**EXHIBIT  99.1**

 

 

 

 

 

 

 

 

**BELL  CANADA**

**2003  FINANCIAL INFORMATION**

 

 

 

 

 

 

 

 

 

 

  

  

  

  
 2003   Financial   Information
  

  

  

  

  

  

**Bell Canada**  For the year ended December 31, 2003

 

Bell Canada  2003 Financial Information   1

 Bell Canada  is Canada’s leading provider of wireline and wireless communications services,  Internet access, data services and Direct-to-Home (DTH) satellite television  services to residential and business customers. 

 This document  contains the Bell Canada management’s discussion and analysis of financial  condition and results of operations and its financial statements for 2003.  This document also contains Bell Canada’s statement of corporate governance  practices. 

 Please  visit our website at www.bell.ca  for information about our products and services. 

 Bell Canada  is indirectly wholly-owned by BCE Inc. To obtain a copy of BCE Inc.’s annual  report, please visit BCE Inc.’s website at www.bce.ca,  call 1-888-932-6666 or write to us at: 

 Bell Canada    Corporate Communications   1000, rue de La Gauchetière Ouest   Bureau 3700   Montréal, Québec   Canada H3B 4Y7 

2   2003  Financial Information   Bell Canada 
***MANAGEMENT’S  DISCUSSION AND ANALYSIS***MD&A at a glance
About        our business
3
        The year at a glance
8
        Financial results analysis
10
        Financial and capital management
17
        Risks that could affect our business
23
        Our accounting policies
30
        Supplementary financial information
34
In          this MD&A, *we, us*and *our*mean Bell Canada, its          subsidiaries and joint ventures. BCE Inc. (BCE) is our ultimate parent          company. BCE owns indirectly 100% of Bell Canada.

This management’s  discussion and analysis of financial condition and results of operations (MD&A)  comments on Bell Canada’s operations, performance and financial condition  for the years ended December 31, 2003 and 2002.

All          amounts in this MD&A are in millions of Canadian dollars, except          where otherwise noted. 
Please        refer to the audited consolidated financial statements when reading this        MD&A. You will find more information about us, including Bell Canada’s        Annual Information Form for the year ended December 31, 2003        (Bell Canada 2003 AIF), on BCE’s website at *www.bce.ca*and on SEDAR at *www.sedar.com*.**ABOUT FORWARD-LOOKING STATEMENTS**
A statement          we make is forward looking when it uses what we know today to make a          statement about the future.               Forward-looking statements may include          words such as *anticipate, believe, could, expect, goal, intend, may,          objective, outlook, plan, seek, strive, target*and *will.*

Securities  laws encourage companies to disclose forward-looking information so that investors  can get a better understanding of the company’s future prospects and make  informed investment decisions.        Bell Canada’s 2003 Financial information,  including this MD&A, and in particular the outlook sections of this MD&A,  contain forward-looking statements about Bell Canada’s objectives,  strategies, financial condition, results of operations and businesses. These  statements are “forward-looking” because they are based on our current  expectations about the markets we operate in, and on various estimates and assumptions.    It is important to know that:  
- forward-looking    statements in Bell Canada’s 2003 Financial information, including    this MD&A, describe our expectations on March 10, 2004
- our actual    results could be materially different from what we expect if known or unknown    risks affect our business, or if our estimates or assumptions turn out to    be inaccurate. As a result, we cannot guarantee that any forward-looking statement    will materialize.
-  forward-looking    statements do not take into account the effect that transactions or non-recurring    items announced or occurring after the statements are made may have on our    business. For example, they do not include the effect of sales of assets,    monetizations, mergers, acquisitions, other business combinations or transactions,    asset write downs or other charges.
- we disclaim    any intention and assume no obligation to update any forward-looking statement    even if new information becomes available, as a result of future events or    for any other reason.

     Risks  that could cause our actual results to materially differ from our current expectations  are discussed throughout this MD&A and, in particular, in *Risks that  could affect our business*. 

**NON-GAAP  FINANCIAL MEASURES**

**EBITDA**

We          define EBITDA as operating revenues less operating expenses, which means          it represents operating income before amortization expense, net benefit          plans (cost) credit, and restructuring and other charges. 

 The term,  EBITDA (earnings before interest, taxes, depreciation and amortization), does  not have any standardized meaning prescribed by Canadian generally accepted  accounting principles (GAAP). It is therefore unlikely to be comparable to similar  measures presented by other issuers. EBITDA is presented on a consistent basis  from period to period.        We believe that EBITDA is an important measure  because it allows us to assess the operating performance of our ongoing businesses  without the effects of amortization expense, net benefit plans (cost) credit,  and restructuring and other charges. We exclude amortization expense and net  benefit plans (cost) credit because they largely depend on the accounting methods  and assumptions a company uses, as well as non-operating factors, such as the  historical cost of capital assets and the fund performance of a company’s  pension plans. We exclude restructuring and other charges because they are transitional  in nature.        EBITDA allows us to compare our operating performance  on a consistent basis. We believe that certain investors and analysts use EBITDA  to measure a company’s ability to service debt and to meet other payment  obligations, or as a common valuation measurement in the telecommunications  industry.        EBITDA should not be confused with net cash flows  from operating activities. The most comparable Canadian GAAP financial measure  is operating income. You will find a reconciliation of EBITDA to operating income  on a consolidated basis in *Financial results analysis*. 

  

Bell Canada  2003 Financial Information   3

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Free  cash flow**

We          define free cash flow as cash from operating activities after capital          expenditures, total dividends and other investing activities.

The term,  free cash flow, does not have any standardized meaning prescribed by Canadian  GAAP. It is therefore unlikely to be comparable to similar measures presented  by other issuers. Free cash flow is presented on a consistent basis from period  to period.        We consider free cash flow to be an important  indicator of the financial strength and performance of our business because  it shows how much cash is available to repay debt and to reinvest in our company.  We believe that certain investors and analysts use free cash flow when valuing  a business and its underlying assets.        The most comparable Canadian GAAP financial measure  is cash from operating activities. You will find a reconciliation of free cash  flow to cash from operating activities on a consolidated basis in *Financial  and capital management*. 
ABOUT  OUR BUSINESS****
This          section describes Bell Canada’s businesses, objectives and          strategies. 

Bell Canada  is Canada’s leading provider of wireline and wireless communications services,  Internet access, data services and Direct-to-Home (DTH) satellite television  services to residential and business customers. 
**ACQUISITION OF ALIANT INC. (ALIANT)**
 Before December 31, 2002,  we had a 39% equity investment in Aliant and accounted for it using the equity  method. Effective December 31, 2002, BCE transferred its 14%  interest in Aliant at carrying value to us in exchange for common shares of  Bell Canada. This was done to simplify the structure of BCE’s holdings.  As result, we now own a 53.5% interest in Aliant.        We started consolidating the net assets of Aliant  in our consolidated balance sheet as of December 31, 2002. This  resulted in an increase of $463 million in our net assets, an increase of $566  million in common shares and a decrease of $103 million in contributed surplus  at December 31, 2002.        We started consolidating the results of operations  of Aliant as of January 1, 2003. As a result, our  2002 results of  operations exclude the consolidation of Aliant (except for our 39% equity interest  in the earnings of Aliant).
**ACQUISITION OF BELL EXPRESSVU LIMITED PARTNERSHIP (BELL EXPRESSVU)**
 In December 2002,  we and BCE completed a corporate reorganization. This resulted in the transfer  of our directories business and BCE’s agreement to contribute Bell ExpressVu,  a $498 million note receivable from Bell Canada Holdings Inc. (BCH) and  cash to BCE Holdings GP, a partnership held 52% by us and 48% by BCE. 

BCH          is our parent company. BCH owns 100% of Bell Canada. 

 At  the end of December 2002, BCE transferred its 100% investment in Bell  ExpressVu at carrying value to the partnership in exchange for units in the  partnership. The partnership then distributed the net proceeds from the sale  of the directories business to its partners. A net distribution of $1.1 billion  was made to BCE, which was partly used to help finance the repurchase of SBC  Communications Inc.’s (SBC) remaining indirect interest in Bell Canada.         We started consolidating the net assets of Bell  ExpressVu in our consolidated balance sheet as of December 31, 2002.  This resulted in an increase of $342 million in our net assets and in contributed  surplus at December 31, 2002.        We started consolidating the results of operations  of Bell ExpressVu as of January 1, 2003. As a result, our 2002 results  of operations exclude the consolidation of Bell ExpressVu. 

     The  table below shows the number of customer connections for each of our connectivity  services. 
 
Number        of connections (millions) *Connectivity      service*December 31, 2003 December 31, 2002 December 31, 2001 
Local        telephone
**13.1** 13.2 13.3 
Cellular        and personal communications (PCS)
**4.4** 3.9 3.4 
Paging
**0.5** 0.6 0.7 
High-speed        Internet access
**1.5** 1.1 0.8 
Dial-up        Internet access
**0.9** 0.9 1.0 
DTH        satellite television
**1.4** 1.3 1.1 
Digital        equivalent access lines (1)
**3.9** 3.7 3.7 **Total****25.7**** ****24.7**** ****24.0** 
(1)  Calculated by converting low-capacity data lines to the equivalent number of  voice-grade access lines.
4   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     We  operate mainly as the incumbent telephone company in: 
- Ontario    and Québec, through Bell Canada, Télébec Limited    Partnership (Télébec) and Northern Telephone Limited Partnership    (Northern Telephone)
- Atlantic    Canada, through Aliant
- Canada’s    northern territories, through Northwestel Inc. (Northwestel).

     We  also operate as a competitive local exchange carrier (CLEC) in Alberta and British  Columbia through Bell West Inc. (Bell West). 
     Bell Canadaowns: - 63% of    Télébec and Northern Telephone. The Bell Nordiq Income Fund    owns the remaining 37%.
- 53.5%    of Aliant. The remaining 46.5% is publicly held.
- 100%    of Northwestel
- 60% of    Bell West. The remaining 40% is held by Manitoba Telecom Services Inc. (MTS).

MTS          is publicly traded. Bell Canada owns 22% of MTS. MTS is a significantly          influenced investment, which we account for under the equity method.          

 On  February 2, 2004, MTS exercised its option to sell its 40% interest in Bell  West to Bell Canada for approximately $645 million in cash. The cash is  payable at closing, which is expected to occur on or before August 3, 2004.  

     In  May 2002, the Canadian Radio-television and Telecommunications Commission  (CRTC) issued the second Price Cap decision (Price Cap decision). This decision  mandated price reductions to various services and led to lower revenues in the  last seven months of 2002 compared to the same period in 2001 and  for the first five months of 2003 compared to the same period in  2002.  In some cases in this MD&A, we presented a comparison of our actual reported  results, which include the impact of the Price Cap decision on our results in  the first five months of 2003, as well as a comparison excluding this impact.  This is to help you assess our performance without the impact of the Price Cap  decision.        The chart shows the operating revenues that each  line of business contributed to our total operating revenues for the year ended December 31, 2003.  Some of these revenues vary slightly by season. For example, terminal equipment  sales to business customers have historically tended to be higher in the fourth  quarter. Wireless and DTH satellite television equipment sales have also tended  to be higher in the fourth quarter because of increased consumer spending during  the holiday season. These seasonal effects were less pronounced in 2003.  
**Local andaccess services**We operate an extensive local access network that provides local telephone servicesto business and residential customers.      Local telephone service is the main source of localand access revenues. Other sources of local and access revenues include: -  value-added    services, such as call display, call waiting and voice mail 
-  services    provided to competitors accessing our local network 
-  connections    to and from our local telephone service customers for competing long distance    companies 
-  subsidies    from the National Contribution Fund to support local service in high-cost    areas.

     Rates  for local telephone and value-added services in our incumbent territories are  subject to the Price Cap decision. 

**Long  distance services**  We supply long distance voice services to business and residential customers.  We also receive settlement payments from other carriers for completing their  customers’ long distance calls in our territory.        Prices for long distance services have been declining  since this market was opened to competition. The rate of decline, however, has  eased over the past several years. Price decreases have generally led to increased  volume in conversation minutes. 

Bell Canada  2003 Financial Information   5

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**Wirelessservices**We offer a full range of wireless communications services to business and residentialcustomers, including cellular, PCS and paging. PCS customers can get wirelessaccess to the Internet through our *Mobile Browser*service or send textmessages. We also provide value-added services, such as call display and voicemail, and roaming services with other wireless service providers. Customers canchoose to pay for their cellular and PCS services through a monthly rate plan(post-paid) or in advance (prepaid).      The wireless division of each of our incumbent telephonecompanies provides wireless communications in its home territory, except for BellMobility Inc. (Bell Mobility), which provides these services in Alberta and BritishColumbia, in addition to its home territory of Ontario and Québec.      In 2003, we continued to expand the reach ofour high-speed wireless network, which allows customers to send data at speedsof up to 86 Kbps, five times faster than what was previously available. By theend of 2003, our high-speed wireless network covered: - 95% of    the population in Ontario and Québec, which is the same as our analogue    coverage in these regions
- 60% of    the population in Atlantic Canada
- Calgary,    Edmonton and Vancouver in Western Canada.
**Data services**High-speed Internet access services provided through digital subscriber line (DSL)technology for residential, and small and medium-sized business customers area growth area for us. We provide high-speed and dial-up Internet access to residentialcustomers in our incumbent territories primarily through the Sympatico brand.     DSL was available to 78% of home and business linespassed in Ontario and Québec at the end of  2003, up from 75% at theend of 2002. In Atlantic Canada, DSL was available to 65% of homes at theend of 2003 compared to 60% at the end of 2002. Bell Canada isscheduled to begin installing new low-density DSL remotes in neighbourhoods in2004 to further expand its DSL footprint.      In the fourth quarter of 2003, we announcedour plans to double the speed of our main consumer DSL offering, Sympatico HighSpeed Edition, to 3 megabits per second (Mbps) from 1.5 Mbps. We also announcedthat we would be increasing the speed for our Ultra customers in early 2004 to4 Mbps from 3 Mbps.      We offer a full range of data services to businesscustomers, including local network access, Internet access, Internet Protocol(IP)/broadband, managed network solutions, frame relay, asynchronous transfermode (ATM) and e-commerce services, as well as sales of communications and relatedequipment. In 2004, we will start retiring many of our legacy data services, includingframe relay and ATM, as we carry out our IP strategy. See *About our business– Our objectives and strategy*for details.      Our incumbent telephone companies provide data servicesto business customers in their home territory. Bell West provides these servicesin Western Canada. 
**DTH  satellite television services**  DTH satellite television services have rapidly become a major competitor to  cable television. Bell ExpressVu has been delivering digital services directly  to Canadian homes and businesses since 1997. It is Canada’s largest licensed  DTH distributor of digital programming, with more than 300 digital television  and CD-quality audio channels, more than 60 pay-per-view channels, and unique  interactive TV services such as Hockey Night in Canada Plus. It is also Canada’s  leading provider of high-definition television (HDTV) with over 20 HDTV channels.  Bell ExpressVu uses two satellites, Nimiq 1 and Nimiq 2, which are owned by  Telesat Canada (Telesat). 

Telesat          is an affiliated company under common control. BCE owns 100% of Telesat.          

     In 2003,  Bell ExpressVu began expanding into the multiple-dwelling unit (MDU) market  in Toronto using very high-speed DSL (VDSL). This market represents approximately  40% of all households in Toronto. VDSL allows Bell ExpressVu to deliver video  signals to up to three televisions, a high-speed Internet connection and on-screen  access to calling features, such as calling-line identification, through one  set-top box. 

6   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     Signal  piracy continues to be a major issue facing all segments of the Canadian broadcasting  industry. During the year, Bell ExpressVu intensified its ongoing efforts against  television signal theft with several new initiatives. These included: 
- an electronic    countermeasure program that transmits electronic signals to disable set-top    boxes with illegal cards
- the use    of new sophisticated set-top box tracking systems and implementation of specific    point-of-sale practices, such as obtaining customer photo identification and    credit card information, and requiring customers to pre-register online, to    ensure that set-top boxes are being used by legitimate subscribers
- Bell    ExpressVu also launched a public awareness campaign about signal theft and    its new measures to combat this industry problem. This included print and    TV advertising, as well as letters to existing customers.
**Terminalsales and other**This category includes revenues from a number of other sources, including: - renting,    selling and maintaining terminal equipment
- wireless    handset sales
- wholesale    international switched minutes
- network    installation for third parties.
**Discontinuedoperations**In the past two years, we have disposed of, or approved formal plans for disposingof, a number of our businesses. These include: - Bell Canada’s    directories business, which was sold in November 2002
- Aliant’s    emerging business segment, the assets of which were sold in 2003
- Aliant’s    remote communications segment, which consisted of Aliant’s 53.2% investment    in Stratos Global Corporation (Stratos). Stratos was sold in December 2003.

     All  of these business dispositions were treated as discontinued operations, except  for the sale of the directories business.        Treating business dispositions as discontinued  operations means that we restated the financial results of all previous years  to exclude the results of these businesses. They are presented separately in  the consolidated financial statements and are discussed separately in the MD&A.         The sale of our directories business in November 2002  was not treated as a discontinued operation because it did not meet the criteria  set out in the Canadian Institute of Chartered Accountants (CICA) Handbook.  As a result, our financial results before that date were not restated to exclude  the financial results of that business. In some cases in this MD&A, we presented  a comparison of our actual reported results, which include the results of our  directories business until November 2002, as well as a comparison excluding  the results of that business. This is to help you assess the performance of  our continuing businesses without the effects of the sale of the directories  business.

See          *Financial results analysis*for details about how these business          dispositions affected our results of operations, financial condition          and cash flows. 
**Transactions with related parties**As a regular part of our business, we have transactions with related parties.All of the transactions are negotiated at arm’s length between the relatedparties and us for amounts that are agreed to.      In 2003, we generated revenue from the saleof equipment and services to BCE Emergis Inc. (BCE Emergis) for $103 million,CGI Group Inc. (CGI) for $35 million and Entourage Technology Solutions Inc. (Entourage)for $32 million.      In 2003, we also bought equipment, suppliesand services from CGI for $391 million, Entourage for $145 million and BCE Emergisfor $89 million. 
BCE Emergis is an          affiliated company under common control. BCE owns 63.9% of BCE Emergis.          

CGI is a joint          venture of BCE. BCE owns 29.8% of CGI. 

Entourage is an          equity investment of Bell Canada. Bell Canada owns 33% of Entourage.
     All other significant transactions between the relatedparties and us are discussed throughout this MD&A.
Bell Canada  2003 Financial Information   7

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**New reporting structure**  In May 2003, we announced a new business structure that simplified our  operations by creating business divisions that reflect the major customer segments  we serve. Starting in the first quarter of 2004, we will present and discuss  our operating results under these segments: - the consumer    segment provides the following services to Bell Canada’s residential    customers mainly in Ontario and Québec:   – local            telephone and long distance through the Bell brand– wireless            through Bell Mobility– Internet            access through the Sympatico brand– television            services through the ExpressVu brand and VDSL. 
- the business    segment provides local telephone, long distance, data and other services to    Bell Canada’s small and medium-sized and large enterprise business    customers in Ontario and Québec and to medium-sized and large enterprise    business customers in Western Canada.
- the Aliant    segment provides local telephone, long distance, wireless, data and other    services to residential and business customers in Atlantic Canada.

**Our  objectives and strategy**  The telecommunications industry is currently going through a major transformation  as it evolves from multiple service-specific networks to IP-based integrated  communications networks. These will facilitate the introduction of innovative  new applications and opportunities for our customers.        Businesses will benefit from our ability to integrate  all of their communications needs while we lay out an evolution plan that will  result in greater flexibility and cost savings for our customers. Consumers  will discover the advantages of a Broadband Home where leading-edge voice, video  and data services are provided simply through one company and one brand: Bell Canada.         Our overall objective is to take a leadership  position in setting the standard in IP for the industry and for our customers.         That begins with a three year plan to: 
- move    all of Bell Canada’s core traffic to a national IP-based network
- offer    a full range of IP services to 90% of Bell Canada’s customers.

     IP-based  communications will allow us to further enhance our revenue growth profile and  realize on our promise of simplicity for customers by offering new value-added  features, faster and simpler delivery and greater self-service capabilities.  It will also provide Bell Canada with significant opportunities to reduce  costs in the future.        Our strategy is to set the standard for innovation,  simplicity and service, and efficiency leveraging the opportunities created  by IP-based communications. 

*Innovation*– Bell Canada intends to bring together the broadest set of platforms  by: 
- expanding    its next-generation network to increase bandwidth and value-added services
- offering    new voice-over-IP (VoIP) based products
- expanding    its digital video service offerings through VDSL and IP television (IPTV).

*Simplicity  and service*– We plan to simplify the customer experience by offering  simpler products and solutions, and by making it easier to deal with us. This  includes: 
- value-added    bundles of services
- speech-activated    assistance
- unified    customer channels and one-stop service
- faster    response and improved service.

*Efficiency*– We intend to build on our success as a streamlined and responsive  provider of services through: 
- increased    productivity
- fewer    networks and related operating support systems
- financial    discipline.

