<PAGE>
                                                                 Exhibit 99a


















                       Consolidated Financial Statements
                        (Expressed in Canadian dollars)


                                AT&T CANADA INC.

                  Years ended December 31, 2001, 2000 and 1999
<PAGE>
[KPMG LOGO]

            KPMG LLP
            CHARTERED ACCOUNTANTS                    Telephone   (416) 228-7000
            Yonge Corporate Centre                   Telefax (416) 228-7123
            4120 Yonge Street Suite 500              www.kpmg.ca
            North York ON M2P 2B8

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of AT&T Canada Inc. as at
December 31, 2001 and 2000 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three year period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2001 in accordance with
Canadian generally accepted accounting principles.


/s/KPMG LLP
---------------------
Chartered Accountants

Toronto, Canada
February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note
5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1,
2002

COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern such as those described in
note 2 to the consolidated financial statements. Our report to the shareholders
dated February 1, 2002, except as to note 2, which is as of March 14, 2002, as
to note 5, which is as of February 20, 2002 and as to note 9(h), which is as of
May 1, 2002, is expressed in accordance with Canadian reporting standards, which
do not permit a reference to such conditions and events in the auditors' report
when these are adequately disclosed in the financial statements.

/s/KPMG LLP
---------------------
Chartered Accountants

Chartered Accountants

Toronto, Canada
February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note
5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1,
2002.
<PAGE>
AT&T CANADA INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)

December 31, 2001 and 2000

<TABLE>
<CAPTION>
================================================================================
                                                      2001               2000
--------------------------------------------------------------------------------
ASSETS
<S>                                               <C>                <C>
Current assets:
   Cash and cash equivalents (note 4)             $    537,294       $    68,587
   Accounts receivable (note 5)                         70,640           258,425
   Other current assets                                 14,154            12,922
   -----------------------------------------------------------------------------
                                                       622,088           339,934
Property, plant and equipment (note 6)               2,180,773         2,120,659
Goodwill (note 7)                                    1,639,065         1,705,155
Deferred pension asset (note 15)                        45,174            10,626
Deferred foreign exchange                              127,116            40,853
Other assets (note 8)                                  132,238           112,691
--------------------------------------------------------------------------------
                                                  $  4,746,454       $ 4,329,918
================================================================================

LIABILITIES AND SHAREHOLDERS'
 EQUITY (DEFICIT)

Current liabilities:
   Accounts payable                               $     63,291       $    78,961
   Accrued liabilities                                 267,229           285,231
   Accrued interest payable                             70,004            43,589
   Income taxes payable                                  5,584             3,655
   Current portion of long-term debt (note 9)            1,930             2,210
   -----------------------------------------------------------------------------
                                                       408,038           413,646

Long-term debt (note 9)                              4,672,738         3,628,465
Other long-term liabilities                             45,110            28,254

Shareholders' equity (deficit) (note 11):

   Common shares                                     1,133,664         1,039,065
   Warrants                                                709              1,192
   Deficit                                          (1,513,805)        (780,704)
   -----------------------------------------------------------------------------
                                                      (379,432)          259,553

--------------------------------------------------------------------------------
                                                  $  4,746,454         4,329,918
================================================================================
</TABLE>

Impact of Strategic Business Combination on basis of presentation (note 2)
Reconciliation to accounting principles generally accepted in the United States
(note 22)
Other commitments and contingencies (note 23)
Subsequent events (notes 2, 5 and 9(h))

See accompanying notes to consolidated financial statements.

On behalf of the Board:
"Alan D. Horn"       Director           "D. Craig Young"       Director
-----------------                       --------------------

                                       1
<PAGE>
AT&T CANADA INC.

Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
=============================================================================================
                                               2001                2000             1999
---------------------------------------------------------------------------------------------
<S>                                          <C>               <C>               <C>
Revenue                                      $ 1,544,721       $ 1,505,378       $ 866,721

Expenses:
   Service costs                               1,005,790         1,034,860         586,761
   Selling, general and administrative           385,966           411,947         253,677
   ------------------------------------------------------------------------------------------
                                               1,391,756         1,446,807         840,438
---------------------------------------------------------------------------------------------

Earnings before interest, taxes,
  depreciation and amortization,
  integration costs, provision
  for restructuring, workforce
  reduction costs and
  minority interest                              152,965            58,571          26,283

Integration costs, provision for
  restructuring and workforce
  reduction costs (note 12)                       21,901           (10,249)        157,790
---------------------------------------------------------------------------------------------

Earnings (loss) before interest, taxes,
  depreciation and amortization
  and minority interest                          131,064            68,820        (131,507)

Depreciation and amortization                    465,600           402,551         232,782
---------------------------------------------------------------------------------------------

Loss from operations                            (334,536)         (333,731)       (364,289)

Other income (expense):
   Interest income                                19,134            17,243          35,070
   Interest expense                             (401,114)         (319,046)       (259,589)
   Gain on sale of minority
   interest (note 3(h))                               --                --         462,028
   Other (note 13)                                (8,620)           13,739           1,998
   ------------------------------------------------------------------------------------------
                                                (390,600)         (288,064)        239,507

Loss before minority interest and
  provision for income taxes                    (725,136)         (621,795)       (124,782)

Minority interest (note 10)                           --           104,274         124,460

Provision for income taxes (note 14)               7,965             5,686           4,964
---------------------------------------------------------------------------------------------

Loss for the year                               (733,101)         (523,207)         (5,286)

Deficit, beginning of year                      (780,704)         (257,497)       (252,211)

---------------------------------------------------------------------------------------------
Deficit, end of year                         $ (1,513,805)     $  (780,704)      $(257,497)
=============================================================================================

Basic and diluted loss per
  common share (note 11(f))                  $     (7.45)      $     (5.48)      $   (0.06)
=============================================================================================

Weighted average number
 of common shares
 outstanding (in thousands)                       98,406            95,561          92,457
=============================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
AT&T CANADA INC.

Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)

Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
===========================================================================================================
                                                                2001            2000             1999
-----------------------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>             <C>
Cash provided by (used in):

Operating activities:
   Loss for the year                                           $(733,101)     $ (523,207)     $   (5,286)
   Adjustments required to
    reconcile loss to cash flows
    from operating activities:

     Depreciation and amortization                               465,600         402,551         232,782
     Accretion of Senior Discount Note
      interest                                                   145,148         125,916         118,735
     Amortization of debt issue costs                             15,661          16,248              --
     Write-down of networks and equipment                             --              --          35,568
     Loss (gain) on disposition of  investments                    8,894         (13,011)             --

     Gain on sale of minority interest (note
      3(h))                                                           --              --        (462,028)
     Minority interest (note 10)                                      --        (104,274)       (124,460)
     Amortization of deferred foreign
      exchange                                                     1,440              --              --
     Amortization of deferred gain on
      termination of
      cross currency swaps
      and forward contracts                                       (4,264)             --              --

     Deferred pension charge                                      (4,148)         (4,848)         (3,492)
     Change in pension plan valuation
      allowance                                                  (31,934)          2,937           2,029
     Other                                                         2,137           2,012          (8,767)
-----------------------------------------------------------------------------------------------------------
                                                                (134,567)        (95,676)       (214,919)
Change in non-cash working capital (note 19)                     117,270        (164,023)         47,325
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities                            (17,297)       (259,699)       (167,594)

Investing activities:
    Acquisitions, net of cash acquired                           (43,410)       (197,867)         31,362
    Dispositions of investments                                    3,580          17,656              --
    Additions to plant, property and
     equipment                                                  (345,279)       (472,235)       (629,304)
    Reductions (additions) to other assets                           236          (1,164)         12,145
    Decrease to restricted investments                                --          42,429          47,178
-----------------------------------------------------------------------------------------------------------
    Net cash used in investing activities                       (384,873)       (611,181)       (538,619)

Financing activities:
    Issue of share capital, net of issue
     costs                                                        48,243          35,206          24,807
    Termination of cross currency swaps and
     forward contracts (note 16(b))                              150,664              --              --
    Draw from (repayment of) credit facility                    (100,000)        270,000              --
    Issues of long-term debt                                     781,959         355,912         869,730
    Debt issue costs                                              (6,230)         (5,234)         (6,481)
    Increase (decrease) in other long-term
     liabilities                                                  (5,054)         (5,935)          2,605
    Repayment of shareholder loans                                    --              --        (157,187)
    Repayment of subordinated debentures                              --              --         (88,325)
    Repayment of preferred shares                                     --              --        (500,000)
    Net cash provided by financing
     activities                                                  869,582         649,949         145,149

Effect of exchange rate changes on cash                            1,295             187          (4,334)
-----------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and cash
  equivalents                                                    468,707        (220,744)       (565,398)

Cash and cash equivalents, beginning of
year                                                              68,587         289,331         854,729

-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                         $ 537,294       $  68,587       $ 289,331
===========================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements .

                                        3



<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



AT&T Canada Inc. (the "Company") was incorporated as MetroNet Communications
Corp. ("MetroNet") under the laws of the Province of Alberta and was
subsequently continued under the Canada Business Corporations Act. The Company
changed its name to AT&T Canada Inc. coincident with the consummation of the
combination of MetroNet and AT&T Canada Corp. (formerly AT&T Canada Long
Distance Services Company) ("AT&T LDS") and ACC TelEnterprises Ltd. ("ACC")
effective June 1, 1999.

The Company is a holding company, which engages in the telecommunications
business in Canada through its subsidiaries the most significant of which is its
69% owned operating subsidiary, AT&T Canada Corp. The Company's activities in
the telecommunications business consist primarily of the development and
construction of telecommunications networks for the provision of local, data,
Internet and E-Business solutions and long distance services to businesses in
Canada.

1.   SIGNIFICANT ACCOUNTING POLICIES:

     The accompanying consolidated financial statements are prepared in
     accordance with accounting principles generally accepted in Canada which,
     in the case of the Company, conform in all material respects with those in
     the United States, except as outlined in note 22.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenue and expenses.
     Actual results could differ from those estimates.

     The Company believes the most significant estimates used in the preparation
     of its consolidated financial statements are the useful lives of property,
     plant and equipment and goodwill and other intangibles and the related
     estimates of future cash flows to evaluate recoverability of such long-
     lived assets.

     The Company's significant accounting policies are as follows:

     (a)  Cash and cash equivalents:

          Cash equivalents consist of investments in money market instruments
          with a maturity at the date of purchase of less than three months.
          Cash and cash equivalents are recorded at cost, which approximates
          current market value.

                                       4
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (b)  Revenue recognition:

          Revenue on long distance, and other usage based services and products
          is recognized based upon minutes of traffic processed. Revenue on
          local, data, internet and other products and services is recognized
          upon delivery in accordance with contract terms, including customer
          acceptance. Revenue from technical support is recognized over the term
          of the contract during which the support services are rendered.
          Revenue on multiple element arrangements is allocated to each element
          based on the relative fair value of the elements.

     (c)  Restricted investments:

          Restricted investments consist of U.S. government securities which are
          restricted to the payment of interest on certain debt and are stated
          at cost plus accrued interest.

     (d) Accounts receivable securitization:

          The Company accounts for the transfer of receivables according to
          Accounting Guideline AcG-12, "Transfer of Receivables." The Company
          recognizes gains or losses on the transfer of receivables that qualify
          as sales and retains a subordinated retained interest in the accounts
          receivable transferred and ongoing servicing responsibilities. Losses
          on the sale of accounts receivable are recorded in the consolidated
          statements of operations and deficit at the date of sale.

          The amount of the losses depends in part on the carrying amount of the
          accounts receivable involved in the transfer, allocated between the
          accounts receivable sold and the Company's retained interest based on
          their relative fair value at the date of the transfer. The Company
          measures fair value based on the expected future cash receipts to be
          realized using management's best estimates of key assumptions for
          credit and dilution losses, collection term of the accounts
          receivable, and the trust' s contracted return.

          Any subsequent decline in the value of the retained interest, other
          than a temporary decline, will be recorded in income.

                                       5
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (e)  Property, plant and equipment:

          Property, plant and equipment are recorded at cost. Depreciation is
          computed using the straight-line method over the estimated useful
          lives of the assets as follows:

<TABLE>
<S>                                                                <C>
          Telecommunications facilities and equipment               3 - 20 years
          Buildings                                                13 - 40 years
          Other capital assets                                      4 - 40 years
          Equipment under capital leases                            3 - 15 years
          Leasehold improvements                                   Term of lease
          Application software                                       1 - 7 years
</TABLE>

          Costs incurred in developing new networks or expanding existing
          networks, including costs of acquiring rights-of-way, network design
          and interest are included within telecommunications facilities and
          equipment.

          Construction costs related to telecommunications facilities and
          equipment that are installed on rights-of-ways granted by others are
          capitalized and depreciated over the lives of rights-of-ways,
          including option periods. Telecommunications facilities and equipment
          begin to depreciate once the network is put in service.

          Interest is capitalized on assets that are under construction for more
          than three months at the Company's weighted average cost of capital.

                                       6
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (f)  Business combinations, goodwill, intangible and other long-lived
          assets:

          (i)   Business combinations are accounted for by the purchase method
                of accounting, under which the assets and liabilities purchased
                are recorded at their fair values with the excess of the
                purchase price over the fair value of identifiable assets and
                the liabilities acquired recorded as goodwill. The results of
                operations are included from the date of acquisition.

          (ii)  The consolidated financial statements include the accounts of
                the Company and its majority-owned subsidiaries. All
                intercompany transactions and balances have been eliminated on
                consolidation.

          (iii) Goodwill and other intangible assets are recorded at the date of
                acquisition and are amortized on a straight-line basis over
                their estimated useful lives of five to 25 years.

          (iv)  Long-lived assets, such as property, plant and equipment,
                goodwill and other intangible assets are reviewed for impairment
                whenever events or changes in circumstances indicate that the
                carrying amount may not be recoverable. If the total of the
                expected future undiscounted cash flows is less than the
                carrying amount of the asset, a loss is recognized for the
                difference between the expected future undiscounted cash flows
                and carrying value of the asset.

                                       7
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          (v)   Effective January 1, 2002, the Company will adopt the Canadian
                Institute of Chartered Accountants Handbook Section ("HB") 1581
                "Business Combinations", and HB 3062 "Goodwill and Other
                Intangible Assets". The new sections are substantially
                consistent with equivalent U.S. pronouncements, SFAS No. 141
                "Business Combinations" and SFAS No. 142 "Goodwill and Other
                Intangible Assets" issued by the Financial Accounting Standards
                Board ("FASB") in July 2001.

