##### 



Exhibit 99.3 (CALL-NET LOGO) Management Discussion & Analysis
For period ending December 31, 2003 Managements Discussion and Analysis (MD&A) is intended to help readers
understand the dynamics of Call-Nets business and the key factors underlying
its financial results. It explains trends in Call-Nets financial condition,
results of operations and balance sheet for the year ending December 31, 2003
compared with the previous fiscal year. The MD&A is prepared in accordance with
National Instrument 51-102  Continuous Disclosure Obligations and Form
51-102F1  Managements Discussion and Analysis. This MD&A should be read in
conjunction with the Audited Consolidated Financial Statements for December 31,
2003 and December 31, 2002. Forward-Looking Statements The consolidated financial statements and MD&A necessarily include amounts and
conclusions based on informed judgments and estimates of the expected effects
of current events and transactions with appropriate consideration to
materiality. Certain statements in the MD&A also constitute forward-looking statements. They
involve known and unknown risks, uncertainties, and other factors that may
cause the results, performance or achievements of Call-Net to differ materially
from those expressed or implied by such statements. Such factors include, among
others, general economic and business conditions, demographic changes,
regulation, major technology changes, timing of product introductions,
competition and the ability of Call-Net to attract and retain key employees. Non GAAP Measures Certain financial measures used in this MD&A do not have any standardized
meaning under Canadian generally accepted accounting principles (GAAP). Below
is a definition of each of the non-GAAP financial measures used in this MD&A.
At the point in the MD&A which each non-GAAP financial measure is discussed, a
table has been provided to reconcile to the most directly comparable GAAP
measure. EBITDA Earnings before interest, taxes, depreciation and amortization (EBITDA) is a
financial metric used by investors to analyze the operating results of
companies and their ability to incur and service debt. Call-Net uses EBITDA as
an operating performance benchmark and defines it as revenue less carrier
charges and operating costs. Readers are cautioned that EBITDA as calculated
by Call-Net may not be comparable to similarly titled amounts reported by other
companies. Free Cash Flow Free cash flow is defined as EBITDA less interest expense on long-term debt,
cash income taxes paid and net capital expenditures. Call-Net Enterprises Inc.
    
    1/31
    
    MD&A 2003




---



##### 



Call-Nets Business Strategy Call-Net is the only national, full-service telecommunications alternative to
the long-established telephone companies, known as incumbent local exchange
carriers, or ILECs. Primarily through its wholly owned subsidiary Sprint Canada
Inc. (Sprint Canada), the Company offers home phone, long distance, dial-up
Internet, and wireless services to residential customers in Canadas largest
metropolitan areas, as well as local, long distance, data and Internet protocol
solutions (including high-speed access) to Canadian businesses and governments
of all sizes. Call-Net provides services through three businesses units  Consumer Services,
Business Solutions and Carrier Services. The first two are provided largely
under the Sprint Canada brand, while carrier services are delivered under the
Call-Net brand. Call-Net is a facilities-based company operating 14,000 route kilometres (8,600
route miles) of North American fibre. This network connects Canadas largest
markets and key United States markets and with Europe through company-owned
international gateway switches in New York City and London, and a
trans-Atlantic fibre indefeasible right of usage. Call-Net is seamlessly connected to the network of Sprint Communications
Company L.P. (Sprint) at multiple points across the Canada/U.S. border. In
Canada, Call-Net also owns and operates a national Cisco Internet protocol (IP)
network. Local service is provided through equipment co-located in the switch centres of
the ILECs. At December 31, 2003, Call-Net had 134 active co-locations in five
major urban centres incorporating 25 of Canadas most populous municipalities.
The Company intends to install at least 14 new co-locations in 2004. In
Montreal and Vancouver, certain co-locations are connected to Call-Nets local
switches by metro area networks (MANs). Call-Net can sell local access to an
addressable market of 4.0 million consumer and 2.6 million local equivalent
business lines. Call-Net has historically derived the bulk of its revenue from long distance
services provided to Canadian households and businesses. In the past three
years, the Company has reduced its dependency on long distance services and
broadened its Call-Net Enterprises Inc.
    
    2/31
    
    MD&A 2003




---



##### 



product offering. While long distance remains an important contributor to
financial performance, Call-Nets focus has shifted to market niches where the
Company can gain competitive advantage by offering bundled services as well as
superior customer service. This niche market strategy consists of offering bundled services to residential
users centered on the home phone; North American network services to
multi-national corporations; comprehensive business solutions, including
IP-enabled solutions, for large and medium-sized organizations; bundled
services for small and medium-sized businesses; and technological innovations
such as voice recognition applications in certain niches. Call-Net is headquartered in Toronto and has operations in 13 offices across
Canada, employing over 1,700 people and four U.S. locations. Competitive Advantages The Company has several competitive advantages over the ILECs and other
telecommunications service providers. They include: For residential consumers:  q
    
    A single, affordable price for services bundled according to customer preferenceq
    
    A single invoice that integrates all customer requirementsq
    
    Simplicity and ease of customer contact regardless of the number of servicesq
    
    Reliable always-on service. For businesses:  q
    
    The ability to deliver seamless North American network services
to multi-national corporations (MNCs)q
    
    Early delivery of next-generation business applications through
its relationship with Sprintq
    
    Reliable, affordable solutions for integrated local, long
distance and data in the small and medium sized business market segmentq
    
    Enhanced voice applications for call centres, including
automated voice recognition and customized voice applications. Call-Net Enterprises Inc.
    
    3/31
    
    MD&A 2003




---



##### 



Competitive Disadvantages Call-Net faces two major competitive disadvantages compared with the incumbent
telecommunication companies. One is the lack of economic scale. Achieving
sufficient scale depends on several factors, such as further investment in
local service and high-speed Internet infrastructure, and improved ILEC
compliance with CRTC rulings designed to promote fair competition in local
services. The other major disadvantage is that Sprint Canadas offerings are comparable
in quality and availability to that of the incumbents. This means that in
order to differentiate itself, the Company must compete on price and service.
These two factors combine to reduce margins relative to the incumbents. Technology Risks The biggest force for potential change in the telecommunications industry is
the threat of substitution of the traditional landline telephone by new
technologies. Wireless is often cited as an eventual replacement for the standard home
telephone, although experience shows that wireless phones are used primarily as
a second line. The popularity of wireless phones among younger generations has
resulted in some abandonment of landline service, but these preferences are not
likely to challenge the prominence of the traditional wireline phone for many
years, if at all. To benefit from the popularity of wireless phones as a second
line, Call-Net introduced a bundled home phone/wireless service in 2003 with
considerable initial success. A more recently cited threat to the standard landline telephone is telephone
service over the Internet, commonly referred to as voice over Internet protocol
(VoIP). This service may not be for everyone as it is less reliable than the
standard telephone, though there are potential cost savings for users. To meet
the demands of those who want Internet telephony, Call-Net will introduce VoIP
service for residential consumers in 2004. In managements view, the home phone will remain the centerpiece of Canadian
telecommunications. From company-owned equipment, Call-Net can provide home Call-Net Enterprises Inc.
    
    4/31
    
    MD&A 2003




---



##### 



phone service to approximately one-third of the 12 million homes in Canada. The
introduction of VoIP service will expand the Companys addressable market. In the business market, there is a continuing shift from asynchronous transfer
mode (ATM) and frame relay (two common data networks) to Internet protocol (IP)
delivered through virtual private network (VPN) services. This transition
results in lower costs for both users and carriers. Call-Net is positioned
ahead of this trend with one of the most advanced IP networking solutions
available. 2003 in Summary In 2003, Call-Net had its best year in the past five. In 2003, Call-Nets
operations generated more cash than it consumed. EBITDA was at the second
highest level in the past ten years and its net loss was dramatically reduced.
By year-end, its balance sheet was in good shape with a strong cash position
and net debt at its lowest level in five years. This progress in a year of
definitive turnaround, removed much of the financial risk that has inhibited
Call-Net in the past five years. Fourth Quarter 2003 Highlights In the fourth quarter, revenue was flat over the previous quarter, but the
Company continued to make progress in selling home phone service and bundled
home phone/ wireless service to Canadian consumers, and IP-enabled solutions to
Canadian business of all sizes. Call-Net Enterprises Inc.
    
    5/31
    
    MD&A 2003




---



##### 



Revenue Breakdown by Segment Variance from Prior
    
    Variance fromThree Months Ended
    
    Year
    
    Preceding QuarterDec 31,
    
    Dec 31,
    
    Sept 30,($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Long distance
    
    
    45.4
    
    
    
    45.3
    
    
    
    46.6
    
    
    
    0.1
    
    
    
    0.2
    %
    
    
    (1.2
    )
    
    
    (2.6
    )%Data
    
    
    3.4
    
    
    
    4.8
    
    
    
    3.6
    
    
    
    (1.4
    )
    
    
    (29.2
    )%
    
    
    (0.2
    )
    
    
    (5.6
    )%Local
    
    
    21.8
    
    
    
    16.6
    
    
    
    19.5
    
    
    
    5.2
    
    
    
    31.3
    %
    
    
    2.3
    
    
    
    11.8
    %Wireless
    
    
    1.3
    
    
    
    
    
    
    
    0.1
    
    
    
    1.3
    
    
    
    
    
    
    
    1.2
    
    
    
    1200.0
    %Consumer Services
    
    
    71.9
    
    
    
    66.7
    
    
    
    69.8
    
    
    
    5.2
    
    
    
    7.8
    %
    
    
    2.1
    
    
    
    3.0
    %Long distance
    
    
    37.8
    
    
    
    36.2
    
    
    
    38.5
    
    
    
    1.6
    
    
    
    4.4
    %
    
    
    (0.7
    )
    
    
    (1.8
    )%Data
    
    
    33.0
    
    
    
    36.8
    
    
    
    33.9
    
    
    
    (3.8
    )
    
    
    (10.3
    )%
    
    
    (0.9
    )
    
    
    (2.7
    )%Local
    
    
    8.8
    
    
    
    5.7
    
    
    
    8.3
    
    
    
    3.1
    
    
    
    54.4
    %
    
    
    0.5
    
    
    
    6.0
    %Business Solutions
    
    
    79.6
    
    
    
    78.7
    
    
    
    80.7
    
    
    
    0.9
    
    
    
