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed by Nortel 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.

NORTEL NETWORKS CORPORATION Consolidated Statements of Operations (unaudited)

---------------------------------------------------------------------- (US GAAP; millions of U.S. dollars, except per March 31, March 31, share amounts) 2004 2003 ---------------------------------------------------------------------- As restated Revenues $2,444 $2,298 Cost of revenues 1,391 1,403 ---------------------------------------------------------------------- Gross profit 1,053 895

Selling, general and administrative expense 542 490 Research and development expense 471 477 Amortization of acquired technology and other 3 33 Deferred stock option compensation - 9 Special charges 7 140 (Gain) loss on sale of businesses and assets - (1) ---------------------------------------------------------------------- Operating earnings (loss) 30 (253)

Other income - net 86 94 Interest expense Long-term debt (44) (46) Other (8) (8) ---------------------------------------------------------------------- Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies 64 (213) Income tax benefit (expense) 9 26 ---------------------------------------------------------------------- 73 (187) Minority interests - net of tax (14) (25) Equity in net loss of associated companies - net of tax (1) (22) ---------------------------------------------------------------------- Net earnings (loss) from continuing operations 58 (234) Net earnings (loss) from discontinued operations - net of tax 1 122 ---------------------------------------------------------------------- Net earnings (loss) before cumulative effect of accounting change 59 (112) Cumulative effect of accounting change - net of tax - (12) ---------------------------------------------------------------------- Net earnings (loss) $ 59 $ (124) ----------------------------------------------------------------------

Basic earnings (loss) per common share - from continuing operations $0.01 $(0.06) - from discontinued operations 0.00 0.03 ---------------------------------------------------------------------- Basic earnings (loss) per common share $0.01 $(0.03) ----------------------------------------------------------------------

Diluted earnings (loss) per common share - from continuing operations $0.01 $(0.06) - from discontinued operations 0.00 0.03 ---------------------------------------------------------------------- Diluted earnings (loss) per common share $0.01 $(0.03) ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 including the notes to the unaudited consolidated financial statements.

NORTEL NETWORKS CORPORATION Consolidated Balance Sheets (unaudited)

---------------------------------------------------------------------- March 31, Dec. 31, (US GAAP; millions of U.S. dollars) 2004 2003 ---------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 3,599 $ 3,997 Restricted cash and cash equivalents 62 63 Accounts receivable - net 2,397 2,505 Inventories - net 1,246 1,190 Income taxes recoverable 85 90 Deferred income taxes - net 400 369 Other current assets 314 315 ---------------------------------------------------------------------- Total current assets 8,103 8,529

Investments 217 244 Plant and equipment - net 1,598 1,656 Goodwill 2,303 2,305 Intangible assets - net 82 86 Deferred income taxes - net 3,336 3,397 Other assets 384 374 ---------------------------------------------------------------------- Total assets $16,023 $16,591 ----------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 13 $ 17 Trade and other accounts payable 822 861 Payroll and benefit-related liabilities 523 764 Contractual liabilities 487 530 Restructuring 161 206 Other accrued liabilities 2,336 2,505 Long-term debt due within one year 23 119 ---------------------------------------------------------------------- Total current liabilities 4,365 5,002

Long-term debt 3,883 3,891 Deferred income taxes - net 169 191 Other liabilities 2,962 2,945 ---------------------------------------------------------------------- Total liabilities 11,379 12,029 ----------------------------------------------------------------------

Minority interests in subsidiary companies 623 617

Commitments and contingencies

SHAREHOLDERS' EQUITY Common shares, without par value - Authorized shares: unlimited; Issued and outstanding shares: 4,272,674,456 as of March 31, 2004 and 4,166,714,475 as of December 31, 2003 33,840 33,674 Additional paid-in capital 3,220 3,341 Accumulated deficit (32,473) (32,532) Accumulated other comprehensive loss (566) (538) ---------------------------------------------------------------------- Total shareholders' equity 4,021 3,945 ---------------------------------------------------------------------- Total liabilities and shareholders' equity $16,023 $16,591 ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 including the notes to the unaudited consolidated financial statements.