                HB 1581 requires that the purchase method of accounting be used
                for all business combinations initiated after June 30, 2001. Use
                of the pooling-of-interests method is no longer permitted. HB
                1581 also includes guidance on the initial recognition and
                measurement of goodwill and other intangible assets acquired in
                a business combination that is completed after June 30, 2001. HB
                3062 no longer permits the amortization of goodwill and
                indefinite-lived intangible assets effective January 1, 2002.
                Instead, these assets must be reviewed annually (or more
                frequently under certain conditions) for impairment using a fair
                value approach rather than the undiscounted cash flow approach
                previously used. Intangible assets that have definite lives will
                continue to be amortized over their estimated useful lives and
                tested for impairment in accordance with HB 3062. In connection
                with HB 3062's transitional goodwill impairment evaluation, HB
                3062 requires the Company to perform an assessment of whether
                there is an indication that goodwill is impaired as of the date
                of adoption. This involves identifying reporting units and
                determining the carrying value of each reporting unit by
                assigning the assets and liabilities, including the existing
                goodwill and intangible assets, to those reporting units as of
                January 1, 2002. The Company then has until June 30, 2002 to
                determine the fair value of each reporting unit and compare it
                to the carrying amount of the reporting unit. If the carrying
                amount of a reporting unit exceeds its fair value, the Company
                must perform the second step of the transitional impairment test
                as soon as possible, but no later than the end of the year of
                adoption. In the second step, the Company must compare the
                implied fair value of the reporting unit goodwill with the
                carrying amount of the reporting unit goodwill. Any transitional
                impairment loss will be recognized as a prior period adjustment
                to opening retained earnings at January 1, 2002.

                                        8
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

                The Company currently accounts for all business combinations
                under the purchase method and does not expect adoption of HB
                1581 to have an effect on the result of operations. As of the
                date of adoption of HB 3062, the Company has unamortized
                goodwill in the amount of $1,639.1 million and unamortized
                identifiable intangible assets in the amount of $14.8 million,
                all of which will be subject to the transition provisions of HB
                3062. Amortization expense related to goodwill was $110 million
                for the year ended December 31, 2001. The Company is in the
                process of assessing the impact of adoption and it is expected
                that a significant portion of its goodwill will be impaired
                under the new accounting standards. Because of the extensive
                effort needed to comply with adopting HB 3062, it is not
                practicable to reasonably estimate the impact of adoption on the
                Company's financial statements at the date of this report.

     (g)  Debt issuance costs:

          Debt issuance costs are amortized on a straight-line basis over the
          terms of the related debt financing.

     (h)  Foreign currency translation and hedging relationships:

          Foreign currency-denominated monetary items are translated into
          Canadian dollars at the exchange rate prevailing at the balance sheet
          date. Foreign currency-denominated non-monetary items are translated
          at the historical exchange rate. Transactions included in operations
          are translated at the average exchange rate for the period.
          Translation gains or losses are reflected in the consolidated
          statements of operations in the period in which they occur except for
          those related to long-term monetary items. Unrealized gains and losses
          on translation of foreign currency-denominated long-term monetary
          items which are not hedged are deferred and amortized over the
          remaining lives of the related items.

                                       9
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          The Company hedges its exposure to foreign currency exchange rate risk
          on long-term debt from time to time, by designating existing foreign
          currency denominated monetary assets as hedge instruments and, through
          the purchase of currency options, cross currency swaps and forward
          exchange contracts. All such instruments are only used for risk
          management purposes and are designated as hedges of specific debt
          instruments. The Company accounts for these financial instruments as
          hedges and, as a result, foreign exchange gains and losses on hedge
          instruments are recorded in the same period as the corresponding gains
          and losses on the related long-term debt. Premiums paid to acquire
          currency options, cross currency swaps and forward exchange contracts
          are deferred and amortized on a straight-line basis over the terms of
          the instruments.

          Effective January 1, 2002, the Company will adopt the amendment to HB
          1650 "Foreign Currency Translation". The revised HB requires the
          immediate recognition in income of unrealized currency exchange gains
          and losses on long-term monetary items with a fixed or ascertainable
          life as opposed to unrealized gains and losses being deferred and
          amortized over the remaining term of the long-term monetary items. The
          revised recommendations are to be applied retroactively with prior
          years' financial statements being restated. The effect of applying the
          revisions will be that foreign exchange gains and losses on the
          unhedged portion of the Company's long-term debt currently deferred
          and amortized over the term of the debt will be reflected in the
          consolidated statement of operations. The reported losses for the
          years ended December 31, 2001 and 2000 will be increased by $12.3
          million and nil, respectively.

          Effective January 1, 2003, the Company will adopt the new Accounting
          Guideline, AcG-13, "Hedging Relationships," which requires that in
          order to apply hedge accounting, all hedging relationships must be
          identified, designated, documented and effective. Where hedging
          relationships cannot meet these requirements, hedge accounting must be
          discontinued. The Company is currently evaluating the impact of
          adoption of AcG-13 and has not yet determined the effect of adoption
          on its results of operations or financial condition.

                                       10
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (i)  Employee benefit plans:

          (i)   Retirement benefits:

                The Company recognizes the costs of retirement benefits and
                certain post-employment benefits over the period in which
                employees render services in return for the benefits. The costs
                of pensions and other retirement benefits earned by employees
                are actuarially determined using the projected benefit method
                prorated on credited service and management's best estimate of
                expected plan investment performance, salary escalation and
                retirement ages of employees. For the purpose of calculating the
                expected return on plan assets, those assets are valued using a
                market-related value. Past service costs from plan amendments
                are amortized on a straight-line basis over the average
                remaining service period of employees active at the date of
                amendment. The excess of the cumulative unrecognized net gains
                (loss) over 10% of the greater of the benefit obligation and the
                market-related value of plan assets is amortized over the
                average remaining service period of active employees.

                When the restructuring of a benefit plan gives rise to both a
                curtailment and a settlement of obligations, the curtailment is
                accounted for prior to the settlement.

          (ii)  Stock option plans:

                No compensation expense is recognized for these plans when
                shares or options are issued to employees. Any consideration
                paid by employees on exercise of options or purchase of shares
                is credited to share capital.

          (iii) Employee Share Ownership Plan:

                Compensation expense is recognized for the Company's
                contributions to the Employee Share Ownership Plan. The
                Company's contributions are made through the issuance of Class B
                Non-Voting Shares from treasury.

                                       11
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          (iv)  Recent pronouncement:

                Effective January 1, 2002, the Company will adopt the new HB
                3870 "Stock-based Compensation and Other Stock-based Payments",
                which establishes standards for the recognition, measurement and
                disclosure of stock-based compensation and other stock-based
                payments made in exchange for goods and services.

                HB 3870 sets out a fair value based method of accounting that is
                required for certain, but not all, stock-based transactions. HB
                3870 must be applied to: all stock-based payments to
                non-employees, and to employee awards that are direct awards of
                stock, that call for settlement in cash or other assets, or are
                stock appreciation rights that call for settlement by the
                issuance of equity instruments. However, the new standard
                permits the Company to continue its existing policy that no
                compensation cost is recorded on the grant of stock options to
                employees. Consideration paid by employees on the exercise of
                stock options is recorded as share capital.

                HB 3870, however, does require additional disclosures for
                options granted to employees, including disclosure of pro forma
                earnings and pro forma earnings per share as if the fair value
                based accounting method had been used to account for employee
                stock options.

                The Company has evaluated the impact of adoption of HB 3870 and
                has determined that adoption will not have an effect on its
                results of operations or financial condition.

     (j)  Income taxes:

          The Company uses the liability method of accounting for income taxes.
          Future income tax assets and liabilities are recognized for the
          estimated future tax consequences attributable to differences between
          the financial statement carrying amounts of existing assets and
          liabilities and their respective tax bases. When necessary, a
          valuation allowance is recorded to reduce future income tax assets to
          an amount where realization is more likely than not. Future income tax
          assets and liabilities are measured using enacted or substantively
          enacted tax laws and rates in effect for the year in which those
          temporary differences are expected to be recovered or settled. The
          effect on future income tax assets and liabilities of a change in tax
          laws and rates is recognized as part of the provision for income taxes
          in the period that includes the enactment date (or the period in which
          the change in rates are substantively enacted).

                                       12
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (k)  Loss per common share:

          Basic and diluted loss per share is calculated using the weighted
          average number of common shares outstanding during the year after
          giving retroactive effect to the share split described in note
          11(b)(ii).

          Effective January 1, 2001, the Company adopted, retroactively with
          restatement, the recommendations of HB 3500 with respect to loss per
          share. Under the revised standard, the treasury stock method is used
          instead of the imputed earnings approach for determining the dilutive
          effect of options, issued warrants or other similar instruments.

          The change in the method of calculation of loss per share did not
          impact basic and diluted loss per share for 2001, 2000 and 1999 as
          further described in note 11(f).

2.   IMPACT OF STRATEGIC BUSINESS COMBINATION ON BASIS OF PRESENTATION:

     The consolidated financial statements have been prepared on a going concern
     basis in accordance with Canadian generally accepted accounting principles
     ("GAAP"). The going concern basis of presentation assumes that the Company
     will continue in operation for the foreseeable future and will be able to
     realize its assets and discharge its liabilities and commitments in the
     normal course of business.

     The consolidated financial statements do not reflect adjustments that would
     be necessary if the going concern assumption was not appropriate. If the
     going concern basis was not appropriate for these consolidated financial
     statements, then adjustments would be necessary to the carrying value of
     assets and liabilities, the reported revenues and expenses, and the balance
     sheet classifications used.

     Certain circumstances relating to the future ownership of the Company under
     the Strategic Business Combination, as described in 3(h) and in the
     following paragraph, raise doubt about the appropriateness of the use of
     the going concern assumption in the preparation of the consolidated
     financial statements. The outcome of these circumstances will be largely
     determined by third parties.

                                       13
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



2.   IMPACT OF STRATEGIC BUSINESS COMBINATION ON BASIS OF PRESENTATION:
     (CONTINUED):

     The Strategic Business Combination provides for the purchase of the
     outstanding shares of the Company by AT&T Corp. and/or a third party at
     AT&T Corp.'s discretion any time prior to July 1, 2003. In the event that
     foreign ownership restrictions are lifted, in whole or in part, on or
     before June 30, 2003, AT&T Corp. is obligated to purchase or to arrange for
     a third party affiliated with AT&T Corp. to purchase the outstanding shares
     of the Company up to the extent permitted by law, subject to certain
     limitations in the Deposit Receipt Agreement. At any time prior to July 1,
     2003, AT&T Corp. may elect to purchase or cause to be purchased by any
     third party, all of the outstanding shares. In the event that, by June 30,
     2003, (i) foreign ownership restrictions are not amended so as to allow
     AT&T Corp. to acquire all of the outstanding shares, and (ii) AT&T Corp.
     has not elected to purchase or arrange for a third party to purchase the
     outstanding shares of the Company, the Company will be put up for auction
     upon and subject to the terms of the Deposit Receipt Agreement. A change in
     control of the Company, resulting in the Company being owned by an entity
     other than AT&T Corp., could require the Company to repurchase some or all
     of the outstanding unsecured senior notes of the Company at 101% of their
     principal value and repay amounts drawn from its Senior Credit Facility.

     The Company is not in a position at this time to determine the business
     strategy of AT&T Corp. and/or a third party following such acquisition or
     auction and the effect that any such transaction or the results therefrom
     would have on the Company's business plan, capital spending program, and
     the funding of its operating and working capital requirements. There is
     uncertainty about what will occur on or before June 30, 2003 relating to
     the transactions that may arise as a result of the Strategic Business
     Combination, whether or not the Company will be required, as a result of
     such events, to repurchase any debt obligations and how it will finance its
     operations following any change in control.

     On March 14, 2002, the Company announced the formation of a committee of
     its board of directors to work with management to address complex issues
     facing the Company in the foreseeable future. Such issues include a
     significant regulatory decision expected on or before May 31, 2002, which
     could have a significant impact on the future of sustainable competition in
     telecommunications in Canada, as further described in note 23(a); the
     effect of AT&T Corp. satisfying its obligations under the Deposit Receipt
     Agreement; and the impact of these events on operating and financial
     circumstances of the Company. In addition, the committee appointed
     independent financial advisors to evaluate various scenarios regarding
     issues, opportunities and alternatives for the Company.

                                       14
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.   ACQUISITIONS AND DISPOSITIONS:

     Details of business acquisitions during 2001, 2000 and 1999 are as follows.
     Consideration is cash unless otherwise noted below.

     2001 AND 2000

<TABLE>
<CAPTION>
     ===============================================================================
                                                             2000
                               2001      -------------------------------------------
                             MONTAGE     Contour       Brak       Netcom       DMC
                               (b)         (c)         (d)         (e)         (f)
     -------------------------------------------------------------------------------
<S>                          <C>         <C>         <C>         <C>         <C>
     Current assets          $15,493     $10,373     $ 4,044     $ 6,192     $ 3,993
     Capital assets            4,717       7,093         548          --         501
     Other assets                 --         694         990       5,545          --
     Goodwill                 51,029      70,032      29,554      66,892      92,309
     -------------------------------------------------------------------------------
                              71,239      88,192      35,136      78,629      96,803

     Current liabilities      11,869      11,337       4,708      11,157       1,308
     Long-term debt               --       6,875         202          --          --
     -------------------------------------------------------------------------------
                              11,869      18,212       4,910      11,157       1,308

     -------------------------------------------------------------------------------
     Purchase price          $59,370     $69,980     $30,226     $67,472     $95,495
     ===============================================================================
</TABLE>

1999

<TABLE>
<CAPTION>
                                                      MetroNet,
                                                      AT&T LDS
                                                       and ACC          Netcom
     1999                                                (h)             (e)
     ---------------------------------------------------------------------------
<S>                                                  <C>              <C>
     Current assets                                  $  253,545       $    5,686
     Capital assets                                     575,954            7,084
     Other assets                                         9,954              314
     Goodwill                                           897,031           22,020
     ---------------------------------------------------------------------------
                                                      1,736,484           35,104

     Current liabilities                                244,132            4,233
     Preferred shares                                   500,000               --
     Subordinated debentures                             83,289               --
     Shareholder loan                                   130,500               --
     Long-term debt                                          --               28
     Minority interest                                       --            4,323
     Other long-term liabilities                         33,981               --
     ---------------------------------------------------------------------------
                                                        991,902            8,584

     ---------------------------------------------------------------------------
     Purchase price                                  $  744,582       $   26,520
     ===========================================================================
</TABLE>

                                       15

<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):

         2001

         (a)      On May 1, 2001, the Company disposed of certain call centres.
                  Proceeds on disposition were $3.6 million in cash. The
                  disposition generated a loss on sale of $8.9 million.