    1.1
    %
    
    
    (1.1
    )
    
    
    (1.4
    )%Long distance
    
    
    39.6
    
    
    
    40.8
    
    
    
    41.8
    
    
    
    (1.2
    )
    
    
    (2.9
    )%
    
    
    (2.2
    )
    
    
    (5.3
    )%Data
    
    
    11.8
    
    
    
    15.2
    
    
    
    11.5
    
    
    
    (3.4
    )
    
    
    (22.4
    )%
    
    
    0.3
    
    
    
    2.6
    %Local
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    20.0
    %
    
    
    0.1
    
    
    
    9.1
    %Carrier Services
    
    
    52.6
    
    
    
    57.0
    
    
    
    54.4
    
    
    
    (4.4
    )
    
    
    (7.7
    )%
    
    
    (1.8
    )
    
    
    (3.3
    )%Total
    
    
    204.1
    
    
    
    202.4
    
    
    
    204.9
    
    
    
    1.7
    
    
    
    0.8
    %
    
    
    (0.8
    )
    
    
    (0.4
    )%
 Total revenue in the fourth quarter was $204.1 million representing a 0.4 per
cent decline from the third quarter of 2003 and a 0.8 per cent increase from
the fourth quarter of 2002. Consumer services revenue improved compared with
the third quarter of 2003 and the fourth quarter of 2002. Increases in home
phone service and new revenue from wireless service more than offset declines,
principally in dial-up Internet access. Consumer long distance revenue was
essentially unchanged from fourth quarter of 2002. Consumer long distance
revenue was down in the fourth quarter of 2003 compared with the third quarter
of 2003, due mainly to a change in the mix of long distance plans, as more
consumers took advantage of Sprint Canadas unlimited North American calling
plan. During the fourth quarter, Call-Net added 37,900 net local equivalent lines, of
which 30,600 were for consumers. Call-Net also finished the quarter with
12,800 wireless subscribers. Call-Net Enterprises Inc.
    
    6/31
    
    MD&A 2003




---



##### 



Business solutions and carrier services revenue fell in the fourth quarter,
relative to the third quarter of 2003, as a result of the overall decline in
business activity during the fourth quarter holiday season. Compared to the same quarter last year,
business solutions revenue increased marginally, as a decline in data revenue
was more than offset by higher revenue from long distance and local service.
Carrier services revenue declined by $4.4 million compared to the same period
last year, primarily due to lower data revenue. Components of EBITDA Variance from
    
    Variance fromThree Months Ended
    
    Prior Year
    
    Prior QuarterDec 31,
    
    Dec 31,
    
    Sept. 30($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Revenue
    
    
    204.1
    
    
    
    202.4
    
    
    
    204.9
    
    
    
    1.7
    
    
    
    0.8
    %
    
    
    (0.8
    )
    
    
    (0.4
    )%Carrier charges
    
    
    96.8
    
    
    
    103.4
    
    
    
    108.5
    
    
    
    (6.6
    )
    
    
    (6.4
    )%
    
    
    (11.7
    )
    
    
    (10.8
    )%Gross profit
    
    
    107.3
    
    
    
    99.0
    
    
    
    96.4
    
    
    
    8.3
    
    
    
    8.4
    %
    
    
    10.9
    
    
    
    11.3
    %Operating costs
    
    
    81.9
    
    
    
    68.4
    
    
    
    73.0
    
    
    
    13.5
    
    
    
    19.7
    %
    
    
    8.9
    
    
    
    12.2
    %EBITDA
    
    
    25.4
    
    
    
    30.6
    
    
    
    23.4
    
    
    
    (5.2
    )
    
    
    (17.0
    )%
    
    
    2.0
    
    
    
    8.5
    %Depreciation and amortization
    
    
    (38.4
    )
    
    
    (41.1
    )
    
    
    (38.7
    )
    
    
    2.7
    
    
    
    (6.6
    )%
    
    
    0.3
    
    
    
    (0.8
    )%Restructuring and other charges
    
    
    
    
    
    
    (4.9
    )
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (13.0
    )
    
    
    (15.4
    )
    
    
    (15.3
    )
    
    
    2.4
    
    
    
    (15.6
    )%
    
    
    2.3
    
    
    
    (15.0
    )%Carrier charges as a % of revenue
    
    
    47.4
    %
    
    
    51.1
    %
    
    
    53.0
    %
    
    
    
    
    
    
    (3.7
    )%
    
    
    
    
    
    
    (5.6
    )%Gross profit as a % of revenue
    
    
    52.6
    %
    
    
    48.9
    %
    
    
    47.0
    %
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    5.6
    %Operating costs as a % of revenue
    
    
    40.1
    %
    
    
    33.8
    %
    
    
    35.6
    %
    
    
    
    
    
    
    6.3
    %
    
    
    
    
    
    
    4.5
    %EBITDA as a % of revenue
    
    
    12.4
    %
    
    
    15.1
    %
    
    
    11.4
    %
    
    
    
    
    
    
    (2.7
    )%
    
    
    
    
    
    
    1.0
    %
 Carrier charges in the fourth quarter totaled $96.8 million or 47.4 per cent of
revenue. This is the first time in the last ten years that carrier charges have
made up less than 50 per cent of revenue. Network optimization initiatives,
favourable changes in product mix, dispute wins, favourable foreign exchange
gains and contract negotiations in the quarter all contributed to the
improvement in carrier charges. Operating costs increased to $81.9 million in the fourth quarter, up 12.2 per
cent from the third quarter and 19.7 per cent from the fourth quarter of 2002.
The increase in operating costs resulted from support of the new wireless
product offering, improvements in customer service levels, and performance
incentives for employees. Call-Net Enterprises Inc.
    
    7/31
    
    MD&A 2003




---



##### 



EBITDA in the fourth quarter was $25.4 million, up 8.5 per cent from $23.4
million in the third quarter and down $5.2 million or 17.0 per cent from the
fourth quarter of 2002. However, EBITDA for the fourth quarter of 2002 included
the accrual of a  $10.0 million refund in respect of certain DNA services retroactive to May 30,
2002. The Company generated $3.0 million of free cash flow in the quarter as
increased EBITDA more than offset increased capital spending. Summary of Free Cash Flow 2002
    
    2003($ Millions)
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4EBITDA
    
    $
    30.6
    
    
    $
    24.9
    
    
    $
    24.1
    
    
    $
    23.4
    
    
    $
    25.4Interest expense on long-term debt
    
    
    (12.8
    )
    
    
    (12.1
    )
    
    
    (11.1
    )
    
    
    (11.1
    )
    
    
    (8.9
    )Cash income taxes paid
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Net capital expenditures
    
    
    (9.4
    )
    
    
    (5.4
    )
    
    
    (4.8
    )
    
    
    (12.8
    )
    
    
    (13.3
    )Free cash flow
    
    
    7.9
    
    
    
    6.9
    
    
    
    7.7
    
    
    
    (0.7
    )
    
    
    3.0Interest income and other expense
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    (2.3
    )
    
    
    (2.6
    )Operating component of foreign exchange gain (loss)
    
    
    0.4
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    (1.8
    )
    
    
    (4.6
    )Other taxes paid
    
    
    (1.2
    )
    
    
    0.1
    
    
    
    (0.7
    )
    
    
    (0.1
    )
    
    
    0.1Change in non-cash working capital and other charges
    
    
    (0.7
    )
    
    
    (8.4
    )
    
    
    (3.6
    )
    
    
    (1.7
    )
    
    
    (0.8
    )Change in deferred costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Acquisitions
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (20.0
    )
    
    
    0.3Proceeds from sale of accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    -Change in RoW liability
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.3
    )Equity issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35.2
    
    
    
    5.4Change in cash & short term investments
    
    
    6.5
    
    
    
    1.3
    
    
    
    6.4
    
    
    
    17.9
    
    
    
    (0.5
    )
 Quarterly Summary Information Over the past eight quarters, Call-Nets revenue has been quite stable, ranging
from a low of $194.1 million to a high of $204.9 million. Gains from the
introduction of new products and services, and the marketing success of new
pricing plans offset declines in the per minute and per unit price of services.
The volume of traffic on Call-Nets network continues to grow each year. In
2003, long distance minutes grew by 8.4 per cent to 8.8 billion minutes. Call-Net Enterprises Inc.
    
    8/31
    
    MD&A 2003




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##### 



Quarterly Summary Information Pre-Recapitalization2001
    
    2002
    
    2003(in millions of Canadian dollars, except per share data)
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Statement of OperationsRevenue
    
    $
    215.1
    
    
    $
    201.8
    
    
    $
    197.9
    
    
    $
    198.6
    
    
    $
    202.4
    
    
    $
    202.2
    
    
    $
    194.1
    
    
    $
    204.9
    
    
    $
    204.1Carrier charges
    
    
    130.7
    
    
    
    116.8
    
    
    
    118.4
    
    
    
    113.9
    
    
    
    103.4
    
    
    
    106.2
    
    
    
    98.4
    
    
    
    108.5
    
    
    
    96.8Gross profit
    
    
    84.4
    
    
    
    85.0
    
    
    
    79.5
    
    
    
    84.7
    
    
    
    99.0
    
    
    
    96.0
    
    
    
    95.7
    
    
    
    96.4
    
    
    
    107.3Depreciation & amortization
    
    
    (41.1
    )
    
    
    (41.8
    )
    
    
    (38.7
    )
    
    
    (40.5
    )
    
    
    (41.1
    )
    
    
    (40.1
    )
    
    
    (39.6
    )
    
    
    (38.7
    )
    
    
    (38.4
    )Operating income (loss)
    
    
    (23.6
    )
    
    
    (29.9
    )
    
    
    (74.0
    )
    
    
    (25.5
    )
    
    
    (15.4
    )
    
    
    (15.2
    )
    
    
    (22.5
    )
    
    
    (15.3
    )
    
    
    (13.0
    )Net Income (loss)
    
    
    (98.2
    )
    
    
    (91.8
    )
    
    
    (62.4
    )
    
    
    29.1
    
    
    
    (24.4
    )
    
    
    8.1
    
    
    
    2.5
    
    
    
    (29.7
    )
    
    
    (16.2
    )EPS, basic
    
    
    (21.70
    )
    
    
    (20.26
    )
    
    
    (2.62
    )
    
    
    1.22
    
    
    
    (1.02
    )
    
    
    0.34
    
    
    
    0.10
    
    
    
    (1.13
    )
    
    
    (0.46
    )
 The most significant trend over the past eight quarters has been the decline in
carrier charges and the consequent increase in gross profit. Over the past two
years, carrier charges, as a per cent of revenue, have declined from 60.8 per
cent to 47.4 per cent, while gross profit, as a percentage of revenue, has
risen from 39.2 per cent to 52.6 per cent. Approximately one-third of this
improvement comes from reductions in carrier charges as a result of Canadian
Radio-television and Telecommunications Commission (CRTC) initiatives to level
the competitive playing field. The remaining two-thirds of the improvement
have come from Call-Nets own initiatives to optimize its network and negotiate
reductions in rates paid to other carriers, as well as favourable dispute
settlements and foreign exchange gains. 2003 Operating Results Revenue Highlights In 2003, total revenue grew by $4.6 million, or 0.6 per cent, from the prior
year to $805.3 million. Growth in the Companys business solutions and consumer
services operations supported the revenue stability, although wholesale carrier
revenue declined as expected. Call-Net made significant inroads in the market for local services, adding
65,000 net consumer lines and 41,400 net equivalent business lines for a total
of 106,400 lines, a 62.1 per cent increase year over year. Call-Net Enterprises Inc.
    