     Our  goal is to expand Bell Canada’s consumer segment by providing the  Broadband Home and offering our customers the advantages of “one-company,  one brand and one point of contact”. Next-generation services will provide  growth opportunities and will include video services, new information management  tools that are being developed with Microsoft Corporation (Microsoft), VoIP  and wireless solutions. 
  8   2003 Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     Our  goal for Bell Canada’s small and medium-sized business customers is  to increase our market share by becoming our customers’ technology advisor  with new VoIP and wireless fidelity (Wi-Fi) services, added security and firewall  capabilities, new mobile and business information tools and storage capacity.         Our goal for Bell Canada’s large enterprise  customers is to move from providing connectivity to offering value-added services  on an IP network, including security, network management, wireless data and  simplified customer channels. 
THE  YEAR AT A GLANCE
This section reviews          the key measures we use to assess our performance and how our results          in 2003 compare to our results in 2002. 
**CUSTOMER  CONNECTIONS**
*Wireless*– The total number of cellular and PCS subscribers grew 13.2% or 514,000  to 4,412,000 in 2003.*High-speed internet*– The number of DSL high-speed Internet subscribers  grew 34% or 372,000 to 1,482,000 in 2003. *DTH satellite television*– The number of DTH satellite television  service subscribers grew 6.4% or 83,000 to 1,387,000 in 2003. *Network Access Services (NAS)*– Our NAS declined 0.8% or 103,000  to 13.1 million in 2003. 
**REVENUES**
 Our revenues  increased 14.4% or $2,100 million to $16,698 million in 2003, compared  to 2002. This increase was mainly from: 
- the consolidation    of Aliant’s and Bell ExpressVu’s revenues starting January 1, 2003.    Aliant and Bell ExpressVu had combined revenues of $2,504 million in 2002.
- an increase    of $158 million from our continuing businesses.

 This was  partly offset by: 
- a decrease    of $501 million from the sale of our directories business
- a decrease    of $61 million from the Price Cap decision.
**OPERATING  INCOME AND EBITDA**
 Our operating  income increased 12.6% or $428 million to $3,836 million in 2003, compared  to 2002.        Our EBITDA increased 8.8% or $567 million to $7,001  million in 2003, compared to 2002. This increase was mainly from:  
- the consolidation    of Aliant and Bell ExpressVu starting January 1, 2003. Aliant and Bell    ExpressVu had a combined EBITDA of $645 million.
- an increase    of $294 million from our continuing businesses.

 This was  partly offset by: 
- a decrease    of $311 million from the sale of our directories business
- a decrease    of $61 million from the Price Cap decision.

     Our  EBITDA margin decreased 2.2% to 41.9%. 
**NET  EARNINGS**
 Net earnings  applicable to common shares this year were $2,244 million. In 2002, net  earnings applicable to common shares were $1,352 million. Net earnings in 2002  were impacted by restructuring and impairment charges, partly offset by the  gain on the sale of our directories business. 

Bell Canada  2003 Financial Information   9

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**CAPITAL  EXPENDITURES**
 Capital  expenditures declined 1.2% or $35 million to $2,892 million in 2003, compared  to 2002. Capital expenditures as a percentage of revenues decreased to  17.3% from 20.1% in 2002. 
**CASH  FROM OPERATING ACTIVITIES AND FREE CASH FLOW**
 Cash from  operating activities increased 17.7% or $808 million to $5,366 million in 2003,  compared to 2002.        Free cash flow was $393 million in 2003,  a significant improvement from negative free cash flow of $252 million in 2002  reflecting the increase in cash from operations.        The improvement in free cash flow contributed  to a reduction of our net debt to total capitalization ratio to 49.2% at December 31, 2003  from 53.9% at December 31, 2002. We reduced our net debt by $1.2  billion in 2003. 
**EXECUTING  ON OUR PRIORITIES**
**Setting  the standard in IP**  The telecommunications industry is currently going through a major transformation  as it evolves from multiple service-specific networks to IP-based communications.  At BCE’s Business Review Conference in December 2003, we announced  our multi-year plan to lead change in the industry and set the standard in the  IP world while continuing to deliver on our goals of innovation, simplicity  and service, and efficiency.        We will also continue to focus on our previously  announced consumer, small and medium-sized business and large enterprise customer  segments strategies. 

**Innovation**  Significant progress was made in 2003 in furthering our innovation goals  including: 
 –agreement        with Microsoft on June 16, 2003 to create a co-branded portal and        to deliver a unique package of leading-edge Microsoft services to customers        in the second quarter of 2004 –use      of Nortel Networks Corporation (Nortel) IP telephony technology and the      creation of a joint Bell-Nortel Innovation Centre to accelerate the launch      of new IP telephony and multimedia services announced on September 8, 2003 –agreement      with Microsoft on October 9, 2003 to work together to test and deploy      standard and HDTV channels, on-demand programming and interactivity over      Bell Canada’s broadband network through the use of Microsoft’s      new IPTV technology –our      October 20, 2003 announcement that we will be using Lucent Technologies      Canada Corp.’s new DSL remotes in neighbourhoods to expand the Sympatico      high-speed Internet footprint and its IP-based platform to evolve our voice      messaging services –our      December 16, 2003 announcement regarding the purchase of Nortel’s      optical network technology to accelerate the delivery of IP-based services      and the creation of an Optical Innovation Centre to accelerate the deployment      of new IP-oriented optical solutions –our      showcasing of working demonstrations of Hosted IP telephony and residential      VoIP services at BCE’s Business Review Conference in December 2003.      Hosted IP telephony service for enterprise customers is expected to be commercially      available in the third quarter of 2004, while residential VoIP is currently      undergoing technical trials. –more      recently, on January 19, 2004, Bell Canada and Cisco Systems Canada      (Cisco) announced plans to accelerate the creation, commercialization and      delivery of a comprehensive suite of IP services that will allow large and      medium-sized business customers to benefit from an integrated data, voice      and video IP-based network. As a result of this alliance, Bell Canada      will build on its network capability and focus its investments towards a      single IP/Multi-Protocol Label System (MPLS) service delivery network with      a national footprint.**Simplicityand service**We made significant progress in simplifying the customer experience in 2003.Initiatives such as Bell Canada’s interactive voice-response system*Emily*, specialized call centre queues, the introduction of *One-Bill*,and reduced provisioning intervals for business high-speed Internet service haveimproved customer service. In addition, the launch of new services, such as *SingleNumber Reach*and *Business Back-Up*, have made life simpler for customers.
10   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       On September 25, 2003, Bell Canada launched  *The Bell Bundle*which combines wireless, Internet access and DTH satellite  television services into one simple offer for customers taking Bell Canada’s  long distance service. Customer response to The *Bell Bundle*has exceeded  expectations with over 70,000 sales by December 31, 2003. 
FINANCIAL  RESULTS ANALYSIS****
This          section provides detailed information and analysis about our performance          for the past two years. 

**OPERATING  REVENUES**

 Our revenues  increased 14.4% or $2,100 million to $16,698 million in 2003, compared  to 2002. This was mainly from: 
- the consolidation    of Aliant’s and Bell ExpressVu’s revenues starting January 1, 2003.    Aliant and Bell ExpressVu had combined revenues of $2,504 million in 2002.
- an increase    of $158 million from our continuing businesses. This $158 million increase    was driven by our consumer business with growth in customer connections and    revenues from wireless, high-speed Inter-net access and DTH satellite television    services offsetting revenue declines in terminal sales and other, long distance,    and business and wholesale data.

 This was  partly offset by: 
- a decrease    of $501 million from the sale of our directories business
- a decrease    of $61 million from the Price Cap decision.

**Local  and access revenues**  Local and access revenues increased 10.9% or $599 million to $6,105 million  in 2003, compared to 2002. This was mainly due to: 
- the consolidation    of Aliant’s revenues starting January 1, 2003. Aliant had local    and access revenues of $623 million in 2002.
- gains    from *SmartTouch*features, wireline insurance and maintenance plans,    as well as increased demand for interconnection services provided to competing    companies.

 This was  partly offset by: 
- lower    NAS
- the Price    Cap decision led to a revenue reduction of $25 million in the first five months    of the year compared to the same period in 2002.

     Excluding  the impact of the Price Cap decision in the first five months of 2003,  full-year local and access revenues would have been essentially unchanged in 2003,  compared to 2002.        Including Aliant’s 2002 customer base,  NAS in service declined 0.8% or 103,000 in 2003, compared to 2002.  This was a result of continued pressure from growth in high-speed Internet access  services, which reduces the need for second telephone lines, losses resulting  from competition and business downsizings, and customers substituting wireline  with wireless telephone service. Consumer NAS in service declined 0.7% or 62,000  in 2003, compared to 2002. Business NAS in service declined 0.9% or  41,000 in 2003, compared to 2002. 

**Long  distance revenues**  Long distance revenues increased 9.8% or $221 million to $2,487 million in 2003,  compared to 2002. This reflected the consolidation of Aliant’s revenues  starting January 1, 2003. Aliant had long distance revenues of $313 million  in 2002. 

 This was  partly offset by: 
- competitive    pressures in the business and wholesale long distance markets
- lower    settlement payments
- rate    reductions of $9 million in the first five months of 2003 related to    the Price Cap decision.

     Although  prices for consumer long distance increased because of various pricing initiatives  introduced in the past year, these gains were partly offset by a reduction in  consumer long distance conversation minutes. This reflected competition from  nontraditional long distance service providers such as prepaid card and dial-around  providers, and greater long distance usage from wireless services.        Business and wholesale long distance minutes grew  in 2003, compared to 2002. Prices decreased as a result of competitive  pressures.        Including Aliant’s 2002 results, the  overall volume of conversation minutes increased by 0.5% in 2003. The additional  revenues generated by this increase were more than offset by average-revenue-per-minute  (ARPM) declines of 1.6% to $0.124 in 2003 from $0.126 in 2002. 

  

Bell  Canada 2003 Financial Information   11

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Wireless  revenues**  Wireless service revenues increased 32% or $610 million to $2,526 million in 2003,  compared to 2002. This reflected: 
- the consolidation    of Aliant’s revenues starting January 1, 2003. Aliant had wireless    revenues of $287 million in 2002.
- subscriber    growth of 13.2%
- higher    average revenue per unit (ARPU).

     Including  Aliant’s 2002 results, net additions of 514,000 in 2003 were  up 62,000 over 2002 despite continued competitive pressures. Improved customer  satisfaction suggests that our quality of service and price and value of our  offerings are key drivers to this growth.        The total number of cellular and PCS subscribers  was 4,412,000 at the end of 2003. Including paging subscribers, the total  number of wireless subscribers was 4,936,000 at the end of 2003.        80% of the net subscribers added in 2003  were on post-paid rate plans. At December 31, 2003, 76% of our  total cellular and PCS subscribers were on post-paid plans, up from 75% at the  end of 2002, including Aliant.        Including Aliant’s 2002 results, total  ARPU increased $1 to $48 per month in 2003, compared to 2002. This  reflected a higher post-paid ARPU and an increase in post-paid subscribers as  a percentage of total subscribers. Increases in revenues from value-added services,  such as *Message Centre*and *Call Display*, long distance and data  services, as well as higher usage, led to a $1 per month increase in post-paid  ARPU in 2003, compared to 2002. Prepaid ARPU was $12 per month in 2003,  unchanged from 2002.        Including Aliant’s 2002 results, blended  churn improved to 1.4% per month in 2003 from 1.7% in 2002. Post-paid  churn improved 0.2% to 1.3% compared to 2002. 

*Churn*          Churn measures the rate at which existing subscribers cancel their service.          Lower churn reduces the cost incurred to maintain or grow the existing          subscriber base and leads to improved profitability. 

**Data  revenues**  Data revenues increased 9.6% or $333 million to $3,791 million in 2003,  compared to 2002. This increase was mainly because of the consolidation  of Aliant’s revenues starting January 1, 2003. Aliant had data revenues  of $312 million in 2002.        This was partly offset by a $27 million decline  from the Price Cap decision.        Including Aliant’s 2002 revenues, consumer  data revenue grew 20.7% in 2003, compared to 2002. This reflected  strong growth in the number of Sympatico subscribers.        Including Aliant’s 2002 revenues, business  data revenues increased 0.5% in 2003, compared to 2002. This reflected  continued softness in the market, as well as a more disciplined approach to  acquiring customers in the later part of 2003 to increase profitability.  Business data revenues were also negatively affected by price competition, the  Price Cap decision and a shift in product mix from legacy data services to emerging  data services. Declines in legacy service revenue were partly offset by growth  in high-speed Internet access service for small and medium-sized business customers,  and by growth in IP/broadband and managed network services.        Including Aliant’s 2002 revenues, wholesale  data revenues declined 16.2% in 2003, compared to 2002, as this business  remained weak due to price and volume drivers, as well as being negatively impacted  by the Price Cap decision.        Including Aliant’s 2002 results, the  number of high-speed Internet access subscribers increased 372,000 to 1,482,000  in 2003. Including Aliant’s 2002 results, the total number of  dial-up customers declined to 869,000 at the end of 2003, compared to 957,000  at the end of 2002.        We added 203,000 new subscriptions of Sympatico  value-added services such as *Desktop Anti-virus*and *Desktop Firewall*in 2003, for a total of 287,000 at the end of 2003.        Bell Canada continues to develop and offer  exclusive online content to attract and retain high-speed Internet access customers.  Exclusive content provided in 2003 included the Bell Sympatico Concert  Tour series which featured concert webcasts from many of Canada’s top recording  artists, and NHL Snapshot, which featured summaries of hockey games. 

**DTH satellite  television revenues**  We started consolidating Bell ExpressVu’s results on January 1, 2003.  For information purposes, the following discussion compares Bell ExpressVu’s 2003  results to its 2002 results.        DTH satellite television revenues increased 19.3%  or $123 million to $761 million in 2003, compared to 2002. This growth  was driven by increases in the number of subscribers and average revenue per  subscriber (ARPS). Bell ExpressVu’s customer base grew 6.4% to 1,387,000  in 2003. This was an estimated 14% share of the combined DTH and cable  market. 

12   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       Bell ExpressVu had 83,000 net additions in 2003.  It acquired more than 75% of all new Canadian DTH subscribers, increasing its  DTH market share to 63.1%. Net additions in 2003 were down from 235,000  achieved in 2002. This reflected a significant slowdown in the digital  television market in general, price increases implemented earlier in the year  and ongoing anti-piracy initiatives.        In 2003, Bell ExpressVu focused on acquiring  higher quality subscribers by implementing new anti-piracy initiatives. Specific  point-of-sale initiatives, such as obtaining customer photo identification and  credit card information may have negatively affected the rate of subscriber  growth. In addition, Bell ExpressVu introduced one and two-year terms to improve  customer retention and to further enhance the quality of its subscriber base.  This is expected to improve long-term profitability.        ARPS increased $2 to $46 per month in 2003,  compared to 2002. This increase reflected the $2.99 system access charge  for all customers, which came into effect on April 28, 2003, and the  $2 to $3 rate increase on specific programming packages that was introduced  on February 1, 2003. This was partly offset by lower pay-per-view revenues.         Churn increased to 1.1% in 2003 from 1.0%  in 2002. This was a result of the rate increases introduced earlier in  the year and new anti-piracy initiatives that started in the third quarter of 2003.  

**Terminal  sales and other revenues**  Terminal sales and other revenues increased 8.1% or $77 million to $1,028 million  in 2003, compared to 2002, which was mainly from the consolidation  of Aliant’s revenues starting January 1, 2003. Aliant contributed  $331 million of terminal sales and other revenues in 2002.        This was partly offset by the reductions in wholesale  international long distance minutes, lower voice terminal equipment sales and  lower third-party billing related to network installation, particularly in the  fourth quarter. The wholesale unit intentionally exited certain contracts for  international switched minutes that had minimal margins. 
**REVENUE  OUTLOOK FOR 2004**
 In 2004,  we expect the overall Canadian telecom market to grow in line with the Canadian  gross domestic product (GDP), which is expected to grow by about 3%. As a result,  we are targeting only modest revenue growth in 2004 similar to our revenue growth  in 2003, excluding the revenues from the directories business in 2002.         We are targeting higher revenue growth in the  Bell Canada consumer segment than GDP growth. We expect solid increases  in the number of customer connections, including growth in wireless, DSL high-speed  Internet access and DTH satellite television services.        We are targeting flat to slightly positive revenue  growth in the Bell Canada business segment. Revenue growth from small and  medium-sized business customers should be largely offset by flat to slightly  negative revenue growth from enterprise customers. 
**OPERATING  INCOME**
 Operating  income increased 12.6% or $428 million to $3,836 million in 2003, compared  to 2002. The increase was mainly from lower restructuring and other charges,  and higher EBITDA. This was partly offset by higher amortization expense and  the net benefit plan cost. 

Bell  Canada 2003 Financial Information   13

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**EBITDA**
 Our EBITDA  increased by 8.8% or $567 million to $7,001 million in 2003, compared to 2002.  This increase was mainly due to: 
- the consolidation    of Aliant and Bell ExpressVu starting January 1, 2003. Aliant and Bell    ExpressVu had a combined EBITDA of $645 million.
- an increase    of $294 million from our continuing businesses.

 This was  partly offset by: 
- a decrease    of $311 million from the sale of our directories business
- a decrease    of $61 million from the Price Cap decision.

     The  increase in EBITDA from our continuing businesses of $294 million reflects higher  levels of wireless, Internet access and DTH satellite television revenues, a  continued focus on productivity, lower acquisition costs related to lower levels  of gross additions (DTH in particular) and a greater emphasis on more profitable  contracts within the enterprise and wholesale business units.        Our productivity improvement program reduces the  cost per unit of various processes and materials required throughout the company.  By constantly focusing on unit cost reduction, the large volumes involved in  our operations lead to significant productivity improvements. The processes  and materials used in our operations are generally used to: 
- acquire    customers; for example, sales activities, commissions and equipment sold
- serve    existing customers; for example, help desk support, equipment maintenance    and repair and billing
- provide    back-office support functions; for example, finance, human resources and communications.

     We  achieve unit cost reductions in many ways. These include: 
- negotiating    lower prices from various external providers of equipment, software, supplies    and services
- optimizing    operational processes based on current business needs and the latest IS/IT    capabilities
- better    use of economies of scale.

     Our 2003  program achieved cost savings in many of the same areas as our 2002 program.  These included call centers, field services, supply chain, and customer provisioning  and servicing of new services, such as consumer high-speed Internet access and  IP/broadband.        In addition to taking costs out of the business,  our various productivity initiatives are simplifying how customers deal with  us. Initiatives such as our interactive voice-response system, *Emily*,  and specialized call centre queues, which provide customers who are moving with  a single point of contact for all their Bell Canada services, contribute  to our productivity gains while improving customer service.        Renegotiating collective agreements could result  in higher labour costs and work disruptions, including work stoppages or work  slowdowns. Labour disruptions could also result in reduced revenues.        Including Aliant’s 2002 results, wireless  EBITDA increased 22% or $164 million to $918 million in 2003, compared  to 2002. This reflected higher revenues from gains in subscribers and an  improvement in post-paid ARPU. This was partly offset by higher customer acquisition  costs as a result of more customer activations in 2003.        Including Aliant’s 2002 results, our  wireless EBITDA margin increased to 36% in 2003 from 34% in 2002.  This increase reflected the positive effects of a larger customer base, higher  ARPU and our initiatives to manage handset upgrades through a more disciplined  response to competitive pressures.        Including Aliant’s 2002 results, wireless’  cost of acquisition (COA) was $426 per gross activation in 2003, an improvement  of 0.7% or $3 per gross activation, compared to 2002. This was mainly driven  by reduced marketing and advertising expenses related to higher levels of gross  additions and higher direct channel sales, which are more cost effective for  us.        We started consolidating Bell ExpressVu’s  results on January 1, 2003. For information purposes, the following discussion  compares Bell ExpressVu’s 2003 results to its 2002 results.        Bell ExpressVu’s EBITDA loss of $45 million  was a significant improvement from an EBITDA loss of $176 million in 2002.  This improvement was driven by decreased subscriber acquisition costs related  to lower gross activations, improved ARPS from rate increases introduced earlier  in the year and ongoing cost controls.        Bell ExpressVu’s COA per gross activation  was $671 in 2003, down from $690 in 2002. This reflected the benefit  of a stronger Canadian dollar because we buy our set-top boxes in U.S. dollars.  This was partly offset by more customers who bought second receivers and costs  related to a promotion for free installation.

  14   2003 Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**BELOW  EBITDA INCOME AND EXPENSES**
 The table  below is a reconciliation of EBITDA to net earnings applicable to common shares.   **2003** 2002 **EBITDA****7,001** 6,434 Amortization      expense**(2,970****)**(2,401)Net      benefit plans (cost) credit**(181****)**50 Restructuring      and other charges**(14****)**(675)**Operating      income****3,836** 3,408 Other      income**217** 1,264 Interest      expense**(945****)**(839)**Pre-tax      earnings from continuing operations****3,108** 3,833 Income      taxes**(787****)**(1,087)Non-controlling      interest**(53****)**(1,278)**Earnings      from continuing operations****2,268** 1,468 Discontinued      operations**59** – **Net      earnings****2,327** 1,468 Dividends      on preferred shares**(58****)**(63)Interest      on equity-settled notes**(25****)**(53)**Net      earnings applicable to common shares****2,244** 1,352 **Amortization expense**
*Amortization          expense*          The amount of our amortization expense in any year is affected by: 
-  how              much we invested in new capital assets in previous years 
-  how              many assets we retired during the year 
-  changes              in accounting rules and estimates. 