         (b)      Acquisition of MONTAGE eIntegration Inc.:

                  On June 1, 2001, the Company acquired all of the issued and
                  outstanding shares of MONTAGE eIntegration Inc. ("MONTAGE").
                  MONTAGE is a Canadian E-Business solutions integrator focused
                  on transforming traditional organizations into connected
                  enterprises through internet technologies. Consideration of
                  $58.4 million was paid on closing, comprised of $13.7 million
                  in cash and $44.7 million, represented by 967,355 Class B
                  Non-Voting Shares of the Company. In addition, acquisition
                  costs of $1.0 million were incurred. The vendors have the
                  potential to earn up to an additional $30.0 million contingent
                  upon the attainment by June 30, 2002 of certain specified
                  performance targets. Any earned contingent consideration is
                  payable over the three-year period ending June 30, 2004 and
                  will be recorded once the contingent amount is determinable. A
                  portion of the contingent payment will be accounted for as
                  additional purchase price with the balance recorded as
                  compensation expense.

         2000

         (c)      Acquisition of Contour Telecom Inc. (Canada) (formerly
                  TigerTel Inc.) ("Contour"):

                  On January 6, 2000, the Company acquired all of the issued and
                  outstanding shares of Contour, a Canadian business
                  telecommunications provider.

         (d)      Acquisition of Brak Systems Inc.:

                  On March 20, 2000, the Company acquired all of the issued and
                  outstanding shares of Brak Systems Inc. ("Brak"), a Canadian
                  internet security company.


                                       16
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):

         (e)      Acquisition of Netcom Canada Holding Inc.:

                  On April 10, 2000, the Company exercised its right to acquire
                  the remaining 49% of issued and outstanding shares of Netcom
                  Canada Holding Inc. ("Netcom"), an internet service provider
                  for U.S. $46.2 million (Cdn. $67.5 million) in cash.

                  On March 16, 1999, the Company acquired 51% of the issued and
                  outstanding shares of Netcom.

         (f)      Acquisition of DMC Inc.:

                  On May 31, 2000, the Company acquired all of the issued and
                  outstanding shares of DMC Inc. ("DMC"), a Canadian business
                  specializing in the deployment of business-focused Internet
                  and E-Business strategies and solutions. Purchase
                  consideration of $95.5 million, recorded at the date of
                  acquisition, was funded by a combination of the issuance of
                  769,231 of the Company's Class B Non-Voting Shares priced at
                  market on date of acquisition and $50 million in cash, $25
                  million of which was held in escrow pending attainment of
                  certain specified performance targets. In July 2001, the
                  remaining $25 million of purchase consideration was paid.

         (g)      Shared Technologies of Canada:

                  On July 18, 2000, the Company reduced its ownership in Shared
                  Technologies of Canada ("STOC") from 70% to 15%. Proceeds on
                  disposition were $16.5 million: $13.6 million received in cash
                  and a receivable of $2.9 million recorded. STOC also repaid
                  intercompany loans owing of $4.5 million. The disposition
                  generated a gain on sale of $13.0 million before income taxes.
                  The remaining 15% investment in STOC is accounted for by the
                  cost method of accounting.


                                       17
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):

         1999

         (h)      Combination with AT&T LDS and ACC (also known as "Strategic
                  Business Combination"):

                  On June 1, 1999, MetroNet and AT&T LDS and ACC consummated a
                  combination by way of a plan of arrangement. This resulted in
                  MetroNet shareholders indirectly owning approximately 69% of
                  the equity of the combined company and AT&T Corp. ("AT&T")
                  indirectly owning approximately 31% of the equity of the
                  combined company. MetroNet contributed all of its assets and
                  operations to the combined company. AT&T contributed its 33%
                  voting interest in AT&T LDS. In addition, AT&T agreed to
                  purchase, if permitted to do so under Canadian foreign
                  ownership regulations as a result of any amendment of such
                  regulations prior to July 1, 2003, all of the outstanding
                  shares of the Company for the greater of (i) $37.50 per share
                  and (ii) the appraised fair market value. The exact timing of
                  this purchase by AT&T is dependent upon the future status of
                  Canadian foreign ownership regulations. If such regulations do
                  not permit AT&T to purchase the shares of the Company before
                  June 30, 2003, AT&T may elect to purchase or arrange for
                  another entity to purchase the shares of the Company.

                  Effective June 30, 2000, the minimum $37.50 per share price
                  began to increase by 16% per annum compounded quarterly from
                  that date through to no later than June 30, 2003. If by June
                  30, 2003, AT&T has not elected to purchase or arranged for the
                  purchase of the outstanding shares, then upon and subject to
                  the terms of the Deposit Receipt Agreement, the Company has
                  agreed that it will be put up for auction and AT&T would make
                  whole the shareholders of the Company for the difference
                  between the proceeds received from the auction and the greater
                  of (i) the accreted minimum price, and (ii) the appraised fair
                  market value of the shares.

                  The combination has been accounted for by the purchase method
                  of accounting and the results of operations of AT&T LDS and
                  ACC are included from the date of combination. The Company
                  recorded a gain of $462 million, resulting from the sale of
                  the 31% interest in MetroNet to AT&T. The shares issued to
                  AT&T for its 31% economic interest in the Company were issued
                  from the Company's operating subsidiary, AT&T Canada Corp.,
                  which is 69% owned by the Company.

                  The purchase consideration of $744.6 million represents the
                  value of the 69% interest in AT&T LDS and ACC, including
                  acquisition costs of $34.7 million.


                                       18
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):

        Unaudited pro forma consolidated financial information

        The following unaudited pro forma consolidated financial information
        reflects the combination with AT&T LDS and ACC and the acquisitions of
        Contour, Brak, Netcom and DMC as if these transactions had occurred on
        January 1, 1999 and reflects the acquisition of MONTAGE as if it had
        occurred on January 1, 2000:

<TABLE>
<CAPTION>
=================================================================================================
                                                              2001           2000           1999
-------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>            <C>
Revenue                                                $ 1,568,655    $ 1,560,729    $ 1,456,893

Expenses:
  Service costs                                          1,020,851      1,068,704        993,855
  Selling, general and administrative
    expenses                                               395,208        430,368        426,428
  -----------------------------------------------------------------------------------------------
                                                         1,416,059      1,499,072      1,420,283
-------------------------------------------------------------------------------------------------
Earnings before interest, taxes, depreciation and
  amortization, integration costs, provision for
  restructuring, workforce reduction costs
  and minority interest                                    152,596         61,657         36,610

Integration costs, provision for restructuring
  and workforce reduction costs                             21,901        (10,249)       157,790
-------------------------------------------------------------------------------------------------
Earnings (loss) before interest, taxes, depreciation
  and amortization and minority interest                   130,695         71,906       (121,180)

Depreciation and amortization                              470,309        422,780        333,814
-------------------------------------------------------------------------------------------------
Loss from operations                                      (339,614)      (350,874)      (454,994)

Other income (expense):
  Interest expense, net                                   (382,094)      (302,064)      (242,828)
  Gain on sale of minority interest                             --             --        462,028
  Gain on sale of residential
    business                                                    --             --         29,349
  Other                                                     (4,812)        13,874           (801)
  -----------------------------------------------------------------------------------------------
                                                          (386,906)      (288,190)       247,748
-------------------------------------------------------------------------------------------------
Loss before minority interest and
  provision for income taxes                              (726,520)      (639,064)      (207,246)

Minority interest                                               --        101,983        121,523

Provision for income taxes                                   9,580          6,073          6,660
-------------------------------------------------------------------------------------------------
Loss for the year                                      $  (736,100)   $  (543,154)   $   (92,383)
=================================================================================================
Basic and diluted loss per common share                $     (7.48)   $     (5.68)   $     (0.99)
=================================================================================================
</TABLE>


                                       19
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):

                  This financial information has not been adjusted to give
                  effect to the dispositions of STOC and certain call centres on
                  July 18, 2000 and May 1, 2001, respectively. The pro forma
                  consolidated financial information has been provided for
                  information purposes only and is not necessarily indicative of
                  the results of operations or financial condition that actually
                  would have been achieved if the acquisitions had been
                  completed on January 1, 2000 and 1999, respectively, or that
                  may be reported in the future.

4.       CASH AND CASH EQUIVALENTS:

<TABLE>
<CAPTION>
      ===================================================================
                                                         2001       2000
      -------------------------------------------------------------------
<S>                                                  <C>        <C>
      Cash on deposit:
        Canadian dollar                              $ 10,139   $    723
        U.S. dollar                                       214     (2,662)
      Short-term investments, at rates of interest
       varying between 1.60% and 2.45%:
        Canadian dollar                               481,434     48,312
        U.S. dollar                                    45,507     22,214
      -------------------------------------------------------------------
                                                     $537,294   $ 68,587
      ===================================================================
</TABLE>

5.       ACCOUNTS RECEIVABLE SECURITIZATION:

                  On July 20, 2001, the Company signed a securitization
                  agreement with a special purpose trust. Under the terms of the
                  securitization agreement, the Company has the ability to sell
                  certain of its accounts receivable on a revolving basis
                  through securitization transactions at varying monthly limits.
                  The maximum cash proceeds that may be funded under the program
                  is $150 million. The accounts receivable pool consists of the
                  Company's trade accounts receivable for telecommunications
                  products and services rendered.


                                       20
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


5.       ACCOUNTS RECEIVABLE SECURITIZATION (CONTINUED):

                  When the accounts receivable are sold to the trust, an initial
                  purchase price is paid to the Company and the Company is
                  entitled to an additional deferred purchase price based on the
                  realized value of the receivables sold. The Company retains
                  ongoing servicing responsibilities with respect to the
                  receivables transferred. The investors and the trust have no
                  recourse against the Company beyond the level of the trust
                  assets. The Company does not receive compensation for its
                  servicing responsibilities and the related servicing liability
                  is considered insignificant.

                  On July 20, 2001, the Company sold accounts receivable for
                  initial proceeds of $100 million and recorded a loss of $0.4
                  million, representing the cost relating to establishing the
                  agreement at the date of the sale.

                  The following table illustrates the effect of securitization
                  on the Company's balance sheet as at December 31, 2001:

<TABLE>
<S>                                                              <C>
        ===============================================================

        Total cash received                                      $100.0
        Net carrying amount of accounts receivable transferred    149.8
        Deferred purchase price included in other assets           49.8

        ===============================================================
</TABLE>

                  The fair value of the retained interest approximates the
                  carrying value. The key economic assumption used in measuring
                  the loss on sale and value of the retained interest is the
                  expected credit and dilution losses estimated to be 6.5%.

                  On February 20, 2002, the Company repurchased for
                  approximately $100 million, all of the outstanding accounts
                  receivable sold in the above securitization program. The
                  program has not been terminated and may be resumed in the
                  future if certain conditions are satisfied. The securitization
                  agreement included the requirement that the Company maintains
                  an investment grade credit rating from both Moody's Investor
                  Services Inc. and Standard & Poor's Rating Services.


                                       21
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


6.      PROPERTY, PLANT AND EQUIPMENT:

<TABLE>
<CAPTION>
     =========================================================================
                                                    Accumulated       Net book
     2001                                  Cost    depreciation          value
     -------------------------------------------------------------------------
<S>                                   <C>          <C>              <C>
     Telecommunications facilities
       and equipment                  $2,060,341     $  483,964     $1,576,377
     Land and buildings                  169,516         41,601        127,915
     Other capital assets                600,911        254,104        346,807
     Equipment under capital leases       28,542          6,430         22,112
     Leasehold improvements               31,115         12,841         18,274
     Application software                163,253         73,965         89,288
     -------------------------------------------------------------------------
                                      $3,053,678     $  872,905     $2,180,773
     =========================================================================
</TABLE>

<TABLE>
<CAPTION>
     =========================================================================
                                                    Accumulated       Net book
     2000                                   Cost   depreciation          value
     -------------------------------------------------------------------------
<S>                                   <C>          <C>              <C>
     Telecommunications facilities
       and equipment                  $1,800,550     $  290,287     $1,510,263
     Land and buildings                  152,727         24,794        127,933
     Other capital assets                547,311        168,470        378,841
     Equipment under capital leases       28,756          5,318         23,438
     Leasehold improvements               27,780          8,834         18,946
     Application software                 99,332         38,094         61,238
     -------------------------------------------------------------------------
                                      $2,656,456     $  535,797     $2,120,659
     =========================================================================
</TABLE>

As of December 31, 2001 and 2000, property, plant and equipment include $16.9
million and $48.3 million, respectively, of networks in progress that are not in
service and, accordingly, have not been depreciated. Interest capitalized to
property, plant and equipment during 2001 amounted to $0.9 million (2000 - $6.9
million) and has been calculated using the Company's weighted average cost of
capital of 11.5% (2000 - 10.8%) applied to the monthly amount expended in
networks in progress that are not in service.


                                       22
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


7.      GOODWILL:

<TABLE>
<CAPTION>
              =======================================================
                                         Accumulated         Net book
              2001               Cost   amortization            value
              -------------------------------------------------------
<S>                        <C>          <C>                <C>
              Goodwill     $1,913,208       $274,143       $1,639,065
              =======================================================
</TABLE>

<TABLE>
<CAPTION>
              =======================================================
                                         Accumulated         Net book
              2000               Cost   amortization            value
              -------------------------------------------------------
<S>                        <C>          <C>                <C>
              Goodwill     $1,870,112       $164,957       $1,705,155
              =======================================================
</TABLE>

8.      OTHER ASSETS:

<TABLE>
<CAPTION>
  ===========================================================================
                                                   Accumulated       Net book
  2001                                     Cost   amortization          value
  ---------------------------------------------------------------------------
<S>                                    <C>        <C>                <C>
  Debt issuance costs                  $ 78,926       $ 27,602       $ 51,324
  Retained interest on accounts
    receivable securitization (note 5)   49,829             --         49,829
  Non-compete agreement                  32,500         28,435          4,065
  Long-term investments, at cost         10,745             --         10,745
  Other                                  20,407          4,132         16,275
  ---------------------------------------------------------------------------
                                       $192,407       $ 60,169       $132,238
  ===========================================================================
</TABLE>

<TABLE>
<CAPTION>
  ===========================================================================
                                                   Accumulated       Net book
  2000                                     Cost   amortization          value
  ---------------------------------------------------------------------------
<S>                                    <C>        <C>                <C>
  Debt issuance costs                  $ 71,146       $ 18,654       $ 52,492
  Option premiums on financial
    instruments (note 8(a))              38,271         20,638         17,633
  Non-compete agreement                  32,500         20,311         12,189
  Long-term investments, at cost         10,755             --         10,755
  Other                                  21,484          1,862         19,622
  ---------------------------------------------------------------------------
                                       $174,156       $ 61,465       $112,691
  ===========================================================================
</TABLE>


                                       23
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


8.       OTHER ASSETS (CONTINUED):

         (a)      During 2001, the Company monetized certain swaptions, cross
                  currency swaps and the related option premiums (note 16(b)).
                  The option premiums had a cost of $38.3 million with
                  accumulated amortization of $26.0 million.