    9/31
    
    MD&A 2003




---



##### 



Lines and Customers 2002
    
    2003Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Residential Home Phone Service Lines
    
    
    141,000
    
    
    
    144,600
    
    
    
    157,100
    
    
    
    175,400
    
    
    
    206,000Business Local Line Equivalents*
    
    
    30,200
    
    
    
    43,900
    
    
    
    53,500
    
    
    
    64,300
    
    
    
    71,600Total Local Lines
    
    
    171,200
    
    
    
    188,500
    
    
    
    210,600
    
    
    
    239,700
    
    
    
    277,600Average Monthly Churn **
    
    
    4.0
    %
    
    
    3.8
    %
    
    
    3.6
    %
    
    
    3.4
    %
    
    
    2.6
    %Residential LD Customers
    
    
    555,700
    
    
    
    530,600
    
    
    
    522,800
    
    
    
    632,600
    
    
    
    609,100Residential Dial-up Internet Customers
    
    
    77,000
    
    
    
    72,000
    
    
    
    69,700
    
    
    
    68,400
    
    
    
    65,700Residential Wireless Customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600
    
    
    
    12,800
  *
    
    Business local line equivalents include Primary Rate Interfaces (PRIs) quantified as 23 individual business lines (IBLs)**
    
    Average Monthly Churn equals monthly disconnections divided by the average number of lines per month Customer churn in local services declined significantly, from an average of 4.0
per cent in 2002, to 2.6 per cent by the fourth quarter of 2003. Consumer Services Through Sprint Canada, Call-Net competes for residential customers with one of
the former telephone monopolies in each of Canadas five largest metropolitan
markets including 25 different municipalities. The Company has built a
profitable and growing customer base around the home phone by offering bundled
services  local, long distance, dial-up Internet access and, since September
2003, wireless services. No national competitor offers customers choice with
the combination of service and value provided by Sprint Canada. Over the past several years, the Company has learned a great deal about the
challenges of competing in the home phone market. The technological
requirements are complex. Effort must be invested in forming cooperative
relationships with the sometimes reluctant ILECs who lack experience in
efficiently switching customers seeking Sprint Canadas service. Progress,
though slow, is being made. In the first
half of 2003, new home phone subscriber activations averaged approximately 400
daily. In the second half of 2003, as Call-Nets provisioning process improved
and as the cut-over became more efficient, home phone line activations averaged
almost 700 a day. The Companys resources and systems are currently scaled to handle as many as
1,000 new home phone line activations daily. Call-Net continues to consider
which capital investments can be justified to expand operational scale to
handle a much Call-Net Enterprises Inc.
    
    10/31
    
    MD&A 2003




---



##### 



higher volume of customer acquisitions. To date, the Company has
taken an incremental approach consistent with the incremental nature of CRTC
rulings that make fair competition more feasible. Churn reductions among home phone service customers amounted to approximately
25 per cent in 2003. Continued improvement in churn is expected in 2004 as the
Companys offerings attract new subscribers to bundled services, stringent
credit checks screen out financially unreliable customers, customer service
continues to improve, retention programs are introduced, and the opportunity to
provide high-speed Internet access materializes. Recent regulatory actions
should also help to reduce churn by extending the period during which the ILECs
are prohibited from winning-back Sprint Canada customers using
anti-competitive practices. Churn in stand-alone long distance customers also fell in 2003. Stand-alone
long distance churn is much higher than that in the home phone customer base as
there are many more competitors in this market and it is comparatively easy to
switch long distance carriers. The Company is focused on improving the
effectiveness of customer acquisition and retention efforts. For example,
affinity programs are effective in reducing stand-alone long distance churn and
were developed with companies such as TD Visa and American Express. Overall, consumer revenue increased in 2003 by $11.8 million or 4.6 per cent to
$269 million. Call-Net had an excellent year in growing the home phone business
among Canadian households, although the stand-alone long distance and dial-up
Internet businesses declined as expected. Consumer Home Phone Service Revenue Local, or home phone, service revenue grew by 44.0 per cent in 2003 to $75.9
million as the number of lines expanded by 46.1 per cent to 206,000 at
year-end. Home phone service customers, almost all of whom subscribe to more
than one service from Sprint Canada, are emerging as the primary source of
consumer revenue. In 2003, revenue from bundled customers accounted for 45.3
per cent of Call-Nets consumer revenue. Call-Net Enterprises Inc.
    
    11/31
    
    MD&A 2003




---



##### 



Consumer Long Distance Revenue Long distance customers increased by 53,400 to 609,100, reflecting the addition
of the eForce customer base in the third quarter. Long distance revenue
(including bundled long distance revenue) declined by 3.6 per cent to $176.5
million as price declines and churn in the stand-alone base for the full year
did not offset the eForce customer additions. Stand-alone long distance service
remains a viable business, however the Company expects further price declines
and continued aggressive competition. Consumer Service Revenue Variance from Prior
    
    Variance from
    
    
    
    
    
    
    
    
    
    Variance fromThree Months Ended
    
    Year
    
    Preceding Quarter
    
    Twelve Months Ended
    
    Prior YearDec 31,
    
    Dec 31,
    
    Sept 30,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dec 31,
    
    Dec 31,($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %
    
    2003
    
    2002
    
    $
    
    %Long distance
    
    
    45.4
    
    
    
    45.3
    
    
    
    46.6
    
    
    
    0.1
    
    
    
    0.2
    %
    
    
    (1.2
    )
    
    
    (2.6
    )%
    
    
    176.5
    
    
    
    183.1
    
    
    
    (6.6
    )
    
    
    (3.6
    )%Data
    
    
    3.4
    
    
    
    4.8
    
    
    
    3.6
    
    
    
    (1.4
    )
    
    
    (29.2
    )%
    
    
    (0.2
    )
    
    
    (5.6
    )%
    
    
    15.2
    
    
    
    21.4
    
    
    
    (6.2
    )
    
    
    (29.0
    )%Local
    
    
    21.8
    
    
    
    16.6
    
    
    
    19.5
    
    
    
    5.2
    
    
    
    31.3
    %
    
    
    2.3
    
    
    
    11.8
    %
    
    
    75.9
    
    
    
    52.7
    
    
    
    23.2
    
    
    
    44.0
    %Wireless
    
    
    1.3
    
    
    
    
    
    
    
    0.1
    
    
    
    1.3
    
    
    
    
    
    
    
    1.2
    
    
    
    1200.0
    %
    
    
    1.4
    
    
    
    
    
    
    
    1.4
    
    
    
    Consumer Services
    
    
    71.9
    
    
    
    66.7
    
    
    
    69.8
    
    
    
    5.2
    
    
    
    7.8
    %
    
    
    2.1
    
    
    
    3.0
    %
    
    
    269.0
    
    
    
    257.2
    
    
    
    11.8
    
    
    
    4.6
    %
 The $19.7 million eForce acquisition added 115,000 customers in the third
quarter. eForce resells long distance through consumer services companies
and provides customer acquisition, integrated billing and customer relationship
management services. Its major clients include CIBC Card Products, one of
Canadas largest credit card issuers, and EastLink, an eastern Canadian-based
communications company. eForce plans to expand its service to other marquee
brands and offers good margins with low acquisition costs and minimal product
development demands. The acquisition of eForce, which offers lower rates on
average than the Company, reduced the average revenue per minute in residential
long distance by 1.4 per cent in 2003. Consumer Data Revenue Revenue from dial-up Internet customers declined by 29.0 per cent to $15.2
million and the number of subscribers shrank by 15.1 per cent to 65,400 at
year-end. The declines were anticipated as Canadian households continue to
migrate to high-speed Internet services. Call-Net Enterprises Inc.
    
    12/31
    
    MD&A 2003




---



##### 



Consumer Wireless Revenue In September 2003, Call-Net launched a bundled wireless service under the Fido®
brand through an agreement with Microcell Solutions Inc. of Montreal. The
service is
available only to Sprint Canada home phone service customers. Sprint Canada
provides sales, marketing, customer support, billing and payment processing
services, while Microcell provides technical support service. The bundling of
home phone and wireless service is cost-efficient to market and has proven
popular. By year-end, 12,800 net households had been added. Call-Net expects
as many as 10 to 20 per cent of new Sprint Canada subscribers will opt for the
Fido-bundled package. An attractive aspect of this service for Call-Net is
that the subscribers sign two-year contracts. The Companys analysis shows that
customers who use Sprint Canada home phone service for more than 12 months are
substantially less likely to churn than those subscribing for less time.
Revenue from wireless operations totaled $1.4 million in 2003. The Company
incurred approximately $3.0 million in costs associated with the launch of this
program. The Company believes that the Canadian wireless market will grow by
nearly 30 per cent to 18 million users by 2006. The partnership with Microcell
provides the Company with a cost effective way to share in this growth. Business Solutions The business telecommunications market continues to experience fierce
competition. The ILECs are competing aggressively in each others former
monopoly territory, while new competitors are trying to establish greater
market share. As a result of competition and new technologies, voice and data
prices have declined; a trend that is expected to continue. Call-Net is a small player in this market, focused on four niches where it can
develop competitive advantages:  1.
    