NORTEL NETWORKS CORPORATION Consolidated Statements of Cash Flows (unaudited)

---------------------------------------------------------------------- March 31, March 31, (US GAAP; millions of U.S. dollars) 2004 2003 ---------------------------------------------------------------------- As restated Cash flows from (used in) operating activities Net earnings (loss) from continuing operations $58 $(234) Adjustments to reconcile net earnings (loss) from continuing operations to net cash from (used in) operating activities, net of effects from acquisitions and divestitures of businesses: Amortization and depreciation 90 150 Non-cash portion of special charges and related asset write downs - 18 Equity in net loss of associated companies 1 22 Current and deferred stock option compensation 15 14 Deferred income taxes (4) (10) Other liabilities 60 12 Gain on repurchases of outstanding debt securities - (4) (Gain) loss on sale or write down of investments and businesses (33) 6 Other - net (136) (146) Change in operating assets and liabilities (391) 74 ---------------------------------------------------------------------- Net cash from (used in) operating activities of continuing operations (340) (98) ----------------------------------------------------------------------

Cash flows from (used in) investing activities Expenditures for plant and equipment (43) (22) Proceeds on disposals of plant and equipment 5 6 Acquisitions of investments and businesses - net of cash acquired (3) (2) Proceeds on sale of investments and businesses 55 7 ---------------------------------------------------------------------- Net cash from (used in) investing activities of continuing operations 14 (11) ----------------------------------------------------------------------

Cash flows from (used in) financing activities Increase (decrease) in notes payable - net (3) (13) Repayments of long-term debt (97) (43) Repayments of capital leases payable (3) (3) Dividends paid by subsidiaries to minority interests (9) (8) Issuance of common shares 30 - ---------------------------------------------------------------------- Net cash from (used in) financing activities of continuing operations (82) (67) ---------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents 13 18 ---------------------------------------------------------------------- Net cash from (used in) continuing operations (395) (158) Net cash from (used in) discontinued operations (3) 301 ---------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (398) 143 Cash and cash equivalents at beginning of period 3,997 3,790 ---------------------------------------------------------------------- Cash and cash equivalents at end of period $3,599 $3,933 ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 including the notes to the unaudited consolidated financial statements.

Segment revenues - Q1 2004

The following table summarizes our unaudited revenues for the three months ended March 31, 2004 and 2003, respectively, by segment:

---------------------------------------------------------------------- For the three months ended March 31, (US GAAP; 2004 2003 $ Change % Change millions of U.S. dollars) ----------------------------------------------------------------------

Wireless Networks $1,225 $ 869 $356 41 Enterprise Networks 534 588 (54) (9) Wireline Networks 439 515 (76) (15) Optical Networks 245 317 (72) (23) Other (a) 1 9 (8) (89) ---------------------------------------------------------------------- Consolidated $2,444 $2,298 $146 6 ----------------------------------------------------------------------

(a) "Other" represented miscellaneous business activities and corporate functions.

Geographic revenues

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

---------------------------------------------------------------------- For the three months ended March 31, (US GAAP; 2004 2003 $ Change % Change millions of U.S. dollars) ----------------------------------------------------------------------

United States $1,217 $1,163 $ 54 5 EMEA (a) 596 579 17 3 Canada 154 131 23 18 Asia Pacific 347 303 44 15 CALA (b) 130 122 8 7 ---------------------------------------------------------------------- Consolidated $2,444 $2,298 $146 6 ----------------------------------------------------------------------

(a) The Europe, Middle East and Africa region, or EMEA. (b) The Caribbean and Latin America region, or CALA.

Please refer to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 including the notes to the unaudited consolidated financial statements.

NORTEL NETWORKS CORPORATION Consolidated Statements of Operations (unaudited)

---------------------------------------------------------------------- Three months ended Six months ended (US GAAP; millions of U.S. June 30, June 30, dollars, except per share amounts) 2004 2003 2004 2003 ---------------------------------------------------------------------- As As restated restated

Revenues $2,590 $2,285 $5,034 $4,583 Cost of revenues 1,535 1,403 2,926 2,806 ---------------------------------------------------------------------- Gross profit 1,055 882 2,108 1,777

Selling, general and administrative expense 542 441 1,084 931 Research and development expense 493 508 964 985 Amortization of acquired technology and other 2 33 5 66 Deferred stock option compensation - 6 - 15 Special charges (1) (22) 6 118 (Gain) loss on sale of businesses and assets (75) 12 (75) 11 ---------------------------------------------------------------------- Operating earnings (loss) 94 (96) 124 (349)

Other income (expense) - net (18) 60 68 154 Interest expense Long-term debt (43) (45) (87) (91) Other (7) (6) (15) (14) ---------------------------------------------------------------------- Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies 26 (87) 90 (300) Income tax benefit (expense) (7) 14 2 40 ---------------------------------------------------------------------- 19 (73) 92 (260) Minority interests - net of tax (8) (17) (22) (42) Equity in net loss of associated companies - net of tax (1) (3) (2) (25) ---------------------------------------------------------------------- Net earnings (loss) from continuing operations 10 (93) 68 (327) Net earnings (loss) from discontinued operations - net of tax 6 (8) 7 114 ---------------------------------------------------------------------- Net earnings (loss) before cumulative effect of accounting change 16 (101) 75 (213) Cumulative effect of accounting change - net of tax - - - (12) ---------------------------------------------------------------------- Net earnings (loss) $ 16 $ (101) $ 75 $ (225) ----------------------------------------------------------------------