9.       LONG-TERM DEBT:

<TABLE>
<CAPTION>
============================================================================================
                                                                      2001             2000
--------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>
12.0% Senior Notes (2001 - U.S. $248.6 million;
  2000 - U.S. $248.4 million) (note 9(a))                       $  395,988       $  372,419
10.75% Senior Discount Notes (2001 - U.S. $155.8 million;
  2000 - U.S. $140.4 million) (note 9(b))                          248,227          210,455
9.95% Senior Discount Notes (2001 - U.S. $842.2 million;
  2000 - U.S. $764.3 million) (note 9(c))                        1,341,482        1,146,036
10.625% Senior Notes (2001 - U.S. $225.0 million;
  2000 - U.S. $225.0 million) (note 9(d))                          358,380          337,388
7.65% Senior Notes (2001 - U.S. $1,000.0 million;
  2000 - U.S. $500.0 million) (note 9(e))                        1,592,800          749,750
7.15% Senior Notes (note 9(f))                                     150,000          150,000
7.625% Senior Notes (2001 - U.S. $250.0 million)
  2000 - $250.0 million) (note 9(g))                               398,200          374,875
Senior credit facilities (note 9(h))                               170,000          270,000
Capital lease obligations (note 9(i))                               19,591           19,752
--------------------------------------------------------------------------------------------
                                                                 4,674,668        3,630,675

Less current portion of capital lease                                1,930            2,210
obligations (note 9(i))
--------------------------------------------------------------------------------------------
                                                                $4,672,738       $3,628,465
============================================================================================
</TABLE>

At December 31, 2001, principal repayments on long-term debt required in the
next five years consist of the following:

<TABLE>
<CAPTION>
=======================================================================================
                           2002       2003       2004            2005              2006
---------------------------------------------------------------------------------------
<S>                        <C>     <C>       <C>        <C>             <C>
Senior credit facility      nil    $20,400   $149,600
7.15% Senior Notes                            150,000
7.625% Senior Notes                                     U.S.$ 250,000
7.65% Senior Notes                                                      U.S. $1,000,000
=======================================================================================
</TABLE>


                                       24
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

         (a)      12.0% Senior Notes:

                  The Company's 12.0% Senior Notes (the "12.0% Notes") are due
                  on August 15, 2007 and are repayable in the amount of U.S.
                  $250.0 million. The 12.0% Notes are redeemable, at the option
                  of the Company, in whole or in part, on or after August 15,
                  2002, beginning at 106% of par value and declining to par
                  value in 2005, plus accrued and unpaid interest. In the event
                  of a change in control of the Company, as defined in the
                  indenture governing the 12.0% Notes, resulting in the Company
                  being owned by an entity other than AT&T Corp., the 12.0%
                  Notes are redeemable at the option of the note holders at a
                  price of 101% of par value, plus accrued and unpaid interest.
                  The 12% Notes are unsecured and rank pari passu with other
                  unsubordinated senior debt of the Company. The 12.0% Note
                  Indenture contains certain covenants, including limits on the
                  incurrence of additional indebtedness or liens, payment of
                  dividends, redemption of shares and certain default
                  provisions, including defaults under other indebtedness.

         (b)      10.75% Senior Discount Notes:

                  The Company's 10.75% Senior Discount Notes (the "10.75%
                  Notes") are due November 1, 2007, repayable in the amount of
                  U.S. $170.0 million and bear interest at 10.75% per annum at
                  the issue price of U.S. $592.24 per U.S. $1,000 stated amount
                  at maturity until November 1, 2002. Interest to November 1,
                  2002 accrues on the issue price but is not payable until
                  maturity. From November 1, 2002, interest at a rate of 10.75%
                  per annum on the stated amount at maturity of the 10.75%
                  Notes, will be payable in cash. The 10.75% Notes are unsecured
                  and rank pari passu with other senior unsubordinated
                  indebtedness of the Company. The 10.75% Notes are redeemable
                  at the option of the Company in whole or in part at any time
                  on or after November 1, 2002, beginning at 105.375% of par
                  value and declining to par value in 2005, plus accrued and
                  unpaid interest. In the event of a change in control of the
                  Company, as defined in the Indenture governing the 10.75%
                  Notes, resulting in the Company being owned by an entity other
                  than AT&T Corp., the 10.75% Notes are redeemable at the option
                  of the holders at a price of 101% of par value, plus accrued
                  and unpaid interest. The 10.75% Note Indenture contains
                  certain covenants, including limits on the incurrence of
                  additional indebtedness or liens, payment of dividends,
                  redemption of shares and certain default provisions, including
                  defaults under other indebtedness. The effective interest rate
                  for 2001 was 11.04% (2000 - 11.04%).


                                       25
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

         (c)      9.95% Senior Discount Notes:

                  The Company's 9.95% Senior Discount Notes (the "9.95% Notes")
                  are due June 15, 2008, repayable in the amount of U.S. $970.0
                  million and bear interest at 9.95% per annum at the issue
                  price of U.S. $614.55 per U.S. $1,000 stated amount at
                  maturity until June 15, 2003. Interest to June 15, 2003,
                  accrues on the issue price but is not payable until maturity.
                  Thereafter, interest will be payable in cash. The 9.95% Notes
                  are unsecured and rank pari passu with other unsubordinated
                  senior debt of the Company. The 9.95% Notes are redeemable at
                  the option of the Company in whole or in part at any time on
                  or after June 15, 2003 beginning at 104.975% of par value,
                  declining to par value in 2006 plus accrued and unpaid
                  interest. In the event of a change in control of the Company,
                  as defined in the Indenture governing the 9.95% Notes,
                  resulting in the Company being owned by an entity other than
                  AT&T Corp., the 9.95% Notes are redeemable at the option of
                  the holders at a price of 101% of par value, plus accrued and
                  unpaid interest. The 9.95% Note Indenture contains certain
                  covenants, including limits on the incurrence of additional
                  indebtedness or liens, payment of dividends, redemption of
                  shares and certain default provisions, including defaults
                  under other indebtedness. The effective interest rate for 2001
                  was 10.2% (2000 - 10.2%).

         (d)      10.625% Senior Notes:

                  The Company's 10.625% Senior Notes (the "10.625% Notes") are
                  due November 1, 2008 and are repayable in the amount of U.S.
                  $225.0 million. At any time on or after November 1, 2003, the
                  10.625% Notes are redeemable at the option of the Company, in
                  whole or in part, at redemption prices beginning at 105.313%
                  of par value and declining to par in 2006 plus accrued and
                  unpaid interest. In the event of a change in control of the
                  Company, as defined in the Indenture governing the 10.625%
                  Notes, resulting in the Company being owned by an entity other
                  than AT&T Corp., the 10.625% Notes are redeemable at the
                  option of the holders at a price of 101% of par value plus
                  accrued and unpaid interest. The 10.625% Notes are unsecured
                  and rank pari passu with all senior unsubordinated debt of the
                  Company. The 10.625% Note Indenture contains certain
                  covenants, including limits on the incurrence of additional
                  indebtedness or liens, payment of dividends, redemption of
                  shares and certain default provisions, including defaults
                  under other indebtedness.


                                       26
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

         (e)      7.65% Senior Notes:

                  The Company's 7.65% Senior Notes (the "7.65% Notes") are due
                  on September 15, 2006 and are repayable in the amount of U.S.
                  $1 billion. The 7.65% Notes are redeemable, in whole or in
                  part, at the option of the Company at a redemption price equal
                  to the greater of (i) 100% of the principal amount and (ii)
                  the sum of the present values of the remaining scheduled
                  payments of principal and interest thereon discounted at a
                  prescribed interest rate to the redemption date on a
                  semi-annual basis plus accrued and unpaid interest, if any, to
                  the date of redemption. Each holder of the 7.65% Notes has the
                  right to require the Company to repurchase all or any part of
                  such holder's 7.65% Notes in the event of a change in control
                  of the Company, as defined in the Indenture governing the
                  7.65% Notes, resulting in the Company being owned by an entity
                  other than AT&T Corp., at a repurchase price in cash equal to
                  101% of the principal amount thereof, plus accrued and unpaid
                  interest to the repurchase date. The 7.65% Notes are
                  unsecured, subordinated to all existing and future secured
                  indebtedness of the Company and rank pari passu to existing
                  unsecured indebtedness. The Indenture covering the 7.65% Notes
                  contains certain covenants including limits on sale/leaseback
                  transactions or liens, the ability to subordinate certain
                  intercompany debt and the ability of the Company to
                  consolidate or merge with or into or transfer all or
                  substantially all of its assets to another entity, and certain
                  default provisions, including defaults under other
                  indebtedness.

         (f)      7.15% Senior Notes:

                  The 7.15% Senior Notes (the "7.15% Notes") are due September
                  23, 2004 and are repayable in the amount of $150 million. Each
                  holder of the 7.15% Notes has the right to require the Company
                  to repurchase all or any part of such holder's 7.15% Notes in
                  the event of a change in control of the Company, as defined in
                  the Indenture governing the 7.15% Notes, resulting in the
                  Company being owned by an entity other than AT&T Corp., at a
                  repurchase price in cash equal to 101% of the principal amount
                  thereof, plus accrued and unpaid interest. The 7.15% Notes are
                  unsecured and rank pari passu with other unsubordinated senior
                  debt of the Company. The Indenture covering the 7.15% Notes
                  contains certain covenants, including limits on sale/leaseback
                  transactions, the incurrence of certain liens, the ability to
                  subordinate certain intercompany debt and the ability to
                  consolidate or merge with or into or transfer all or
                  substantially all of its assets to another entity, and certain
                  default provisions, including defaults under other
                  indebtedness.


                                       27
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



9.       LONG-TERM DEBT (CONTINUED):

         (g)      7.625% Senior Notes:

                  The Company's 7.625% Senior Notes (the "7.625% Notes") are due
                  March 15, 2005 and are repayable in the amount of U.S. $250.0
                  million. The 7.625% Notes are redeemable, in whole or in part,
                  at the option of the Company at a redemption price equal to
                  the greater of (i) 100% of the principal amount and (ii) the
                  sum of the present values of the remaining scheduled payments
                  of principal and interest thereon discounted at a prescribed
                  interest rate to the redemption date on a semi-annual basis
                  plus accrued and unpaid interest, if any, to the date of
                  redemption. Each holder of the 7.625% Notes has the right to
                  require the Company to repurchase all or any part of such
                  holders' 7.625% Notes in the event of a change in control of
                  the Company, as defined in the Indenture governing the 7.625%
                  Notes, resulting in the Company being owned by an entity other
                  than AT&T Corp., at a repurchase price in cash equal to 101%
                  of the principal amount thereof, plus accrued and unpaid
                  interest to the repurchase date. The 7.625% Notes are
                  unsecured, subordinated to all existing and future secured
                  indebtedness of the Company and rank pari passu to existing
                  unsecured indebtedness. The Indenture covering the 7.625%
                  Notes contains certain covenants, including limits on
                  sale/leaseback transactions or liens, the ability to
                  subordinate certain intercompany debt and the ability of the
                  Company to consolidate or merge with or into or transfer all
                  or substantially all of its assets to another entity, and
                  certain default provisions, including defaults under other
                  indebtedness.

         (h)      Senior Credit Facility ("Facility"):

                  At December 31, 2001, the Company had a credit agreement
                  ("Credit Agreement") with a syndicate of financial
                  institutions to provide the Company with the following:

                  (i)      a revolving term facility to a maximum of $525
                           million (or the equivalent U.S. dollar amount
                           thereof) to be used to refinance vendor financing
                           indebtedness in the amount of up to 90% of the cost
                           of telecommunication assets, as defined, acquired by
                           the Company; and

                  (ii)     an operating facility to a maximum of $75 million (or
                           the equivalent U.S. dollar amount thereof) to be used
                           for working capital and general corporate purposes,
                           of which $25 million is available for letters of
                           credit and $10 million is available as a swingline
                           credit line.


                                       28
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

                  Outstanding principal amounts under the Facility bear interest
                  at the Canadian prime rate, the LIBOR rate or the market rate
                  for bankers' acceptances, as applicable, plus an Applicable
                  Margin, as defined, which is based on the Company' s corporate
                  credit rating. The Facility is secured by all of the assets of
                  the Company and may be drawn at any time by the Company
                  subject to compliance with the terms of the Facility. The
                  revolving term facility has scheduled principal repayments,
                  including accrued interest, which begin on a quarterly basis
                  on September 30, 2003 through March 31, 2004, when the
                  Facility expires. The operating facility is due in full on
                  March 31, 2004. The Facility includes several financial and
                  other covenants, such as restrictions on the Company's ability
                  to create additional indebtedness, permit or incur liens, sell
                  assets, make investments or pay dividends. Events of default
                  under the Facility include defaults under other indebtedness,
                  non-compliance with the above mentioned covenants, receipt of
                  an opinion rendered on its financial statements by independent
                  auditors with an impermissible qualification (as defined in
                  the Credit Agreement), and in certain circumstances change in
                  control of the Company, resulting in the Company being owned
                  by an entity other than AT&T Corp. as defined in the Credit
                  Agreement.

                  During 2001, the Company repaid $240 million and $10 million
                  of the revolving term facility and the operating facility,
                  respectively, and drew $150 million under the revolving term
                  facility.

                  The financial covenants include the maintenance of certain
                  prescribed levels of Consolidated Senior Debt to Total
                  Capitalization and Minimum Consolidated EBITDA and effective
                  June 30, 2003, Consolidated Senior Debt to Consolidated EBITDA
                  and Consolidated EBITDA to Consolidated Cash Debt Service, all
                  as defined. The Company is currently in compliance with all
                  covenants under the facilities.