    Call-Net is the only Canadian telecommunications company in a close
working relationship with a U.S. partner.Sprint and Sprint Canada offer MNCs single-service, single-invoice
seamless North American network coverage. The Company believes that the
market for cross-border service exceeds $5.0 billion. Sprint recognizes
that a joint sales Call-Net Enterprises Inc.
    
    13/31
    
    MD&A 2003




---



##### 



effort between Sprint and Sprint Canada gives it a
competitive advantage over other U.S. carriers.The Company has three full-time employees at Sprint whose sole
responsibility is to maintain and further develop a productive
cross-border relationship.The Companys success in capturing new MNC accounts in 2003 was
epitomized by The Oppenheimer Group, one of North Americas top produce
distributors. It consolidated its communications on the Sprint Canada
network and took advantage of the relationship with Sprint to place its
North American operations on a single technology platform. Another new
customer, Top Producer Systems Inc. chose Sprint Canada to provide local,
long distance, toll free and Internet access services over the
high-capacity Canadian digital fibre network and seamlessly through
Sprints network to service 140,000 real estate professionals throughout
North America.2.
    
    The Companys IP-enabled solutions deliver the most recent business
innovations at substantial cost savings and time efficiencies.Call-Nets business relationship with Sprint ensures it can bring the
next-generation of IP-based solutions to Canada ahead of competitors and
at limited capital cost. For instance, a large national retailer selected
Sprint Canada to update its national frame relay network to consolidate
all remote locations and dispersed local area networks. A North American
entertainment company chose Sprint Canada to tie 60 theatres across
Canada to its back office and expedite data management. As well, a global
financial media services organization switched to Sprint Canada to
deliver its financial markets data to investment brokers from
coast-to-coast. In each of these situations, Sprint Canada is using
IP-enabled solutions to integrate legacy systems with next-generation
services in an efficient and cost-effective manner for its customers. Call-Net Enterprises Inc.
    
    14/31
    
    MD&A 2003




---



##### 



3.
    
    The Company bundles long distance, local, and high-speed Internet access
for small and medium-sized enterprises (SME).The SME market is under-serviced by the ILECs and other competitors.
Business owners are responding to the Companys bundled product offering,
pricing and attention to customer service. Sprint Canada Business
Solutions was able to more than double its customer base in 2003 to
11,000 largely as a result of beginning to successfully take advantage of
the market opportunities within the SME sector.4.
    
    The Company has successfully penetrated the call centre sector with
complex interactive voice response (IVR) and advanced voice recognition
(AVR) applications.The Companys customized voice applications are moving call centres to
speech-enabled technology that is easier for customers to use and
circumvents the frustration of pressing numerals to access service.
Call-Net, through its wholly-owned subsidiary Time iCR, is a leader in
national language speech enabled applications. In 2003, Air Canada
selected Sprint Canada to manage its eight call centres. The centres were
redeployed on two network nodes using proprietary knowledge software to
provide more economical, reliable and user-friendly service. Airline
pilots, for instance, now check their flight schedules using
voice-activated systems. Large companies conduct extensive due diligence before selecting a new
telecommunications service provider. Their decisions to switch to Sprint Canada
are votes of confidence in the Companys technological leadership, network
reliability, customer service and financial stability. Major corporate clients
include Bata Limited, Bechtel Corporation, The Columbia House Company (Canada),
Intuit Canada Limited, The Oppenheimer Group, Schneider National Inc., Siemens
Business Services Canada Inc. and Top Producer Systems Inc. Call-Net Enterprises Inc.
    
    15/31
    
    MD&A 2003




---



##### 



Business Solutions Revenue In 2003, Call-Net grew annual business solutions revenue and earnings for the
first time in more than five years in an industry where voice and data industry
revenue actually declined. Total business solutions revenue improved by 2.1
per cent or $6.7 million to $318.6 million. The growth was initiated by a
stronger product offering, including IP-enabled solutions and the establishment
of a third-party agency sales channel for small and medium-sized business.
Business Solutions revenue represented about 40 per cent of total corporate
revenue in 2003. Business Solutions Revenue Variance from Prior
    
    Variance fromThree Months Ended
    
    Year
    
    Preceding QuarterDec 31,
    
    Dec 31,
    
    Sept 30,($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Long distance
    
    
    37.8
    
    
    
    36.2
    
    
    
    38.5
    
    
    
    1.6
    
    
    
    4.4
    %
    
    
    (0.7
    )
    
    
    (1.8
    )%Data
    
    
    33.0
    
    
    
    36.8
    
    
    
    33.9
    
    
    
    (3.8
    )
    
    
    (10.3
    )%
    
    
    (0.9
    )
    
    
    (2.7
    )%Local
    
    
    8.8
    
    
    
    5.7
    
    
    
    8.3
    
    
    
    3.1
    
    
    
    54.4
    %
    
    
    0.5
    
    
    
    6.0
    %Business Solutions
    
    
    79.6
    
    
    
    78.7
    
    
    
    80.7
    
    
    
    0.9
    
    
    
    1.1
    %
    
    
    (1.1
    )
    
    
    (1.4
    )%
   [Continued from above table, first column(s) repeated] Variance fromTwelve Months Ended
    
    Prior YearDec 31,
    
    Dec 31,($ Millions)
    
    2003
    
    2002
    
    $
    
    %Long distance
    
    
    153.6
    
    
    
    150.3
    
    
    
    3.3
    
    
    
    2.2
    %Data
    
    
    134.0
    
    
    
    144.9
    
    
    
    (10.9
    )
    
    
    (7.5
    )%Local
    
    
    31.0
    
    
    
    16.7
    
    
    
    14.3
    
    
    
    85.6
    %Business Solutions
    
    
    318.6
    
    
    
    311.9
    
    
    
    6.7
    
    
    
    2.1
    %
 Business long distance revenue grew by 2.2 per cent to $153.6 million at a time
when the Companys competitors generally suffered revenue loss. Average
revenue per minute declined by approximately 11 per cent. Focus on selling local service bundles to small and medium sized enterprises
has produced solid results. New business local line equivalents more than
doubled with 41,400 additions during the year, bringing the year-end total to
71,600. Revenue from business local services increased by 85.6 per cent to
$31.0 million. Data revenue declined by 7.5 per cent to $134.0 million. A declining data
revenue trend in the first two quarters of 2003 flattened considerably in the
third as the Companys cross border efforts began to be realized. Call-Net Enterprises Inc.
    
    16/31
    
    MD&A 2003




---



##### 



Carrier Services The owners and operators of fibre networks routinely buy and sell excess
capacity in the wholesale market. During the past three years, the wholesale
carrier business has suffered as telecommunications companies went out of
business, while demand for fibre bandwidth declined and prices continued to
fall. Quality customer service and flexibility of offerings are hallmarks of the
Call-Net wholesale business. They help to preserve good margins. To further
solidify customer relations and corporate performance, the staff that purchase
access from other networks and the staff that sell access to the Call-Net
network were merged into a single team in 2003. This initiative reduced carrier
costs substantially and strengthened gross margin. Carrier Services Revenue Call-Nets strategy is to optimize the contribution from wholesale services, by
focusing on profitability, rather than revenue growth. With approximately 125
wholesale customers, the Company works closely with the 20 largest that
represent about 75 per cent of carrier services revenue. Call-Nets largest
customers are actually other large carriers such as MCI, Sprint, and the
Canadian ILECs. In 2003, wholesale revenue totaled $217.7 million, representing a 6.0 per cent
decline from $231.6 million in the prior year and representing 27.0 per cent of
the Companys total revenue. Average revenue per minute (ARPM) in wholesale
declined by approximately 13 per cent. Carrier Services Revenue Three Months Ended
    
    Variance from PriorYear
    
    Variance fromPreceding QuarterDec 31,
    
    Dec 31,
    
    Sept 30,($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Long distance
    
    
    39.6
    
    
    
    40.8
    
    
    
    41.8
    
    
    
    (1.2
    )
    
    
    (2.9
    )%
    
    
    (2.2
    )
    
    
    (5.3
    )%Data
    
    
    11.8
    
    
    
    15.2
    
    
    
    11.5
    
    
    
    (3.4
    )
    
    
    (22.4
    )%
    
    
    0.3
    
    
    
    2.6
    %Local
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    20.0
    %
    
    
    0.1
    
    
    
    9.1
    %Carrier Services
    
    
    52.6
    
    
    
    57.0
    
    
    
    54.4
    
    
    
    (4.4
    )
    
    
    (7.7
    )%
    
    
    (1.8
    )
    
    
    (3.3
    )%
   [Continued from above table, first column(s) repeated] Variance fromTwelve Months Ended
    
    Prior YearDec 31,
    
    Dec 31,($ Millions)
    
    2003
    
    2002
    
    $
    
    %Long distance
    
    
    162.8
    
    
    
    170.2
    
    
    
    (7.4
    )
    
    
    (4.3
    )%Data
    
    
    50.1
    
    
    
    59.0
    
    
    
    (8.9
    )
    
    
    (15.1
    )%Local
    
    
    4.8
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    100.0
    %Carrier Services
    
    
    217.7
    
    
    
    231.6
    
    
    
    (13.9
    )
    
    
    (6.0
    )%
 Call-Net Enterprises Inc.
    
