##### 



Exhibit 99.2

CONSOLIDATED FINANCIAL STATEMENTS

CALL-NET ENTERPRISES INC.

DECEMBER 31, 2003

(CALL-NET LOGO)





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##### 



AUDITORS REPORT

To the Shareholders ofCall-Net Enterprises Inc.

We have audited the consolidated balance sheets of Call-Net Enterprises Inc.
as at December 31, 2003 and 2002 and the consolidated statements of operations
and deficit and cash flows for each of the periods in the three years ended
December 31, 2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003 and 2002 and the results of its operations and its cash flows for each of
the periods in the three years ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.

|                                      |  |                           
|------------------------------------- |  | --------------------------
|Toronto, Canada,                      |  |                           
|February 13, 2004 [except for note 21 |  |                           
|which is as at February 20,
2004].    |  | [signed] Ernst & Young LLP
|                                      |  | Chartered Accountants     





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##### 



Call-Net Enterprises Inc.

CONSOLIDATED BALANCE SHEETS

As at December 31
[millions of Canadian dollars]

|                                                   |                                                 |  |       |       |      |  |       |       | 
|-------------------------------------------------- | ----------------------------------------------- |  | ----- | ----- | ---- |  | ----- | ----- | 
|                                                   |                                                 |  | 2003  |       | 2002
|                                                   |                                                 |  |       |       |     
|ASSETS                                             |                                                 |  |       |       |      |  |       |      
|Cash and cash equivalents                          |                                                 |  | 56.5  |       |      |  | 34.1  |      
|Short-term investments                             |                                                 |  | 93.6  |       |      |  | 90.9  |      
|                                                   |                                                 |  |       |       |      |  |       |      
|Cash, cash equivalents and short-term investments  |                                                 |  | 150.1 |       |      |  | 125.0 |      
|Accounts receivable [note 3]                       |                                                 |  | 42.7  |       |      |  | 89.3  |      
|Other current assets [note 4]                      |                                                 |  | 48.9  |       |      |  | 4.4   |      
|                                                   |                                                 |  |       |       |      |  |       |      
|Total current assets                               |                                                 |  | 241.7 |       |      |  | 218.7 |      
|                                                   |                                                 |  |       |       |      |  |       |      
|Capital assets [note 5]                            |                                                 |  | 515.2 |       |      |  | 600.0 |      
|Other assets [note 6]                              |                                                 |  | 80.7  |       |      |  | 101.1 |      
|                                                   |                                                 |  |       |       |      |  |       |      
|Total assets                                       |                                                 |  | 837.6 |       |      |  | 919.8 |      
|                                                   |                                                 |  |       |       |      |  |       |      
|LIABILITIES AND SHAREHOLDERS EQUITY               |                                                 |  |       |       |      |  |       |      
|Accounts payable and accrued liabilities[note 7]   |                                                 |  | 159.1 |       |      |  | 159.4 |      
|Long-term liabilities[note 8]                      |                                                 |  | 424.1 |       |      |  | 511.8 |      
|Commitments and contingencies [notes 8, 11 and 12] |                                                 |  |       |       |      |  |       |      
|Shareholders equity                               |                                                 |  |       |       |      |  |       |      
|Capital stock [note 9]                             |                                                 |  |       |       |      |  |       |      
|                                                   | Common Shares, unlimited authorized             |  |       | 49.8  |      |  |       | 50.3  | 
|                                                   | Class B Non-Voting Shares, unlimited authorized |  |       | 297.6 |      |  |       | 256.0 | 
|                                                   | Preferred Shares, unlimited authorized          |  |       |      |      |  |       |      | 
|Deficit                                            |                                                 |  | (93.0 | )     |      |  | (57.7 | )    
|                                                   |                                                 |  |       |       |      |  |       |      
|Total shareholders equity                         |                                                 |  | 254.4 |       |      |  | 248.6 |      
|                                                   |                                                 |  |       |       |      |  |       |      
|Total liabilities and shareholders equity         |                                                 |  | 837.6 |       |      |  | 919.8 |      
|                                                   |                                                 |  |       |       |      |  |       |      

See accompanying notes

On behalf of the Board:

|                          |  |                         
|------------------------- |  | ------------------------
|Lawrence G. Tapp
Chairman |  | David A. Rattee
Director





