Reliant FORM 10-K manual Nortel Networks S.A, Significant accounting policies

NORTEL NETWORKS S.A.

(a Subsidiary of Nortel Networks Limited) Notes to Consolidated Financial Statements (thousands of euros, unless otherwise stated)

1.Nortel Networks S.A.

All of the shares of Nortel Networks S.A. are owned by Nortel Networks Limited (“Nortel Networks”) and Nortel Networks International Finance & Holding B.V. (“NNIF&H B.V.”), which is an indirect wholly owned subsidiary of Nortel Networks. Nortel Networks S.A. (formerly known as Nortel Matra Cellular SCA) is a French société anonyme (limited liability company) established in 1992. Nortel Networks S.A. develops wireless network equipment for Nortel Networks customers. This includes the engineering, configuration and implementation of various Nortel Networks products for wireless network applications.

On June 24, 2003, Nortel Networks S.A. acquired the outstanding shares of Northern Telecom France S.A. (“Northern Telecom France”) from Nortel Networks Inc. (“NNI”), a subsidiary of Nortel Networks (see note 9). Northern Telecom France is a holding company that was then holding interests of 17.8 percent in Nortel Networks France S.A.S. (“Nortel Networks France”) and 13.2 percent in EADS Telecom S.A.S., formerly EADS Defence and Security Networks S.A.S. (“EADS Telecom”).

On December 18, 2003, through a series of transactions Nortel Networks S.A. acquired all outstanding shares of Nortel Networks France not already under its control from Nortel Networks and from NNIF&H B.V. (see note 9). Nortel Networks France primarily distributes Wireline, Optical and Enterprise products of Nortel Networks in France either directly or through various distribution channels.

2.Significant accounting policies

Basis of presentation

The consolidated financial statements of Nortel Networks S.A. have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for the preparation of financial statements.

Nortel Networks S.A. and certain affiliates entered into a series of complex transactions during the periods presented that constituted a reorganization and transfers of share ownership of entities under common control (see note 9). The transactions have been accounted for at historical cost in a manner similar to a pooling of interest, and in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” (“SFAS 141”) all prior period financial statements presented have been restated as if the reorganization took place at the beginning of such periods.

As described in note 3, the consolidated statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2002 and 2001 and the consolidated balance sheet as of December 31, 2002, including the applicable notes, were restated.

These financial statements have been prepared on the basis that Nortel Networks S.A. is a going concern. Nortel Networks S.A. has received a pledge of support from Nortel Networks.

(a)Principles of consolidation

The financial statements of entities which are controlled by Nortel Networks S.A. through voting equity interests, referred to as subsidiaries, are consolidated. Entities which are jointly controlled, referred to as joint ventures, and entities which are not controlled but over which Nortel Networks S.A. has the ability to exercise significant influence, referred to as associated companies, are accounted for using the equity method. Variable Interest Entities (“VIEs”) (which include, but are not limited to, special purpose entities, trusts, partnerships, certain joint ventures and other legal structures), as defined by the Financial Accounting Standards Board (“FASB”) in FASB Interpretation (“FIN”) No. 46 (Revised 2003), “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46R”), are entities in which equity investors do not have the characteristics of a “controlling financial interest” or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by Nortel Networks S.A. when it is determined, that it will, as the primary beneficiary, absorb the majority of the VIEs expected losses and/or

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