                                       29
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

                  On May 1, 2002, the Credit Agreement was amended, reducing the
                  total facility from $600 million to $400 million. The total
                  amount drawn on May 1, 2002 was $200 million. The revolving
                  term facility component was reduced to $325 million from $525
                  million. The $75 million operating facility component was
                  unchanged. Further draws are permitted as follows: $100
                  million is available under the revolving term facility upon
                  delivery of a business plan, following the release of the CRTC
                  "price cap" decision, that demonstrated compliance with
                  covenants under the Senior Credit Facility and is approved by
                  lenders representing two-thirds of the amount committed, and,
                  a further $100 million is available under the revolving term
                  facility upon the approval of each lender. The amendment also
                  requires that the Company unwinds a sufficient amount of its
                  cross-currency interest rate swaps to generate cash proceeds
                  of at least $100 million, which will be used to fund the
                  Company's capital expenditure program. Under the amendment,
                  the maximum allowable out-of-the-money-mark-to-market position
                  on the Company's hedged position has been set at $100 million.
                  The Company believes that the disclosure in note 2 to these
                  consolidated financial statements does not constitute an
                  impermissible qualification under the Credit Agreement and the
                  lenders have agreed not to assert or otherwise claim that such
                  disclosure constitutes an impermissible qualification for the
                  2001 consolidated financial statements. This amendment does
                  not affect the interpretation by either the Company or the
                  lenders of the definition of impermissible qualification in
                  any future period.


                                       30
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


9.       LONG-TERM DEBT (CONTINUED):

         (i)      Capital lease obligations:

                  The following is a schedule, by year, of the future minimum
                  lease payments for capital leases, together with the balance
                  of the obligation, as at December 31, 2001:

<TABLE>
<S>                                                                     <C>
         =======================================================================
         2002                                                           $  3,118
         2003                                                              2,287
         2004                                                              1,980
         2005                                                              1,885
         2006                                                              1,850
         2007 and thereafter                                              20,350
         -----------------------------------------------------------------------
         Total minimum lease payments                                     31,470

         Less imputed interest at rates varying from 3.9% to 11.8%        11,879
         -----------------------------------------------------------------------

         Balance of the obligations                                       19,591

         Less current portion                                              1,930
         -----------------------------------------------------------------------
                                                                        $ 17,661
         =======================================================================
</TABLE>


                                       31
<PAGE>
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



10. MINORITY INTEREST:

    The minority interest arose primarily from the June 1, 1999 acquisition by
    AT&T Corp., of approximately 31% of the Company's operating subsidiary, AT&T
    Canada Corp. The losses of AT&T Canada Corp. have drawn down the minority
    interest balance to nil. In accordance with generally accepted accounting
    principles, losses in excess of the minority interest balance are charged
    against the majority interest. When future earnings materialize, the
    majority interest will be credited for those earnings up to the amount of
    the losses previously absorbed. As at December 31, 2001, the amount of the
    losses absorbed was $247.9 million.

11. SHARE CAPITAL:

    (a)  Authorized:

         Common: Unlimited number of convertible Class A Voting Shares without
                 nominal or par value, each Class A Share has one vote, and
                 unlimited number of Class B Non-Voting Shares without nominal
                 or par value. Other than with respect to voting rights and
                 conversion rights, the two classes of common shares have
                 identical rights. Each Class A Voting Share may, under certain
                 circumstances at the option of the holder, be converted into
                 one Class B Non-Voting Share. Each Class B Non-Voting Share
                 may, under certain circumstances at the option of the holder,
                 be converted into one Class A Voting Share. The holders of
                 Common Shares are entitled to receive dividends as determined
                 by the Board of Directors, subject to the rights of the holders
                 of the Preferred Shares. The holders of Common Shares are also
                 entitled to participate equally in the event of liquidation of
                 the Company, subject to the rights of the holders of the
                 Preferred Shares.

    Preferred:   Unlimited number of Non-Voting Preferred Shares without
                 nominal or par value. The Preferred Shares may be issued in one
                 or more series. The Board of Directors of the Company may fix
                 the number of shares in each series and designate rights,
                 privileges, restrictions, conditions and other provisions. The
                 Preferred Shares shall be entitled to preference over any other
                 shares of the Company with respect to the payment of dividends
                 and in the event of liquidation of the Company.


                                       32
<PAGE>
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



11. SHARE CAPITAL (CONTINUED):

        Upon all the restrictions of the foreign ownership of voting shares
        being removed by an amendment to the Telecommunications Act, the Class B
        Non-Voting Shares shall be converted into Class A Voting Shares on a
        one-for-one basis.

    (b) Outstanding:


COMMON SHARES

<TABLE>
<CAPTION>
================================================================================================
                                                            Number of shares (000' s)
------------------------------------------------------------------------------------------------
Class                                     Voting A      Non-Voting B      Non-Voting C    Total
------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>               <C>             <C>
Balances, January 1, 1999                      155         45,084            325          45,564
Issued - options                                --          1,115             --           1,115
Issued for acquisitions                         --            220             --             220
Issued - warrants (note 11(c)(i))               --            172             --             172
Conversion (note 11(b)(i))                      --            325           (325)             --
Share split (note 11(b)(ii))                   155         46,645             --          46,800

Balances, December 31, 1999                    310         93,561             --          93,871
Issued - options (note 11(d))                   --          1,959             --           1,959
Issued for acquisitions (note 3(f))             --            769             --             769
Issued - warrants (note 11(c)(i))               --            155             --             155
Issued - other (note 11(e))                     --             40             --              40
------------------------------------------------------------------------------------------------
Balances, December 31, 2000                    310         96,484             --          96,794
Issued - options (note 11(d))                   --          2,097             --           2,097
Issued for acquisitions (note 3(b))             --            967             --             967
Issued - warrants (note 11(c)(i))               --            121             --             121
Issued - other (note 11(e))                     --             27             --              27
------------------------------------------------------------------------------------------------
Balances, December 31, 2001                    310         99,696             --         100,006
================================================================================================
</TABLE>


                                       33

<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



11. SHARE CAPITAL (CONTINUED):

           COMMON SHARES
<TABLE>
<CAPTION>
============================================================================================

                                                            Amounts (000' s)
--------------------------------------------------------------------------------------------
Class                                Voting A     Non-Voting B     Non-Voting C       Total
--------------------------------------------------------------------------------------------
<S>                                  <C>          <C>             <C>             <C>
Balances, January 1, 1999            $   416      $  926,273      $    1,363      $  928,052
Issued - options                          --          16,283              --          16,283
Issued for acquisitions                   --          10,745              --          10,745
Issued - warrants (note 11(c)(i))         --           1,617              --           1,617
Conversion (note 11(b)(i))                --           1,363          (1,363)             --
--------------------------------------------------------------------------------------------
Balances, December 31, 1999              416         956,281              --         956,697
Issued - options (note 11(d))             --          33,629              --          33,629
Issued for acquisitions (note 3(f))       --          45,385              --          45,385
Issued - warrants (note 11(c)(i))         --             620              --             620
Issued - other (note 11(e))               --           2,734              --           2,734
--------------------------------------------------------------------------------------------
Balances, December 31, 2000              416       1,038,649              --       1,039,065
Issued - options (note 11(d))             --          48,244              --          48,244
Issued for acquisitions (note 3(b))       --          44,666              --          44,666
Issued - warrants (note 11(c)(i))         --             483              --             483
Issued - other (note 11(e))               --           1,206              --           1,206
--------------------------------------------------------------------------------------------
Balances, December 31, 2001          $   416      $1,133,248      $       --      $1,133,664
============================================================================================
</TABLE>
(i)    Share conversion:

       In accordance with the plan of arrangement described in note 3(h), the
       325,000 Class C Non-Voting Shares were converted into Class B Non-Voting
       Shares.

(ii)   Share split:

       On October 14, 1999, the Board of Directors and voting shareholders of
       the Company approved the subdivision on a two-for-one basis of the issued
       and outstanding Class A Voting Shares and Class B Non-Voting Shares of
       the Company.

                                       34

<PAGE>

AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



11. SHARE CAPITAL (CONTINUED):

       (c) Warrants:

<TABLE>
<CAPTION>
============================================================
                                      Number        Amount
                                     (000's)       (000's)
------------------------------------------------------------
<S>                                   <C>          <C>
Balances, January 1, 1999              250         $ 3,429
Exercised for shares                  (118)         (1,617)
------------------------------------------------------------
Balances, December 31, 1999            132           1,812
Exercised for shares                   (45)           (620)
------------------------------------------------------------
Balances, December 31, 2000             87           1,192
Exercised for shares                   (35)           (483)
------------------------------------------------------------
Balances, December 31, 2001             52         $   709
============================================================
</TABLE>

(i) Warrants:

    Warrants entitle the holder thereof to acquire 3.429 Class B Non-Voting
    Shares at an exercise price of U.S. $0.01 expiring August 15, 2007. The
    warrants were issued as part of the issue of the 12% Senior Notes described
    in note 9(a) and the amount of $3.4 million reflects the valuation of the
    warrants on the issue date.

                                       35

<PAGE>
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


11. SHARE CAPITAL (CONTINUED):

    (d) Share purchase options:

        The Board of Directors has established two stock option plans under
        which options to purchase Class B Non-Voting Shares are granted to
        directors, officers and employees of the Company. Pursuant to the stock
        option plans, 17.5 million Class B Non-Voting Shares have been reserved
        for options. These options were granted at exercise prices estimated to
        be at least equal to the fair value of Class B Non-Voting Shares, vest
        over a three-year period and generally expire five years from the date
        of grant. The option information below has been retroactively restated
        to reflect the two-for-one share split that occurred in 1999:

<TABLE>
<CAPTION>
================================================================================
                                                 Exercise          Weighted
                                 Number of        prices            average
                                 shares          per share        exercise price
                                 (000's)
--------------------------------------------------------------------------------
<S>                              <C>             <C>              <C>
Outstanding, January 1, 1999       6,426                               $ 10.60
Granted                            6,109         $ 23.75 to 58.25        40.52
Cancelled                           (570)           2.25 to 56.50        31.93
Exercised                         (1,946)           0.50 to 23.75         7.42
--------------------------------------------------------------------------------
Outstanding, December 31, 1999    10,019            2.25 to 58.25        28.17
Granted                            3,760           42.70 to 90.00        56.28
Cancelled                         (1,342)           2.25 to 90.00        47.97
Exercised                         (1,959)           0.50 to 45.10        17.19
--------------------------------------------------------------------------------
Outstanding, December 31, 2000    10,478            2.25 to 90.00        37.80
Granted                              996           44.20 to 47.96        45.67
Cancelled                           (587)          14.00 to 90.00        49.42
Exercised                         (2,097)           2.25 to 45.10        22.79
--------------------------------------------------------------------------------
Outstanding, December 31, 2001     8,790            2.25 to 90.00        41.39
================================================================================
</TABLE>

At December 31, 2001, 4.9 million options (2000 - 4.2 million; 1999 - 2.6
million) were exercisable at a weighted average exercise price of $35.80 per
share (2000 - $22.83; 1999 - $11.00).

                                           36
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



11. SHARE CAPITAL (CONTINUED):

        The following table summarizes information concerning options
        outstanding at December 31, 2001:



<TABLE>
<CAPTION>
=========================================================================================
                 Options outstanding (000's)                Options exercisable (000's)
-----------------------------------------------------------------------------------------
                                   Weighted
                                    average        Weighted                    Weighted
Range of                           remaining        average                    average
exercise              Number     contractual life  exercise      Number        exercise
prices              outstanding     (years)          price      exercisable     price
-----------------------------------------------------------------------------------------
<S>                 <C>          <C>               <C>          <C>            <C>
$ 0.00 - 9.00           247           0.3           $ 3.79          247        $ 3.79
$ 9.01 - 18.00        1,117           0.5            12.96        1,117         12.96
$18.01 - 27.00          226           1.1            21.43          212         21.28
$27.01 - 36.00           29           2.1            27.72           15         27.73
$36.01 - 45.00        3,213           2.4            41.51        2,054         41.40
$45.01 - 54.00        2,764           3.3            48.78          821         49.82
$54.01 - 63.00          509           3.3            56.32          179         56.31
$63.01 - 72.00          606           2.7            65.58          271         65.43
$72.01 - 81.00           26           3.0            74.74            9         74.61
$81.01 - 90.00           53           2.9            85.56           21         85.54
=========================================================================================
</TABLE>


(e) Employee Share Ownership Plan:

    The Employee Share Ownership Plan offers all full-time permanent employees
    the opportunity to purchase securities of the Company. Employees may
    contribute between 1% and 5% of their salary to buy units in a single stock
    mutual fund, the Company's Stock Fund, which in turn holds only Class B
    Non-Voting Shares. The Company contributes the equivalent of 25% of
    participant contributions per quarter. The Company's contributions are made
    through the issuance of Class B Non-Voting Shares from treasury. 200,000
    Class B Non-Voting Shares have been authorized for issuance for this
    purpose. In 2001, the Company issued 26,592 shares (2000 - 40,253) under the
    plan.





                                               37
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



11. SHARE CAPITAL (CONTINUED):

    (f) Diluted weighted average shares outstanding:

        Effective January 1, 2001, the Company adopted retroactively the
        treasury stock method of calculating diluted earnings per share in
        accordance with HB 3500. The treasury stock method includes only those
        unexercised options and warrants where the average market price of the
        common shares during the period exceeds the exercise price of the
        options and warrants. In addition, this method assumes that the proceeds
        would be used to purchase common shares at the average market price
        during the period.

        The change in the method of calculation of loss per share did not impact
        basic and diluted loss per share for 2001, 2000 and 1999.

        As a result of net losses for the years ended December 31, 2001, 2000
        and 1999, respectively, the effect of converting stock options, warrants
        and other contingent consideration has not been included in the
        calculation of diluted loss per common share because to do so would have
        been anti-dilutive.

                                       38
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


12. INTEGRATION COSTS, PROVISION FOR RESTRUCTURING AND WORKFORCE REDUCTION
    COSTS:

    (a) Integration costs and provision for restructuring:

        During 1999, the Company incurred integration costs and recorded a
        provision for restructuring and asset write-downs aggregating $157.8
        million as a result of implementing certain initiatives required in
        order to consolidate the operations of the Company with those of AT&T
        LDS and ACC. The amounts were comprised of the following:

<TABLE>
<CAPTION>
================================================================================
<S>                                                                     <C>
Integration costs (note 12(a)(i))                                       $ 24,400
Provision for restructuring (note 12(a)(ii))                              97,804
Write-down of carrying value of certain assets (note 12(a)(iii))          35,586
--------------------------------------------------------------------------------
Total provision                                                         $157,790
================================================================================
</TABLE>


        (i)    The Company incurred integration costs associated with
               consolidating office locations, interconnecting networks and
               consolidating systems and network operations of the Company and
               AT&T LDS and ACC.

        (ii)   The provision for restructuring included amounts principally for
               employee severance and lease and other contract cancellation
               costs.

                The lease and other contract cancellation costs of $48.9 million
                related to excess space in various leased premises and to
                penalties incurred in connection with the termination of
                contracts with various resellers and alternate access facility
                providers.