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##### 



Call-Net Enterprises Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

Years ended December 31
[millions of Canadian dollars, except per share amounts]

|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|------------------------------------------------------ |  | ---- | ----- | ---- |  | -------------- | ------ | ------ |  | -------------------- | -------- | - |  |  | -------- | -
|                                                       |  |      |       |      |  |                |        |        |  | Pre-recapitalization
|                                                       |  |      |       |      |  |                |        |        |  |                     
|                                                       |  |      |       |      |  | Nine Months    |        | Three  |  |                      |          |  
|                                                       |  |      |       |      |  | Ended          |        | Months |  |                      |          |  
|                                                       |  |      |       |      |  | Dec 31,        |        | Ended  |  |                      |          |  
|                                                       |  | 2003 |       | 2002 |  | March 31, 2002 |        | 2001  
|                                                       |  |      |       |      |  |                |        |       
|Revenue                                                |  |      | 805.3 |      |  |                | 598.9  |        |  |                      | 201.8    |   |  |  | 928.4    |  
|Carrier charges                                        |  |      | 409.9 |      |  |                | 335.7  |        |  |                      | 116.8    |   |  |  | 508.9    |  
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Gross profit                                           |  |      | 395.4 |      |  |                | 263.2  |        |  |                      | 85.0     |   |  |  | 419.5    |  
|Operating costs                                        |  |      | 297.6 |      |  |                | 227.3  |        |  |                      | 73.1     |   |  |  | 284.7    |  
|Restructuring and other charges [note 15]              |  |      | 7.0   |      |  |                | 30.5   |        |  |                      |         |   |  |  | 1,109.7  |  
|Depreciation and amortization [notes 5 and 6]          |  |      | 156.8 |      |  |                | 120.3  |        |  |                      | 41.8     |   |  |  | 213.1    |  
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Operating loss                                         |  |      | (66.0 | )    |  |                | (114.9 | )      |  |                      | (29.9    | ) |  |  | (1,188.0 | )
|Net gain on sale of capital assets and rights [note 5] |  |      |      |      |  |                | 9.4    |        |  |                      |         |   |  |  | 6.1      |  
|Gain on repurchase of long-term debt [note 8(a)]       |  |      |      |      |  |                | 93.1   |        |  |                      |         |   |  |  |         |  
|Interest on long-term debt                             |  |      | (43.2 | )    |  |                | (43.9  | )      |  |                      | (60.3    | ) |  |  | (226.7   | )
|Interest and other income (expense)                    |  |      | (5.7  | )    |  |                | (2.9   | )      |  |                      | (0.8     | ) |  |  | 15.2     |  
|Foreign exchange gain (loss)                           |  |      | 85.9  |      |  |                | 4.1    |        |  |                      | (1.8     | ) |  |  | (139.2   | )
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Loss before taxes                                      |  |      | (29.0 | )    |  |                | (55.1  | )      |  |                      | (92.8    | ) |  |  | (1,532.6 | )
|Income tax benefit (expense) [note 10]                 |  |      | (6.3  | )    |  |                | (2.6   | )      |  |                      | 1.0      |   |  |  | 7.9      |  
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Net loss for the period                                |  |      | (35.3 | )    |  |                | (57.7  | )      |  |                      | (91.8    | ) |  |  | (1,524.7 | )
|Deficit, beginning of period                           |  |      | (57.7 | )    |  |                |       |        |  |                      | (2,759.4 | ) |  |  | (1,234.7 | )
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Deficit, end of period                                 |  |      | (93.0 | )    |  |                | (57.7  | )      |  |                      | (2,851.2 | ) |  |  | (2,759.4 | )
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  
|Basic earnings (loss) per share[note 16]               |  |      | (1.28 | )    |  |                | (2.42  | )      |  |                      | (20.26   | ) |  |  | (336.95  | )
|Fully diluted earnings (loss) per share[note 16]       |  |      | (1.28 | )    |  |                | (2.42  | )      |  |                      | (20.26   | ) |  |  | (336.95  | )
|                                                       |  |      |       |      |  |                |        |        |  |                      |          |   |  |  |          |  