Each year, we review          our estimate of the useful lives of our capital assets.
Amortization expense increased 23.7% or $569 million to $2,970 million in 2003,compared to 2002. This was mainly from the consolidation of Aliant’sand Bell ExpressVu’s results starting January 1, 2003. Aliant’sand Bell ExpressVu’s amortization expense was $478 million for 2002.     Adjusting to exclude this effect, amortization expensewas higher by $91 million in 2003 compared to 2002. The following activitiesincreased our amortization expense: - an increase    in assets that resulted from capital expenditures and the creation of Bell    West in April 2002
- the consolidation    of $88 million in capital assets of a shared services entity, starting on    July 1, 2003.

     The  sale of the directories business in November 2002 decreased our amortization  expense. 

***Outlook  for 2004***  We expect a modest increase in amortization expense in 2004 as a result of the  investments in capital assets we have made over the past few years. We plan  to maintain our capital spending in 2004 at an amount similar to 2003.  

**Net benefit  plans cost**

*Net          benefit plans*          We maintain plans that provide two types of benefits: 
-  pension              benefits – we are responsible for adequately funding these              plans as entitlements are earned. We make contributions based on              actuarial methods permitted by the pension regulatory bodies. Because              most of our plans have a surplus, we have not had to make any significant              contributions in the past several years.
-  other              retirement and post-employment benefits – we do not generally              fund these benefit plans in advance. We make contributions every              year as actual benefit payments are mad

The amount  of the net pension benefit plans (cost) credit in a year primarily depends on:  
- the return    on pension plan assets expected to be generated during the year – the    lower the return, the higher the cost
- the present    value of future pension benefit payments to employees – the lower the    present value, the lower the cost
- actuarial    gain (loss) – the difference between the actual funded status of our    pension plans and that calculated using our accounting assumptions. We amortize    this into earnings over time.

     The  net benefit plans cost was $181 million in 2003, compared to a net benefit  plans credit of $50 million in 2002. Aliant had a net benefit plans cost  of $12 million in 2002.        Adjusting to exclude this effect, the net benefit  plans cost was $181 million in 2003 compared to a net benefit plans credit  of $38 million in 2002.        Poor capital market conditions resulted in an  actual rate of return on plan assets of negative 6% in 2002. This created  an actuarial loss, which contributed to approximately two-thirds of the change  from a credit to a cost. The remaining one-third reflected a reduction in our  assumption of expected long-term return on plan assets to 7.5% in 2003  from 8.3% in 2002. We made this change based on a review of market trends  and our long-term outlook for the investment performance of our pension assets.         Our main pension plan had a surplus of approximately  $600 million on a solvency basis at December 31, 2003. The actual  return on our pension plan assets was approximately 14.6% in 2003. 

 

Bell Canada  2003 Financial Information   15

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

***Outlook for 2004***  We are anticipating an increase in the net benefit plans cost in 2004. The most  recent actuarial valuation reflects a higher accrued benefit obligation. We  expect that this will contribute to the increase in the net benefit plans cost  in 2004. This should be partly offset by the effect of the positive fund performance  in 2003, which resulted in an actuarial gain and increased the fair value  of plan assets. Based on a review of market trends and our investment outlook,  we have maintained our assumption of the long-term return on plan assets at  7.5% for 2004.
***Restructuring  and other charges****Restructuring        and other charges*        Restructuring and other charges include various operating expenses that        are not directly related to the operating revenues generated during the        year. Examples are costs related to streamlining initiatives, asset write-downs        and other types of charges. **2003**
**Restructuring  of Xwave Solutions Inc.**  Aliant recorded a pre-tax restructuring charge of $15 million ($4 million after  taxes and non-controlling interest) in 2003. This was a result of a restructuring  at its subsidiary, Xwave Solutions Inc. Costs associated with the restructuring  include severance and related benefits, technology lease cancellation penalties  and real estate rationalization costs. At December 31, 2003,  the unpaid balance of this restructuring provision was $6 million. The restructuring  is expected to be complete in 2004. 

***Bell Canada  charges***  In 2003, Bell Canada recorded charges of $65 million relating to various  asset write-downs and other provisions. These charges were offset by a credit  of $66 million relating to the reversal of the restructuring charges recorded  in 2002, which were no longer necessary because fewer employees were terminated  than expected. This was due to an increased redeployment of employees within  Bell Canada. 

**2002**

***Streamlining  and other charges at Bell Canada***  Bell Canada recorded a pre-tax charge of $302 million in the fourth quarter  of 2002 ($190 million after taxes). This included restructuring charges  of $232 million and other charges of $70 million.        The restructuring charges were mainly from streamlining  Bell Canada’s management, line and other support functions. They included  severance for approximately 1,700 employees, enhanced pension benefits and other  employee costs. The restructuring was largely complete in 2003.        Other charges consisted mainly of various accounts  receivable write-downs relating to billing adjustments and unreconciled balances  from previous years that were identified in 2002. 

***Pay  equity settlement***  On September 25, 2002, the members of the Canadian Telecommunications Employees’  Association (CTEA) ratified a settlement reached between the CTEA and Bell Canada  relating to the 1994 pay equity complaints that the CTEA had filed on behalf  of its members before the Canadian Human Rights Commission. The settlement included  a cash payout of $128 million and related pension benefits of approximately  $50 million.        As a result of the settlement, Bell Canada  recorded a charge of $79 million in the third quarter of 2002 ($45 million  after taxes). The charge is equal to the $128 million cash payout, less a previously  recorded provision. We are deferring and amortizing the related pension benefits  into earnings over the estimated average remaining service life of active employees  and the estimated average remaining life of retired employees. 

***Write-down  of Bell Canada’s accounts receivable***  At the same time we were developing our new billing system, we adopted a new  and more precise method for analysing receivables by customer and by service  line. This method allows us to more accurately determine the validity of amounts  that customers owe to us.        The analysis indicated that a write-down of accounts  receivable of $272 million was appropriate at June 30, 2002 ($177 million  after taxes).        Because these amounts came from legacy billing  systems and processes, Bell Canada carried out a detailed review of billings  and adjustments for the period from 1997 to 2002. It determined that these  amounts were the cumulative result of a series of individually immaterial events  and transactions relating to its legacy accounts receivable systems dating back  to the early 1990s. 

16   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

*Other income*          Other income includes income that we receive from activities that are          not part of our regular business, such as: 
-  net              gains on investments, including gains or losses when we dispose              of, write down or reduce our ownership in investments 
-  interest              income on our cash and cash equivalents 
-  foreign              currency gains (losses) 
-  other              items, including equity in net earnings (losses) in significantly              influenced companies and miscellaneous income. 
**Other      income**     **2003** 2002 Net      gains on investments**106** 1,282 Interest      income**87** 31 Foreign      currency gains**19** 7 Other**5** (56)**Other      income****217** 1,264 
     Other  income of $217 million in 2003 decreased by $1,047 million compared to  the same period last year. Aliant’s and Bell ExpressVu’s other expense  was $132 million in 2002. Adjusting to exclude this effect, other income  was $915 million lower in 2003, compared to 2002. 

***Net  gains on investments***  In 2003, our net gains on investments of $106 million were mainly from:  
- a $120    million gain from the sale of a 3.66% interest in the directories business    for net proceeds of $135 million in cash in the fourth quarter. Bell Canada’s    retained interest in the directories business is 3.24%.
- a $14    million loss from the write-down of a number of our cost-accounted investments.

     In 2002,  our net gains on investments of $1,282 million were mainly from: 
- selling    the directories business ($2.4 billion) in the fourth quarter
- writing    down our investment in Teleglobe ($1.4 billion) to zero in the second quarter
- selling    a 37% interest in each of Télébec and Northern Telephone when    the Bell Nordiq Income Fund was created ($222 million) in the second quarter.

***Interest  income***  Interest income was $56 million higher in 2003, compared to 2002.  This reflected slightly higher average cash balances. The retained cash on hand  from the sale of the directories business in November 2002 and the net  cash raised in 2003 from operating and financing activities contributed  to the increase in average cash balances. 

***Foreign  currency gains***

*Foreign currency          gains (losses)*          We recognize foreign currency gains on our U.S. dollar denominated debt          when the Canadian dollar strengthens compared to the U.S. dollar. We          recognize foreign currency losses on our U.S. dollar denominated debt          when the Canadian dollar weakens compared to the U.S. dollar. 

In April 2003,  we entered into forward contracts to hedge U.S.$200 million of long-term debt  at Bell Canada that had not been previously hedged. This removed the foreign  currency risk on the principal amount of that debt, which minimized the effect  of foreign exchange for the rest of the year. 

**Interest  expense**

*Interest expense*          Our debt structure consists of a combination of short-term and long-term          debt. The interest rate on our short-term debt is usually variable.          The interest rate on our long-term debt is usually fixed.

Interest  expense increased 12.6% or $106 million to $945 million in 2003, compared  to 2002. This was mainly from the consolidation of Aliant’s and Bell  ExpressVu’s results starting January 1, 2003. Aliant’s and Bell  ExpressVu’s interest expense was $119 million in 2002. Adjusting to  exclude this effect, interest expense declined $13 million in 2003, compared  to 2002. This reflected the $2.2 billion of debt repayments in 2003  and the refinancing of some of our debt at lower interest rates. 

***Outlook  for 2004***  We expect a further decrease in interest expense in 2004 because we significantly  reduced our debt in 2003 and we refinanced some of our debt at lower rates.  

**Income  taxes**  Income taxes declined 28% or $300 million to $787 million in 2003, compared  to 2002. The decline was mainly from the reduction in the statutory income  tax rate to 35.4% in 2003 from 37.4% in 2002, the cash tax savings  relating to loss utilization transactions with BCE, BCH and BCE Emergis and  the decrease in pre-tax earnings (excluding the effect of the write-off of our  investment in Teleglobe, which was not tax effected).        The cash tax savings from the loss utilization  transactions were $363 million in 2003 and $69 million in 2002.        In December 2003, the Ontario government  enacted tax changes that eliminated the previous reductions in corporate tax  rates to 11% and increased them to 14% for 2004 and later years. As a result,  we recalculated our future income tax balances using the new rates. This resulted  in an adjustment of approximately $12 million to net earnings in 2003.  We recorded $9 million as an income tax expense and $3 million as non-controlling  interest. 

Bell  Canada 2003 Financial Information   17

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       The Canadian statutory rate that applies to us  is currently set at 34.3% for 2004. The decrease from 2003 relates to reductions  in federal corporate tax rates, partly offset by the increase in the Ontario  tax rate. 

**Non-controlling  interest**

*Non-controlling          interest*          The non-controlling interest in the statements of operations reflects          the percentage of a subsidiary that we do not own multiplied by the          amount of the subsidiary’s after-tax earnings. 

Non-controlling  interest decreased $1,225 million to $53 million in 2003, compared to 2002.  This decline was mainly a result of the consolidation of our 52% interest in  Bell ExpressVu ($1,319 million), which was partly offset by the consolidation  of our 53% interest in Aliant ($93 million). 

**Discontinued  operations**  The table below is a summary of net gains (losses) on discontinued operations.  
 **2003** 2002 **Aliant’s      emerging business segment**    Operating      losses**(12****)**– Net      gain on disposal**8** – **Aliant’s      remote communications segment**    Operating      gains**15** – Net      gain on disposal**48** – **Net      gain from discontinued operations****59** – 
***Aliant’s  emerging business segment***  Aliant’s emerging business segment mainly consisted of Aliant’s investments  in iMagicTV Inc., Prexar LLC and AMI Offshore Inc. Almost all of these assets  were sold as of December 31, 2003. 

***Aliant’s  remote communications segment***  Aliant’s remote communications segment consisted of Aliant’s 53.2%  investment in Stratos. In December 2003, Aliant completed the sale of Stratos  after receiving the required regulatory approvals.        Aliant received $340 million ($320 million net  of selling costs) in cash for the sale. At the time of sale, the net carrying  value of Stratos’ net assets was $215 million. Stratos had total assets  of $696 million, including $52 million in cash and cash equivalents, and total  liabilities of $372 million. The transaction resulted in a gain on sale of $105  million ($48 million after taxes and non-controlling interest). 
FINANCIAL  AND CAPITAL MANAGEMENT
This section tells          you how we manage our cash and capital resources to carry out our strategy          and deliver financial results. It provides an analysis of our financial          condition, cash flows and liquidity. 
**2003  HIGHLIGHTS**
 We executed  on our priorities in 2003. By the end of the year we had: 
- generated    free cash flow of $393 million
- reduced    our capital intensity to 17.3%. This was an improvement of 2.8% over 2002.
- reduced    our net debt by approximately $1.2 billion
- improved    our credit ratings.
**OUTLOOK  FOR 2004**
 In 2004,  we will continue to focus on financial discipline and execution. We are targeting  to: 
- deliver    positive free cash flow, mostly from recurring sources, at comparable levels    to 2003
- reduce    our overall net debt
- maintain    capital intensity of 17% to 18%.

**CAPITAL  STRUCTURE**

*Capital structure*          Capital structure shows how much of our net assets are financed by debt          and equity. 
        **2003** 2002 Note      payable to BCH**–** 975 Debt      due within one year**1,165** 1,837 Long-term      debt**10,024** 10,223 Less:      Cash and cash equivalents**(398****)**(1,013)**Total      net debt****10,791** 12,022 **Non-controlling      interest****1,627** 1,917 **Total      shareholders’ equity****9,527** 8,370 **Total      capitalization****21,945** 22,309 **Net      debt to capitalization****49.2****%**53.9%
 

18   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     The  capital structure for 2003 and 2002 reflects the consolidation of  the net assets of Aliant and Bell ExpressVu. 

**Net  debt to capitalization ratio**

*Net debt to          capitalization ratio*          The net debt to capitalization ratio is a key measure that we use to          assess our financial condition. It shows how much net debt (short-term          and long-term debt, net of cash) we have in relation to our capital          (total net debt, non-controlling interest and shareholders’ equity).          

Our net  debt to capitalization ratio was 49.2% at the end of 2003, a significant  improvement from 53.9% at the end of 2002. This reflected improvements  in net debt and total shareholders’ equity.        Net debt improved $1,231 million to $10,791 million  in 2003. This was mainly from: 
- a cash    capital contribution of $975 million received from BCH upon the cash repayment    of our $975 million debt to BCH
- $393    million of free cash flow in 2003
- net cash    proceeds of $320 million on the sale of Aliant’s 53.2% interest in Stratos
- the sale    of our 89.9% ownership in Certen Inc. (Certen). This resulted in an overall    reduction of $135 million in net debt.

These were  partly offset by: 
- an increase    of $175 million in Bell ExpressVu’s capital lease obligation to Telesat    for leased assets relating to the Nimiq 1 and Nimiq 2 satellites that are    operated by Telesat
- an increase    of $180 million in short-term cash advances made to Bell Globemedia Inc. (Bell    Globemedia), an affiliated company under common control. BCE owns 68.5% of    Bell Globemedia.
- the consolidation    of $122 million of debt relating to a newly consolidated shared services entity,    effective July 1, 2003.

     Total  shareholders’ equity increased $1,157 million to $9,527 million in 2003.  This was primarily a result of a net cash capital contribution by BCH of $975  million and $247 million of net earnings in excess of the dividends declared  on common and preferred shares in 2003.        In 2003, Bell Canada simplified its  capital structure and that of its parent company, BCH, by carrying out certain  transactions. They included: 
- Bell Canada’s    cash repayment of $2,068 million of equity-settled notes payable to BCH
- Bell Canada’s    cash repayment of $975 million of notes payable to BCH
- BCH’s    cash capital contribution of $3,043 million to Bell Canada’s contributed    surplus
- Bell Canada’s    transfer of $3,338 million from contributed surplus to common shares.

     The  only intercompany loan remaining in Bell Canada’s consolidated balance  sheet at December 31, 2003 is a $498 million note receivable  from BCH. 

Bell  Canada 2003 Financial Information   19

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**SUMMARY  OF CASH FLOWS**
 The table  below is a summary of the flow of cash into and out of Bell Canada in 2003  and 2002. We started consolidating the cash flows of Aliant and Bell ExpressVu  on January 1, 2003. As a result, all comparative figures and discussions  in this section relating to our 2002 cash flows do not include Aliant’s  and Bell ExpressVu’s cash flows. 
 **2003** 2002 Cash      from operating activities**5,366** 4,558 Capital      expenditures**(2,892****)**(2,927)Dividends      and distributions**(2,081****)**(1,799)Interest      paid on equity-settled notes**(47****)**(84)Other      investing activities**47** – Free      cash flow from operations**393** (252)Business      acquisitions**(120****)**(37)Business      dispositions**55** 3,045 Change      in investments accounted for under the cost and equity methods**145** (50)Cash      and cash equivalents acquired or transferred in business combinations**–** 272 Capital      contribution by BCH (1)**3,043** 296 Distribution      of capital**–** (975)Distributions      paid by subsidiaries to BCE (1)**–** (1,396)Increase      in advances made to an affiliated company under common control**(180****)**(270)Repayment      of equity-settled notes**(2,068****)**– Net      issuance (repayment) of debt instruments**(2,196****)**530 Financing      activities of subsidiaries with third parties**2** 93 Cash      provided by discontinued operations**321** – Other**(46****)**21 **Net      increase (decrease) in cash and cash equivalents****(651****)**1,277 
(1)  $1,396 million is a distribution made by BCE Holdings GP to BCE from the proceeds  of the sale of the directories business. BCE, through BCH, subsequently made  a capital contribution of $296 million into Bell Canada from these proceeds.  This resulted in an effective net cash payment of $1.1 billion to BCE from the  proceeds of the sale of the directories business, which was partly used to help  finance the repurchase of SBC’s remaining indirect interest in Bell Canada.
*Free cash flow*          Free cash flow is a key financial measure we use to assess our performance.          It is derived from the statement of cash flows.                A positive free cash flow means that we          generated more cash from our operations than we needed to pay for capital          expenditures, dividends and other investing activities. 

**Cash  from operating activities**  Cash from operating activities increased 17.7% or $808 million to $5,366 million  in 2003, compared to 2002. This was mainly a result of the positive  effect of changes in working capital and cash tax savings in 2003.        We realized cash tax savings of $363 million in 2003  and $69 million in 2002 by using strategies to consolidate tax losses of  BCE, BCE Emergis and BCH with Bell Canada’s current earnings. 
**Capital  expenditures**

*Capital intensity*          Capita capital expenditures divided by operating revenues. It is a key          financial measure that we use to assess our performance and that of          our business units.               Improving capital intensity is a key component          to improved free cash flow. A positive trend over time means that wel          intensity is are becoming more efficient in using capital to generate          growth in revenue and cash flows. 

We continue  to make investments to expand and update our networks, and to meet customer  demand. Rigorous programs we have in place to manage capital spending prudently,  led to a reduction of 1.2% in capital expenditures in 2003, compared to 2002.  This was partly offset by the consolidation of Aliant and Bell ExpressVu’s  results starting January 1, 2003.        This resulted in a decrease in our capital intensity  ratio to 17.3% in 2003 from 20.1% in 2002.

**Other  investing activities**  Cash from other investing activities of $47 million in 2003 included $34  million of insurance proceeds that Bell ExpressVu received for a malfunction  on the Nimiq 2 satellite. 

**Business  acquisitions**  We invested $120 million in business acquisitions in 2003. This consisted  mainly of the purchase of BCE’s 51% interests in BCE Nexxia Corporation  (Nexxia U.S.) for a nominal amount and Fiberco Telecommunications Corporation  (FiberCo U.S.) for $27 million in cash and Bell Globemedia’s 100% interest  in Sympatico Inc. for $45 million in cash, and of an additional 30% interest  in Connexim, Limited Partnership in the fourth quarter, which increased our  total interest to 100%. In each case, the price paid was based on fair value.  

  20   2003 Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       The transfer of BCE’s 51% interests in Nexxia  U.S. and FiberCo U.S. to Bell Canada was done to simplify the structure  of BCE’s holdings. Bell Canada now owns 100% of Nexxia U.S. and FiberCo  U.S.        The transfer of Sympatico Inc. to Bell Canada  was done so that the sympatico.ca portal could be more closely tied to Bell Canada’s  Sympatico Internet access services.        We made no significant business acquisitions in 2002.  

**Business  dispositions**  We received $55 million for business dispositions in 2003. This related  to the sale of our 89.9% ownership interest in Certen in the third quarter.  We received $89 million in cash, which was reduced by $34 million of Certen’s  cash and cash equivalents at the time of sale.        We received $3.0 billion for business dispositions  in 2002. This consisted mainly of the net proceeds of approximately $2.7  billion from the sale of our directories business. Other business dispositions  of $306 million included Bell Canada’s sale of a 37% interest in each  of Télébec and Northern Telephone to the Bell Nordiq Income Fund  in the second quarter. 