        (iii)  As a result of consolidating its operations, the Company
               identified certain capital assets which would not be used in the
               consolidated operations and the carrying value of these assets
               was no longer supported by future cash flows. Accordingly, these
               capital assets were written down to their net recoverable values.

        2000 included a reversal of $10.2 million, the provision deemed no
        longer required, as a result of negotiation of lower expenditures than
        originally anticipated and the impact of changes in the real estate
        market that made it uneconomical to exit certain properties.

        During 2001, the outstanding balance of $22.2 million as at December 31,
        2000 was substantially drawn down through payments related to lease
        contract penalties and settlement of lawsuits. The related activities
        have been completed.

                                       39
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



12. INTEGRATION COSTS, PROVISION FOR RESTRUCTURING AND WORKFORCE REDUCTION COSTS
    (CONTINUED):

    (b) Workforce reduction costs:

        During 2001, management approved and carried out a workforce reduction
        plan and recorded a provision of $21.9 million for severance and
        benefits related to the termination of approximately 650 personnel,
        achieved through terminations, attrition and non-renewal of contract
        personnel. The personnel terminated were from various areas across the
        Company, including marketing, network services, customer service,
        Internet and E-Business solutions services and administration. The
        Company had substantially completed the terminations as at December 31,
        2001. The remaining liability balance of $6.2 million at December 31,
        2001 represents salary continuance payments in accordance with the
        employee termination agreements.

13.     OTHER INCOME (EXPENSE):

<TABLE>
<CAPTION>
============================================================================================
                                                       2001             2000            1999
--------------------------------------------------------------------------------------------
<S>                                                <C>              <C>             <C>
Gain on disposition of STOC (note 3(g))            $     --         $ 13,011        $     --
Loss on disposition of certain call centres
  (note 3(a))                                        (8,894)              --              --
Other                                                   274              728           1,998
--------------------------------------------------------------------------------------------
                                                   $ (8,620)        $ 13,739        $  1,998
============================================================================================
</TABLE>

                                       40
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



14. INCOME TAXES:

    The Company uses the liability method of accounting for income taxes. The
    tax effects of temporary differences that give rise to significant portions
    of future income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
================================================================================
                                                  2001              2000
--------------------------------------------------------------------------------
Future tax assets:
<S>                                          <C>               <C>
Future income tax deductions                   $  56,244         $  51,084
  Operating loss carryforwards                   794,172           840,220
  Deferred foreign exchange                       26,829             5,113
--------------------------------------------------------------------------------
  Total future tax assets                        877,245           896,417

Future tax liabilities:
  Deferred pension asset                         (14,748)           (4,050)
  Debt and share issue costs                      (6,717)           (3,572)
  Tax depreciation claimed in excess of
  depreciation booked                           (119,926)          (99,816)
--------------------------------------------------------------------------------
  Total future tax liabilities                  (141,391)         (107,438)
--------------------------------------------------------------------------------
                                                 735,854           788,979
--------------------------------------------------------------------------------
Valuation allowance                             (735,854)         (788,979)
--------------------------------------------------------------------------------
Net future income tax assets                 $        --         $      --
================================================================================
</TABLE>


The reconciliation of the tax provision for income taxes, which consists only of
current taxes, to amounts computed by applying federal and provincial tax rates
to loss before minority interest and provision for income taxes is as follows:


<TABLE>
<CAPTION>
====================================================================================================================================
                                                    2001                           2000                            1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                <C>             <C>               <C>           <C>             <C>
Computed at combined statutory rate    $(303,107)         41.80 %         $(270,481)        43.50%        $ (56,152)        45.00%
Tax effect of:
  Expenses not deductible for
  income tax purposes                     47,762            (6.60)%          43,058         (6.90)%           9,914         (7.94)%
 Income not taxable for
  income tax purposes                       (891)            0.10 %          (1,867)         0.30 %         (207,913)      166.62
 Large Corporations Tax                    7,965            (1.10)%           5,686         (0.90)%           4,964         (3.98)%
 Change in valuation allowance           256,236           (35.30)%         229,290        (36.90)%         254,151       (203.68)%
------------------------------------------------------------------------------------------------------------------------------------
                                       $   7,965            (1.10)%       $   5,686         (0.90)%       $   4,964         (3.98)%
====================================================================================================================================
</TABLE>

                                       41
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



14. INCOME TAXES (CONTINUED):

    At December 31, 2001, the Company has non-capital losses of approximately
    $2.468 billion, available to reduce future years' taxable income, which
    expire as follows:
<TABLE>
<CAPTION>
================================================================================
<S>                                                         <C>
2002                                                        $   22,500
2003                                                           204,700
2004                                                           222,200
2005                                                           309,700
2006                                                           171,600
2007                                                           599,900
2008                                                           582,400
2009                                                           354,500
================================================================================
</TABLE>


    Certain amendments to tax filings may be made to avoid the expiry of losses
    that would otherwise expire in 2002.

15. EMPLOYEE BENEFITS:

       The Company provides a number of retirement benefits, including defined
       benefit plans, providing pension, other retirement and post-employment
       benefits to most of its employees.

    (a) The total expense (income) for the Company's defined benefit plans is as
        follows: 2001 2000 1999

<TABLE>
<CAPTION>
================================================================================
                                           2001            2000           1999
--------------------------------------------------------------------------------
<S>                                    <C>             <C>            <C>
Plans providing pension benefits       $(26,860)       $  5,627       $  3,578
Plans providing other benefits              505             474            576
================================================================================
</TABLE>


The average remaining service periods of the active employees covered by the
pension plans range from 10 to 14 years. The average remaining service period of
the active employees covered by the other retirement benefits plan is 13 years.

                                       42

<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


15.     EMPLOYEE BENEFITS (CONTINUED):

        Information about the Company's defined benefit plans as at December 31,
        2001 and 2000, in aggregate, is as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                               2001                            2000
----------------------------------------------------------------------------------------------
                                       Pension          Other          Pension          Other
                                 benefit plans  benefit plans    benefit plans  benefit plans
----------------------------------------------------------------------------------------------
<S>                              <C>            <C>              <C>            <C>
Accrued benefit obligation:
  Balance, beginning of year        $ 477,665        $ 5,390        $ 443,824        $ 5,965
  Interest cost                        34,158            379           33,218            353
  Actuarial loss (gain)                46,514            374           32,146         (1,012)
  Current service cost                  7,543            227            6,769            213
  Employees' contributions              2,867             --            2,397             --
  Plan amendments                       4,711             --            1,031             --
  Benefits paid                       (38,349)          (192)         (37,320)          (129)
  Settlements                              --             --           (4,400)            --
  Curtailment loss (gain)                 366            (26)              --             --
----------------------------------------------------------------------------------------------
Balance, end of year                $ 535,475        $ 6,152        $ 477,665        $ 5,390
==============================================================================================
Plan assets:
  Fair value, beginning of year     $ 541,237        $    --        $ 528,069        $    --
  Actual return on plan assets        (24,716)            --           44,953             --
  Employer contributions                7,688            192            7,538            129
  Employees' contributions              2,867             --            2,397             --
  Benefits paid                       (38,349)          (192)         (37,320)          (129)
  Settlements                              --             --           (4,400)            --
----------------------------------------------------------------------------------------------
Fair value, end of year             $ 488,727        $    --        $ 541,237        $    --
==============================================================================================
</TABLE>

<TABLE>
<CAPTION>
=================================================================================================
                                                    2001                          2000
------------------------------------------------------------------------------------------------
                                           Pension          Other         Pension          Other
                                     benefit plans  benefit plans   benefit plans  benefit plans
------------------------------------------------------------------------------------------------
<S>                                  <C>            <C>             <C>            <C>
Funded status - plan surplus
  (deficit)                              $(46,748)       $(6,152)       $ 63,572        $(5,390)

Unrecognized actuarial loss (gain)         87,110         (1,061)        (21,940)        (1,510)
Unrecognized prior service costs            4,812             --             928             --
------------------------------------------------------------------------------------------------
Accrued benefit asset (liability)          45,174         (7,213)         42,560         (6,900)
Valuation allowance (note 15(b))               --             --         (31,934)            --
------------------------------------------------------------------------------------------------
Accrued benefit asset (liability),
  net of valuation allowance             $ 45,174        $(7,213)       $ 10,626        $(6,900)
=================================================================================================
</TABLE>


                                       43
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


15.     EMPLOYEE BENEFITS (CONTINUED):

                  The significant actuarial assumptions adopted in measuring the
                  Company's accrued benefit obligations are as follows (weighted
                  average assumptions as of December 31, 2001 and 2000):

<TABLE>
<CAPTION>
=============================================================================================
                                                  2001                          2000
---------------------------------------------------------------------------------------------
                                         Pension          Other        Pension          Other
                                   benefit plans  benefit plans  benefit plans  benefit plans
---------------------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>            <C>
Discount rate                              6.50%          6.50%          7.00%         7.00%
Expected long-term rate of return
  on plan assets                           8.00%            --           8.00%           --
Rate of compensation increase              3.50%            --           3.50%           --
=============================================================================================
</TABLE>

                  The Company's net benefit plan expense for the year ended
                  December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
=============================================================================================
                                                  2001                          2000
---------------------------------------------------------------------------------------------
                                         Pension          Other        Pension          Other
                                   benefit plans  benefit plans  benefit plans  benefit plans
---------------------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>            <C>
Current service cost                   $  7,543          $ 227       $  6,769         $ 213
Interest cost                            34,158            379         33,218           353
Expected return on plan assets          (38,711)            --        (37,397)           --
Prior service costs amortization            574             --            103            --
Valuation allowance (reversed)
  provided against accrued
  benefit asset (note 15(b))            (31,934)            --          2,937            --
Actuarial gain recognized                   (24)           (75)            (3)          (92)
Curtailment loss                          1,534            (26)            --            --
---------------------------------------------------------------------------------------------
Net benefit plan expense
  (income)                             $(26,860)         $ 505       $  5,627         $ 474
=============================================================================================
</TABLE>

         (b)      Change in valuation allowance:

                  An accrued benefit asset arises when the accumulated cash
                  contributions to a pension plan exceed the accumulated pension
                  expense. The accrued benefit asset on an employer's books is
                  comprised of two components:

                  (i)      plan surplus (i.e., the excess of the fair value of
                           the plan assets over the accrued benefit obligation
                           of the plan); and


                                       44
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


15.     EMPLOYEE BENEFITS (CONTINUED):

                  (ii)     net unrecognized (gains) losses (i.e., the sum of the
                           unamortized past service costs, actuarial (gains) and
                           losses and any transitional (asset) or transitional
                           obligation).

                  The expected future benefit from a surplus is generally the
                  present value of employer contribution holidays expected in
                  future years. However, if there is a net unrecognized loss,
                  the accrued benefit asset will be expected to decrease over
                  time due to the amortization of the net unrecognized loss. As
                  a result, the accrued benefit asset on an employer's books
                  cannot exceed the sum of the expected employer future benefit
                  and any net unrecognized losses. When the accrued benefit
                  asset first exceeds the limit, a valuation allowance is
                  established in order to keep the accrued benefit asset on an
                  employer's books at the limit. In future accounting periods,
                  any change in the valuation allowance is recorded through the
                  consolidated statements of operations.

                  At December 31, 2000, the accrued benefit asset relating to
                  the Company's defined benefit pension plans was affected by
                  the limit and contained a cumulative valuation allowance of
                  $31.9 million. The impact of negative returns on plan assets
                  in the Company's defined benefit pension plans has been an
                  elimination of the pension surplus and generation of
                  unamortized losses at December 31, 2001. Under generally
                  accepted accounting principles, the limit on the accrued
                  benefit asset is required to be increased by the amount of the
                  losses that will be charged as an expense in future years,
                  resulting in a reduction in the valuation allowance and a
                  credit to the pension expense amount of the Company. The
                  impact of the above is that the valuation allowance of $31.9
                  million is no longer required and has been recognized into
                  income in 2001.

16.     FINANCIAL INSTRUMENTS:

         (a)      Fair values of financial assets and liabilities:

                  The fair values of cash and cash equivalents, accounts
                  receivable, accounts payable, accrued liabilities and accrued
                  interest payable approximate their carrying values due to the
                  short-term nature of these instruments.

                  The fair value of long-term debt, including the attached
                  warrants, at December 31, 2001, was approximately $3,022.1
                  million (2000 - $3,440.9 million), based on current trading
                  values.


                                       45
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


16.     FINANCIAL INSTRUMENTS (CONTINUED):

                  The fair value of foreign currency options, cross currency
                  swaps and forward contracts at December 31, 2001 was
                  approximately $138.8 million (2000 - $84.5 million), which
                  includes the net fair value of the options monetized in
                  November 2001 of $(2.1) million, based on current trading
                  values, as further described in note 16(b)).

         (b)      Foreign currency risk:

                  The Company is exposed to foreign currency fluctuations on its
                  U.S. dollar-denominated debt, cash and short-term deposits.
                  For the year ended December 31, 2001, the Company held the
                  following financial instruments to hedge the following
                  financings:

<TABLE>
<CAPTION>
============================================================================================================
                                  Foreign                             Foreign        Canadian
                                 currency                            exchange      equivalent
                Financial      obligation                               rates   interest rate          Fair
Debt          instruments        notional        Maturity            weighted        weighted         market
instrument           type           value            date             average         average          value
------------------------------------------------------------------------------------------------------------
                            (In millions)                                                      (In millions)
<S>           <C>           <C>              <C>                <C>             <C>            <C>
10.75%              Cross
  Notes          currency                      November 1,       Cdn. $1.5702
                    swaps      U.S. $170.0            2007      to U.S. $1.00          11.24%     $    (2.8)

9.95%               Cross
  Notes          currency                         June 15,       Cdn. $1.5276
                    swaps      U.S. $970.0            2008      to U.S. $1.00          9.73%      $    71.5

7.65%               Cross
  Notes          currency                    September 15,       Cdn. $1.4977
                    swaps      U.S. $500.0            2006      to U.S. $1.00          7.72%      $    47.4

7.625%              Cross
  Notes          currency                        March 15,       Cdn. $1.5489
                    swaps      U.S. $250.0            2005      to U.S. $1.00          7.87%      $     5.7

12%               Forward
  Notes          exchange                     February 28,       Cdn. $1.5532
                 contract      U.S. $250.0            2002      to U.S. $1.00           n/a        $   10.1

10.625%           Forward
  Notes          exchange                     February 28,       Cdn. $1.5532
                 contract      U.S. $225.0            2002      to U.S. $1.00           n/a        $    9.0
------------------------------------------------------------------------------------------------------------
                                                                                                   $  140.9
============================================================================================================
</TABLE>


                                       46
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


16.     FINANCIAL INSTRUMENTS (CONTINUED):

                  Additional financial instruments:

                  In addition to the financial instruments stated above, as at
                  December 31, 2001, the Company held the following foreign
                  currency options:

                  A foreign currency option that allows the Company to acquire
                  U.S. $85.0 million at an exchange rate equal to the lesser of
                  (i) the October 31, 2002 spot exchange rate or (ii) Cdn.
                  $1.435 to U.S. $1.00 on November 1, 2002; or on November 1,
                  2002 to enter a cross currency swap which will have the effect
                  of acquiring the U.S. dollar-denominated interest payments
                  relating to the 10.75% Notes from May 1, 2003 to November 1,
                  2007 at a rate of 11.25% on the notional Canadian dollar
                  principal amount.