See accompanying notes





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##### 



Call-Net Enterprises Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31
[millions of Canadian dollars]

|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |         |  
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------- |  | ----- | ----- | ---- |  | ----------------- | ----- | ------------------ |  | -------------------- | ---- | - |  | -------- | ------- | -
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  | Pre-recapitalization
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                     
|                                                                                 |                                                                   |  |       |       |      |  | Nine Months Ended |       | Three Months Ended |  |                      |      |  
|                                                                                 |                                                                   |  |       |       |      |  | Dec 31,           |       | March 31,          |  |                      |      |  
|                                                                                 |                                                                   |  | 2003  |       | 2002 |  | 2002              |       | 2001              
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                   
|OPERATING ACTIVITIES                                                             |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Net loss for the period                                                          |                                                                   |  | (35.3 | )     |      |  | (57.7             | )     |                    |  | (91.8                | )    |   |  | (1,524.7 | )      
|Add (deduct) operating items not requiring cash:                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|                                                                                 | Depreciation and amortization                                     |  |       | 156.8 |      |  |                   | 120.3 |                    |  |                      | 41.8 |   |  |          | 213.1   |  
|                                                                                 | Interest and other (income) expense                               |  |       | 1.3   |      |  |                   | 3.2   |                    |  |                      | (0.2 | ) |  |          | (1.9    | )
|                                                                                 | Foreign exchange (gain) loss on long-term debt                    |  |       | (85.9 | )    |  |                   | (4.8  | )                  |  |                      | 1.8  |   |  |          | 137.6   |  
|                                                                                 | Income taxes [note 10]                                            |  |       | 4.3   |      |  |                   |      |                    |  |                      |     |   |  |          |        |  
|                                                                                 | Gain on repurchase of long-term debt [note 8(a)]                  |  |       |      |      |  |                   | (93.1 | )                  |  |                      |     |   |  |          |        |  
|                                                                                 | Net losses on disposals and writedowns of capital assets [note 5] |  |       |      |      |  |                   | 1.3   |                    |  |                      |     |   |  |          | 21.9    |  
|                                                                                 | Interest on long-term debt                                        |  |       |      |      |  |                   |      |                    |  |                      | 35.7 |   |  |          | 130.8   |  
|                                                                                 | Writedown of goodwill [note 15]                                   |  |       |      |      |  |                   |      |                    |  |                      |     |   |  |          | 1,071.1 |  
|                                                                                 | Future income taxes                                               |  |       |      |      |  |                   |      |                    |  |                      | (2.4 | ) |  |          | (12.0   | )
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Cash provided by (used in) operations before changes in non-cash
working capital |                                                                   |  | 41.2  |       |      |  | (30.8             | )     |                    |  | (15.1                | )    |   |  | 35.9     |        
|Net change in non-cash working capital balances related
to operations [note 17]  |                                                                   |  | (7.5  | )     |      |  | 60.3              |       |                    |  | (8.3                 | )    |   |  | (63.1    | )      
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Cash provided by (used in) operating activities                                  |                                                                   |  | 33.7  |       |      |  | 29.5              |       |                    |  | (23.4                | )    |   |  | (27.2    | )      
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|INVESTING ACTIVITIES                                                             |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|(Increase) decrease in short-term investments                                    |                                                                   |  | (2.7  | )     |      |  | 12.3              |       |                    |  | 217.2                |      |   |  | (201.2   | )      
|Acquisition of capital assets [note 17]                                          |                                                                   |  | (44.1 | )     |      |  | (62.4             | )     |                    |  | (16.0                | )    |   |  | (101.5   | )      
|Net proceeds on disposal of capital assets and rights [note 5]                   |                                                                   |  | 7.8   |       |      |  | 6.7               |       |                    |  |                     |      |   |  | 37.9     |        
|Acquisitions [note 13]                                                           |                                                                   |  | (19.7 | )     |      |  | (1.0              | )     |                    |  |                     |      |   |  | 1.9      |        
|Increase in deferred costs                                                       |                                                                   |  | (1.0  | )     |      |  |                  |       |                    |  | (2.6                 | )    |   |  |         |        
|Proceeds from sale of accounts receivable                                        |                                                                   |  | 10.0  |       |      |  |                  |       |                    |  |                     |      |   |  |         |        
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Cash provided by (used in) investing activities                                  |                                                                   |  | (49.7 | )     |      |  | (44.4             | )     |                    |  | 198.6                |      |   |  | (262.9   | )      
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|FINANCING ACTIVITIES                                                             |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Increase (decrease) in right of way liability                                    |                                                                   |  | (2.2  | )     |      |  | (0.1              | )     |                    |  | (0.1                 | )    |   |  | 4.6      |        
|Issuance of Common Shares                                                        |                                                                   |  | 40.6  |       |      |  |                  |       |                    |  |                     |      |   |  |         |        
|Repurchase of long-term debt [note 8(a)]                                         |                                                                   |  |      |       |      |  | (29.7             | )     |                    |  |                     |      |   |  |         |        
|Termination of cross-currency swaps                                              |                                                                   |  |      |       |      |  |                  |       |                    |  |                     |      |   |  | 1.1      |        
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Cash provided by (used in) financing activities                                  |                                                                   |  | 38.4  |       |      |  | (29.8             | )     |                    |  | (0.1                 | )    |   |  | 5.7      |        
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Net increase (decrease) in cash and cash equivalents
during the period           |                                                                   |  | 22.4  |       |      |  | (44.7             | )     |                    |  | 175.1                |      |   |  | (284.4   | )      
|Cash and cash equivalents, beginning of period [note 1]                          |                                                                   |  | 34.1  |       |      |  | 78.8              |       |                    |  | 15.5                 |      |   |  | 299.9    |        
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        
|Cash and cash equivalents, end of period                                         |                                                                   |  | 56.5  |       |      |  | 34.1              |       |                    |  | 190.6                |      |   |  | 15.5     |        
|                                                                                 |                                                                   |  |       |       |      |  |                   |       |                    |  |                      |      |   |  |          |        