**Change  in investments accounted for under the cost and equity methods**  In the fourth quarter of 2003, we sold a 3.66% interest in the directories  business for net proceeds of $135 million in cash.        Throughout 2002, we made investments of approximately  $45 million in cash in Nexxia U.S. and FiberCo U.S. 

**Capital  contributions**  In the first and second quarters of 2003, we received capital contributions  of $3,043 million in cash from BCH. 

**Equity  instruments**  In the fourth quarter of 2002, we made a return of capital to BCH of $975  million in cash on our common shares. 

**Debt instruments**

*Debt instruments*          We use a combination of long-term and short-term debt to finance our          operations. Our short-term debt consists primarily of bank facilities          and notes payable under commercial paper programs. We usually pay fixed          rates of interest on our long-term debt and floating rates on our short-term          debt. 

We made  $2.2 billion of debt repayments (net of issues) in 2003. These were financed  mainly with free cash flow of $393 million generated in 2003, net cash  proceeds of $320 million from the sale of Stratos, as well as a net capital  contribution of $975 million received from BCH.        On March 1, 2004, Bell Canada redeemed all  of its outstanding Series DU debentures for $126 million. The original maturity  date of these debentures was March 1, 2011. They had an interest rate of 9.45%.         The average annual interest rate on our total  debt was between 7.0% and 8.0% in 2003 and in 2002. 

**Cash  relating to discontinued operations**  Cash provided by discontinued operations was $321 million in 2003. This  consisted mainly of net cash proceeds of $320 million on Aliant’s sale  of its 53.2% interest in Stratos. 
**CREDIT  RATINGS**
*Credit ratings*          The interest rates we pay are partly based on the quality of our credit          ratings, all of which were investment grade at March 10, 2004. Investment          grade ratings usually mean that when we borrow money, we qualify for          lower interest rates than companies that have ratings lower than investment          grade. 

On May 15, 2003,  Moody’s Investors Service, Inc. (Moody’s) removed the negative trend  on Bell Canada’s commercial paper and long-term debt credit ratings.  The table below lists our key credit ratings at March 10, 2004. 
**Bell Canada****S&P** **DBRS** **Moody’      s** Commercial      paperA-1      (mid) / stable R-1      (mid) / stable P-2      / stable Extendable      commercial notesA-1      (mid) / stable R-1      (mid) / stable – Long-term      debtA      / stable A      (high) / stable A-3      / stable Preferred      sharesP-2      (high) / stable Pfd-2      (high) /stable – 
**LIQUIDITY**

*Liquidity*          Our ability to generate cash in the short term and in the long term,          when needed, and to provide for planned growth and to fund development          activities, depends on our sources of liquidity and on our cash requirements.

Our plan  is to generate enough cash from our operating activities to pay for capital  expenditures and dividends. In other words, we are targeting to have positive  free cash flow in the short term and in the long term.        We expect to repay contractual obligations maturing  in 2004 and in the long term from cash on hand, from cash generated from our  operations or by issuing new debt. Contractual obligations include long-term  debt. 

**Cash  requirements**  In 2004, we will need cash mainly for capital expenditures, dividend payments,  the payment of contractual obligations and other cash requirements. This includes  the financing of approximately $645 million for the acquisition of MTS’s  40% interest in Bell West. 

  

Bell  Canada 2003 Financial Information   21

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

***Capital  expenditures***  We spent $2.9 billion on capital expenditures in 2003. This equalled 17.3%  of our revenues for the year. Our target is for capital expenditures to be in  the range of 17% to 18% of our total revenues in 2004. 

***Contractual  obligations***  The table below is a summary of our contractual obligations at December 31, 2003  that are due in each of the next five years and thereafter. 
 2004 2005 2006 2007 2008 Thereafter Total Long-term      debt         (excluding capital leases)              999 965 482 611 906 6,298 **10,261** 
Notes        payable and bank advances
              32 – – – – – **32** Capital      leases134 112 113 104 102 331 **896** Operating      leases338 219 200 189 181 1,348 **2,475** 
Commitments        for capital expenditures
              240 – – – – – **240** Other      purchase obligations 539  362  333  284  157  275  **1,950** Other      long-term liabilities– 47 55 64 61 74 **301** **Total**2,282 1,705 1,183 1,252 1,407 8,326 **16,155** 
     Long-term  debt and notes payable and bank advances include $28 million drawn under our  committed credit facilities. They exclude $252 million of letters of credit.  The total amount available under these committed credit facilities and under  our commercial paper programs, including the amount currently drawn, is $1,355  million.         The imputed interest to be paid on capital leases  is $390 million.         Rental expense relating to operating leases was  $315 million in 2003 and $244 million in 2002.         Our commitments for capital expenditures include  investments to expand and update our networks, and to meet customer demand.  Other purchase obligations consist mainly of contractual obligations under service  contracts.        Other long-term liabilities included in the table  relate to Bell Canada’s future payments over the remaining life of  its contract with Certen for the development of Bell Canada’s billing  system. The total amount was $301 million at December 31, 2003.         At December 31, 2003, we had other  long-term liabilities that were not included in the table. They consisted of  an accrued employee benefit liability, future income tax liabilities, deferred  revenue and gains on assets and various other long-term liabilities.        We did not include the accrued employee benefit  liability and future income tax liabilities because we cannot accurately determine  the timing and amount of cash needed for them. This is because: 
- future    contributions to the pension plans depend largely on how well they are funded.    This varies based on the results of actuarial valuations that are performed    periodically and on the investment performance of the pension fund assets.
- future    payments of income taxes depend on the amount of taxable earnings and on whether    there are tax loss carryforwards available to reduce income tax liabilities.

       We did not include deferred revenue and gains on assets because they do not  represent future cash payments. 

***Agreement  with MTS***  The agreement between Bell Canada and MTS to create Bell West included  put and call options relating to MTS’s 40% interest in Bell West. On February  2, 2004, MTS exercised its option to sell its 40% interest in Bell West to Bell Canada  for approximately $645 million in cash. The cash is payable at closing, which  is expected to occur on or before August 3, 2004.        Bell Canada will finance the purchase of  MTS’s 40% interest in Bell West with cash on hand, from cash raised from  operations or by issuing debt. 

  22   2003 Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Other  cash requirements**  Our cash requirements may also be affected by the liquidity risks related to  our contingencies, off-balance sheet arrangements and derivative instruments.  We may not be able to quantify all of these risks. 

***Off-balance  sheet arrangements****Guarantees*  As a regular part of our business, we enter into agreements that provide for  indemnification and guarantees to counterparties in transactions involving business  dispositions, sales of assets, sales of services, purchases and development  of assets, securitization agreements and operating leases.        The nature of almost all of these indemnifications  prevents us from making a reasonable estimate of the maximum potential amount  we could be required to pay counterparties. As a result, we cannot determine  how they could affect our future liquidity, capital resources or credit risk  profile. We have not made any significant payments under these indemnifications  in the past. See Note 23 to the consolidated financial statements for more information.  

*Securitization  of accounts receivable*  Bell Canada and Aliant have agreements in place under which they sold interests  in pools of accounts receivable to securitization trusts for a total of $1,030  million in 2001. The main purpose of these agreements is to provide us  with a less expensive form of financing. As a result, they are an important  part of our capital structure and liquidity. If we did not have these agreements,  we would have had to finance approximately $1,030 million by issuing debt or  equity, either of which would have been more expensive for us.        The total accounts receivable that were sold must  meet minimum performance targets. These are based on specific delinquency, default  and receivable turnover ratio calculations, as well as minimum credit ratings.  If these accounts receivable go into default, the full purchase price will have  to be returned to the buyers. See Note 9 to the consolidated financial statements  for more information. 

***Derivative  instruments***  We periodically use derivative instruments to manage our exposure to interest  rate risk, foreign currency risk and changes in the price of BCE common shares.  We do not use derivative instruments for speculative purposes. Because we do  not trade actively in derivative instruments, we are not exposed to any significant  liquidity risks relating to them.        The carrying value of the outstanding derivative  instruments was a net liability of $120 million at December 31, 2003.  Their fair values amounted to a net liability of $141 million. See Note 17 to  the consolidated financial statements for more information. 

***Litigation***  We become involved in various claims and litigation as a regular part of our  business. While we cannot predict the final outcome of claims and litigation  that were pending at December 31, 2003, management believes that  the resolution of these claims and litigation will not have a material and negative  effect on our consolidated financial position or results of operation.        You will find a more detailed description of the  material claims and litigation pending at December 31, 2003 in  the Bell Canada 2003 AIF. 

***CRTC  Price Cap decision***  The Price Cap decision made a number of changes to the rules governing local  service in Canada’s telecommunications industry. These rules will be in  effect for four years.        The CRTC has stated that it will initiate a Price  Cap review in the final year of the regime and make modifications to the regulatory  framework, as necessary.        One of the changes resulting from the Price Cap  decision was a new mechanism, called the deferral account, which will be used  to fund initiatives such as service improvements, reduced rates and/or rebates.  We estimated our commitment relating to the deferral account to be approximately  $160 million at December 31, 2003, which we expect to clear substantially  in 2004 by implementing various initiatives. 

**Sources  of liquidity**  While we do not expect any cash shortfall in the foreseeable future, we believe  that we could cover a shortfall through the financing facilities we have in  place at this time.        These financing facilities, along with our strengthening  balance sheet, give us flexibility in carrying out our plans for future growth.  We can supplement our liquidity sources, if necessary, by issuing additional  debt or equity, or by selling non-core assets. We might do this to help finance  business acquisitions or for contingencies. 

Bell Canada  2003 Financial Information   23

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     The  table below is a summary of our outstanding lines of credit, bank facilities  and commercial paper programs at December 31, 2003. 
   **Non-**    **Committed** **Committed** **Total** Commercial      paper credit lines987 900 1,887 Other      credit facilities368 306 674 **Total****1,355** **1,206** **2,561** **Drawn****280** **–** **280** **Undrawn****1,075** **1,206** **2,281** 
     Bell Canada  and Aliant may issue notes under their commercial paper programs up to the amount  of their supporting committed lines of credit. The total amount of these supporting  committed lines of credit was $987 million at December 31, 2003.         Bell Canada and Aliant had no amounts outstanding  under their commercial paper programs at December 31, 2003.        Bell Canada can issue up to $400 million  of Class E notes under its commercial paper program. These notes are not supported  by committed lines of credit and may be extended in certain circumstances. Bell Canada  had no Class E notes outstanding at December 31, 2003.        The drawn portion of our total credit facilities  includes issued letters of credit of $252 million under our committed facilities.  
RISKS  THAT COULD AFFECT OUR BUSINESS
This section describes          general risks that could affect us. 

A risk is the possibility          that an event might happen in the future that could have a negative          effect on our financial condition, results of operations or business.          Part of managing our business is to understand what these potential          risks could be and to minimize them where we can.               Because no one can predict whether an          event will happen or its consequences, the actual effect of any event          on our business could be materially different from what we currently          anticipate. In addition, this description of risks does not include          all possible risks, and there may be other risks that we are currently          not aware of.

**Strategies  and plans**  We plan to achieve our business objectives through various strategies and plans.  Our strategy is to lead change in the industry and set the standard for IP-based  communications while continuing to deliver on our goals of innovation, simplicity  and service, and efficiency. The key elements of our strategies and plans include:  
- evolving    from multiple service-specific networks to a single IP-based network
- providing    new services to meet customers’ needs by introducing innovative technologies,    including VoIP, VDSL and IPTV
- maintaining    and improving customer satisfaction by simplifying all areas of our customers’    experience, including call centres, billing and points of sale
- increasing    the number of customers who buy multiple products by focusing our marketing    and sales efforts by customer segment. This includes offering bundled services    to consumers and service packages to businesses.
- lowering    costs by improving efficiency in all areas of product and service delivery,    including installation, activation and call centres.

     Our  strategic direction involves significant changes in processes, in how we approach  our markets, and in products and services. These changes will require a shift  in employee skills.        The strategies and plans outlined above will require  capital expenditures for their implementation. The timing and quantity of the  returns from these investments are uncertain.        If we are unable to achieve our business objectives,  our financial performance, including our growth prospects, could be hurt. This  could have a material and negative effect on our results of operations. At this  time, we cannot determine the effect that moving to a single IP-based network  could have on our results of operations. 

**Economic  and market conditions**  Our business is affected by general economic conditions, consumer confidence  and spending, and the demand for, and the prices of, our products and services.  When there is a decline in economic growth, and in retail and commercial activity,  there tends to be a lower demand for our products and services. During these  periods, customers may delay buying our products and services, or reduce or  discontinue using them. 
24   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     The  slower pace of growth and the uncertainty in the global economy have reduced  demand for some of our products and services, which has negatively affected  our financial performance and may continue to negatively affect it in the future.  In particular, weak economic conditions have led to: - lower    than expected growth in data revenue because of lower demand from business    and wholesale customers
- pressure    on business customers to reduce their capital expenditures and delay or defer    communication system upgrades and expansion plans reducing our revenues
- pressure    on business customers to reduce operating expenses. This increases their tendency    to negotiate contracts with lower unit prices for communications services,    which reduces our revenues.
- some    reductions in the number of network access lines because of business failures,    consolidations or business contractions.

     Weak  economic conditions may negatively affect our profitability and cash flows from  operations. They could also negatively affect the financial condition and credit  risk of our customers, which could increase uncertainty about our ability to  collect receivables and potentially increase our bad debt expenses. 

**Increasing  competition**  We face intense competition from traditional competitors, as well as from new  entrants to the markets we operate in. We compete not only with other telecommunications  and television service providers, but also with other businesses and industries.  These include cable, software and Internet companies, a variety of companies  that offer network services, such as providers of business information systems  and system integrators, and other companies that deal with, or have access to,  customers through various communications networks.        Many of our competitors have substantial financial,  marketing, personnel and technological resources. Other competitors have recently  emerged, or may emerge in the future, from restructurings with reduced debt  and a stronger financial position. This means that they could have more financial  flexibility to price their products and services at very competitive rates.         Competition could affect our pricing strategies  and reduce our revenues and profitability. It could also affect our ability  to retain existing customers and attract new ones. Competition puts us under  constant pressure to improve, and invest in, customer service and to keep our  prices competitive. It forces us to continue to reduce costs, manage expenses  and increase productivity. This means that we need to be able to anticipate  and respond quickly to the constant changes in our businesses and markets.        We already have several domestic and foreign competitors,  but the number of foreign competitors with a presence in Canada and large resources  could increase in the future. In 2003, the Canadian government started  a review of the foreign ownership restrictions that apply to telecommunications  carriers and to broadcasting distribution undertakings (BDUs). Removing or easing  the limits on foreign ownership could result in foreign companies entering the  Canadian market by making acquisitions or investments. This could result in  greater access to capital for our competitors or the arrival of new competitors  with global scale, which would increase competitive pressure. Because the government’s  review has not been completed, it is impossible to predict the outcome or to  assess how any recommendations may affect us. 

***Wireline  and long distance***  We experience significant competition in long distance from dial-around providers,  pre-paid card providers and others, and from traditional competitors, such as  inter-exchange carriers and resellers.        Contracts for long distance services to large  business customers are very competitive. Our pricing strategy is to offer prices  that reflect the quality of our service and the volume and the characteristics  of the traffic. Customers may choose to switch to competitors that offer very  low prices to acquire market share and have little regard for the quality of  service or impact on their earnings.        We also face increasing cross-platform competition  as customers substitute new technologies for traditional services. For example,  our wireline business competes with wireless and Internet services, including  chat services, instant messaging and e-mail. We expect to face competitive pressure  from cable companies as they implement voice services over their networks and  from other emerging competitors, including municipal electrical utilities and  other VoIP providers. We expect these kinds of competition to intensify as growth  in Internet and wireless services continues and new technologies are developed.  

Bell  Canada 2003 Financial Information   25

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     Cross-platform  competition will be increasingly intense as technologies, such as VoIP, improve  and gain market acceptance. We have announced plans to launch our own VoIP initiative,  but there is no assurance that it will attract a sustainable customer base.  VoIP services are anticipated to take business away from our other products  and services. If significant competition for VoIP develops, it could reduce  our existing market share in local and long distance services, and could have  a material and negative effect on our future revenues and profitability.        VoIP technology does not require service providers  to own or rent physical networks, which increases access to this market by other  competitors. If competition from these service providers further develops, it  could have a material and negative effect on our future revenues and profitability.         Technology substitution, and VoIP in particular,  has reduced barriers to entry that existed in the industry. This has allowed  competitors with limited access to financial, marketing, personnel and technological  resources to rapidly launch new products and services and to gain market share.  This trend is expected to accelerate in the future, which could materially and  negatively affect our financial performance. 

***Internet  access***  Cable companies and independent Internet service providers have increased competition  in the broadband and Internet access services business. Competition has led  to pricing for Internet access in Canada that is among the lowest in the world.  

***Wireless***  The Canadian wireless telecommunications industry is also highly competitive.  We compete directly with other wireless service providers that have aggressive  product and service introductions, pricing and marketing, and with wireline  service providers. We expect competition to intensify as new technologies, products  and services are developed. 

***DTH  satellite television***  Bell ExpressVu competes directly with another DTH satellite television provider  and with cable companies across Canada. These cable companies have recently  upgraded their networks, operational systems and services, which could improve  their competitiveness. This could materially and negatively affect the financial  performance of Bell ExpressVu. 

**Improving  productivity and containing capital intensity**  We continue to implement several productivity improvements while containing  our capital intensity. There could be a material and negative effect on our  profitability if we do not continue to successfully implement these productivity  improvements and manage capital intensity while maintaining the quality of our  service. For example, we must reduce the price of certain of our services that  are subject to regulatory price caps, each year between 2002 and 2006.  In addition, to remain competitive in some business data services that are not  regulated, we have reduced our prices and may have to continue doing so in the  future. Our profits will decline if we cannot lower our expenses at the same  rate. There could also be a material and negative effect on our profitability  if market factors or other regulatory actions result in lower revenues and we  cannot reduce our expenses at the same rate.        Many productivity improvements require capital  expenditures to implement systems that automate or assist in our operations.  There is no assurance that these investments will be effective in delivering  the planned productivity improvements. 
**Anticipatingtechnological change**
We operate in markets          that are experiencing constant technological change, evolving industry          standards, changing client needs, frequent new product and service introductions,          and short product life cycles. 
Our success will depend in large part on how well we can anticipate and respondto changes in industry standards and client needs, and how quickly and efficientlywe can introduce new products, services and technologies, and upgrade existingones.      We may face additional financial risks as we developnew products, services and technologies, and update our networks to stay competitive.Newer technologies, for example, may quickly become obsolete or may need morecapital than expected. Development could be delayed for reasons beyond our control.Substantial investments usually need to be made before new technologies proveto be commercially viable.      We are in the process of moving our core circuit-basedinfrastructure to IP technology. This may allow us to: - offer    integrated voice, data and video services
- offer    a range of valuable network enabled business solutions to large business customers
- increase    capital efficiency
- increase    operating efficiency, including our efficiency in introducing and supporting    services.

  

26   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

     Aspart of this move, we also plan to discontinue certain services that are basedon circuit-based infrastructure. This is a necessary component of increasing capitaland operating efficiencies. In some cases, this could be delayed or preventedby customers or regulatory actions. If we cannot discontinue these services asplanned, we will not be able to achieve improvements as expected.      There is no assurance that we will be successfulin developing, implementing and marketing new technologies, products, servicesor enhancements in a reasonable time, or that they will have a market. There isalso no assurance that efficiencies will increase as expected. New products orservices that use new or evolving technologies could make our existing ones unmarketableor cause their prices to fall. 
**Liquidity**  Our ability to generate cash and to maintain capacity to meet our financial  obligations and provide for planned growth depends on our cash requirements  and on our sources of liquidity.        Our cash requirements may be affected by the risks  associated with our contingencies, off-balance sheet arrangements and derivative  instruments.        In general, we finance our capital needs in four  ways: 
- from    cash generated by our operations or investments
- by borrowing    from commercial banks
- through    debt and equity offerings in the capital markets
- by selling    or otherwise disposing of assets.

     An  increased level of debt financing could lower our credit ratings, increase our  borrowing costs and give us less flexibility to take advantage of business opportunities.         Our ability to raise financing depends on our  ability to access the capital markets and the syndicated commercial loan market.  The cost of funding depends largely on market conditions, and the outlook for  our business and our credit ratings at the time capital is raised. If our credit  ratings are downgraded, our cost of funding could significantly increase. In  addition, participants in the capital and syndicated commercial loan markets  have internal policies limiting their ability to invest in, or extend credit  to, any single borrower or group of borrowers or to a particular industry.        Bell Canada and certain of its subsidiaries  have entered into renewable credit facilities with various financial institutions.  They include facilities serving as back-up facilities for issuing commercial  paper. There is no assurance that these facilities will be renewed at favourable  terms.        We need significant amounts of cash to implement  our business plan. This includes cash for capital expenditures to provide our  services, dividend payments and payment of our contractual obligations, including  refinancing our outstanding debt.        Our plan in 2004 is to generate enough cash from  our operating activities to pay for capital expenditures and dividends. We expect  to repay contractual obligations maturing in 2004 from cash on hand, from cash  generated from our operations or by issuing debt. If actual results are different  from our business plan or if the assumptions in our business plan change, we  may have to raise more funds than expected from issuing debt or equity.        If we cannot raise the capital we need upon acceptable  terms, we may have to: 
- limit    our ongoing capital expenditures
- limit    our investment in new businesses
- try to    raise additional capital by selling or otherwise disposing of assets.