Basic earnings (loss) per common share - from continuing operations $0.00 $(0.02) $0.02 $(0.08) - from discontinued operations 0.00 (0.00) 0.00 0.03 ---------------------------------------------------------------------- Basic earnings (loss) per common share $0.00 $(0.02) $0.02 $(0.05) ---------------------------------------------------------------------- Diluted earnings (loss) per common share - from continuing operations $0.00 $(0.02) $0.02 $(0.08) - from discontinued operations 0.00 (0.00) 0.00 0.03 ---------------------------------------------------------------------- Diluted earnings (loss) per common share $0.00 $(0.02) $0.02 $(0.05) ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 including the notes to the unaudited consolidated financial statements.

NORTEL NETWORKS CORPORATION Consolidated Balance Sheets (unaudited)

---------------------------------------------------------------------- June 30, Dec. 31, (US GAAP; millions of U.S. dollars) 2004 2003 ----------------------------------------------------------------------

ASSETS Current assets Cash and cash equivalents $3,709 $3,997 Restricted cash and cash equivalents 52 63 Accounts receivable - net 2,387 2,505 Inventories - net 1,282 1,190 Income taxes recoverable 86 90 Deferred income taxes - net 407 369 Other current assets 331 315 ---------------------------------------------------------------------- Total current assets 8,254 8,529

Investments 156 244 Plant and equipment - net 1,540 1,656 Goodwill 2,301 2,305 Intangible assets - net 77 86 Deferred income taxes - net 3,272 3,397 Other assets 337 374 ---------------------------------------------------------------------- Total assets $15,937 $16,591 ----------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 31 $ 17 Trade and other accounts payable 901 861 Payroll and benefit-related liabilities 485 764 Contractual liabilities 486 530 Restructuring 124 206 Other accrued liabilities 2,457 2,505 Long-term debt due within one year 21 119 ---------------------------------------------------------------------- Total current liabilities 4,505 5,002

Long-term debt 3,862 3,891 Deferred income taxes - net 163 191 Other liabilities 2,843 2,945 ---------------------------------------------------------------------- Total liabilities 11,373 12,029 ----------------------------------------------------------------------

Minority interests in subsidiary companies 621 617

Commitments and contingencies

SHAREHOLDERS' EQUITY Common shares, without par value - Authorized shares: unlimited; Issued and outstanding shares: 4,272,671,213 as of June 30, 2004 and 4,166,714,475 as of December 31, 2003 33,840 33,674 Additional paid-in capital 3,241 3,341 Deferred stock option compensation - - Accumulated deficit (32,457) (32,532) Accumulated other comprehensive loss (681) (538) ---------------------------------------------------------------------- Total shareholders' equity 3,943 3,945 ---------------------------------------------------------------------- Total liabilities and shareholders' equity $15,937 $16,591 ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 including the notes to the unaudited consolidated financial statements.

NORTEL NETWORKS CORPORATION Consolidated Statements of Cash Flows (unaudited)

---------------------------------------------------------------------- Six months ended June 30, (US GAAP; millions of U.S. dollars) 2004 2003 ---------------------------------------------------------------------- As restated Cash flows from (used in) operating activities Net earnings (loss) from continuing operations $ 68 $ (327) Adjustments to reconcile net earnings (loss) from continuing operations to net cash from (used in) operating activities, net of effects from acquisitions and divestitures of businesses: Amortization and depreciation 171 285 Non-cash portion of special charges and related asset write downs - 39 Equity in net loss of associated companies 2 25 Current and deferred stock option compensation 36 27 Deferred income taxes (2) (12) Other liabilities 113 47 Gain on repurchases of outstanding debt securities - (4) (Gain) loss on sale or write down of investments and businesses (109) 20 Other - net (212) (321) Change in operating assets and liabilities (314) 399 ---------------------------------------------------------------------- Net cash from (used in) operating activities of continuing operations (247) 178 ----------------------------------------------------------------------

Cash flows from (used in) investing activities Expenditures for plant and equipment (102) (64) Proceeds on disposals of plant and equipment 10 21 Acquisitions of investments and businesses - net of cash acquired (6) (2) Proceeds on sale of investments and businesses 132 8 ---------------------------------------------------------------------- Net cash from (used in) investing activities of continuing operations 34 (37) ----------------------------------------------------------------------