                  A foreign currency option that allows the Company to acquire
                  U.S. $122.0 million at an exchange rate equal to (i) the
                  lesser of the June 15, 2003 spot exchange rate or (ii) Cdn.
                  $1.515 to U.S. $1.00 on June 15, 2003; or on June 15, 2003, to
                  enter into a cross currency swap, which will have the effect
                  of acquiring the U.S. dollar-denominated interest payments
                  relating to the 9.95% Notes from December 15, 2003 to June 15,
                  2008 at a rate of 10.45% on the notional Canadian dollar
                  principal amount.

                  In November 2001, the Company monetized the above foreign
                  currency options by entering into foreign currency options
                  with other counterparties containing terms that exactly offset
                  the above foreign currency options for total proceeds of $26.7
                  million. As at December 31, 2001, the fair value of all the
                  foreign currency options was $(2.1) million (comprising assets
                  of $28.1 million offset by liabilities of $30.2 million).

                  Monetization of swaps:

                  In 2001, the Company monetized certain foreign currency
                  options, including those mentioned above, cross currency swaps
                  and a forward contract with a notional value totalling U.S.
                  $1,415.4 million for total proceeds of $150.7 million. These
                  hedges were replaced with new cross currency swaps and forward
                  contracts at current market rates with a notional value
                  totalling U.S. $1,420.4 million. The net deferred gain of
                  $33.6 million will be recognized in earnings over the
                  remaining term of the underlying debt for which the
                  derivatives were designated as cash flow hedges. The
                  unamortized balance of the premiums paid for the foreign
                  currency options that were monetized has been netted against
                  the gain. As at December 31, 2001, the Company recognized $4.3
                  million of the net deferred gain in earnings.


                                       47
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


16.     FINANCIAL INSTRUMENTS (CONTINUED):

                  In the May 1, 2002 amendment to its Credit Facility, the
                  Company agreed to unwind a sufficient amount of its
                  cross-currency interest rate swaps to generate cash proceeds
                  of at least $100 million (see note 9(h)).

                  As at December 31, 2000, the Company held the following
                  financial instruments:

<TABLE>
<CAPTION>
==============================================================================================================
                                        Foreign                          Foreign        Canadian
                                       currency                         exchange      equivalent
                   Financial         obligation                            rates   interest rate        Fair
Debt             instruments           notional        Maturity         weighted        weighted       market
instrument              type              value            date          average         average        value
--------------------------------------------------------------------------------------------------------------
                                  (In millions)                                    (In millions)
<S>              <C>              <C>             <C>              <C>             <C>                <C>
10.75%               Foreign                             Option
  Notes             currency                        October 31,
                     options        U.S. $170.0            2002
                                                          Swap:
                                                    November 1,     Cdn. $1.4350
                                                          2007     to U.S. $1.00          11.25%      $  23.9

9.95%                Foreign                             Option
  Notes             currency                           June 15,
                     options        U.S. $244.1      2003 Swap:
                                                       June 15,     Cdn. $1.5150
                                                           2008    to U.S. $1.00          10.45%      $  7.4

9.95%                  Cross
  Notes             currency                           June 15,     Cdn. $1.5034
                       swaps        U.S. $725.9            2008    to U.S. $1.00           9.36%      $  4.3

7.65%                  Cross
  Notes             currency                      September 15,     Cdn. $1.4740
                       swaps        U.S. $500.0            2006    to U.S. $1.00           7.40%      $  12.4

7.625%                 Cross
  Notes             currency                          March 15,     Cdn. $1.4575
                       swaps        U.S. $250.0            2005    to U.S. $1.00           6.86%      $  18.5

12% and              Forward
  10.625%           exchange                        January 31,     Cdn. $1.4602
  Notes             contract        U.S. $450.0            2001    to U.S. $1.00            n/a       $  18.0
--------------------------------------------------------------------------------------------------------------
                                                                                                      $  84.5
==============================================================================================================
</TABLE>


                                       48
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


16.     FINANCIAL INSTRUMENTS (CONTINUED):

         (c)      Interest rate risk:

                  The following table summarizes the Company's exposure to
                  interest rate risk.

<TABLE>
<CAPTION>
======================================================================================================
                                             Fixed interest rate maturing within
------------------------------------------------------------------------------------------------------
                                Floating                                          After   Non-interest
2001                                rate       1 year      1 - 5 years          5 years        bearing
------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>         <C>               <C>          <C>
FINANCIAL ASSETS:

Cash and cash equivalents       $537,294       $   --       $       --       $       --       $     --
Accounts receivable                   --           --               --               --         70,640

FINANCIAL LIABILITIES:

Current liabilities                   --        1,930               --               --        406,108
Long-term debt                   170,000           --        2,145,334        2,357,404             --
======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
======================================================================================================
                                             Fixed interest rate maturing within
------------------------------------------------------------------------------------------------------
                                Floating                                          After   Non-interest
2000                                rate       1 year      1 - 5 years          5 years        bearing
------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>         <C>               <C>         <C>
FINANCIAL ASSETS:

Cash and cash equivalents       $ 68,587       $   --       $       --       $       --       $     --
Accounts receivable                   --           --               --               --        258,425

FINANCIAL LIABILITIES:

Current liabilities                   --        2,210               --               --        411,436
Long-term debt                   270,000           --          542,417        2,816,048             --
======================================================================================================
</TABLE>


                                       49
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


16.     FINANCIAL INSTRUMENTS (CONTINUED):

         (d)      Credit risk:

                  The Company's financial instruments that are exposed to credit
                  risk are cash and cash equivalents, accounts receivable and
                  financial instruments used for hedging purposes. Cash and cash
                  equivalents, which consist of investments in highly liquid,
                  highly secure money market instruments, are on deposit at
                  major financial institutions. Credit risk with respect to
                  accounts receivable is limited due to the large number of
                  customers to which the Company provides services. Credit risk
                  on hedging instruments is limited as these transactions are
                  only entered into with highly rated bank counterparties.

17.     SEGMENTED INFORMATION:

                  The Company currently operates in one operating segment, the
                  telecommunications industry in Canada. The Company offers a
                  number of products, delivered through its integrated fibre
                  optics networks, sold by a national sales force, agents and
                  telemarketers and provisioned by one operations group. The
                  Company makes decisions and evaluates financial performance
                  primarily based on its products.

                  Revenue by product is as follows:

<TABLE>
<CAPTION>
================================================================================
                                            2001             2000           1999
--------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>
Data                                  $  485,031       $  465,407       $282,273
Local                                    209,207          177,424         93,379
Internet and E-Business solutions        171,852          129,865         52,471
Other                                     20,843           32,643         37,407
--------------------------------------------------------------------------------
                                         886,933          805,339        465,530

Long distance                            657,788          700,039        401,191
--------------------------------------------------------------------------------
                                      $1,544,721       $1,505,378       $866,721
================================================================================
</TABLE>

                  During the years ended December 31, 2001, 2000 and 1999, no
                  customers of the Company individually represented more than
                  10% of the Company's revenue.


                                       50
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


18.     RELATED PARTY TRANSACTIONS:

                  Services are exchanged between the Company and its
                  shareholders and certain of their subsidiaries. These
                  transactions are in the normal course of operations and are
                  measured at the exchange amounts being the amounts agreed to
                  by the parties.

                  Transactions with the above related parties were as follows:

<TABLE>
<CAPTION>
              ====================================================
                                 2001           2000          1999
              ----------------------------------------------------
<S>                          <C>            <C>            <C>
              Revenue        $146,759       $114,278       $49,584
              Expenses        100,900        117,173        84,928
              ====================================================
</TABLE>

Amounts due from and to the above related parties are as follows:

<TABLE>
<CAPTION>
                ===============================================
                                             2001          2000
                -----------------------------------------------
<S>                                       <C>           <C>
                Accounts receivable       $14,958       $14,265
                Accounts payable           22,297        26,772
                ===============================================
</TABLE>

19.     RECONCILIATION OF CHANGE IN NON-CASH WORKING CAPITAL:

                  The change in non-cash working capital consists of the
                  following:

<TABLE>
<CAPTION>
       ==================================================================
                                             2001        2000       1999
       ------------------------------------------------------------------
<S>                                     <C>         <C>         <C>
       Accounts receivable              $ 184,114   $  10,469   $(21,135)
       Other current assets                  (986)      1,734      8,185
       Accounts payable                   (20,663)   (110,155)    79,213
       Accrued liabilities                (67,942)    (64,635)   (57,750)
       Accrued interest payable            21,544       3,349     36,252
       Income taxes payable                   438      (4,785)     2,560
       Deferred revenue in
         "Other long term liabilities"        765          --         --
       ------------------------------------------------------------------
                                        $ 117,270   $(164,023)  $ 47,325
       ==================================================================
</TABLE>


                                       51
<PAGE>
AT&T CANADA INC.

Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999


20.      SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
    =======================================================================
                                                    2001      2000     1999
    -----------------------------------------------------------------------
<S>                                             <C>       <C>       <C>
    Supplemental cash flow information:
      Cash interest paid                        $213,890  $165,362  $30,265
      Cash income taxes paid                       6,241     7,148    3,218

    =======================================================================

    Supplemental disclosures of non-cash
      investing and financing activities:
        Accrued liabilities and accounts
          payable incurred for the acquisition
          of property, plant and equipment      $ 58,418  $ 27,878  $95,108
        Capital lease obligations incurred
          for the purchase of networks
          and equipment                               --       560      202
        Class B Non-Voting Shares issued
          for acquisitions                        44,666    45,385   10,745
        Class B Non-Voting Shares issued
          for conversion of warrants                 483       620    1,617
        Class B Non-Voting Shares issued
          for the Company's contributions to
          the Employee Share Ownership Plan        1,206     2,734       --
    =======================================================================
</TABLE>

21.      RECLASSIFICATION OF PRIOR PERIODS AMOUNTS:

         Certain amounts presented in the prior periods have been reclassified
         to conform with the presentation adopted in the current year.


                                       52
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES:

    The Company's consolidated financial statements have been prepared in
    accordance with accounting principles generally accepted ("GAAP") in Canada
    which, in the case of the Company, conform in all material respects with
    those in the United States, except as outlined below:

    (a) Consolidated statements of operations and consolidated statements of
        comprehensive loss:

        The application of U.S. GAAP would have the following effect on loss for
        the year, deficit and basic loss per common share as reported:


<TABLE>
<CAPTION>
=======================================================================================================
                                                             2001            2000                1999
-------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>
Loss for the year, Canadian GAAP                     $  (733,101)       $  (523,207)       $    (5,286)
Stock-based compensation
  expense (note 22(a)(iii))                              (15,023)            (4,364)              (597)
Foreign exchange loss (note 22(a)(iv))                   (12,274)                --                 --
Loss on derivative
instruments (note 22(a)(v))                              (12,034)                --                 --
Change in valuation allowance (note 22(a)(vi))           (31,934)                --                 --
-------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP
  before accounting change                              (804,366)          (527,571)            (5,883)
-------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change,
  adoption of FAS 133 (note 22(a)(v))                      4,028                 --                 --
-------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP                            (800,338)          (527,571)            (5,883)

Opening deficit, U.S. GAAP                              (794,180)          (266,609)          (260,726)
-------------------------------------------------------------------------------------------------------
Closing deficit, U.S. GAAP                           $(1,594,518)       $  (794,180)       $  (266,609)
=======================================================================================================
Basic and diluted loss per common
  share under U.S. GAAP:
    Before accounting change                         $     (8.17)       $     (5.52)       $     (0.06)
    Cumulative effect of accounting
      change                                                0.04                 --                 --
-------------------------------------------------------------------------------------------------------
                                                     $     (8.13)       $     (5.52)       $     (0.06)
=======================================================================================================
Weighted average number of common
  shares outstanding (in thousands)                       98,406             95,561             92,457
=======================================================================================================
</TABLE>


                                       53
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

    U.S. GAAP also requires disclosure of a Statement of Comprehensive Income
    (Loss). Comprehensive income (loss) generally encompasses all changes in
    shareholders' equity except those arising from transactions with
    shareholders:

<TABLE>
<CAPTION>
================================================================================
                                      2001            2000               1999
--------------------------------------------------------------------------------
<S>                                <C>              <C>              <C>
Loss for the year, U.S. GAAP       $(800,338)       $(527,571)       $  (5,883)
Other comprehensive income,
  net of tax of nil:
  Cumulative effect of accounting
   change on adoption of FAS 133
    (note 22(a)(v))                   21,990               --               --
Unrealized gain on derivative
   instruments (note 22(a)(v))        10,397               --               --
--------------------------------------------------------------------------------
Comprehensive loss,
    U.S. GAAP                      $(767,951)       $(527,571)       $  (5,883)
================================================================================
</TABLE>

(i)    Earnings before interest, taxes, depreciation and amortization,
       integration costs, provision for restructuring, workforce reduction costs
       and minority interest:

       United States GAAP requires that integration costs, provision for
       restructuring, workforce reduction costs, depreciation and amortization
       be included in the determination of operating income and does not permit
       the disclosure of subtotals of the amounts of operating income before
       these items. Canadian GAAP permits the subtotals of the amounts of
       operating income before these items.

(ii)   Statement of cash flows:

       Canadian GAAP permits the disclosure of a subtotal of the amount of funds
       provided by operations before changes in non-cash working capital items
       in the consolidated statement of cash flows. United States GAAP does not
       permit this subtotal to be included.

                                       54
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

     (iii) Stock-based compensation expense:

           For U.S. GAAP purposes, the Company has chosen to account for
           stock-based compensation using the intrinsic value method prescribed
           in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
           for Stock Issued to Employees." Accordingly, compensation expense for
           U.S. GAAP purposes has been recognized at the date of share purchases
           or option grants at the amount by which the quoted market price of
           the stock exceeds the amount an employee must pay to acquire the
           stock.