     Any  of these possibilities could have a material and negative effect on our cash  flow from operations and growth prospects in the long term. 

**Reliance  on major customers**  An important amount of revenue earned by us comes from a small number of major  customers. If we lose contracts with such major customers and cannot replace  them, it could have a material and negative effect on our results. 

**Making  acquisitions**  Our growth strategy includes making strategic acquisitions and entering into  joint ventures. There is no assurance that we will find suitable companies to  acquire or to partner with or that we will have the financial resources needed  to complete any acquisition or to enter into any joint venture. There could  also be difficulties in integrating the operations of recently acquired companies  with our existing operations or in operating joint ventures. 

Bell  Canada 2003 Financial Information   27

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Litigation,  regulatory matters and changes in laws**  Pending or future litigation, regulatory initiatives or regulatory proceedings  could have a material and negative effect on our businesses, operating results  and financial condition. Changes in laws or regulations or in how they are interpreted,  and the adoption of new laws or regulations, including changes in, or the adoption  of, new tax laws that result in higher tax rates or new taxes, could also materially  and negatively affect us. Any claim by a third party, with or without merit,  that a significant part of our business infringes on its intellectual property  could also materially and negatively affect us.

The Bell Canada 2003          AIF contains a detailed description of the principal legal proceedings          involving us and certain regulatory initiatives and proceedings concerning          us.               In addition, please refer to *Changes          to wireline regulations*on the next page for a description of certain          regulatory initiatives and proceedings that could affect us. 

**Pension  fund contributions**  Most of our pension plans had pension fund surpluses as of our most recent actuarial  valuation. As a result, we have not had to make regular contributions to the  pension funds in the past few years. It also means that we have reported pension  credits, which have had a positive effect on our net earnings.        The decline in the capital markets in 2001  and 2002, combined with historically low interest rates, have significantly  reduced the pension fund surpluses and the pension credits. This has negatively  affected our net earnings.        Our pension plan assets had higher returns than  expected in 2003. There is no assurance that high returns will continue.  If returns on pension plan assets decline again in the future, the surpluses  could also continue to decline. If this happens, we might have to start making  contributions to the pension funds. This could have a material and negative  effect on our results of operations. 

**Retaining  employees**  Our success depends in large part on our ability to attract and retain key employees.         The exercise price of most of the stock options  that our key employees hold is higher than the current trading price of BCE  Inc.’s common shares. As a result, our stock option programs may not be  effective in retaining these employees. While we do not expect that we will  lose key people, if it happens, this could materially hurt our businesses and  operating results. 
**Renegotiatinglabour agreements**
Approximately 53%          of our employees are represented by unions and are covered by collective          agreements. 
The following material collective agreements have expired: - the collective    agreement between Bell Canada and the Communications, Energy and Paperworkers    Union of Canada (CEP), representing approximately 7,000 craft and services    employees
- the collective    agreements between Aliant Telecom Inc. (Aliant Telecom), a subsidiary of Aliant,    and its employees, representing approximately 4,200 employees
- the collective    agreement between Connexim, Limited Partnership and its employees, representing    approximately 100 craft and services employees.

     The  collective agreements between Entourage Technology Solutions Inc. and the CEP,  representing approximately 2,000 technicians in Ontario and Québec, will  expire on September 30, 2004.        Renegotiating collective agreements could result  in higher labour costs and work disruptions, including work stoppages or work  slowdowns. Difficulties in renegotiations or other labour unrest could significantly  hurt our businesses, operating results and financial condition. 

**Events  affecting our networks**  Network failures could materially hurt our business, including our customer  relationships and operating results. Our operations depend on how well we protect  our networks, our equipment, our applications and the information stored in  our data centres against damage from fire, natural disaster, power loss, hacking,  computer viruses, disabling devices, acts of war or terrorism, and other events.  Any of these events could cause our operations to be shut down indefinitely.         Our network is connected with the networks of  other telecommunications carriers, and we rely on them to deliver some of our  services. Any of the events mentioned in the previous paragraph, as well as  strikes or other work disruptions, bankruptcies, technical difficulties or other  events affecting the networks of these other carriers could also hurt our business,  including our customer relationships and operating results. 

28   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Changes  to wireline regulations**
***Decisions  of regulatory agencies***  Our business is affected by decisions made by various regulatory agencies, including  the CRTC. Many of these decisions balance requests from competitors for access  to facilities, such as the telecommunications networks, switching and transmission  facilities, and other network infrastructure of incumbent telephone companies,  with the rights of the incumbent telephone companies to compete reasonably freely.  

***Second  Price Cap decision***  In May 2002, the CRTC issued decisions relating to new price cap rules  that will govern incumbent telephone companies for a four-year period starting  in June 2002. These decisions: 
- set a    3.5% productivity factor on many capped services, which may require us to    reduce prices on these services
- extended    price cap regulation to more services
- reduced    the prices that incumbent telephone companies can charge competitors for services
- set procedures    for enforcing standards of service quality
- effectively    froze rates for residential services.

     The  CRTC also established a deferral account, but has not yet determined how the  funds in the account will be used. It will start a proceeding in 2004 to address  issues related to the deferral accounts of incumbent telephone companies. There  is a risk that the account could be used in a way that could have a negative  financial effect on us.        The balance in Bell Canada’s and Aliant  Telecom’s deferral accounts at the end of 2003 was estimated to be  approximately $160 million. Almost all of these funds are expected to be used  in 2004.        On December 2, 2003, Bell Canada  filed an application with the CRTC asking for approval to use some of the funds  in its deferral account to expand its broadband services to certain areas. On December 24, 2003,  the CRTC indicated that it plans to review this proposal as part of its proceeding  in 2004.        In addition, other follow-up issues to the Price  Cap decision are expected to be resolved in 2004. The outcome of these issues  could result in an additional negative effect on our results. 

***Decision  on incumbent affiliates***  On December 12, 2002, the CRTC released its decision on incumbent  affiliates, which requires Bell Canada and its carrier affiliates to receive  CRTC approval on contracts that bundle tariffed and non-tariffed products and  services. This means that: 
- all existing    contracts that bundle tariffed and non-tariffed products and services must    be filed with the CRTC for approval
- all new    contracts that bundle tariffed and non-tariffed products and services must    receive CRTC approval before they are carried out
- carrier    affiliates must meet the same approval requirements as Bell Canada on    products and services they offer in Bell Canada’s operating territory.

     On  September 23, 2003, the CRTC issued a decision that requires Bell Canada  and its carrier affiliates to include a detailed description of the bundled  services they provide to customers when they file tariffs with the CRTC. The  customer’s name will be kept confidential, but the pricing and service  arrangements it has with us will be available on the public record.        These decisions increase our regulatory burden  at both the wholesale and retail levels. They could also cause some of our large  customers to choose another preferred supplier, which could have a material  and negative effect on our results of operations. These decisions are currently  under appeal. 

***Allstream  and Call-Net application concerning customer specific arrangements***  On January 23, 2004, Allstream Corp. (Allstream) and Call-Net Enterprises Inc.  (Call-Net) filed a joint application asking the CRTC to order Bell Canada  to stop providing service under any customer-specific arrangements (CSAs) that  are currently filed with the CRTC and are not yet approved.        Allstream and Call-Net have proposed that Bell Canada  should only provide services to these customers under its general tariff. Allstream  and Call-Net have also proposed that the CRTC suspend its approval of any new  CSAs until Bell Canada’s appeal of the decision on incumbent affiliates  is heard. 

Bell  Canada 2003 Financial Information   29

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       Bell Canada will be opposing all aspects  of this application. If the CRTC grants it, Bell Canada will be required  to cancel contracts with many of its enterprise customers and, in some cases,  to reprice services. Suspending approval of any new CSAs could have a material  and negative effect on Bell Canada’s ability to offer new services  to the large business customer market on competitive terms and conditions. 

***Public  notice on changes to minimum prices***  On October 23, 2003, the CRTC issued a public notice asking for comments  on its preliminary view that revised rules may be needed for setting minimum  prices for our regulated services and for how incumbent telephone companies  price their services, service bundles and customer contracts. It issued an amended  public notice on December 8, 2003.        The CRTC is also seeking comments on proposed  pricing restrictions on volume or term contracts for retail tariffed services.  It is too early to determine if the proposals will be implemented as proposed.  If they are, we will be required to increase the minimum prices we charge for  regulated services. This would limit our ability to compete. Bell Canada  provided its comments to the CRTC on January 30, 2004. 

***Application  seeking consistent regulation***  On November 6, 2003, Bell Canada filed an application requesting that  the CRTC start a public hearing to review how similar services offered by cable  companies and telephone companies are regulated. This would allow consistent  rules to be developed that recognize and support the growing competition between  these converging sectors. Bell Canada also requested that this proceeding  address any rules that might be needed to govern VoIP services provided by cable  companies and others. This proceeding could determine the rules for competition  with other service providers and could affect our ability to compete in the  future. 

***Licences  and changes to wireless regulation***

Companies must have          a spectrum licence to operate cellular, PCS and other radio-telecommunications          systems in Canada. The Minister of Industry awards spectrum licences,          through a variety of methods, at his or her discretion under the *Radiocommunication          Act.*

As a result  of a recent Industry Canada decision, Bell Mobility’s and Aliant Telecom  / MT&T Mobility Inc.’s cellular and PCS licences, which would have  expired on March 31, 2006, will now expire in 2011. MT&T Mobility Inc. is  a wholly-owned subsidiary of Aliant Telecom. The PCS licences that were awarded  in the 2001 PCS auction will expire on November 29, 2011. As a result,  all of Bell Mobility’s cellular and PCS licences are now classified as  spectrum licences with a 10-year licence term. While we expect that they will  be renewed, there is no assurance that this will happen. Industry Canada can  revoke a company’s licence at any time if the company does not comply with  the licence’s conditions. While we believe that we comply with the conditions  of our licences, there is no assurance that Industry Canada will agree, which  could have a material and negative effect on us.        In December 2003, Industry Canada issued  its decision on changing the terms and the method of calculating the fees of  cellular and PCS licences. The new fees are based on the amount of spectrum  a carrier holds in a given geographic area. Fees were previously based on the  degree of deployment or the number of radio sites in operation. The changes  come into effect on April 1, 2004 and will be implemented over seven  years. They are not expected to have a material impact on the amount of fees  paid by Bell Mobility.        In October 2001, the Minister of Industry  announced plans for a national review of Industry Canada’s procedures for  approving and placing wireless and radio towers in Canada, including a review  of the role of municipal authorities in the approval process. If the consultation  process results in more municipal involvement in the approval process, there  is a risk that it could significantly slow the expansion of wireless networks  in Canada. This could have a material and negative effect on our operations.  The final report is expected in April 2004. 

**Increased  accidents from using cellphones**  Some studies suggest that using handheld cellphones while driving may result  in more accidents. It is possible that this could lead to new regulations or  legislation banning the use of handheld cellphones while driving, as it has  in Newfoundland and Labrador and in several U.S. states. If this happens, cellphone  use in vehicles could decline, which could negatively affect us. 

  30   2003 Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Health  concerns about radio frequency emissions**  It has been suggested that some radio frequency emissions from cellphones may  be linked to medical conditions, such as cancer. In addition, some interest  groups have requested investigations into claims that digital transmissions  from handsets used with digital wireless technologies pose health concerns and  cause interference with hearing aids and other medical devices. This could lead  to additional government regulation, which could have a material and negative  effect on our business. In addition, actual or perceived health risks of wireless  communications devices could result in fewer new network subscribers, lower  network usage per subscriber, higher churn rates, product liability lawsuits  or less outside financing available to the wireless communications industry.  Any of these would have a negative effect on our business. 

**Bell  ExpressVu**

Bell ExpressVu currently          uses two satellites, Nimiq 1 and Nimiq 2, for its DTH satellite television          services. Telesat operates these satellites. 

Satellites  are subject to significant risks. Any loss, failure, manufacturing defects,  damage or destruction of these satellites could have a material and negative  effect on Bell ExpressVu’s results of operations and financial condition.         Bell ExpressVu is subject to programming and carriage  requirements under its CRTC licence. Changes to the regulations that govern  broadcasting or to its licence could negatively affect Bell ExpressVu’s  competitive position or the cost of providing its services. Bell ExpressVu’s  existing DTH satellite television distribution undertaking licence was scheduled  to be renewed in August 2003, but was extended to March 31, 2004 so  that the CRTC could review Bell ExpressVu’s application. The CRTC held  the hearings on the renewal application in October 2003. Although we expect  that this licence will be renewed, there is no assurance that it will be renewed  under the same terms and conditions.        Bell ExpressVu continues to face competition from  unregulated U.S. DTH satellite television services that are illegally sold in  Canada. In response, it has started, or is participating in, several legal actions  that are challenging the sale of U.S. DTH satellite television equipment in  Canada. While Bell ExpressVu has been successful in increasing its share of  the satellite television market despite this competition, there is no assurance  that it will continue to do so.        Bell ExpressVu faces a loss of revenue resulting  from the theft of its services. It is taking numerous actions to reduce these  losses, including legal action, investigations, implementing electronic countermeasures  targeted at illegal devices, leading information campaigns and developing new  technology. Implementing these measures, however, could increase Bell ExpressVu’s  capital and operating expenses, reduce subscriber growth and increase churn.
OUR  ACCOUNTING POLICIES
We have prepared          our consolidated financial statements according to Canadian GAAP. See          Note 1 to the consolidated financial statements for more information          about the accounting principles we used to prepare our financial statements.                         This section discusses key estimates and          assumptions that management has made under these principles and how          they affect the amounts reported in the financial statements and notes.          It also describes the key changes in accounting standards and our accounting          policies, and how they affect our financial statements. 
**CRITICAL  ACCOUNTING ESTIMATES**
 Under Canadian  GAAP, we are required to make estimates when we account for and report assets,  liabilities, revenues and expenses, and to disclose contingent assets and liabilities  in our financial statements. We are also required to continually evaluate the  estimates that we use.        We base our estimates on past experience and on  other factors that we believe are reasonable under the circumstances. Because  this involves varying degrees of judgment and uncertainty, the amounts currently  reported in the financial statements could, in the future, prove to be inaccurate.         We consider the estimates described in this section  to be an important part of understanding our financial statements because they  rely heavily on management’s judgment and are based on factors that are  highly uncertain.        Our senior management has discussed the development  and selection of the critical accounting estimates described in this section  with the audit committee of the board of directors. The audit committee has  reviewed these critical accounting estimates. 

Bell Canada  2003 Financial Information   31

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

**Employee benefit plans**
*Employee benefit          plans*          We maintain defined benefit plans that provide pension, other retirement          and post-employment benefits for almost all of our employees. The amounts          reported in the financial statements relating to these benefits are          determined using actuarial calculations that are based on several assumptions.

We perform a valuation at  least every three years to determine the actuarial present value of the accrued  pension and other retirement benefits. The valuation uses management’s  assumptions for the discount rate, expected long-term rate of return on plan  assets, rate of compensation increase, health-care cost trend and expected average  remaining years of service of employees.        While we believe that these assumptions are reasonable,  differences in actual results or changes in assumptions could materially affect  employee benefit obligations and future net benefit plans costs.        We account for differences between actual and  assumed results by recognizing differences in benefit obligations and plan performance  over the working lives of the employees who benefit from the plans.        The two most significant assumptions used to calculate  the net employee benefit plans cost are the discount rate and the expected long-term  rate of return on plan assets. 
***Discountrate***
*Discount rate*          The discount rate is the interest rate used to determine the present          value of the future cash flows that we expect will be needed to settle          employee benefit obligations. It is usually based on the yield on long-term          high-quality corporate fixed income investments, with maturities matching          the estimated cash flows from the plan. 
We determine the appropriate discount rate at the end of every year. Our discountrate was 6.5% at December 31, 2003, unchanged from 2002 and 2001.The table below shows the impact on the net benefit plans cost for 2004 and theaccrued benefit asset at December 31, 2004 of a 0.5% increase and a0.5% decrease in the discount rate.  Impact      on net benefit Impact      on accrued benefit  plan      cost for 2004 asset      at December 31, 2004 Discount      rate    Increased      to 7.0%(75)75 Decreased      to 6.0%75 (75)
     Although  there is no immediate impact on our balance sheet, a lower discount rate results  in a higher accrued benefit obligation and a lower pension surplus. This means  that we may have to increase any cash contributions to the plan otherwise required.
***Expected  long-term rate of return***  We assumed an expected long-term rate of return on plan assets of 7.5% in 2003.  We lowered our assumption from 8.3% in 2002 because we expect lower long-term  rates of return in the financial markets. This change increased our net benefit  plans cost by about $80 million in 2003.        Over the long term, the actual rate of return  has, on average, been substantially more than the rates we assumed. In 2002  and 2001, however, it was substantially less than expected. This resulted  in a significant accumulated actuarial loss, which negatively affected pre-tax  earnings by about $120 million in 2003.        The table below shows the impact on the net benefit  plans cost for 2004 and the accrued benefit asset at December 31,  2004 of a 0.5% increase and a 0.5% decrease in the expected rate of return on  plan assets. 
 Impact      on net benefit Impact      on accrued benefit  plan      cost for 2004 asset      at December 31, 2004 Expected      rate of return on plan assets    Increased      to 8.0%(60)60 Decreased      to 7.0%60 (60)
     Although  there is no immediate impact on our balance sheet, poor fund performance results  in a lower fair value of plan assets and a lower pension surplus. This means  that we may have to increase any cash contributions to the plan otherwise required.  

**Goodwill impairment**

*Goodwill impairment*

We assess the value          of goodwill of all reporting units within each of our operating segments          every year and when events or changes in circumstances indicate that          it might be impaired. 

We generally  measure for impairment using a projected discounted cash flow method and corroborate  our assessment using other valuation methods. If the asset’s carrying value  is more than its fair value, we record the difference as a reduction in the  amount of goodwill on the balance sheet and an impairment charge in the statement  of operations.        We have to make a number of significant estimates  when calculating fair value using a projected discounted cash flow method. These  estimates include the assumed growth rates for future revenue, EBITDA and cash  flows, the numbers of years used in the cash flow model, the discount rate for  future cash flows and many others.        We believe that all of our estimates are reasonable.  They are consistent with our internal planning and reflect our best estimates,  but they have inherent uncertainties that management may not be able to control.  

  

32   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
     Any change in each of the estimates used could havea material impact on the calculation of the fair value and resulting impairmentcharge. As a result, we are unable to reasonably quantify the changes in our overallfinancial performance if we had used different assumptions.      We cannot predict whether an event that triggersan impairment will occur, when it will occur or how it will affect the asset valueswe have reported.      We had $1,586 million of goodwill at December 31, 2003.There were no impairment charges recorded in 2003 or 2002. 
**Contingencies**
*Contingencies*

We become involved          in various litigation and regulatory matters as a part of our business.          Pending litigation, regulatory initiatives or regulatory proceedings          represent potential financial loss to our business. 

We accrue a potential loss  if we believe the loss is probable and it can be reasonably estimated. We base  our decision on information that is available at the time. We estimate the amount  of the loss by consulting with the outside legal counsel who is handling our  defence. This involves analysing potential outcomes and assuming various litigation  and settlement strategies.        If the final resolution of a legal or regulatory  matter results in a judgment against us or requires us to pay a large settlement,  it could have a material and negative effect on our results of operations, cash  flows and financial position in the period that the judgment or settlement occurs.  Any accrual would be charged to operating income and included in *Accounts  payable and accrued liabilities*or *Other long-term liabilities*. Any  cash settlement would be included in cash from operating activities.        We did not have any significant provisions relating  to pending litigation, regulatory initiatives or regulatory proceedings at December 31, 2003.  We have not made any significant changes to our estimates in the past two years.  

 

**Income  taxes**  Management believes that it has adequately provided for income taxes based on  all of the information that is currently available. The calculation of income  taxes in many cases, however, requires significant judgment in interpreting  tax rules and regulations, which are constantly changing.        Our tax filings are also subject to audits, which  could materially change the amount of current and future income tax assets and  liabilities. Any change would be recorded as a charge or a credit to income  tax expense. Any cash payment or receipt would be included in cash from operating  activities.        We had $340 million of future income tax assets  and $441 million of future income tax liabilities at December 31, 2003.  We recognized an income tax expense of $787 million in 2003 and $1,087  million in 2002. Before 2003, in computing future income tax liabilities,  we netted the future income tax asset relating to the liability for other retirement  and post-employment benefits against the future income tax liability relating  to pension benefits. In 2003, we stopped netting these two items to better  represent the asset and liability components of future income taxes, which resulted  in an increase of $486 million in future income tax assets and future income  tax liabilities. This was the only significant change to our estimates that  we made in the past two years. 

