In a three-hour taped television interview, Mr Nasrallah said a negotiator appointed by UN Secretary-General Kofi Annan has been meeting with Hezbollah and Israeli officials.
He would not provide details about the negotiations, but told Hezbollah's TV station, "We have reached a stage of exchanging ideas, proposals or conditions."
The Hezbollah leader has offered to exchange the two for Arab prisoners in Israeli jails, but Israel has repeatedly refused the swap.
Although the UN resolution that ended the 34-day war called for the soldiers' unconditional release, Israel has exchanged prisoners in the past.
"They are serious negotiations ... It's better to keep it away from the media ... this issue is on track. We are moving ahead. How long does it take? It's up to the nature of the negotiations," Mr Nasrallah said.