    17/31
    
    MD&A 2003




---



##### 



Carrier Charges, Operating Costs & Operating Profit Carrier Charges Carrier charges comprise about one half of the Companys total revenue. These
charges declined by 9.4 per cent, or $42.6 million, to $409.9 million in 2003.
Progress was made in network optimizations and international carrier
negotiations, and improvements were made to the competitive landscape as a
result of recent CRTC decisions. Variance from
    
    Variance fromThree Months Ended
    
    Prior Year
    
    Prior QuarterDec 31,
    
    Dec 31,
    
    Sept. 30($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Revenue
    
    
    204.1
    
    
    
    202.4
    
    
    
    204.9
    
    
    
    1.7
    
    
    
    0.8
    %
    
    
    (0.8
    )
    
    
    (0.4
    )%Carrier charges
    
    
    96.8
    
    
    
    103.4
    
    
    
    108.5
    
    
    
    (6.6
    )
    
    
    (6.4
    )%
    
    
    (11.7
    )
    
    
    (10.8
    )%Gross profit
    
    
    107.3
    
    
    
    99.0
    
    
    
    96.4
    
    
    
    8.3
    
    
    
    8.4
    %
    
    
    10.9
    
    
    
    11.3
    %Operating costs
    
    
    81.9
    
    
    
    68.4
    
    
    
    73.0
    
    
    
    13.5
    
    
    
    19.7
    %
    
    
    8.9
    
    
    
    12.2
    %EBITDA
    
    
    25.4
    
    
    
    30.6
    
    
    
    23.4
    
    
    
    (5.2
    )
    
    
    (17.0
    )%
    
    
    2.0
    
    
    
    8.5
    %Depreciation and amortization
    
    
    (38.4
    )
    
    
    (41.1
    )
    
    
    (38.7
    )
    
    
    2.7
    
    
    
    (6.6
    )%
    
    
    0.3
    
    
    
    (0.8
    )%Restructuring and other charges
    
    
    
    
    
    
    (4.9
    )
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (13.0
    )
    
    
    (15.4
    )
    
    
    (15.3
    )
    
    
    2.4
    
    
    
    (15.6
    )%
    
    
    2.3
    
    
    
    (15.0
    )%Carrier charges as a % of revenue
    
    
    47.4
    %
    
    
    51.1
    %
    
    
    53.0
    %
    
    
    
    
    
    
    (3.7
    )%
    
    
    
    
    
    
    (5.6
    )%Gross profit as a % of revenue
    
    
    52.6
    %
    
    
    48.9
    %
    
    
    47.0
    %
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    5.6
    %Operating costs as a % of revenue
    
    
    40.1
    %
    
    
    33.8
    %
    
    
    35.6
    %
    
    
    
    
    
    
    6.3
    %
    
    
    
    
    
    
    4.5
    %EBITDA as a % of revenue
    
    
    12.4
    %
    
    
    15.1
    %
    
    
    11.4
    %
    
    
    
    
    
    
    (2.7
    )%
    
    
    
    
    
    
    1.0
    %
   [Continued from above table, first column(s) repeated] Variance fromTwelve Months Ended
    
    Prior YearDec 31,
    
    Dec 31,($ Millions)
    
    2003
    
    2002
    
    $
    
    %Revenue
    
    
    805.3
    
    
    
    800.7
    
    
    
    4.6
    
    
    
    0.6
    %Carrier charges
    
    
    409.9
    
    
    
    452.5
    
    
    
    (42.6
    )
    
    
    (9.4
    )%Gross profit
    
    
    395.4
    
    
    
    348.2
    
    
    
    47.2
    
    
    
    13.6
    %Operating costs
    
    
    297.6
    
    
    
    300.4
    
    
    
    (2.8
    )
    
    
    (0.9
    )%EBITDA
    
    
    97.8
    
    
    
    47.8
    
    
    
    50.0
    
    
    
    104.6
    %Depreciation and amortization
    
    
    (156.8
    )
    
    
    (162.1
    )
    
    
    5.3
    
    
    
    (3.3
    )%Restructuring and other charges
    
    
    (7.0
    )
    
    
    (30.5
    )
    
    
    23.5
    
    
    
    (77.0
    )%Operating loss
    
    
    (66.0
    )
    
    
    (144.8
    )
    
    
    78.8
    
    
    
    (54.4
    )%Carrier charges as a % of revenue
    
    
    50.9
    %
    
    
    56.5
    %
    
    
    
    
    
    
    (5.6
    )%Gross profit as a % of revenue
    
    
    49.1
    %
    
    
    43.5
    %
    
    
    
    
    
    
    5.6
    %Operating costs as a % of revenue
    
    
    37.0
    %
    
    
    37.5
    %
    
    
    
    
    
    
    (0.5
    )%EBITDA as a % of revenue
    
    
    12.1
    %
    
    
    6.0
    %
    
    
    
    
    
    
    6.1
    %
 Call-Nets gross profit was $395.4 million in 2003, a 13.6 per cent improvement
over the $348.2 million in the previous year. Gross profit, as a percentage of
revenue, was 49.1 per cent in 2003, compared with 43.5 per cent in 2002. While carrier charges were lower overall and are trending downwards, they
fluctuated during the year. For example, carrier charges rose in the third
quarter of 2003 by $10.1 million from the prior quarter following the
acquisition of eForce. Canadian and international termination charges also
fluctuate in response to changes in minute volumes, changes in foreign exchange
rates and in response to changes in the mix between Canadian, U.S. and
international terminations. Operating Costs Call-Nets 2003 corporate strategy involved a shift from fixed to variable
costs through partnerships and outsourcing in the delivery of various sales and
customer care services. The Companys goal was to create a more flexible
workforce and reduce overhead costs so that it could quickly leverage new
growth opportunities. Operating cost reductions have largely been achieved
through staff reductions. Call- Call-Net Enterprises Inc.
    
    18/31
    
    MD&A 2003




---



##### 



Net anticipates modest increases in employee numbers to manage new growth,
especially in customer care. The shift to variable costs reduced overall operating expenses by $2.8 million
in 2003, or 0.9 per cent, to $297.6 million. Operating costs as a percentage of
revenue declined from 37.5 per cent to 37.0 per cent. Operating costs rose by
$16.8 million in the second half of 2003 relative to the second half of 2002,
primarily as a result of increases in sales and marketing expenses, and
customer care costs, together with some one-time increases in personnel costs
in other areas. The Cost of Growth in Local Services Call-Net is focused on growing market share in local services. In doing so, it
incurs costs for sales, marketing and provisioning, or transferring a
customers telephone service from an ILECs network to Call-Nets network.
These costs erode short-term operating profits as the Company builds a solid
and profitable customer base for the future. The provisioning costs paid to the
ILECs appear in Call-Nets carrier charges. In 2003, these one-time carrier
charges for consumer local lines were $9.8 million, compared with $11.2 million
in 2002. Related operating costs for provisioning, selling and marketing local
services to consumers totaled $32.5 million in 2003 versus $35.5 million in
2002. Cost of Acquisition per Customer Consumer ServicesTwelve Months EndedDec 31,
    
    Dec 31,($ Millions)
    
    2003
    
    2002Carrier ChargesLocal Service Request
    
    $
    9.8
    
    
    $
    11.2Operating CostsProvisioning
    
    $
    4.5
    
    
    $
    6.0Selling and marketing
    
    $
    28.0
    
    
    $
    29.5Total Cost of Acquisition
    
    $
    42.3
    
    
    $
    46.7Gross adds
    
    
    127,900
    
    
    
    132,500Cost of Acquisition per Customer
    
    $
    331
    
    
    $
    352
 Call-Net Enterprises Inc.
    
    19/31
    
    MD&A 2003




---



##### 



Operating Profit (Loss) Operating Loss and Other Expenses Variance from
    
    Variance fromThree Months Ended
    
    Prior Year
    
    Prior QuarterDec. 31,
    
    Dec. 31,
    
    Sept. 30,($ Millions, except per share amounts)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %EBITDA
    
    
    25.4
    
    
    
    30.6
    
    
    
    23.4
    
    
    
    (5.2
    )
    
    
    (17.0
    )%
    
    
    2.0
    
    
    
    8.5
    %Depreciation and amortization
    
    
    (38.4
    )
    
    
    (41.1
    )
    
    
    (38.7
    )
    
    
    2.7
    
    
    
    (6.6
    )%
    
    
    0.3
    
    
    
    (0.8
    )%Restructuring and other charges
    
    
    
    
    
    
    (4.9
    )
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    $
    (13.0
    )
    
    $
    (15.4
    )
    
    $
    (15.3
    )
    
    
    2.4
    
    
    
    (15.6
    )%
    
    
    2.3
    
    
    
    (15.0
    )%Net gain on sale of assets and rights
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    (4.9
    )
    
    
    (100.0
    )%
    
    
    
    
    
    
    Gain on repurchase of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on long-term debt
    
    
    (8.9
    )
    
    
    (12.8
    )
    
    
    (11.1
    )
    
    
    3.9
    
    
    
    (30.5
    )%
    
    
    2.2
    
    
    
    (19.8
    )%Interest and other income (expense)
    
    
    (2.7
    )
    
    
    (1.6
    )
    
    
    (2.6
    )
    
    
    (1.1
    )
    
    
    68.8
    %
    
    
    (0.1
    )
    
    
    (260.0
    )%Foreign exchange gain (loss)
    
    
    12.8
    
    
    
    2.2
    
    
    
    (0.4
    )
    
    
    10.6
    
    
    
    481.8
    %
    
    
    13.2
    
    
    
    (3300.0
    )%Income tax benefit (expense)
    
    
    (4.4
    )
    
    
    (1.7
    )
    
    
    (0.3
    )
    
    
    (2.7
    )
    
    
    158.8
    %
    
    
    (4.1
    )
    
    
    1366.7
    %Net Income (Loss)
    
    
    (16.2
    )
    
    
    (24.4
    )
    
    
    (29.7
    )
    
    
    8.2
    
    
    
    (33.6
    )%
    
    
    13.5
    
    
    
    (45.5
    )%EPS, basic *
    
    
    (0.46
    )
    
    
    (1.02
    )
    
    
    (1.13
    )
    
    
    0.56
    
    
    
    (54.9
    )%
    
    
    0.67
    
    
    
    (59.3
    )%
   [Continued from above table, first column(s) repeated] Variance fromTwelve Months Ended
    
    Prior YearDec. 31,
    
    Dec. 31,($ Millions, except per share amounts)
    
    2003
    
    2002
    
    $
    
    %EBITDA
    
    
    97.8
    
    
    
    47.8
    
    
    
    50.0
    
    
    
    104.6
    %Depreciation and amortization
    
    
    (156.8
    )
    
    
    (162.1
    )
    
    
    5.3
    
    
    
    (3.3
    )%Restructuring and other charges
    
    
    (7.0
    )
    
    
    (30.5
    )
    
    
    23.5
    
    
    
    (77.0
    )%Operating loss
    
    $
    (66.0
    )
    
    $
    (144.8
    )
    
    
    78.8
    
    
    
    (54.4
    )%Net gain on sale of assets and rights
    
    
    
    
    
    
    9.4
    
    
    
    (9.4
    )
    