**Recent  changes to accounting standards and policies**  Please see Note 1 to the consolidated financial statements for more information  about the adoption of accounting policies in 2003 resulting from new accounting  standards, which consisted of: 
- stock-based    compensation and other stock-based payments
- disclosure    of guarantees
- disposal    of long-lived assets and discontinued operations
- consolidation    of variable interest entities.

***Subscriber  acquisition costs***  Before 2003, we accounted for the costs of acquiring subscribers by: 
- deferring    and amortizing the costs of acquiring DTH satellite television service subscribers    against earnings over three years
- deferring    and amortizing the costs of acquiring wireless subscribers against earnings    over the terms of the contracts, which are normally up to 24 months
- expensing    all other subscriber acquisition costs when services were activated.

     The  costs we deferred and amortized consisted mainly of hardware subsidies, net  of revenues from the sale of wireless handsets. 

Bell  Canada 2003 Financial Information   33

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***

       Effective January 1, 2003, we changed our  accounting method and started expensing all subscriber acquisition costs when  services are activated. We also started presenting the revenues generated from  the sale of wireless handsets, instead of netting them against operating expenses.         As a result of applying this change, we restated  the comparative figures for 2002: 
- operating    revenues increased $195 million
- operating    expenses increased $233 million
- other    expenses increased by $3 million
- income    taxes decreased $15 million
- net earnings    decreased by $26 million.

     At December  31, 2002, this resulted in: 
- a decrease    of $133 million in other current assets
- a decrease    of $339 million in other long-term assets
- a decrease    of $130 million in future income tax liabilities
- a decrease    of $156 million in non-controlling interest
- a decrease    of $97 million in contributed surplus
- a decrease    of $89 million in the retained earnings.

**Future  changes to accounting standards and policies*****Impairment of long-lived assets***  Effective January 1, 2004, we adopted section 3063 of the CICA Handbook, *Impairment  of long-lived assets*. Adopting this section will affect how we recognize,  measure and disclose the impairment of long-lived assets. The section is effective  for years beginning on or after April 1, 2003.        An impairment loss is recognized on a long-lived  asset to be held and used when its carrying value exceeds the total undiscounted  cash flows expected from its use and disposition.        Before January 1, 2004, the amount of the loss  was determined by deducting the asset’s net recoverable amount (based on  undiscounted cash flows expected from its use and disposition) from its carrying  value.        After January 1, 2004, the amount of the loss  is determined by deducting the asset’s fair value (based on discounted  cash flows expected from its use and disposition) from its carrying value. 

***Asset  retirement obligations***  Effective January 1, 2004, we adopted section 3110 of the CICA Handbook, *Asset  retirement obligations*. The section is effective for years beginning on  or after January 1, 2004. It describes how to recognize and measure liabilities  related to the legal obligations of retiring property, plant and equipment.         These obligations are initially measured at fair  value and are adjusted for any changes resulting from the passage of time and  any changes to the timing or the amount of the original estimate of undiscounted  cash flows. The asset retirement cost is capitalized as part of the related  asset and is amortized into earnings over time.        Adopting this section will not have a material  effect on our future consolidated financial statements because we do not have  any significant asset retirement obligations. 

***Hedging  relationships***  Effective January 1, 2004, we adopted Accounting Guideline 13, *Hedging relationships*.  The guideline is effective for years beginning on or after July 1, 2003.  The guideline provides additional documentation and designation requirements  for hedge accounting and requires regular, periodic assessments of effectiveness.  The guideline does not change the method of accounting for derivative instruments  in hedging relationships.        Adopting this guideline will not affect our future  consolidated financial statements. All outstanding hedges that previously qualified  for hedge accounting continue to qualify for hedge accounting under this guideline.  

***Financial  instruments***  The CICA recently issued revisions to section 3860 of the CICA Handbook, *Financial  instruments – Disclosure and presentation*. The revisions change the  accounting for certain financial instruments that have liability and equity  characteristics. It requires instruments that meet specific criteria to be classified  as liabilities on the balance sheet. Some of these financial instruments were  previously classified as equities.        These revisions come into effect on January 1,  2005. Because we do not have any instruments with these characteristics, adopting  this section on January 1, 2005 will not affect our future consolidated financial  statements. 

34   2003  Financial Information   Bell Canada

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
SUPPLEMENTARY  FINANCIAL INFORMATION **ANNUAL  FINANCIAL INFORMATION**
 The table  below shows selected consolidated financial data for each of the years from  1999 to 2003. 
 **2003** 2002 2001 2000 1999 **Operational      data**          Operating      revenues**16,698** 14,598 14,448 13,435 12,833 Earnings      from continuing operations**2,268** 1,468 1,559 1,512 1,362 Discontinued      operations**59** – – (99)– Net      earnings**2,327** 1,468 1,489 1,413 1,362 Net      earnings applicable to common shares**2,244** 1,352 1,354 1,274 1,295 Included      in net earnings:             Net      gains on sale of investments                and      dilution gains                Continuing      operations**92** 984 399 – 55       Discontinued      operations**56** – – (75)–       Restructuring      and other charges**(3****)**(425)(542)– (141)      Goodwill      amortization**–** – (39)(43)(10)      Other**–** (18)(55)– – **Balance      sheet data**          Total      assets**28,236** 29,055 24,428 22,672 21,742 Long-term      debt (including current portion)**11,157** 11,839 10,237 8,955 8,531 Preferred      shares**1,100** 1,100 1,100 735 630 Common      shareholders’ equity**8,427** 5,202 5,584 5,385 5,483 Capital      expenditures**(2,892****)**(2,927)(4,099)(2,852)(2,499)**Other      data**          Dividends      declared on common shares**2,022** 1,769 1,157 1,085 868 Dividends      declared on preferred shares**58** 63 55 40 32 Number      of employees (thousands) – unaudited**51** 54 44 45 44 
 The factors  that have caused our results to vary over the past two years are discussed throughout  this MD&A.        In 2001, our net earnings included gains  of $399 million on the sale of Sympatico-Lycos and Telecom Directories Limited  of Hong Kong, and restructuring and other charges of $542 million (relating  to streamlining initiatives and the write-down of certain Bell Mobility capital  assets). Our results also included $39 million of goodwill amortization. Goodwill  is no longer amortized effective January 1, 2002. 

Bell  Canada 2003 Financial Information   35

***MANAGEMENT’S  DISCUSSION AND ANALYSIS***
**QUARTERLY  FINANCIAL INFORMATION**
 The table  below shows selected consolidated financial data for each quarter of 2003 and 2002.  This quarterly information has been prepared on the same basis as the annual  consolidated financial statements, but it is unaudited. 
   **2003**       2002    **Q4** Q3 Q2 Q1 Q4 Q3 Q2 Q1 Operating      revenues**4,281** 4,169 4,145 4,103 3,813 3,602 3,638 3,545 EBITDA**1,731** 1,817 1,760 1,693 1,541 1,695 1,621 1,577 Operating      income**930** 1,012 968 926 646 1,040 714 1,008 Earnings      from continuing                   operations**626** 567 550 525 1,444 500 (978)502 Discontinued      operations**53** – 5 1 – – – – Net      earnings**679** 567 555 526 1,444 500 (978)502 Net      earnings applicable to                   common      shares**670** 550 529 495 1,415 471 (1,007)473 Included      in net earnings:                   Net      gains on sale of                      investments      and                      dilution      gains                      Continuing      operations**92** – – – 2,143 – (1,159)–       Discontinued      operations**48** 8 – – – – – –    Restructuring      and other                      charges**(9****)**6 – – (190)(45)(190)–    Other**–** – – – – – (18)– 
 The factors  that have caused our results to vary over the past eight quarters are discussed  throughout this MD&A.

36   2003  Financial Information   Bell Canada
**CONSOLIDATED  FINANCIAL STATEMENTS****Financial statements  at a glance**
Management’s        report
36
Auditors’        report
36
Statements        of operations
37
Statements        of retained earnings
37
Balance        sheets
38
Statements        of cash flows
39
Notes        to consolidated financial statements
40
This section of          our report contains the audited consolidated financial statements of          Bell Canada and detailed notes with explanations and additional information.               Bell Canada consists of many businesses,          including subsidiaries, joint ventures and investments in significantly          influenced companies. We present the financial information for all of          our holdings as one “consolidated” company. Except in          the auditor’s report, *we, us*and *our*mean Bell Canada,          its subsidiaries and joint ventures. 

     The  financial statements contain our results and financial history for the past  two years. The notes are an important part of understanding our financial results.  They explain how we arrived at the numbers in the financial statements, describe  significant events or changes that affect the numbers, and explain certain items  in the financial statements. They also include details about our financial results  that are not shown in the financial statements. 
MANAGEMENT’S  REPORT These financialstatements form the basis for all of the financial information that appears inthis report.      The financial statements and all of the informationin this report are the responsibility of the management of Bell Canada and havebeen reviewed and approved by the board of directors. The board of directors isresponsible for ensuring that management fulfills its financial reporting responsibilities.Deloitte & Touche LLP, the shareholders’ auditors, have audited the financialstatements.      Management has prepared the financial statementsaccording to Canadian generally accepted accounting principles. Under these principles,management has made certain estimates and assumptions that are reflected in thefinancial statements and notes. Management believes that these financial statementsfairly present Bell Canada’s consolidated financial position, results ofoperations and cash flows.      Management has a system of internal controls designedto provide reasonable assurance that the financial statements are accurate andcomplete in all material respects. This is supported by an internal audit groupthat reports to the audit committee, and includes communication to employees aboutpolicies for ethical business conduct. Management believes that the internal controlsprovide reasonable assurance that our financial records are reliable and forma proper basis for preparing the financial statements, and that our assets areproperly accounted for and safeguarded.      The board of directors has appointed an audit committee,which is made up of unrelated and independent directors. The audit committee’sresponsibilities include reviewing the financial statements and other informationin this report, and recommending them to the board of directors for approval.The internal auditors and the shareholders’ auditors have free and independentaccess to the audit committee. 
Michael      J. SabiaSiim      A. VanaseljaKaryn      A. BrooksChief      Executive OfficerChief      Financial OfficerVice-President      and  Corporate      Controller
 March 10,  2004 
AUDITORS’  REPORT
 To the  shareholders of Bell Canada:        We have audited the consolidated balance sheets  of Bell Canada as at December 31, 2003 and 2002, and the consolidated statements  of operations, retained earnings and cash flows for each of the years in the  two-year period ended December 31, 2003. These consolidated financial statements  are the responsibility of Bell Canada’s management. Our responsibility  is to express an opinion on these consolidated 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 consolidated 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 Bell Canada  as at December 31, 2003 and 2002 and the results of its operations and its cash  flows for each of the years in the two-year period ended December 31, 2003,  in accordance with Canadian generally accepted accounting principles. 

 Deloitte  & Touche LLP   Chartered Accountants   Montréal, Canada   March 10, 2004 

Bell Canada  2003 Financial Information   37
CONSOLIDATED  STATEMENTS OF OPERATIONS*For        the year ended December 31 (in $ millions)*Notes **2003** 2002 **Operating      revenues**      Local      and access  **6,105** 5,506 Long      distance  **2,487** 2,266 Wireless  **2,526** 1,916 Data  **3,791** 3,458 Direct-to-home      (DTH)  **761** – Directory      advertising  **–** 501 Terminal      sales and other  **1,028** 951 **Total      operating revenues**  **16,698** 14,598 Operating      expenses  **(9,697****)**(8,164)Amortization      expense  **(2,970****)**(2,401)Net      benefit plans (cost) credit20 **(181****)**50 Restructuring      and other charges4 **(14****)**(675)Total      operating expenses  **(12,862****)**(11,190)**Operating      income**  **3,836** 3,408 Other      income5 **217** 1,264 Interest      expense6 **(945)(839)**Earnings      from continuing operations before**         **income      taxes and non-controlling interest**  **3,108** 3,833 Income      taxes7 **(787****)**(1,087)Non-controlling      interest  **(53****)**(1,278)**Earnings      from continuing operations**  **2,268** 1,468 Discontinued      operations8 **59** – **Net      earnings**  **2,327** 1,468 Dividends      on preferred shares  **(58****)**(63)Interest      on equity-settled notes  **(25****)**(53)**Net      earnings applicable to common shares**  **2,244** 1,352 CONSOLIDATED  STATEMENTS OF RETAINED EARNINGS*For        the year ended December 31 (in $ millions)*Note**2003**2002**Balance        at beginning of year, as previously reported****217**601Adjustment        for change in accounting policies1**(99****)**(63)**Balance        at beginning of year, as restated****118**538     Consolidation        of variable interest entity**(25****)**–     Net        earnings **2,327**1,468     Dividends               – Preferred shares **(58****)**(63) –      Common shares**(2,022****)**(1,769)     Interest        on equity-settled notes**(25****)**(53)     Other**(2****)**(3)**Balance        at end of year****313**118
38   2003  Financial Information   Bell Canada 
CONSOLIDATED  BALANCE SHEETS*At        December 31 (in $ millions)*Notes **2003** 2002 **ASSETS**      **Current      assets**      Cash      and cash equivalents  **398** 1,013 Notes      receivable from related parties  **450** 270 Accounts      receivable9 **1,711** 1,961 Other      current assets  **499** 432 Current      assets of discontinued operations8 **–** 212 **Total      current assets**  **3,058** 3,888 **Capital      assets**10 **19,270** 18,648 **Other      long-term assets**11 **3,526** 3,565 **Indefinite-life      intangible assets**12 **796** 772 **Goodwill**13 **1,586** 1,543 **Non-current      assets of discontinued operations**8 **–** 639 **Total      assets**  **28,236** 29,055 **LIABILITIES**      **Current      liabilities**      Accounts      payable and accrued liabilities  **3,211** 3,160 Note      payable to parent company14 **–** 975 Debt      due within one year14 **1,165** 1,837 Current      liabilities of discontinued operations8 **–** 178 **Total      current liabilities**  **4,376** 6,150 **Long-term      debt**15 **10,024** 10,223 **Other      long-term liabilities**16 **2,682** 2,115 **Non-current      liabilities of discontinued operations**8 **–** 280 **Total      liabilities**  **17,082** 18,768 **Non-controlling      interest**  **1,627** 1,917 **Commitments      and contingencies**22     **SHAREHOLDERS’      EQUITY**      **Preferred      shares**18 **1,100** 1,100 **Equity-settled      notes**18 **–** 2,068 **Common      shareholders’ equity**      Common      shares18 **7,602** 4,264 Contributed      surplus18 **512** 815 Retained      earnings  **313** 118 Currency      translation adjustment  **–** 5 **Total      common shareholders’ equity**  **8,427** 5,202 **Total      shareholders’ equity**  **9,527** 8,370 **Total      liabilities and shareholders’ equity**  **28,236** 29,055 
 On behalf  of the board of directors: 

DirectorDirector
Bell Canada  2003 Financial Information   39
CONSOLIDATED  STATEMENTS OF CASH FLOWS*For        the year ended December 31 (in $ millions)***2003**2002 **Cash      flows from operating activities**    Earnings      from continuing operations**2,268** 1,468 Adjustments      to reconcile earnings from continuing operations       to      cash flows from operating activities:       Amortization      expense**2,970** 2,401    Net      benefit plans cost (credit)**181** (50)   Restructuring      and other charges (non-cash portion)**6** 613    Net      gains on investments**(106****)**(1,282)   Future      income taxes**198** 290    Non-controlling      interest**53** 1,278    Contributions      to employee pension plans**(142****)**(5)   Other      employee future benefit plan payments**(87****)**(72)   Other      items**(260****)**66    Changes      in non-cash working capital**285** (149) **5,366** 4,558 **Cash      flows from investing activities**    Capital      expenditures**(2,892****)**(2,927)Business      acquisitions**(120****)**(37)Business      dispositions**55** 3,045 Decrease      (increase) in investments accounted for       under      the cost and equity methods**145** (50)Cash      and cash equivalents acquired or transferred       in      business combinations**–** 272 Increase      in advances made to an affiliated company       under      common control**(180****)**(270)Other      items**47** –  **(2,945****)**33 **Cash      flows from financing activities**    Increase      (decrease) in notes payable and bank advances**(1,161****)**587 Issue      of long-term debt**717** 1,444 Repayment      of long-term debt**(1,752****)**(1,501)Repayment      of equity-settled notes**(2,068****)**– Contribution      of capital**3,043** 296 Distribution      of capital**–** (975)Cash      dividends paid on common and preferred shares**(1,968****)**(1,770)Distributions      paid by subsidiaries to BCE**–** (1,396)Issue      of equity securities/partnership units and convertible       debentures      by subsidiary to non-controlling interest/BCE**110** 93 Redemption      of equity securities by subsidiaries**(108****)**– Cash      dividends/distributions paid by subsidiaries       to      non-controlling interest**(113****)**(29)Interest      paid on equity-settled notes**(47****)**(84)Other      items**(46****)**21  **(3,393****)**(3,314)Cash      provided by (used in) continuing operations**(972****)**1,277 Cash      provided by discontinued operations**321** – Net      (decrease) increase in cash and cash equivalents**(651****)**1,277 Cash      and cash equivalents (bank indebtedness) at beginning of year**1,049** (228)**Cash      and cash equivalents at end of year****398** 1,049    Consists      of:          Cash      and cash equivalents of continuing operations**398** 1,013       Cash      and cash equivalents of discontinued operations**–** 36      Total**398** 1,049 
 
40   2003  Financial Information   Bell Canada 
***NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS*****NOTE 1. SIGNIFICANT  ACCOUNTING POLICIES**All        amounts are in millions of Canadian dollars, except where noted.        
**BASIS OF PRESENTATION**
 We have prepared the consolidated  financial statements according to Canadian generally accepted accounting principles  (GAAP).       We consolidate the financial statements of all  of the companies we control. We proportionately consolidate our share of the  financial statements of our joint venture interests. All transactions and balances  between these companies have been eliminated on consolidation. 
**COMPARATIVE FIGURES**
 We have reclassified some  of the figures for previous years in the consolidated financial statements to  make them consistent with the current year’s presentation.       We have restated financial information for previous  years to reflect: 
- the change in accounting    treatment to discontinued operations for:   – Aliant Inc.’s            (Aliant) emerging business segment, which consists of Aliant’s            investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc.,            effective May 2003– Aliant’s            remote communications segment, which consists of Aliant’s investment            in Stratos Global Corporation (Stratos), effective December 2003.  the adoption of the fair    value-based method of accounting for employee stock options, effective January 1,    2003 the change in the method    of accounting for subscriber acquisition costs in our wireless and Direct-to-home    (DTH) satellite television businesses from a deferral and amortization method    to a method of expensing as a customer service is activated, effective January 1,    2003. 
**USING ESTIMATES**
 When preparing financial  statements according to GAAP, management makes estimates and assumptions relating  to: 
reported amounts of revenues    and expenses 
- reported amounts of assets    and liabilities   disclosure of contingent    assets and liabilities. 
     Actual  results could be different from these estimates. 
**RECOGNIZING REVENUE**
 We recognize operating  revenues when they are earned, specifically when: 
- services are provided    or products are delivered to customers   clear proof that an arrangement    exists amounts are fixed or    can be determined 
- our ability to collect    is reasonably assured.         In  particular, we recognize:   fees for long distance    and wireless services, and other fees, such as network access fees, licence    fees, hosting fees, maintenance fees and standby fees, when we provide the    services or over the term of the contract 
- subscriber revenue when    customers receive the service   revenues from the sale    of equipment when the equipment is delivered to customers and accepted revenue on long-term    contracts based on actual performance as services are provided, as equipment    is delivered and accepted, or as contract milestones are met. 
     When  a transaction involves more than one product or service, we allocate revenue  to each based on its relative fair value.       We may enter into arrangements with subcontractors  who provide services to our customers. When we act as the principal in these  arrangements, we recognize revenue based on the amounts billed to the customers.  Otherwise, we recognize the net amount that we keep as revenue.       Accruals for sales returns are recorded when revenues  are recognized. We base them on past experience.        We record the payments we receive in advance as  deferred revenues until we provide the service or deliver the product to customers.  Deferred revenues are presented in *Accounts payable and accrued liabilities*  or in *Other long-term liabilities*on the balance sheet. 
Bell Canada  2003 Financial Information   41
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)
**CASH AND CASH  EQUIVALENTS**
 We classify all highly  liquid investments with a short-term maturity of generally three months or less  as *Cash and cash equivalents*. 
**SECURITIZATION  OF ACCOUNTS RECEIVABLE**
 We consider a transfer  of accounts receivable to be a sale when we give up control of them in exchange  for proceeds from a trust (other than our retained beneficial interest in the  accounts receivable).       We determine the fair value of the accounts receivable  transferred based on the present value of future expected cash flows. The present  value of future cash flows is projected using management’s best estimates  of key assumptions, such as discount rates, weighted-average life of accounts  receivable and credit loss ratios. We recognize a loss on this kind of transaction  as *Other income*. The loss partly depends on the carrying amount of the  accounts receivable transferred. We allocate this amount to accounts receivable  sold, or to our retained interest, according to its relative fair value on the  day the transfer is made.       Accounts receivable are transferred on a fully  serviced basis. As a result, we: 
recognize a servicing    liability on the day accounts receivable are transferred to the trust 
- amortize this liability    to earnings over the expected life of the transferred accounts receivable.       **CAPITAL ASSETS**   We carry capital assets  at cost, less accumulated amortization. Most of our capital assets are amortized  using the composite group depreciation method. When we retire assets in the  ordinary course of business, we charge their original cost to accumulated amortization.  In general, we amortize capital assets on a straight-line basis over the estimated  useful lives of the assets. We review the estimate of the useful lives of the  assets every year and adjust it, if needed.    **Estimated      useful life** Telecommunication      assets10      to 25 years Machinery      and equipment2      to 20 years Buildings10      to 40 years Finite-life      intangible assets (Software)3      to 7 years 
 We capitalize construction  costs, labour and overhead related to our self-constructed assets.       We capitalize certain costs incurred for developing  or obtaining internal-use software. We expense software maintenance and training  costs when they are incurred. The expense is included in *Operating expenses*in the statement of operations.       We assess capital assets for impairment when events  or changes in circumstances indicate that we may not be able to recover their  carrying value. We calculate impairment by deducting the asset’s net recoverable  amount (based on estimates of undiscounted future cash flows or other valuation  methods) from its carrying value. This amount is deducted from earnings. 
**ACCOUNTING FOR  INVESTMENTS**
 We use the following methods  to account for investments that are not consolidated or proportionately consolidated  in our financial statements: 
- the equity method for    companies that we can significantly influence   the cost method for our    investments in all other companies.
*Significantly          influenced*          It means that:
-  we              have a 20% to 50% equity interest in a company that we do not control              or jointly control, and  
we have              a significant influence on its operating, investing and financing              activities.