Cash flows from (used in) financing activities Increase (decrease) in notes payable - net 15 (14) Proceeds from long-term debt - - Repayments of long-term debt (98) (94) Repayments of capital leases payable (8) (6) Dividends paid by subsidiaries to minority interests (16) (17) Issuance of common shares 30 - ---------------------------------------------------------------------- Net cash from (used in) financing activities of continuing operations (77) (131) ---------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents (9) 78 ---------------------------------------------------------------------- Net cash from (used in) continuing operations (299) 88 Net cash from (used in) discontinued operations 11 324 ---------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (288) 412 ---------------------------------------------------------------------- Cash and cash equivalents at beginning of period 3,997 3,790 ---------------------------------------------------------------------- Cash and cash equivalents at end of period $3,709 $4,202 ----------------------------------------------------------------------

Please refer to our Quarterly Report on Form 10-Q for the year ended June 30, 2004 including the notes to the unaudited consolidated financial statements.

Segment revenues - Q2 2004

The following table summarizes our unaudited revenues for the three months and six months ended June 30, 2004 and 2003, respectively, by segment:

---------------------------------------------------------------------- (US GAAP; millions For the three months ended June 30, of U.S. dollars) 2004 2003 $ Change % Change ---------------------------------------------------------------------- Wireless Networks $ 1,281 $ 973 $ 308 32 Enterprise Networks 578 517 61 12 Wireline Networks 444 495 (51) (10) Optical Networks 280 288 (8) (3) Other (a) 7 12 (5) (42) ---------------------------------------------------------------------- Consolidated $ 2,590 $ 2,285 $ 305 13 ----------------------------------------------------------------------

---------------------------------------------------------------------- For the six months ended June 30, 2004 2003 $ Change % Change ---------------------------------------------------------------------- Wireless Networks $ 2,506 $ 1,842 $ 664 36 Enterprise Networks 1,112 1,105 7 1 Wireline Networks 883 1,010 (127) (13) Optical Networks 525 605 (80) (13) Other (a) 8 21 (13) (62) ---------------------------------------------------------------------- Consolidated $ 5,034 $ 4,583 $ 451 10 ----------------------------------------------------------------------

Geographic revenues

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

---------------------------------------------------------------------- (US GAAP; millions For the three months ended June 30, of U.S. dollars) 2004 2003 $ Change % Change ---------------------------------------------------------------------- United States $ 1,322 $ 1,145 $ 177 15 EMEA (a) 643 556 87 16 Canada 137 134 3 2 Asia Pacific 330 329 1 0 CALA (b) 158 121 37 31 ---------------------------------------------------------------------- Consolidated $ 2,590 $ 2,285 $ 305 13 ---------------------------------------------------------------------- ---------------------------------------------------------------------- For the six months ended June 30, 2004 2003 $ Change % Change ---------------------------------------------------------------------- United States $ 2,539 $ 2,308 $ 231 10 EMEA (a) 1,239 1,135 104 9 Canada 291 265 26 10 Asia Pacific 677 632 45 7 CALA (b) 288 243 45 19 ---------------------------------------------------------------------- Consolidated $ 5,034 $ 4,583 $ 451 10 ----------------------------------------------------------------------

(a) The Europe, Middle East and Africa region, or EMEA. (b) The Caribbean and Latin America region, or CALA.

Please refer to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 including the notes to the unaudited consolidated financial statements.

Nortel Networks Corporation Reported Unaudited Results Compared to Previously Announced Estimates

The table below sets forth selected unaudited results for the first and second quarters of 2004 as compared to previously announced unaudited estimates for such periods.

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

Previously Announced Estimates As Reported in Form 10-Q ------------------------------ ------------------------ Q1 2004 Q2 2004 Q1 2004 Q2 2004

Revenue 2.46 2.59 2.444 2.590

Gross Margin $ 1.05 1.05 1.053 1.055 % 43% 41% 43% 41%

SG&A 1.02 1.04 1.013 1.035 R&D

(L)EPS Cont. Ops. 0.00 0.00 0.01 0.00 (L)EPS Disc. Ops. 0.00 0.00 0.00 0.00 (L)EPS 0.00 0.00 0.01 0.00

--------------------------------------------------------------------- Cash at end of period 3.6 3.7 3.599 3.709 ---------------------------------------------------------------------

--30--LR/da*

CONTACT: Nortel Media Tina Warren, 905-863-4702 email: tinawarr@nortel.com or Investors 888-901-7286 or 905-863-6049 email: investor@nortel.com www.nortel.com

KEYWORD: TEXAS INTERNATIONAL CANADA INDUSTRY KEYWORD: TELECOMMUNICATIONS NETWORKING INTERNET E-COMMERCE EARNINGS SOURCE: Nortel

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