    
    (100.0
    )%Gain on repurchase of long-term debt
    
    
    
    
    
    
    93.1
    
    
    
    (93.1
    )
    
    
    (100.0
    )%Interest on long-term debt
    
    
    (43.2
    )
    
    
    (104.2
    )
    
    
    61.0
    
    
    
    (58.5
    )%Interest and other income (expense)
    
    
    (5.7
    )
    
    
    (3.7
    )
    
    
    (2.0
    )
    
    
    54.1
    %Foreign exchange gain (loss)
    
    
    85.9
    
    
    
    2.3
    
    
    
    83.6
    
    
    
    3634.8
    %Income tax benefit (expense)
    
    
    (6.3
    )
    
    
    (1.6
    )
    
    
    (4.7
    )
    
    
    293.8
    %Net Income (Loss)
    
    
    (35.3
    )
    
    
    (149.5
    )
    
    
    114.2
    
    
    
    (76.4
    )%EPS, basic *
    
    
    (1.28
    )
    
    NA
    
    NA
    
    NA
  *
    
    The twelve months ended December 31, 2002 is comprised of pre-capitalization and post-recapitalization periods and therefore
both the basic and fully diluted EPS figures cannot be calculated. In 2003, EBITDA increased to $97.8 million, compared with $47.8 million in
2002. The $50.0 million improvement consisted of a $47.2 million improvement in
gross profit and a $2.8 million reduction in operating costs. Depreciation and amortization totaled $156.8 million, a 3.3 per cent decrease
from 2002. Depreciation and amortization has generally been falling as the
Companys capital spending program has been scaled back. In 2003, Call-Net recorded a special charge in the second quarter of $7.0
million. This charge represents the net present value of fibre maintenance
costs on dark fibre that will be incurred by Call-Net under contracts for up to
15 years in length with no foreseeable future economic benefit and for which it
has been determined there is no prospect of recovery. In 2002, there were $30.5
million in restructuring and special charges for severance and equipment
write-downs. Other Expenses Interest expense decreased to $43.2 million from $104.2 million in 2002. The
drop in interest expense was a function of three factors: under the Plan of
Arrangement completed in April 2002, the Company exchanged approximately $2.6
billion of old debt for US$377.0 million (approximately $600.0 million) of new
senior secured notes; the subsequent market purchase of U.S.$77.5 million
(approximately Call-Net Enterprises Inc.
    
    20/31
    
    MD&A 2003




---



##### 



$120.0 million) of senior secured notes in September 2002 thereby avoiding the
interest costs associated with the repurchased notes; and the strengthening, in
2003, of the Canadian dollar, which resulted in a lower Canadian dollar
interest payment obligation on the Companys senior secured notes, which are
denominated in U.S. dollars. In 2003, the Company recorded a gain of $85.9 million on foreign exchange on
the U.S. dollar denominated senior secured notes as the result of the sharp
appreciation of the Canadian dollar against the U.S. dollar. Based on the
December 31, 2003 balances, a one per cent change in the value of the Canadian
dollar against the U.S. currency increases or decreases the Companys long-term
debt by approximately $3.9 million. In 2002, Call-Net recorded non-operating items consisting of a $93.1 million
gain on the repurchase of approximately U.S.$77.5 million of notes and a $9.4
million gain from the disposal of assets and rights. Net Income (Loss) In 2003, Call-Net recorded a net loss of $35.3 million, or $1.28 per share,
compared with a net loss of $149.5 million in 2002. Fiscal 2002 included
pre-capitalization and post-recapitalization periods and therefore the basic
and fully diluted earnings per share (EPS) figures cannot be calculated. Four
principal factors contributed to the $114.2 million improvement compared with a
year earlier:  §
    
    $61.0 million decrease in interest expense on long-term debt§
    
    $83.6 million increase in gain on foreign exchange§
    
    $78.8 million decrease in operating loss
Offset byOffset by§
    
    $102.5 million decrease in gains relating to the sale of assets and
rights and repurchase of long-term debt§
    
    $2.0 million increase in interest and other expense§
    
    $4.7 million increase in income tax expense Call-Net Enterprises Inc.
    
    21/31
    
    MD&A 2003




---



##### 



Cash Flow Variance from
    
    Variance fromThree Months Ended
    
    Prior Year
    
    Prior QuarterDec. 31
    
    Dec. 31
    
    Sept. 30($ Millions)
    
    2003
    
    2002
    
    2003
    
    $
    
    %
    
    $
    
    %Net income (loss)
    
    
    (16.2
    )
    
    
    (24.4
    )
    
    
    (29.7
    )
    
    
    8.2
    
    
    
    (33.6
    )%
    
    
    13.5
    
    
    
    (45.5
    )%Depreciation and amortization
    
    
    38.4
    
    
    
    41.1
    
    
    
    38.7
    
    
    
    (2.7
    )
    
    
    (6.6
    )%
    
    
    (0.3
    )
    
    
    (0.8
    )%Interest and other (income)/expense
    
    
    0.1
    
    
    
    2.0
    
    
    
    0.3
    
    
    
    (1.9
    )
    
    
    (95.0
    )%
    
    
    (0.2
    )
    
    
    (66.7
    )%Foreign exchange (gain)/loss
    
    
    (17.4
    )
    
    
    (1.8
    )
    
    
    (1.4
    )
    
    
    (15.6
    )
    
    
    866.7
    %
    
    
    (16.0
    )
    
    
    1142.9
    %Income taxes
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    4.3
    
    
    
    
    
    
    
    4.3
    
    
    
    Gain on repurchase of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss (gain) on disposals
    
    
    
    
    
    
    (4.9
    )
    
    
    
    
    
    
    4.9
    
    
    
    (100.0
    )%
    
    
    
    
    
    
    Future income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow from operating activities
before change in non-working capital
    
    
    9.2
    
    
    
    12.0
    
    
    
    7.9
    
    
    
    (2.8
    )
    
    
    (23.3
    )%
    
    
    1.3
    
    
    
    16.5
    %Change in non-cash working capital
    
    
    (0.8
    )
    
    
    4.2
    
    
    
    (1.7
    )
    
    
    (5.0
    )
    
    
    (119.0
    )%
    
    
    0.9
    
    
    
    (52.9
    )%Cash flow from operating activities
    
    
    8.4
    
    
    
    16.2
    
    
    
    6.2
    
    
    
    (7.8
    )
    
    
    (48.1
    )%
    
    
    2.2
    
    
    
    35.5
    %Change in short-term investments
    
    
    (0.1
    )
    
    
    24.8
    
    
    
    (17.2
    )
    
    
    (24.9
    )
    
    
    (100.4
    )%
    
    
    17.1
    
    
    
    (99.4
    )%Acquisition of capital assets
    
    
    (13.3
    )
    
    
    (9.4
    )
    
    
    (13.7
    )
    
    
    (3.9
    )
    
    
    41.5
    %
    
    
    0.4
    
    
    
    (2.9
    )%Increase in deferred costs
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )
    
    
    Acquisitions
    
    
    0.3
    
    
    
    (1.0
    )
    
    
    (20.0
    )
    
    
    1.3
    
    
    
    (130.0
    )%
    
    
    20.3
    
    
    
    (101.5
    )%Net proceeds from disposal of capital assets
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    (100.0
    )%Proceeds from sale of accounts receivable
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    (10.0
    )
    
    
    (100.0
    )%Cash flow from investing activities
    
    
    (14.1
    )
    
    
    14.4
    
    
    
    (40.0
    )
    
    
    (28.5
    )
    
    
    (197.9
    )%
    
    
    25.9
    
    
    
    (64.8
    )%Change in ROW liability
    
    
    (0.3
    )
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    (1.0
    )
    
    
    (142.9
    )%
    
    
    0.4
    
    
    
    (57.1
    )%Repurchase of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Common Shares
    
    
    5.4
    
    
    
    
    
    
    
    35.2
    
    
    
    5.4
    
    
    
    
    
    
    
    (29.8
    )
    
    
    (84.7
    )%Cash flow from financing activities
    
    
    5.1
    
    
    
    0.7
    
    
    
    34.5
    
    
    
    4.4
    
    
    
    628.6
    %
    
    
    (29.4
    )
    
    
    (85.2
    )%Net increase (decrease) in cash and
cash equivalents
    
    
    (0.6
    )
    
    
    31.3
    
    
    
    0.7
    
    
    
    (31.9
    )
    
    
    (101.9
    )%
    
    
    (1.3
    )
    
    
    (185.7
    )%
   [Continued from above table, first column(s) repeated] Variance fromTwelve Months Ended
    
    Prior YearDec. 31
    
    Dec. 31($ Millions)
    
    2003
    
    2002
    
    $
    
    %Net income (loss)
    
    
    (35.3
    )
    
    
    (149.5
    )
    
    
    114.2
    
    
    
    (76.4
    )%Depreciation and amortization
    
    
    156.8
    
    
    
    162.1
    
    
    
    (5.3
    )
    
    
    (3.3
    )%Interest and other (income)/expense
    
    
    1.3
    
    
    
    3.0
    
    
    
    (1.7
    )
    
    
    (56.7
    )%Foreign exchange (gain)/loss
    
    
    (85.9
    )
    
    
    (3.0
    )
    
    
    (82.9
    )
    
    
    2763.3
    %Income taxes
    
    
    4.3
    
    
    
    
    
    
    
    4.3
    
    
    
    Gain on repurchase of long-term debt
    
    
    
    
    
    
    (93.1
    )
    
    
    93.1
    
    
    
    (100.0
    )%Interest on long-term debt
    
    
    
    
    
    
    35.7
    
    
    
    (35.7
    )
    
    
    (100.0
    )%Loss (gain) on disposals
    
    
    
    
    
    
    1.3
    
    
    
    (1.3
    )
    
    
    (100.0
    )%Future income taxes
    
    
    
    
    
    
    (2.4
    )
    
    
    2.4
    
    
    
    (100.0
    )%Cash flow from operating activities
before change in non-working capital
    
    
    41.2
    
    
    
    (45.9
    )
    
    
    87.1
    
    
    
    (189.8
    )%Change in non-cash working capital
    
    
    (7.5
    )
    
    
    52.0
    
    
    
    (59.5
    )
    
    
    (114.4
    )%Cash flow from operating activities
    
    
    33.7
    
    
    