  
*Equity        method*        An investment is initially recorded at cost, and adjustments are made        to include our share of the investment’s net earnings or losses.        These adjustments are included in our net earnings. The amount of our        investment is reduced by the amount of dividends received or receivable        from the investment.
 
*Cost        method*        The investment is recorded at cost. Dividends received or receivable from        the investment are included in our net earnings.
     We  include investments in *Other long-term assets*on the balance sheet. Earnings  from investments are included in *Other income*in the statement of operations.       We expense declines in the market values of our  investments when management considers them to be longer term. The expense is  included in *Other income*in the statement of operations. 
**COSTS OF ISSUING  DEBT**
 The costs of issuing debt  are capitalized in *Other long-term assets*. They are amortized on a straight-line  basis over the term of the related debt and are included in *Interest expense*in the statement of operations. 

 

42   2003  Financial Information   Bell Canada 
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)**INDEFINITE-LIFE  INTANGIBLE ASSETS**
 Our indefinite-life intangible  assets consist mainly of the spectrum licences.        We assess these assets for impairment in the fourth  quarter of every year and when events or changes in circumstances indicate that  an asset might be impaired. We calculate the impairment by deducting the asset’s  fair value (based on estimates of discounted future cash flows or other valuation  methods) from its carrying value. This amount is deducted from earnings. 

**GOODWILL**
*Goodwill*

Goodwill          is created when we acquire a business. It is calculated by deducting          the fair value of the net assets acquired from the amount paid. It represents          the value of factors that contribute to a greater earning power, such          as a good reputation, customer loyalty or intellectual capital.

 We assess goodwill of individual  reporting units for impairment in the fourth quarter of every year and when  events or changes in circumstances indicate that goodwill might be impaired.         We assess goodwill for impairment in two steps:  
- we identify a potential    impairment by comparing the fair value of a reporting unit to its carrying    value. Fair value is based on estimates of discounted future cash flows or    other valuation methods. When the fair value of the reporting unit is less    than its carrying value, we allocate the fair value to all of its assets and    liabilities, based on their fair values. The amount that the fair value of    the reporting unit exceeds the amounts assigned to its assets and liabilities    is the fair value of goodwill.   we determine if there    is an impairment by comparing the fair value of goodwill to its carrying value.    Any excess is deducted from earnings. 
     Under  the goodwill transitional provisions of CICA Handbook, section 3062, *Goodwill  and Other Intangible Assets,*no impairment charge was required. 

**TRANSLATION OF FOREIGN CURRENCIES**

*Translation          of foreign currencies*The          way we account for a foreign operation depends on whether it is self-sustaining          or integrated. A self-sustaining foreign operation is largely independent          of the parent company. An integrated foreign operation depends on the          parent company to finance or run its operations.

**Self-sustaining foreign  operations**  For self-sustaining foreign operations, we use: 
- the exchange rates in    effect on the date of the balance sheet for assets and liabilities   the average exchange    rates during the year for revenues and expenses. 
     Translation  exchange gains and losses are reflected as a currency translation adjustment  in shareholders’ equity. When we reduce our net investment in a self-sustaining  foreign operation, we recognize an appropriate portion of the currency translation  adjustment in earnings. 

**Integrated foreign operations**  For integrated foreign operations, we use: 
- the exchange rates on    the date of the balance sheet for monetary assets and liabilities, such as    cash, accounts receivable and payable, and long-term debt   the historical exchange    rates for non-monetary assets and liabilities, such as capital assets the average exchange    rates during the year for revenues and expenses. 
     Translation  exchange gains and losses are included in *Other income*in the statement  of operations. 
**Domestic transactions  and balances in foreign currencies**  For domestic transactions made in foreign currencies, we use: - the exchange rates on    the date of the balance sheet for monetary assets and liabilities   the average exchange    rates during the year for revenues and expenses. 
     Translation  exchange gains and losses are included in *Other income*in the statement  of operations. 

Bell Canada  2003 Financial Information   43
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)**DERIVATIVE FINANCIAL  INSTRUMENTS**
 We use various derivative  financial instruments to hedge against: 
- interest rate risk   foreign exchange rate    risk changes in the price    of BCE Inc. (BCE) common shares relating to special compensation payments    (SCPs). 
     We  expect that the derivatives we use will generate enough cash flows and gains  or incur losses to offset these risks. We do not use derivative financial instruments  for speculative or trading purposes.       We document all relationships between derivatives  and the items they hedge, and our risk management objective and strategy for  using various hedges. This process includes linking every derivative to: 
a specific asset or liability    on the balance sheet, or 
- a specific net investment    in self-sustaining foreign operations, or   a specific firm commitment,    or an anticipated transaction.    
     We  assess how effective derivatives are in managing risk when the hedge is put  in place and on an ongoing basis. If a hedge is no longer effective, we will  stop using hedge accounting.       We follow these policies when accounting for derivatives:  
deferred gains or losses    relating to derivatives that qualify for hedge accounting are recognized in    earnings when the hedged item is sold or the anticipated transaction is ended    early 
- gains and losses related    to hedges of anticipated transactions are recognized in earnings or are recorded    as adjustments of carrying values when the transaction takes place   derivatives that are    economic hedges, but do not qualify for hedge accounting, are recognized at    fair value. We record the change in fair value in earnings. any premiums paid for    financial instrument contracts are deferred and expensed to earnings over    the term of the contract 
- any forward premiums    or discounts on forward foreign exchange contracts that are used to hedge    long-term debt that it denominated in foreign currencies are amortized as    an adjustment to interest expense over the term of the forward contract.         The  following describes our policies for specific kinds of derivatives.   **Interest rate swap agreements**  We use interest rate swap agreements to help manage the fixed and floating interest  rate mix of our total debt portfolio. These agreements often involve exchanging  interest payments without exchanging the notional principal amount that the  payments are based on. We record the exchange of payments as an adjustment of  interest expense on the hedged debt. We include the related amount payable or  receivable from counterparties as an adjustment to *Other long-term assets  or liabilities*.  **Foreign currency swap  agreements**  We use foreign currency swap agreements to manage the exchange rate exposure  of some of our debt that is denominated in foreign currencies. We designate  these agreements as hedges of firm commitments to pay interest and principal  on the foreign currency risk. We recognize gains and losses on these contracts  the same way we recognize the gains and losses on the hedged item. Unrealized  gains or losses are included in *Other long-term assets or liabilities*.  
**Forward contracts**  We use forward contracts to manage: - the exchange rate exposure    of some of our debt that is denominated in foreign currencies. We designate    these agreements as hedges of firm commitments to pay the principal on the    foreign currency risk.   the exposure to anticipated    forecasted transactions denominated in foreign currencies. We designate these    agreements as hedges of the future cash flows. changes in price of BCE    common shares relating to SCPs. 
     We  recognize gains and losses on these contracts the same way we recognize the  gains and losses on the hedged item. Unrealized gains or losses are included  in *Other long-term assets or liabilities*. 
44   2003  Financial Information   Bell Canada 
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)
**EMPLOYEE BENEFIT  PLANS**
 We maintain defined benefit  plans that provide pension benefits for almost all of our employees. Benefits  are based on the employee’s length of service and average rate of pay during  their last five years of service. Most employees are not required to contribute  to the plans. The plans provide increasing pension benefits to help protect  a portion of the income of retired employees against inflation. We are responsible  for adequately funding our pension plans. We make contributions to them based  on various actuarial cost methods that are permitted by pension regulatory bodies.  Contributions reflect actuarial assumptions about future investment returns,  salary projections and future service benefits.       We also provide other future benefits to employees,  including: 
health-care and life    insurance benefits during retirement 
- other post-employment    benefits, including various disability plans, workers’ compensation and    medical benefits to former or inactive employees, their beneficiaries and    dependants, from the time their employment ends until their retirement starts,    under certain circumstances.        Wedo not fund the other employee future benefit plans.     We accrue our obligations under employee benefitplans and related costs, net of the fair value of plan assets. Actuaries determinepension and other retirement benefit costs using:   the projected benefit    method, prorated on years of service, which takes into account future salary    levels 
- a discount rate based    on market interest rates on high-quality bonds with maturities that match    the timing and benefits expected to be paid by the plans   management’s best    estimate of the plans’ expected investment performance, salary increases,    retirement ages of employees and expected health-care costs. 
     We  value pension plan assets at fair value, which is determined using current market  values. We use a market-related value to calculate the expected return on plan  assets. This value is based on a four-year weighted-average of the fair value  of the pension plan assets.       We amortize past service costs from plan amendments  on a straight-line basis over the average remaining service period of employees  who were active on the day of the amendment but not yet fully eligible to receive  benefits. This represents the period that we expect to realize economic benefits  from the amendments.       We use the corridor approach to recognize actuarial  gains and losses into earnings. First we deduct 10% of the benefit obligation  or the market-related value of plan assets, whichever is greater, from the unamortized  net actuarial gains or losses. Then we amortize the excess over the average  remaining service period of active employees. This ranged from approximately  10 to 17 years, with a weighted average of 14 years at the end of 2003.

*Curtailment*A curtailment is a significant reduction in plan benefits that can          result when a defined benefit pension plan is amended or restructured.          Types of curtailments include:
-  a              reduction of the expected number of years of future service of active              employees  the              elimination of the right to earn defined benefits for some or all              of the future service of employees.
 
*Settlement*A company makes a settlement when it substantially settles all or        part of an accrued benefit obligation. An example is a lump-sum cash payment        to employees in exchange for their rights to receive future benefits.        ****
      When  the restructuring of a benefit plan results in both a curtailment and a settlement  of obligations, we account for the curtailment before we account for the settlement.       December 31 is the measurement date for most  of our employee benefit plans. Our actuaries perform a valuation at least every  three years to determine the actuarial present value of the accrued pension  and other retirement benefits. The last actuarial valuation of most of our pension  plans was performed on January 1, 2003. 

**I****NCOME  TAXES**

 Current income tax expense  reflects the estimated income taxes payable for the current year before any  refunds or the use of losses incurred in previous years. We use the asset and  liability method to account for future income taxes. Future income taxes reflect:  
- the temporary differences    between the carrying amounts of assets and liabilities for accounting purposes    and the amounts used for tax purposes, on an after-tax basis   the benefit of losses    that will more likely than not be realized and carried forward to future years    to reduce income taxes. 
     We  calculate future income taxes using the rates enacted by tax law and those substantively  enacted. The effect of a change in tax rates on future income tax assets and  liabilities is included in earnings in the period when the change is substantively  enacted. 
*Tax laws*A tax law is substantively enacted when it has been tabled in the        legislature but may not have been passed into law. 
 

 

Bell Canada  2003 Financial Information   45
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)**STOCK-BASED COMPENSATION  PLANS**
 Bell Canada’s stock-based  compensation plans mainly include employee savings plans (ESPs) and long-term  incentive programs. Before 2000, the long-term incentive programs often included  SCPs.       We credit to share capital any amount employees  pay when they exercise their stock options or buy shares. We recognize the contributions  Bell Canada makes under ESPs as a compensation expense. We also recognize a  compensation expense or recovery relating to SCPs.       We use the fair-value based method for employee  stock options and account for employee stock options by measuring the compensation  cost of options using the Black-Scholes option pricing model. This method was  used for options granted on or after January 1, 2002. 

**RECENT CHANGES  TO ACCOUNTING STANDARDS AND POLICIES**

**Stock-based compensation  and other stock-based payments**  Effective January 1, 2002, we adopted the recommendations in section 3870  of the CICA Handbook, *Stock-based compensation and other stock-based payments*,  on a prospective basis. The section sets standards for recognizing, measuring  and disclosing stock-based compensation and other stock-based payments made  in exchange for goods and services. The standards require us to use a fair value-based  method for:- all stock-based awards    to non-employees   direct awards of stock    and stock appreciation rights to employees awards to employees that    can be settled in cash or other assets. 
     The  standards also encourage companies to use a fair value-based method for all  other awards granted to employees. Awards that are settled in stock are recorded  as equity. Awards that are required to be, or are usually, settled in cash are  recorded as liabilities.       Before January 1, 2003, we recognized an  expense when the option was exercised. We measured the cost of employee stock  options as the amount that the quoted market price of BCE’s common shares  on the day of the grant exceeded the exercise price an employee had to pay to  buy the common shares multiplied by the number of options exercised.       Effective January 1, 2003, we changed our  accounting to the fair value-based method. We now recognize and measure the  compensation cost of options granted on or after January 1, 2002 using  the Black-Scholes option pricing model.*Black-Scholes        option pricing model*The Black-Scholes option pricing model is a financial model we use        to calculate the weighted-average fair value of a stock option granted        using four key assumptions: stock dividend yield, expected stock volatility,        risk-free interest rate and expected life of the stock option.
      As  a result of applying this change, we restated the comparative figures for 2002.  We recorded a compensation expense of $10 million in 2002. At December 31,  2002, this resulted in: - a decrease of $10 million    in retained earnings   an increase of $10 million    in contributed surplus. 
**Subscriber acquisition  costs**  Before 2003, we accounted for the costs of acquiring subscribers by: 
- deferring and amortizing    the costs of acquiring DTH satellite television service subscribers against    earnings over three years   deferring and amortizing    the costs of acquiring wireless subscribers against earnings over the terms    of the contracts, which are normally up to 24 months expensing all other subscriber    acquisition costs when services were activated. 
     The  costs we deferred and amortized consisted mainly of hardware subsidies, net  of revenues from the sale of wireless handsets.       Effective January 1, 2003, we changed our  accounting method and started expensing all subscriber acquisition costs when  services are activated. We also started presenting the revenues generated from  the sale of wireless handsets, instead of netting them against operating expenses.       As a result of applying this change, we restated  the comparative figures for 2002: - operating revenues increased    $195 million   operating expenses increased    $233 million other expenses increased    by $3 million 
- income taxes decreased    $15 million   net earnings decreased    by $26 million. 

 46   2003  Financial Information   Bell Canada

**NOTE  1. SIGNIFICANT ACCOUNTING POLICIES (continued)**

     At  December 31, 2002, this resulted in: 
- a decrease of $133 million    in other current assets   a decrease of $339 million    in other long-term assets a decrease of $130 million    in future income tax liabilities 
- a decrease of $156 million    in non-controlling interest   a decrease of $97 million    in contributed surplus a decrease of $89 million    in the retained earnings. 
**Disclosure of guarantees**  Effective January 1, 2003, we adopted Accounting Guideline 14, *Disclosure  of guarantees*. The guideline describes how to identify guarantees and requires  guarantors to disclose the significant details about guarantees they make, whether  or not they will have to make payments under the guarantees.        See Note 23, *Guarantees*, for more information.  
**Disposal of long-lived  assets and discontinued operations**  Effective May 1, 2003, we adopted the recommendations in section 3475 of  the CICA Handbook, *Disposal of long-lived assets and discontinued operations*.  The new section describes: 
how to recognize, measure,    present and disclose long-lived assets that will be sold 
- criteria for classifying    assets as held for sale. This section requires an asset held for sale to be    measured at its carrying value or fair value less disposal costs, whichever    is lower.   criteria for classifying    a disposal of a business as a discontinued operation and how to present and    disclose discontinued operations and other disposals of long-lived assets.    
     We  are following the recommendations in this section for all business dispositions  after May 1, 2003. 

**Consolidation of variable  interest entities**  Effective July 1, 2003, we adopted Accounting Guideline 15, *Consolidation  of variable interest entities*, on a retroactive basis without restatement  of previous periods. The guideline clarifies when variable interest entities  should be consolidated, when equity investors are not considered to have a controlling  financial interest, or they have not invested enough equity to allow the entity  to finance its activities without additional subordinated financial support  from other parties.       We performed a review and concluded that the entity  with which Bell Canada entered into a 10-year shared services agreement on June 22,  2001 met the criteria for consolidation under this guideline. This entity, which  is a corporation owned by a third party, provides Bell Canada with accounting  systems and administrative services. Before the consolidation, we reported the  fees that the entity charged Bell Canada for its services as operating expenses.       The consolidation of this entity resulted in the  following changes to our consolidated balance sheet at July 1, 2003: 
- an increase of $102 million    in total assets, of which $88 million is capital assets   an increase of $127 million    in total liabilities, of which $122 million is long-term debt a decrease of $25 million    in retained earnings. 
     Changes  to our consolidated statement of operations for the year ended December 31,  2003 were: 
a decrease of $7 million    in operating expenses 
- an increase of $22 million    in amortization expense   an increase of $4 million    in interest expense a decrease of $19 million    in net earnings. 
     Changes  to our consolidated statement of cash flows for the year ended December 31,  2003 were: 
an increase of $2 million    in cash flows from operating activities 
- an increase of $7 million    in cash flows from investing activities   a decrease of $7 million    in cash flows from financing activities. 
Bell Canada  2003 Financial Information   47
NOTE 1. SIGNIFICANT ACCOUNTING  POLICIES (continued)**FUTURE CHANGES  TO ACCOUNTING STANDARDS AND POLICIES**
**Impairment of long-lived  assets**  Effective January 1, 2004, we adopted section 3063 of the CICA Handbook,  *Impairment of long-lived assets*. Adopting this section will affect how  we recognize, measure and disclose the impairment of long-lived assets. The  section is effective for years beginning on or after April 1, 2003.       An impairment loss is recognized on a long-lived  asset to be held and used when its carrying value exceeds the total undiscounted  cash flows expected from its use and disposition.        Before January 1, 2004, the amount of the  loss was determined by deducting the asset’s net recoverable amount (based  on undiscounted cash flows expected from its use and disposition) from its carrying  value.       After January 1, 2004, the amount of the  loss is determined by deducting the asset’s fair value (based on discounted  cash flows expected from its use and disposition) from its carrying value. 

**Asset retirement obligations**  Effective January 1, 2004, we adopted section 3110 of the CICA Handbook,  *Asset retirement obligations*. The section is effective for years beginning  on or after January 1, 2004. It describes how to recognize and measure  liabilities related to the legal obligations of retiring property, plant and  equipment.       These obligations are initially measured at fair  value and are adjusted for any changes resulting from the passage of time and  any changes to the timing or the amount of the original estimate of undiscounted  cash flows. The asset retirement cost is capitalized as part of the related  asset and is amortized into earnings over time.       Adopting this section will not have a material  effect on our future consolidated financial statements because we do not have  any significant asset retirement obligations. 

**Hedging relationships**  Effective January 1, 2004, we adopted Accounting Guideline 13, *Hedging  relationships*. The guideline is effective for years beginning on or after  July 1, 2003. The guideline provides additional documentation and designation  requirements for hedge accounting and requires regular, periodic assessments  of effectiveness. The guideline does not change the method of accounting for  derivative instruments in hedging relationships.       Adopting this guideline will not affect our future  consolidated financial statements. All outstanding hedges that previously qualified  for hedge accounting continue to qualify for hedge accounting under this guideline.  
**FINANCIAL INSTRUMENTS**
 The CICA recently issued  revisions to section 3860 of the CICA Handbook, *Financial instruments –  Disclosure and presentation*. The revisions change the accounting for certain  financial instruments that have liability and equity characteristics. It requires  instruments that meet specific criteria to be classified as liabilities on the  balance sheet. Some of these financial instruments were previously classified  as equities.       These revisions come into effect on January 1,  2005. Because we do not have any instruments with these characteristics, adopting  this section on January 1, 2005 will not affect our future consolidated  financial statements.
NOTE 2. SEGMENTED INFORMATION
 We operate under one segment,  which is consistent with our strategy of providing customers with integrated  communication products and services. It also reflects how we classify our operations  for planning and for measuring performance. Our operations, including most of  our revenues, capital assets and goodwill, are located in Canada.