           In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
           "Accounting for Certain Transactions involving Stock Compensation -
           an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
           following: the criteria for determining whether a plan qualifies as a
           non-compensatory plan; the accounting consequences of various
           modifications to the terms of the previously fixed stock options or
           awards; and the accounting for an exchange of stock compensation
           awards in business combinations. The Company has accounted for FIN 44
           as part of the reconciliation to accounting principles generally
           accepted in the United States.

           During the year, the Company recorded stock compensation expense of
           $1.4 million (2000-$4.4 million; 1999-$0.6 million) as a result of
           accelerating the vesting period of certain employee stock option
           awards. In addition, the Company recorded $13.6 million (2000-nil;
           1999-nil) in stock compensation expense as a result of extending the
           expiry date of certain employee stock option awards.

     (iv)  Foreign exchange:

           Under Canadian GAAP, unrealized gains and losses on translation of
           foreign currency-denominated long-term monetary items which are not
           hedged are deferred and amortized over the remaining lives of the
           related items. Under U.S. GAAP, gains or losses on translation of
           foreign currency-denominated long-term monetary items which are not
           hedged are credited or charged to earnings. Under Canadian GAAP, most
           of the U.S.-denominated long-term debt has been fully hedged, and for
           this portion, foreign exchange gains or losses on hedge instruments
           are recorded in the same period as the corresponding gains and losses
           on the related long-term debt.

                                     55
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)


Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

           The deferred loss under Canadian GAAP related to the U.S. denominated
           long-term debt that has not been hedged at December 31, 2001 was
           $12.3 million.

       (v) Unrealized loss on derivative instruments:

           The Company is required to and has implemented SFAS No. 133
           "Accounting for Derivative Instruments and Hedging Activities", as
           amended by SFAS No. 137 and SFAS No. 138 ("SFAS 133") for the current
           fiscal year ended December 31, 2001. SFAS 133 establishes accounting
           and reporting standards for derivative instruments, including certain
           derivative instruments embedded in other contracts and for hedging
           activities. All derivatives, whether designated in hedging
           relationships or not, are required to be recorded on the balance
           sheet at fair value. If the derivative is designated as a fair value
           hedge, the changes in the fair value of the derivative and of the
           hedged item attributable to the hedged risk are recognized in
           earnings. If the derivative is designated as a cash flow hedge, the
           effective portions of changes in the fair value of the derivative are
           recorded in Accumulated Other Comprehensive Income ("AOCI") and are
           recognized in the income statement when the hedged item affects
           earnings. The AOCI account forms a component of shareholders' equity.
           Changes in fair values of derivative instruments not designated as
           hedging instruments and ineffective portion of hedges, if any, are
           recognized in earnings in the current period.

           The Company recognized a one-time transition gain of $26.0 million
           which represents the net effect of recognizing the market value of
           the Company's derivative portfolio of $84.5 million (consisting of
           assets of $98.2 million and liabilities of $13.7 million), the
           derecognition of the unamortized balance of swaption premiums of
           $17.6 million and the derecognition of deferred foreign exchange
           losses of $40.9 million as at December 31, 2000. The portion of the
           one-time transition gain that relates to derivatives designated and
           qualifying as cash flow hedges, totalling $ 22.0 million has been
           recognized in the AOCI account and will be reclassified into earnings
           over the life of the underlying hedged items, of which the last
           expires in June 2008. The portion of the one-time transition gain
           related to derivatives not designated as hedges, totaling $4.0
           million, has been recognized in earnings as the cumulative effect of
           the accounting change on adoption of FAS 133.



                                     56
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

           For the year ended December 31, 2001, as a result of SFAS 133
           relative to Canadian GAAP, the Company realized a loss of $12.0
           million due to the unfavourable change in time value of the swaptions
           of $12.1 million, the net gain in the fair market value of foreign
           exchange forward contracts not designated as hedging instruments of
           $(39.4) million, the effect of foreign exchange losses on the related
           debt of $44.3 million, the reversal of amortization of option
           premiums recorded under Canadian GAAP of $(5.4) million and
           recognition of $(3.9) million of a deferred gain relating to unwound
           swaps, offset by the reversal of the amortization of the deferred
           gain under Canadian GAAP of $4.3 million.

           Foreign currency risk:

           The Company enters into various financial instruments including
           swaptions and cross currency swaps to manage its exposure to changes
           in currency exchange rates related to its U.S. dollar-denominated
           debt. The Company enters into financial instruments solely for
           hedging requirements and does not use them for speculative purposes.

           The Company has designated derivatives with a net notional value of
           U.S. $1,890 million (composed of derivatives to purchase U.S. $2,097
           million and derivatives to sell U.S. $207 million) as cash flow
           hedges which hedge the foreign currency risk of cash flows relating
           to U.S. dollar-denominated debt with a face value of the same amount.
           These cash flow hedges were and are expected to continue to be highly
           effective in hedging foreign currency rate risk. The changes in
           market value of the effective portion of the derivatives designated
           as cash flow hedges are reported in AOCI. Gains and losses reported
           in the AOCI account will be classified in earnings when the
           underlying debt matures or is repaid. The ineffective portion of the
           change in market value, specifically the time value component, is
           charged through earnings. In 2001, the change in market value of the
           time value component increased net loss by $12.1 million.

                                     57
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):OTHER DERIVATIVES:

           As at December 31, 2001, the fair value of the derivatives designated
           as cash flow hedges was $119.7 million consisting of assets of $159.9
           million and liabilities of $40.2 million.

           Other derivatives:

           In addition, the Company holds foreign exchange forward contracts
           with a notional value totaling U.S. $475 million, for periods of one
           to six months that are renewed for a further one to six months on a
           continuous basis, based on the historical rate of the contract,
           adjusted for the forward premium or discount. The foreign exchange
           contracts are used to hedge the foreign currency risk of cash flows
           relating to the payment of principal of certain U.S. dollar
           denominated debt with a face value of the same amount. These foreign
           exchange contracts are not eligible to be designated as effective
           hedges since the term of the contracts do not match the underlying
           debt being hedged and, therefore, the changes in their market value
           are recorded in earnings. As at December 31, 2001, the fair value of
           the foreign exchange contracts was $19.1 million.

           In May 2001, the Company unwound certain swaptions, cross currency
           swaps and a forward contract. The related AOCI balances of the
           derivatives unwound represented a deferred gain of $29.6 million.
           This gain is being recognized in earnings over the remaining term of
           the underlying debt for which these derivatives were designated as
           cash flow hedges. The gains to be recognized in future periods are as
           follows:
<TABLE>
<CAPTION>
================================================================================
<S>                                                                  <C>
2002                                                                 $ 6,242
2003                                                                   6,242
2004                                                                   6,242
2005                                                                   3,466
2006                                                                   2,344
2007 and thereafter                                                    1,158
--------------------------------------------------------------------------------
                                                                     $25,694
================================================================================
</TABLE>

                                       58
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

    (vi)  Change in valuation allowance:

           During the year, the Company recognized a gain under Canadian GAAP of
           $31.9 million from the reversal of the valuation allowance on the
           accrued benefit asset relating to its defined benefit pension plan.
           The reversal of the valuation allowance is not permitted under U.S.
           GAAP and accordingly, the gain has been reversed for U.S. GAAP
           reporting purposes.

   (b) Other disclosures:

       (i) Stock-based compensation expense disclosure:

           Had the Company determined compensation expense costs based on the
           fair value at the date of grant for stock options under SFAS No. 123,
           loss attributable to common shareholders and basic loss per share
           would have increased as indicated below.

           The company uses the Black-Scholes option-pricing model to estimate
           the fair value at the date of grant for options granted subsequent to
           the Company's initial public offering.

           In 2001, 996,939 (2000 - 3,760,500; 1999 - 6,109,104) options with a
           weighted average fair value of $18.33 (2000 - $15.16; 1999 - $16.20)
           were granted using the following weighted average assumptions:

<TABLE>
<CAPTION>
================================================================================
                                     2001           2000           1999
--------------------------------------------------------------------------------
<S>                                  <C>            <C>            <C>
Risk free interest rate (%)           5.1%           6.2%           5.5%
Expected volatility (%)              35.7%           5.4%          0.44%
Expected life (in years)                5              5              5
Expected dividends                    Nil            Nil            Nil
================================================================================
</TABLE>

                                       59
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):


<TABLE>
<CAPTION>
================================================================================
                                         2001             2000             1999
--------------------------------------------------------------------------------
<S>                                     <C>             <C>            <C>
Loss attributable to common
  shareholders, U.S. GAAP -
  as reported                           $(800,338)      $(527,571)     $  (5,883)
Loss attributable to common
  shareholders, U.S. GAAP -
  pro forma                              (841,473)       (578,200)       (48,622)
Loss per share - as reported                (8.13)          (5.52)         (0.06)
Loss per share - pro forma                  (8.55)          (6.05)         (0.53)
================================================================================
Weighted average number of shares
outstanding (in thousands)                 98,406          95,561         92,457
================================================================================
</TABLE>

(ii)  Accounts receivable are net of an allowance for doubtful accounts of $24.3
      million (2000 - $31.1 million) at December 31, 2001.

(iii) Recent pronouncements:

      (a) Business combinations, goodwill and other intangible assets:

          Effective January 1, 2002, the Company will adopt The Canadian
          Institute of Chartered Accountants Handbook Section ("HB") 1581
          "Business Combinations", and HB 3062 "Goodwill and Other Intangible
          Assets". The new sections are substantially consistent with equivalent
          U.S. pronouncements, SFAS No. 141 "Business Combinations" and SFAS No.
          142 "Goodwill and Other Intangible Assets", issued by the Financial
          Accounting Standards Board ("FASB") in July 2001 except that under
          U.S. GAAP, any transitional impairment charge is recognized in
          earnings as a cumulative effect of a change in accounting principles.
          The accounting policy is described in note 1(f).

                                       60
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
    STATES (CONTINUED):

         (b)  Accounting for asset retirement obligations:

              In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
              Retirement Obligations". The statement requires entities to record
              the fair value of a liability for an asset retirement obligation
              in the period in which the legal or contractual removal obligation
              is incurred. The statement is effective for fiscal years beginning
              after June 15, 2002, with earlier adoption encouraged. The Company
              does not believe that the adoption of SFAS No. 143 will have a
              material effect on its results of operations and financial
              position.

         (c)  Accounting for the impairment or disposal of long-lived assets:

              SFAS No. 144 "Accounting for the Impairment or Disposal of
              Long-Lived Assets" was issued in October 2001. The statement
              supersedes SFAS No. 121 "Accounting for the Impairment of
              Long-Lives Assets to Be Disposed of" and the accounting and
              reporting provisions of APB Opinion No. 30, "Reporting the Results
              of Operations - Reporting the Effects of Disposal of a Segment of
              a Business, and Extraordinary, Unusual and Infrequently Occurring
              Events and Transactions" (Opinion 30), for the disposal of a
              segment of a business (as previously defined in that Opinion).
              Statement 144 retains the fundamental provisions in Statement 121
              for recognizing and measuring impairment losses on long-lived
              assets held for use and long-lived assets to be disposed of by
              sale. It also provides guidance on how a long-lived asset that is
              used as part of a group should be evaluated for impairment,
              establishes criteria for when a long-lived asset is held for sale,
              and prescribes the accounting for a long-lived asset that will be
              disposed of other than by sale. Statement 144 retains the basic
              provisions of Opinion 30 on how to present discontinued operations
              in the income statement but broadens that presentation to include
              a component of an entity (rather than a segment of a business).
              FAS 144 is effective for fiscal years beginning after December 15,
              2001. The Company does not believe that the adoption of SFAS No.
              144 will have a material effect on its results of operations and
              financial position.

                                     61
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



23.  OTHER COMMITMENTS AND CONTINGENCIES:

     (a)   Regulatory environment:

           In previous submissions and in its recent proposals to the Canadian
           Radio-television and Telecommunications Commission ("CRTC") during
           the Price Cap proceeding, initiated to review the framework for local
           competition, the Company has stated its position that the existing
           regulatory framework is out of balance and favours the incumbent
           providers at the expense of competitive providers. A decision by the
           CRTC on the Price Cap proceeding is expected on or before May 31,
           2002. Should this and the future decisions of the CRTC fail to
           recognize and remedy the existing imbalance, the sustainability of
           competition and the benefits of competition could be threatened.
           There is no assurance that the CRTC will accept the Company's
           proposals and the Company cannot predict the ultimate impact that the
           CRTC's decision and any future decisions will have. As stated during
           the course of the proceeding, should the CRTC not take this
           opportunity to establish a framework for effective competition in the
           local business telecommunications market, and thereby reduce the
           Company's costs, the Company will need to re-evaluate its plans and
           growth assumptions in this and related telecommunications markets.

    (b) Contractual commitments:

        Under the terms of its operating lease agreements for fibre optics
        maintenance, operating facilities, equipment rentals and minimum
        purchase commitments under supply contracts and customer contracts, the
        Company is committed to make the following payments for the years ending
        December 31, as follows:
<TABLE>
================================================================================
<S>                                                            <C>
2002                                                           $156,498
2003                                                             91,995
2004                                                             75,993
2005                                                             63,919
2006                                                             50,998
Thereafter                                                      332,780
--------------------------------------------------------------------------------
                                                                $772,183
================================================================================
</TABLE>

                                       62
<PAGE>

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2001, 2000 and 1999



23.     OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED):

   (c)  Litigation:

        In the normal course of business, the Company is subject to proceedings,
        lawsuits and other claims. Such matters are subject to many
        uncertainties, and outcomes are not predictable with assurance.
        Consequently, the Company is unable to ascertain the ultimate aggregate
        amount of monetary liability or financial impact with respect to these
        matters at December 31, 2001.

        These matters could affect the operating results of any one quarter when
        resolved in future periods. However, the Company believes that after
        final disposition, any monetary liability or financial impact to the
        Company beyond that provided for at year end would not be material to
        the annual consolidated financial statements.

   (d)  Letters of credit:

        In the normal course of business, the Company issues letters of credit
        in compliance with its right-of-way agreements with various
        municipalities and utility companies. In general, the terms of the
        letter of credit permit the municipality or the utility company to draw
        on the letter of credit to recover any losses incurred under the
        right-of-way agreement, as defined. As at December 31, 2001, the Company
        had letters of credit outstanding of $2.2 million with nil drawn.

   (e)  Contingent payment on acquisitions:

        In the acquisition of MONTAGE, the vendors have the potential to earn up
        to an additional $30.0 million contingent upon the attainment by June
        30, 2002 of certain specified performance targets. Any earned contingent
        consideration is payable over the three-year period ending June 30, 2004
        and will be recorded once the contingent amount is determinable. A
        portion of the contingent payment will be accounted for as additional
        purchase price with the balance recorded as compensation expense.

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