    6.1
    
    
    
    27.6
    
    
    
    452.5
    %Change in short-term investments
    
    
    (2.7
    )
    
    
    229.5
    
    
    
    (232.2
    )
    
    
    (101.2
    )%Acquisition of capital assets
    
    
    (44.1
    )
    
    
    (78.4
    )
    
    
    34.3
    
    
    
    (43.8
    )%Increase in deferred costs
    
    
    (1.0
    )
    
    
    (2.6
    )
    
    
    1.6
    
    
    
    (61.5
    )%Acquisitions
    
    
    (19.7
    )
    
    
    (1.0
    )
    
    
    (18.7
    )
    
    
    1870.0
    %Net proceeds from disposal of capital assets
    
    
    7.8
    
    
    
    6.7
    
    
    
    1.1
    
    
    
    16.4
    %Proceeds from sale of accounts receivable
    
    
    10.0
    
    
    
    
    
    
    
    10.0
    
    
    
    Cash flow from investing activities
    
    
    (49.7
    )
    
    
    154.2
    
    
    
    (203.9
    )
    
    
    (132.2
    )%Change in ROW liability
    
    
    (2.2
    )
    
    
    (0.2
    )
    
    
    (2.0
    )
    
    
    1000.0
    %Repurchase of long-term debt
    
    
    
    
    
    
    (29.7
    )
    
    
    29.7
    
    
    
    (100.0
    )%Issuance of Common Shares
    
    
    40.6
    
    
    
    
    
    
    
    40.6
    
    
    
    0.0
    %Cash flow from financing activities
    
    
    38.4
    
    
    
    (29.9
    )
    
    
    68.3
    
    
    
    (228.4
    )%Net increase (decrease) in cash and
cash equivalents
    
    
    22.4
    
    
    
    130.4
    
    
    
    (108.0
    )
    
    
    (82.8
    )%
 Operating Activities Operating activities before changes in non-cash working capital provided $41.2
million of cash in 2003 compared with a use of $45.9 million of cash in 2002.
The $87.1 million improvement reflected better operating results. Non-cash
working capital changes consumed $7.5 million of cash due primarily to a
decline in accounts payable, offset by an increase in other accrued
liabilities. Investing Activities Investment activities in 2003 used $49.7 million of cash compared with proceeds
of $154.2 million in 2002. In 2003, $44.1 million was spent on capital assets
to improve existing systems, accommodate new products and enhance cost
efficiency, $19.7 million was spent on acquisitions. A further $3.7 million was
used in changes in short-term investments and deferred costs. The expenditures
were offset by
$10.0 million in proceeds from the sale of receivables and $7.8 million in
proceeds from the sale of capital assets. Call-Net Enterprises Inc.
    
    22/31
    
    MD&A 2003




---



##### 



In 2003, Call-Net spent approximately 5.5 percent of revenue on capital
assets. This is significantly less than the 15 to 17 per cent invested by the
ILECs and reflects Call-Nets unique position in the industry. Through its
agreement with Sprint, Call-Net is able to acquire next-generation products at
reduced cost, relieving the Company of the necessity of incurring its own
product development costs. In addition, significant components of Call-Nets
network are leased from other carriers. Call-Net is required to make regular
lease payments, but is not compelled to incur capital costs to maintain these
leased components. Call-Net expects that it will continue to be able to
operate effectively, while spending substantially less in capital than its
competitors, when measured as a percentage of sales. Financing Activities Financing activities provided $38.4 million of cash compared with a use of
$29.9 million in 2002. During the year, Call-Net completed a share offering,
selling a total of 11.5 million class B common shares (including an
over-allotment option) at $3.75 per share to a group of underwriters for net
proceeds after commissions and transaction costs of $40.6 million. Call-Net
gained a number of new Canadian institutional and retail shareholders as a
result of this deal and added significantly to its liquidity. The Company also
incurred $2.2 million in costs in 2003 associated with the repayment of a
right-of-way liability. In 2002 the Company repurchased U.S.$77.5 million face amount of senior secured
notes at a cost of $29.7 million. Call-Net continues to evaluate the most
effective use of capital and may make market purchases of senior secured notes
in the future, depending on market opportunities, capital requirements and
liquidity needs. Free Cash Flow In mid-2002, Call-Net committed to becoming cash flow self-sufficient, a goal
it reached in the fourth quarter of 2002. Maintaining positive free cash flow
remained a priority in 2003. Cash was used first to pay interest on debt,
second for asset
maintenance and third to grow the business. In 2003, the Company generated
$16.9 million in free cash flow. Call-Net Enterprises Inc.
    
    23/31
    
    MD&A 2003




---



##### 



Free Cash Flow 2002
    
    2003($ Millions)
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalEBITDA
    
    $
    30.6
    
    
    $
    24.9
    
    
    $
    24.1
    
    
    $
    23.4
    
    
    $
    25.4
    
    
    $
    97.8Interest expense on long-term debt
    
    
    (12.8
    )
    
    
    (12.1
    )
    
    
    (11.1
    )
    
    
    (11.1
    )
    
    
    (8.9
    )
    
    
    (43.2
    )Cash income taxes paid
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (1.4
    )Net capital expenditures
    
    
    (9.4
    )
    
    
    (5.4
    )
    
    
    (4.8
    )
    
    
    (12.8
    )
    
    
    (13.3
    )
    
    
    (36.3
    )Free cash flow
    
    
    7.9
    
    
    
    6.9
    
    
    
    7.7
    
    
    
    (0.7
    )
    
    
    3.0
    
    
    
    16.9Interest income and other expense
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    (2.3
    )
    
    
    (2.6
    )
    
    
    (4.4
    )Operating component of foreign exchange gain (loss)
    
    
    0.4
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    (1.8
    )
    
    
    (4.6
    )
    
    
    Other taxes paid
    
    
    (1.2
    )
    
    
    0.1
    
    
    
    (0.7
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.6
    )Change in non-cash working capital and other charges
    
    
    (0.7
    )
    
    
    (8.4
    )
    
    
    (3.6
    )
    
    
    (1.7
    )
    
    
    (0.8
    )
    
    
    (14.5
    )Change in deferred costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    (1.0
    )Acquisitions
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (20.0
    )
    
    
    0.3
    
    
    
    (19.7
    )Proceeds from sale of accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    10.0Change in RoW liability
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.3
    )
    
    
    (2.2
    )Equity issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35.2
    
    
    
    5.4
    
    
    
    40.6Change in cash & short term investments
    
    
    6.5
    
    
    
    1.3
    
    
    
    6.4
    
    
    
    17.9
    
    
    
    (0.5
    )
    
    
    25.1
 Liquidity and Capital Resources Call-Net increased its liquidity position in 2003. Cash, cash equivalents and
short-term investments increased by $25.1 million and the Company established
an accounts receivable securitization with availability up to $55.0 million, of
which $10.0 million was realized in 2003. Cash Reconciliation Cash and Short-Term Investments
    
    ($ Millions)Cash & short-term investments December 31, 2002
    
    $
    125.0Free cash flow
    
    
    16.9Interest income and other expense
    
    
    (4.4
    )Change in non-cash working capital and other charges
    
    
    (14.5
    )Proceeds from equity issue
    
    
    40.6Proceeds from sale of accounts receivable
    
    
    10.0Acquisition of eForce
    
    
    (19.7
    )Net, other items
    
    
    (3.8
    )Cash and short-term investments, December 31, 2003
    
    $
    150.1
 Call-Net Enterprises Inc.
    
    24/31
    
    MD&A 2003




---



##### 



Cash, cash equivalents and short-term investments are generally invested in
liquid Canadian dollar denominated securities with maturities no greater than
one year and having one of the two highest ratings by either the Standard and
Poors Rating Group or Moodys Investors Service, Inc. Under the five-year accounts receivable securitization program created in 2003,
Sprint Canada can sell an undivided co-ownership interest in certain trade
receivables to a securitization trust. The program affects some line items on
the Companys balance sheet, income statement and cash flow statement. On the balance sheet, the Company no longer recognizes the trade receivables
sold under the program as accounts receivable and instead recognizes the fair
value of the assets received (the retained interest) and liabilities incurred
(such as servicing liability) in the transaction. Retained interests are
initially recorded at their allocated carrying amount. At each reporting date,
the Company estimates the fair value of its retained interest based on expected
cash flows using managements best estimates of bad debt, credit and dilution
losses. Any change or impairment in the value of the retained interest is
recorded in the Interest and other income (expense) category. At December 31,
2003, the amount of accounts receivable that have been included as Retained
interest in other current assets was $41.2 million. On the income statement, the portion of trade receivables sold includes the bad
debt associated with those receivables; consequently the bad debt expense
related to the Companys retained interest is not included in operating
expenses. Instead, any change or impairment in the value of the retained
interest, including the effect of bad debt, credit and dilution losses is
recorded in Interest and other income (expense). Any fees or servicing costs
are also recorded in Interest and other income (expense). As a consequence of
the accounts receivable securitization, bad debt expense dropped by $2.2
million in the second half of 2003. This was offset by a corresponding increase
in the interest and other income (expense). The total loss on sale of
receivables of $3.9 million includes this adjustment to the retained interest
valuation as well as fees and servicing losses. Call-Net Enterprises Inc.
    
    25/31
    
    MD&A 2003




---



##### 



On the cash flow statement, the amount of cash advanced to the Company for
sales under the program is reflected as a source of cash under Investment
activities, in the line item entitled Proceeds on sale of accounts
receivable. In 2003, this amounted to $10.0 million. The remaining changes in
the balance sheet items such as Accounts receivable and Other current
assets (which includes Retained interests) flow through Cash provided by
operating activities  more specifically the Net change in non-cash working
capital. The net impact of the securitization on the cash provided by
operating activities in 2003 was a use of cash of $1.6 million. This negative
impact on cash from operating activities includes one-time and monthly fees of
$1.4 million and the classification of the proceeds of $10.0 million as
proceeds from the sale of receivables assets as an investment rather than an
operating activity. Management believes that overall liquid resources at December 31, 2003,
together with projected cash flow from operations, are sufficient to finance
its current business plan. At December 31, 2003, Call-Net had shareholders equity of $254.4 million,
$387.1 million of long-term debt outstanding, in the form of 10.625 per cent
senior secured notes, and a $37.0 million right-of-way liability. The Companys
net debt to net capitalization ratio declined to 51.9 per cent from 60.9 per
cent a year earlier. Call-Net has no bank debt (other than cash collateralized
letters of credit of approximately $0.4 million). Call-Net has no financial
covenants relating to its senior secured notes and is not required to repay
them until December 31, 2008. Financial Position At December 31, 2003, Call-Net had current assets of $241.7 million and current
liabilities of $159.1 million. Net working capital improved to $82.6 million
from $59.3 million at December 31, 2002. Total current assets at December 31,
2003 increased by $23.0 million from the balance at December 31, 2002 due to a
$25.1 million increase in cash and short-term investments offset by a $2.1
million decline in accounts receivable and other current assets. Total current
liabilities, composed principally of accounts payable and accrued liabilities,
were little changed, decreasing by $0.3 million to $159.1 million at year-end.
The Companys current ratio stood at 1.5 at year-end. Accounts receivable
stood at 32 days of sales. Call-Net Enterprises Inc.
    