48     2003 Financial Information   Bell Canada
NOTE 3.  BUSINESS ACQUISITIONS AND DISPOSITIONS
The          consolidated statements of operations include the results of acquired          businesses from the day they were acquired. 

**Sale of Certen Inc.  (Certen)**  On July 2, 2003, Bell Canada sold its 89.9% ownership interest in Certen  to a subsidiary of Amdocs Limited for $89 million in cash.       The carrying value of Certen’s net assets  was $159 million at the time of the sale. Certen had total assets of $450 million,  including $34 million in cash and cash equivalents, and total liabilities  of $291 million.       At the time of the sale, Bell Canada extended  the remaining term of its contract with Certen and Amdocs Limited for billing  operations outsourcing, customer care and billing solutions development from  four years to seven years.       Bell Canada received a perpetual right to use  and modify the intellectual property relating to the billing system. It recorded  the perpetual right as an intangible asset of $494 million that will be  amortized against earnings over the remaining life of the contract.       Bell Canada recorded a liability of $392 million.  This represented its future payments to Certen over the remaining life of the  contract for the development of Bell Canada’s billing system. The development  of the billing system was largely completed at the time of the sale. This liability  will be reduced as Bell Canada makes payments to Certen.        The future income tax liability relating to the  intangible asset and long-term liability was $32 million.        The transaction did not result in any gain or  loss for Bell Canada. 

**Acquisition of Aliant**  Before December 31, 2002, we had a 39% equity investment in Aliant and  accounted for it using the equity method. We recorded equity earnings of $66 million  from Aliant in 2002.        Effective December 31, 2002, BCE transferred  its 14% interest in Aliant at carrying value to us in exchange for common shares  of Bell Canada. As a result, we have a 53.5% interest in Aliant. The transaction  also resulted in a decrease of $103 million in contributed surplus.       Effective January 1, 2003, we started consolidating  Aliant’s results of operations. This resulted in a decrease of $574 million  in *Other long-term assets*. It also resulted in increases in our net assets,  which are shown in the table below. 
 **2002** **Current      assets****765** **Non-current      assets, including:****3,252**    Capital      assets**2,345**    Goodwill**674** **Current      liabilities****423** **Non-current      liabilities****1,437** 
**Acquisition of Bell  ExpressVu Limited Partnership (Bell ExpressVu)**  Bell ExpressVu is a provider of digital home entertainment and broadcasts. At  the end of December 2002, BCE transferred its 100% investment in Bell ExpressVu  at carrying value to a partnership held 52% by us and 48% by BCE, in exchange  for units in the partnership. The transaction resulted in an increase of $342 million  in contributed surplus.        Effective January 1, 2003, we started consolidating  Bell ExpressVu’s results of operations. The table below shows the effect  of the consolidation on our net assets. 
 **2002** **Current      assets****73** **Non-current      assets, including:****991**    Capital      assets**649** **Current      liabilities****315** **Non-current      liabilities****227** 
**Sale of the directories  business**  On November 29, 2002, we sold our print and electronic directories business  for approximately $3 billion ($2.8 billion net of selling costs and  after the acquisition of an approximate 10% interest in the acquisition vehicle)  in cash. The net carrying value of the net assets of the directories business  was $403 million at time of the sale. The directories business had total  assets of $390 million, including $52 million in cash and cash equivalents,  and total liabilities of $90 million. We recorded a pre-tax gain of $2.4 billion  on the sale. We allocated $103 million of goodwill to the sale.
        See Note 5, *Other income,*for more information about the sale of        the directories business.****
Bell Canada  2003 Financial Information   49
NOTE 3.  BUSINESS ACQUISITIONS AND DISPOSITIONS (continued) 
     On  the day of the transaction, the buyers owned an approximate 90% equity interest  in an acquisition vehicle that holds the directories business. Bell Canada indirectly  acquired an approximate 10% interest in the acquisition vehicle for approximately  $91 million. It is accounted for under the cost method.       Before the sale closed, we and BCE completed a  corporate reorganization. This resulted in the transfer of our directories business  and BCE’s agreement to contribute Bell ExpressVu, as well as certain debt  receivables and cash to a partnership. At the end of December, BCE transferred  its interest in Bell ExpressVu. We own a 52% interest in the partnership and  BCE owns 48%.       The partnership distributed the net proceeds of  the sale to its partners. A net distribution of $1.1 billion was made to  BCE, which was partly used to help finance the repurchase of SBC Communications Inc.’s  (SBC) remaining indirect interest in Bell Canada. We have used the balance of  the proceeds distributed to us to reduce debt and for general corporate purposes.  

**Creation of Bell West Inc.  (Bell West)**  In April 2002, Bell Canada and Manitoba Telecom Services Inc. (MTS)  created Bell West by combining Bell Canada’s interests in the wireline  assets of BCE Nexxia Inc. in Alberta and British Columbia with Bell Canada’s  and MTS’s interests in Bell Intrigna Inc. Bell West provides telecommunications  services in those two provinces and operates under the Bell brand.
MTS        is publicly traded. Bell Canada owns 22% of MTS. MTS is a significantly        influenced investment, which we account for under the equity method. 
      The  transaction was accounted for at the combined carrying values of the assets  and liabilities. As a result of the transaction, Bell Canada owns 60% of Bell  West and MTS owns 40%. The terms of the agreement between Bell Canada and MTS  also included put and call options relating to MTS’s 40% interest in Bell  West.       On February 2, 2004, MTS exercised its option  to sell its 40% interest in Bell West to Bell Canada for approximately $645 million  in cash. The cash is payable at closing, which is expected to occur on or before  August 3, 2004. 

**Creation of the Bell  Nordiq Income Fund**  In April 2002, Bell Canada announced the initial public offering of units  of the Bell Nordiq Income Fund. The fund acquired a 37% interest in each  of Télébec Limited Partnership (Télébec) and Northern  Telephone Limited Partnership (Northern Telephone) from Bell Canada. Bell Canada  retains management control over both partnerships and holds a 63% interest in  each of them. Bell Canada received gross proceeds of $324 million and recorded  a pre-tax gain of $222 million on this transaction.
NOTE 4.  RESTRUCTURING AND OTHER CHARGES**2003**
**Restructuring of Xwave  Solutions Inc.**  Aliant recorded a pre-tax restructuring charge of $15 million ($4 million  after taxes and non-controlling interest) in 2003. This was a result of a restructuring  at its subsidiary, Xwave Solutions Inc. Costs associated with the restructuring  include severance and related benefits, technology lease cancellation penalties  and real estate rationalization costs. At December 31, 2003, the unpaid  balance of this restructuring provision was $6 million. The restructuring  is expected to be complete in 2004. 

**Bell Canada charges**  In 2003, Bell Canada recorded other charges of $65 million relating to  various asset write-downs and other provisions. These charges were offset by  a credit of $66 million relating to the reversal of the restructuring charges  recorded in 2002, which were no longer necessary because fewer employees were  terminated than expected. This was due to an increased redeployment of employees  with Bell Canada. 
**2002**
**Streamlining and other  charges at Bell Canada**  Bell Canada recorded a pre-tax charge of $302 million in the fourth quarter  of 2002 ($190 million after taxes). This included restructuring charges  of $232 million and other charges of $70 million.

50   2003 Financial  Information   Bell Canada 
NOTE 4.  RESTRUCTURING AND OTHER CHARGES (continued) 
     The  restructuring charges were mainly from streamlining our management, line and  other support functions. They included severance for approximately 1,700 employees,  enhanced pension benefits and other employee costs.       The restructuring was largely complete in 2003.       Other charges consisted mainly of various accounts  receivable write-downs relating to billing adjustments and unreconciled balances  from previous years that were identified in 2002. 

**Pay equity settlement**  On September 25, 2002, the members of the Canadian Telecommunications Employees’  Association (CTEA) ratified a settlement reached between the CTEA and Bell Canada  relating to the 1994 pay equity complaints that the CTEA had filed on behalf  of its members before the Canadian Human Rights Commission. The settlement included  a cash payout of $128 million and related pension benefits of approximately  $50 million.       As a result of the settlement, Bell Canada recorded  a charge of $79 million in the third quarter of 2002 ($45 million  after taxes). The charge is equal to the $128 million cash payout, less  a previously recorded provision. We are deferring and amortizing the related  pension benefits into earnings over the estimated average remaining service  life of active employees and the estimated average remaining life of retired  employees. 

**Write-down of Bell Canada’s  accounts receivable**  At the same time we were developing its new billing system, we adopted a new  and more precise method for analysing receivables by customer and by service  line. This method allows us to more accurately determine the validity of amounts  that customers owe to us.        The analysis indicated that a write-down of accounts  receivable of $272 million ($177 million after taxes) was appropriate  at June 30, 2002.       Because these amounts came from legacy billing  systems and processes, Bell Canada carried out a detailed review of billings  and adjustments for the period from 1997 to 2002. It determined that these amounts  were the cumulative result of a series of individually immaterial events and  transactions relating to its legacy accounts receivable systems dating back  to the early 1990s.
NOTE 5.  OTHER INCOME **2003** 2002  Net gains      on investments**106** 1,282  Interest      income**87** 31  Foreign      currency gains**19** 7  Other**5** (56) **Other      income****217** 1,264  
     Net  gains on investments of $106 million in 2003 were mainly from: 
- a $120 million gain    from the sale of a 3.66% interest in the directories business for net proceeds    of $135 million in cash. Bell Canada’s retained interest in the    directories business is 3.24%.   a $14 million loss    from the write-down of a number of our cost-accounted investments. 
     Net  gains on investments of $1,282 million in 2002 were mainly from: 
- selling the directories    business ($2.4 billion)   writing down our investment    in Teleglobe Inc. (Teleglobe) ($1.4 billion) to zero selling a 37% interest    in each of Télébec and Northern Telephone when the Bell Nordiq Income    Fund was created ($222 million). 
Bell Canada  2003 Financial Information   51
NOTE 6.  INTEREST EXPENSE
 **2003** 2002 Interest      expense on long-term debt**900** 787 Interest      expense on other debt**45** 52 **Total      interest expense****945** 839 
  
NOTE 7.  INCOME TAXES
The table below is a reconciliation  of income tax expense at Canadian statutory rates of 35.4% in 2003, 37.4% in  2002, and the amount of reported income tax expense in the statements of operations.  
 **2003**  2002  Income      taxes computed at statutory rates**1,100**  1,434     Net      gains on disposal of investments**(48****)** (328)    Equity      in net losses of significantly influenced companies**(8****)** (24)    Large      corporations tax**43**  19     Savings      from loss utilization transactions**(363****)** (69)    Other**63**  55  **Total      income tax expense****787**  1,087  
     The  table below shows the significant components of income tax expense relating  to earnings from continuing operations. 
 **2003** 2002  Current      income taxes**589** 797  Future      income taxes:** **       Recognition      and utilization of loss carryforwards**180** –     Change      in Canadian statutory rate**9** (6)    Change      in temporary differences and other**9** 296  **Total      income tax expense****787** 1,087  
     The  table below shows future income taxes resulting from temporary differences between  the carrying amounts of assets and liabilities for accounting purposes and the  amounts used for tax purposes, as well as tax loss carryforwards. 
 **2003**  2002  Non-capital      loss carryforwards**180**  274  Capital      loss carryforwards**12**  23  Capital      assets**(68****)** (87) Employee      benefit plans**(298****)** (255) Investment      tax credits**(18****)** (42) Other**91**  111  **Net      future income taxes****(101****)** 24  Future      income taxes are comprised of:** **        Future      income tax asset – current portion**116**  114     Future      income tax asset – long-term portion**224**  148     Future      income tax liability – current portion**(13****)** –     Future      income tax liability – long-term portion**(428****)** (238) **Net      future income taxes****(101****)** 24  
     At  December 31, 2003, we had $515 million in non-capital loss carryforwards.  We recognized a future tax asset of $180 million for financial reporting  purposes on the non-capital loss carryforwards. $440 million expires in  varying annual amounts until the end of 2010. $75 million expires in varying  annual amounts from 2011 to 2023.       At December 31, 2003, we had $347 million  in capital loss carryforwards, all of which can be carried forward indefinitely.  We: 
- recognized a future tax    asset of $12 million for financial reporting purposes on approximately    $71 million of capital loss carryforwards   did not recognize a future    tax asset for financial reporting purposes on the balance. 
52     2003 Financial Information   Bell Canada
NOTE 8.   DISCONTINUED OPERATIONS **2003**  2002 Aliant’s      remote communications segment**63**  – Aliant’s      emerging business segment**(4****)** – **Net      gain from discontinued operations****59**  – 
The table below is a summarized  statement of operations for the discontinued operations. 
 **2003**  2002 Revenue**547**  – Operating      gain from discontinued operations, before tax**26**  – Gain from      discontinued operations, before tax**121**  – Income      tax expense on operating gain**(7****)** – Income      tax expense on gain**(16****)** – Non-controlling      interest**(65****)** – **Net      gain from discontinued operations****59**  – **ALIANT’S  EMERGING BUSINESS SEGMENT**
 Effective May 2003,  we started presenting the financial results of Aliant’s emerging business  segment as discontinued operations.       Aliant’s emerging business segment consisted  mainly of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI  Offshore Inc. iMagicTV Inc. is a software development company that  provides broadband TV software and solutions to service providers around the  world. Prexar LLC is an Internet services provider. AMI Offshore Inc. provides  process and systems control technical services, and contracts manufacturing  solutions to offshore oil and gas and other industries.        Almost all of the assets of Aliant’s emerging  business segment were sold at December 31, 2003. 
**ALIANT’S  REMOTE COMMUNICATIONS SEGMENT**
 Effective December 2003,  we started presenting the financial results of Aliant’s remote communications  segment as discontinued operations.        Aliant’s remote communications segment consisted  of Aliant’s 53.2% investment in Stratos. Stratos offers Internet Protocol  (IP), data and voice access services through a range of newly emerging and established  technologies, including satellite and microwave, to customers in remote locations.       In December 2003, Aliant completed the sale  of Stratos, after receiving the required regulatory approvals. Aliant received  $340 million ($320 million net of selling costs) in cash for the sale.  At the time of the sale, the net carrying value of Stratos’ net assets  was $215 million. Stratos had total assets of $696 million, including  $52 million in cash and cash equivalents, and total liabilities of $372 million.  The transaction resulted in a gain on sale of $105 million ($48 million  after taxes and non-controlling interest). 
NOTE 9.   ACCOUNTS RECEIVABLE **2003**  2002  Trade accounts      receivable**1,642**  1,702  Other accounts      receivable**282**  408  Allowance      for doubtful accounts**(213****)** (149)  **1,711**  1,961  **SECURITIZATION  OF ACCOUNTS RECEIVABLE**
 Bell Canada sold an interest  in a pool of accounts receivable to a securitization trust for a total of $900 million  in cash, under a revolving sales agreement that came into effect on December 12,  2001. The agreement expires on December 12, 2006. Bell Canada had a retained  interest of $128 million in that pool of accounts receivable at December 31,  2003. This is equal to the amount of overcollateralization in the receivables  transferred.       Aliant sold an interest in a pool of accounts  receivable to a securitization trust for a total of $130 million in cash,  under a revolving sales agreement that came into effect on December 13,  2001. The agreement expires on December 13, 2006. Aliant had a retained  interest of $29 million in that pool of accounts receivable at December 31,  2003.

Bell Canada  2003 Financial Information   53
NOTE 9.   ACCOUNTS RECEIVABLE (continued) 
     Bell  Canada and Aliant continue to service these accounts receivable. The buyers’  interest in the collection of these accounts receivable ranks ahead of the interests  of Bell Canada and Aliant. Bell Canada and Aliant remain exposed to certain  risks of default on the amount of receivables that is securitized. They have  provided various credit enhancements in the form of overcollateralization and  subordination of their retained interests.       The buyers will reinvest the amounts collected  by buying additional interests in the Bell Canada and Aliant accounts receivable  until the agreements expire. The buyers and their investors have no claim on  Bell Canada’s and Aliant’s other assets if customers do not pay amounts  owed on time.       In 2003, we recognized a pre-tax loss of $33 million  on the revolving sale of accounts receivable for the combined securitizations,  compared to $27 million in 2002.       The table below shows balances for the combined  securitizations at December 31, 2003 and the assumptions that were used  in the model on the date of transfer and at December 31, 2003. A 10% or  20% adverse change in each of these assumptions would have no significant effect  on the current fair value of the retained interest. 
 Range  **2003**  2002  Securitized      interest in accounts receivable   **1,030**  1,035  Retained      interest** **  **157**  154  Servicing      liability   **1.4**  1.5  Average      accounts receivable managed   **1,265**  1,150  Assumptions   ** **        Cost      of funds2.99%-3.51**%** **3.22****%** 2.76%    Average      delinquency ratio6.18%-7.65**%** **7.58****%** 6.01%    Average      net credit loss ratio0.90%-1.02**%** **0.95****%** 0.84%    Weighted      average life (in days)35-37  **35**  38     Servicing      fee liability2.00**%** **2.00****%** 2.00% 
     The  table below is a summary of certain cash flows received from and paid to the  trusts during the year. 
 **2003**  2002 Collections      reinvested in revolving sales**13,612**  12,651 Increase      (decrease) in sale proceeds**(5****)** 10 NOTE 10.   CAPITAL ASSETS     **2003**     2002  **Cost** **Accumulated      amortization** **Net      book value** Cost Accumulated      amortization Net      book value Telecommunications    assets**35,942** **22,920** **13,022** 33,959 21,309 12,650 Machinery and    equipment**4,636** **2,497** **2,139** 4,859 2,676 2,183 Buildings**2,415** **1,260** **1,155** 2,428 1,251 1,177 Plant under construction**841** **–** **841** 1,011 – 1,011 Land**78** **–** **78** 78 – 78 Other**308** **115** **193** 131 31 100 **Total property,      plant**    **and      equipment****44,220** **26,792** **17,428** 42,466 25,267 17,199 Finite-life intangible      assets**2,888** **1,046** **1,842** 2,562 1,113 1,449 **Total capital assets****47,108** **27,838** **19,270** 45,028 26,380 18,648 
     The  cost of assets under capital leases was $391 million at December 31,  2003 and $486 million at December 31, 2002. The net book value of  these assets was $206 million at December 31, 2003 and $322 million  at December  31, 2002.        Amortization of capital assets was $2,957 in 2003  and $2,396 million in 2002. Retirements charged to accumulated amortization  were $443 million in 2003 and $879 million in 2002. 

54    2003 Financial  Information   Bell Canada
NOTE 11.   OTHER LONG-TERM ASSETS Notes **2003** 2002 Accrued      benefit asset20 **2,080** 1,965 Future      income taxes7 **224** 148 Investments      at equity** ** **381** 570 Investments      at cost** ** **61** 95 Note receivable      from parent company** ** **498** 498 Long-term      notes and other receivables  **59** 44 Other** ** **223** 245 **Total      other long-term assets**** ** **3,526** 3,565 
     The  amount of *Investments at equity*includes implicit goodwill of $171 million  at December 31, 2003 and $178 million at December 31, 2002. Amortization  of deferred charges was $13 million in 2003 and $5 million in 2002.  
NOTE 12.   INDEFINITE-LIFE INTANGIBLE ASSETS **2003** **Intangible      assets, December 31, 2002****772** Capitalized      interest**24** **Intangible      assets, December 31, 2003****796** Consisting      of:     Spectrum      licences**778**    Cable      licences**18** **Total****796** NOTE 13.   GOODWILL **2003** **Balance      – December 31, 2002****1,543** Additions**43** **Balance      – December 31, 2003****1,586** NOTE 14.   DEBT DUE WITHIN ONE YEAR Note Weighted-average      interest rate Weighted-average      maturity **2003** 2002 Note payable      to BCH      **–** 975 Bank advances  3.31% n/a **18** 97 Notes payable  3.05% 30      days **14** 124 Long-term      debt due within one year15     **1,133** 1,616 **Total      debt due within one year**      **1,165** 1,837 
     The  note payable to Bell Canada Holdings (BCH) was a promissory note that was repaid  in 2003 using proceeds from capital contributions from BCH. BCH is Bell Canada’s  parent company.       We expect to repay debt due within one year with  funds generated internally or by refinancing it.        The conditions of some of the credit agreements  require us to meet specific financial ratios and to place restrictions on acquiring  capital assets and paying dividends. We are in compliance with all conditions  and restrictions. 

Bell Canada  2003 Financial Information   55
NOTE 15.   LONG-TERM DEBT Note Weighted-average      interest rate Maturity **2003**  2002  **Bell      Canada**      ** **     Debentures      and notes (a)  7.36% 2004-2054 **8,789**  9,609  Subordinated      debentures  8.21% 2026-2031 **275**  275  Capital      leases (b)  6.90% 2004-2015 **891**  671  Other      **212**  220  **Total      – Bell Canada**      **10,167**  10,775  **Aliant**      ** **     Debentures,      notes and bonds (c)  7.86% 2004-2025 **985**  1,058  Other      **5**  6  **Total      – Aliant**      **990**  1,064  **Total      debt**      **11,157**  11,839  Less: Amount      due within one year14     **(1,133****)** (1,616) **Long-term      debt**      **10,024**  10,223  **BELL CANADA**(a)**