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Big Nortel News: Mike Z is out, ES Financials Rebound

There were two big Nortel news releases today. The first announced major leadership changes and a new organizational structure designed to work towards the completion of the sales of the company's businesses and other restructuring activities with a continued focus on maximizing value while preserving Nortel's innovative technology platforms and employment to the greatest extent possible. The second was the company's Q2 financial results, including strong quarter sequential growth for its Enterprise Solutions (ES) business unit. According to outgoing Nortel President and CEO Mike Zafirovski the company, since filing for credit protection under bankruptcy law, stabilized "its businesses and maintain[ed] customer commitments and innovation platforms. Results for the second quarter demonstrate solid financial performance over the first quarter, while customer metrics remain strong."According to the news release, effective today, President and CEO Mike Zafirovski will step down. Also effective today, the Boards of Directors of Nortel Networks Corporation (NNC) and Nortel Networks Limited (NNL) will be reduced from nine to three members: John A. MacNaughton, Jalynn H. Bennett and David Richardson, with Mr. Richardson serving as Chairperson. These individuals will also serve as members of NNC's and NNL's audit committees.

Harry Pearce, Chairman of Nortel's Board of Directors, had words of praise for Zafirovski, stating that "Mike made a commitment to see the process through the stabilization of the company, sale of its largest assets and the right plans and people to continue operating our business and serving customers. He has done so. I appreciate the commitment and passion he brought to this company since day one, including his guidance through the extremely difficult decisions we faced since filing for creditor protection."

Zafirovski commented that he was "extremely proud to have been associated with this company. The Board members and I came to Nortel because we really believed in the value of Nortel's people and technology. Although solid progress was made in many areas, at the end, the capital structure and legacy costs coupled with the economic downturn proved too difficult to surmount. I have tremendous respect for the Board of this company and the process we went through to initially transform the company, and since filing, to work to maximize the value of our businesses while preserving employment and customer commitments to the greatest extent possible."

Nortel's new streamlined business structure is as follows:

* The company's business units--Wireless Networks, Enterprise Solutions, Metro Ethernet Networks, Carrier VoIP and Application Solutions and the LG-Nortel joint venture--will report to the Chief Restructuring Officer, Pavi Binning.

* The company's mergers and acquisitions teams will continue their work under the Chief Strategy Officer, George Riedel.

* Nortel Business Services (NBS) will continue to serve the transitional operations needs of Nortel businesses as they are sold to ensure customer and network service levels are maintained throughout the sale and integration processes. NBS will continue to be led by Joe Flanagan.

* A core Corporate Group is being established that will be primarily responsible for the management of ongoing restructuring activities during the sales process as well as post business dispositions. This group will be lead by John Doolittle, formerly Nortel's Treasurer.

* These leaders will report to the NNC and NNL Boards of Directors, the court-appointed Monitor (Ernst & Young) and the proposed U.S. principal officer.

During the Zafirovski years, Nortel ES revenues at first increased as overall market demand for enterprise communications solutions grew, but began to decline before the start of the current economic recession. He hoped that the ICA venture with Microsoft would enhance Nortel's enterprise communications market position and standing while leading to a billion dollar revenue stream for installation/services, but neither came to fruition. Nortel could likely have sold its enterprise business unit two years ago for several times the price it will receive as part of the bankruptcy auction. From the time Zafirovski came to Nortel, its enterprise business slowed down in terms of significant product innovation and design compared to the competition and lost sizable market share, especially in the large enterprise systems segment. By virtually no competitive measure is its large enterprise business better today than it was four years ago, although it has retained its position as a leading small system supplier.

On another note, Nortel's second quarter financials results were mixed. Total revenues were $1.972 million, a 25% decrease year over year, with declines in all segments and regions, but an increase of 14% from the previous quarter. Of particular interest, ES revenues in the second quarter were $465 million, a 28% decline compared with the year ago, but up 18% on a quarter over quarter basis. According to the company, the strong growth sequentially for ES was due to increased spending by customers compared to the first quarter of 2009, when delays in spending were experienced, as well as an increase in the recognition of deferred revenues in the second quarter of 2009. The following is a summation of revenues results by Nortel business unit:

Revenues (Millions)