    26/31
    
    MD&A 2003




---



##### 



Variance fromPrior Year-End($ Millions)
    
    Dec 31, 2003
    
    Dec 31, 2002
    
    $
    
    %Cash and cash equivalents
    
    
    56.5
    
    
    
    34.1
    
    
    
    22.4
    
    
    
    65.7
    %Short-term investments
    
    
    93.6
    
    
    
    90.9
    
    
    
    2.7
    
    
    
    3.0
    %Total cash and short-term investments
    
    
    150.1
    
    
    
    125.0
    
    
    
    25.1
    
    
    
    20.1
    %Accounts receivable & other current assets
    
    
    91.6
    
    
    
    93.7
    
    
    
    (2.1
    )
    
    
    (2.2
    )%Total current assets
    
    
    241.7
    
    
    
    218.7
    
    
    
    23.0
    
    
    
    10.5
    %Capital and other assets
    
    
    595.9
    
    
    
    701.1
    
    
    
    (105.2
    )
    
    
    (15.0
    )%Total assets
    
    
    837.6
    
    
    
    919.8
    
    
    
    (82.2
    )
    
    
    (8.9
    )%Current liabilities
    
    
    159.1
    
    
    
    159.4
    
    
    
    (0.3
    )
    
    
    (0.2
    )%Long-term liabilities
    
    
    424.1
    
    
    
    511.8
    
    
    
    (87.7
    )
    
    
    (17.1
    )%Shareholders equity
    
    
    254.4
    
    
    
    248.6
    
    
    
    5.8
    
    
    
    2.3
    %Total liabilities and shareholders equity
    
    
    837.6
    
    
    
    919.8
    
    
    
    (82.2
    )
    
    
    (8.9
    )%Current ratio
    
    
    1.5
    
    
    
    1.4
    
    
    
    0.1Accounts receivable(days sales outstanding)
    
    
    32
    
    
    
    34
    
    
    
    (2.0
    )Net debt to net capitalization
    
    
    52
    %
    
    
    61
    %
    
    
    
    
    
    
    (9
    )%
 Capital assets and other assets decreased $105.2 million to $595.9 million at
December 31, 2003 from the 2002 year-end. This decrease was primarily due to
the fact that Call-Nets depreciation and amortization substantially exceeded
the amount spent on capital additions. Depreciation and amortization of $156.8
million exceeded net capital and other assets additions of $51.6 million by
$105.2 million in 2003. Other assets at December 31, 2003 were comprised
principally of intangible assets including customer relationships. Other assets
declined by $20.4 million to $80.7 million at December 31, 2003 due primarily
to the $27.4 million amortization of customer relationships, offset by a $13.7
million increase in the asset related to the acquisition of eForce. Total assets at December 31, 2003 were $837.6 million compared with $919.8
million at December 31, 2002. Long-term liabilities, composed of senior secured notes and the right of way
liability, decreased by $87.7 million to $424.1 million primarily due to the
application of the more favourable U.S./Canada foreign exchange rate to the
US$299.5 million senior secured notes, which accounted for $85.9 million of the
change. Repayment of the right-of-way liability amounted to $2.2 million. Call-Net Enterprises Inc.
    
    27/31
    
    MD&A 2003




---



##### 



Outlook In 2004, Call-Net expects continued growth in its consumer and business
solutions revenue, offset somewhat by continued decline in carrier services
revenue. Top line revenue growth should be modest, up one per cent to five per
cent over 2003. In the consumer marketCall-Net will focus on attracting home phone service
customers. While the percentage growth of new lines may slow, the Company
expects to add as many home phone service customers in 2004 as it did in 2003.
Consumer revenue will also be stabilized by continued reductions in churn. A key to long-term success is the ability to economically acquire and retain
bundled home phone service customers. Call-Net will partner with other
companies to enhance acquisition economics, as it did in 2003 with Microcell,
to market wireless services bundled with the home phone. In 2004, Call-Net
expects that more than half of consumer revenue will be derived from bundled
customers, compared with 45.3 per cent in 2003. Several companies are expected to introduce local service using VoIP
technology. Call-Net will be early to market with its own VoIP offering that
will be priced competitively and offer a broader range of features and a higher
reliability than most other entrants can currently offer. The business marketwill remain highly competitive, especially in the large
corporate and mid-sized market segments. As with the consumer market, long
distance and data prices will continue to decline in 2004, offset by success in
the local market and in delivering IP Enabled Solutions. Sprint Canada Business Solutions will focus on the following key activities in
2004:  §
    
    expansion in the small and medium-sized general business markets by
offering bundled local, long distance and high-speed data services that
leverage the Companys co-locations§
    
    leverage the relationship with Sprint to grow market share with
multi-national corporations seeking a consistent North American network
and customer support services Call-Net Enterprises Inc.
    
    28/31
    
    MD&A 2003




---



##### 



§
    
    further penetration of the call centre sector with value-added
integrated voice response and advanced voice recognition applications,
producing increased toll-free traffic volumes for the Call-Net network§
    
    deployment of IP Enabled Solutionsbased on Sprint technology,
including IP/VPN and VoIP services. IP/VPN will gradually replace ATM
and frame relay networks due to the lower costs for both users and
carriers. The ability to deliver next-generation technology earlier
than competitors will allow Call-Net to help Canadian firms move
expeditiously from legacy data networks into the world of IP
networking. The wholesale or carrier marketis expected to face declines in the per unit
price of service. Call-Net is committed to maintaining a profitable carrier
service operation despite wholesale revenue declines throughout 2004. Carrier charges should decline as the result of the Companys ongoing efforts
in network optimization. Gross margin should exceed 50 per cent of revenue for
all of 2004. Much of the reduction in costs associated with lower carrier
charges will be redeployed into customer acquisition programs. As a result,
the Company expects EBITDA growth of five per cent to ten per cent over 2004. Call-Net expects to continue to be cash flow self-sufficient, generating more
in EBITDA in 2004 than it spends in interest, capital and taxes. Capital expenditures in 2004 are expected to be in the range of six per cent of
revenue, of which approximately one half will be spent on improvements and
approximately one half on growth, including the expansion of the Companys
co-location footprint from 134 to 148 centres, the installation of new local
switching equipment and the purchase of other capital equipment to support
local customer growth. Call-Net Enterprises Inc.
    
    29/31
    
    MD&A 2003




---



##### 



Critical Accounting Policies The preparation of financial statements in conformity with generally accepted
accounting principles requires management to select accounting policies and
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the period, the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities at the date of the
financial statements. The following discussion highlights the critical
accounting policies and the main areas where estimates are required. See note
2 to the 2003 annual consolidated financial statements for a more comprehensive
discussion of the Companys significant accounting policies. Revenue Recognition:Revenue from providing long distance, data and local
services are recognized based on customer usage as measured by the Companys
switches or by contractual agreement. Revenue from the sale of equipment is
recognized when goods are delivered and accepted by customers. Revenue from wireless services as a result of co-marketing Sprint Canadas home
phone service with Microcells wireless service are recognized as those
services are provided. The Company expenses equipment subsidies related to the
acquisition of new wireless service customers activation. Other sales and
marketing expenses are recognized as incurred. Accounts Receivable:The Company uses a predictive model as well as specific
assessment to determine the allowance required for doubtful accounts and to
estimate the fair value of the retained interest in securitized receivables. An
industry accepted predictive model is applied to the accounts receivable for
the consumer portion of the business. In other areas, a more detailed review
of the accounts receivable balances and specific customer circumstances is
performed at each month-end. Management experience and knowledge is used to
determine overall reserve amounts in this area. Carrier Cost Payables:In the normal course of business, there are disputes
with other carriers over the charges being billed. Call-Nets policy is to
review the disputes on a monthly basis and apply the probability of winning
disputed items to determine the amount of the reserve required. Call-Net Enterprises Inc.
    
    30/31
    
    MD&A 2003




---



##### 



Customer Relationships:Intangible assets with a definite life are assessed for
impairment when events or circumstances indicate their carrying amount may not
be recoverable. When the net carrying amount of an intangible asset with a
definite life is not recoverable, and exceeds its fair value, the asset is
written down with a charge against income in the period that such determination
is made. At December 31, 2003, management determined no major events or
circumstances had occurred during the year that would indicate impairment has
occurred. Capitalized Costs:Direct labour costs incurred to develop or construct new
assets or upgrade existing assets are capitalized. Direct and indirect overhead
costs, general and administrative costs and interest costs are not capitalized.
Direct labour costs of $10.4 million and $17.6 million were capitalized in
2003 and 2002, respectively. Provisions for Contingent Liabilities:In the ordinary course of business
activities, the Company may be contingently liable for litigation and claims
with customers, suppliers and former employees. These matters are subject to
many uncertainties, and outcomes are not predictable with assurance. The
Company maintains and updates, on a case-by-case basis, provisions for such
items that have been recorded as required. New Accounting Policies In the third quarter of 2003, Call-Net adopted a deferred share unit plan for
directors and senior management. Participants can choose to receive a portion
of their remuneration in deferred share units. On leaving the Company,
participants can redeem the units for common or class B non-voting shares at
the then current market price, or take the cash equivalent. The accrued
liability for all participants is adjusted to the market price of the Companys
shares at each balance sheet date. Call-Net Enterprises Inc.
    
    31/31
    
    MD&A 2003