See accompanying notes





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

1. BASIS OF PRESENTATION

Call-Net Enterprises Inc.
[the Company], through its various subsidiaries,
including Sprint Canada Inc., Call-Net Technology Services, Inc., Call-Net
Communications Inc., Call-Net Carrier Services Inc. and AlternaCall Inc., is an
alternative provider of long distance, data, local and wireless services to
business and residential customers. The consolidated financial statements of
the Company have been prepared in accordance with Canadian generally accepted
accounting principles [Canadian GAAP]. These principles are also in
conformity in all material respects with United States generally accepted
accounting principles [U.S. GAAP] except as described in note 20.

Comparative Figures

In 2003, the Company changed the presentation of its consolidated statements of
operations and deficit to remove the use of earnings measures not prescribed by
Canadian GAAP or U.S. GAAP. Comparative figures have been reclassified to
conform to the current year financial statement presentation. This
reclassification has no effect on the Companys net income (loss), consolidated
balance sheets and consolidated statements of cash flows. The effects of the
reclassification of the consolidated statement of operations and deficit are
the elimination of the captions Earnings (loss) before interest, taxes,
depreciation and amortization and unusual items, Unusual items, and
Earnings (loss) before interest, taxes, depreciation and amortization, and
the addition of the caption Operating loss.

Comparative consolidated financial statements for periods prior to April 1,
2002 have been presented pursuant to regulatory requirements. In reviewing the
comparative consolidated financial statements, readers are reminded that they
do not reflect the effects of the financial reorganization or the application
of fresh start accounting described below.

Financial Reorganization

On April 10, 2002, the Company completed a Plan of Arrangement pursuant to
Section 192 of the Canada Business Corporations Actto surrender all of the
Companys $2.6 billion in principal amount of Senior Notes and Senior Discount
Notes in exchange for U.S. $377.0 of new 10.625% Senior Secured Notes due 2008,
U.S. $81.9 in cash, and 80% of the equity in the recapitalized company.

1





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

The Plan of Arrangement contemplated a series of steps leading to an overall
capital reorganization of the Company. These included, among other things:



|(a) |  | the amendment of the Companys authorized share capital to create three
new classes of shares: Common Shares, Class B Non-Voting Shares and
Preferred Shares, and the issuance of these Common Shares and Class B
Non-Voting Shares in exchange for the Pre-recapitalization Shares;
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | the creation and issuance of the Senior Secured Notes and the issuance of
the Common Shares and the Class B Non-Voting Shares in exchange for the
Pre-recapitalization Notes;                                                                                                       
|   
|(c) |  | the cancellation of all Pre-recapitalization Notes, Shares, Options,
Entitlements and the termination of the Pre-recapitalization Stock Option
Plan;                                                                                                                                
|   
|(d) |  | the consolidation of the Common Shares on a one for 20 basis and the
consolidation of the Class B Non-Voting Shares on a one for 20 basis;                                                                                                                                          
|   
|(e) |  | the adoption of the new Incentive
Stock Option Plan [Option Plan],
Shareholders Rights Plan [Rights Plan] and Restricted Stock Unit Plan
[RSUP];                                                                                                                             
|   
|(f) |  | the reduction and determination of the Companys stated capital in
accordance with the Plan of Arrangement.                                                                                                                                                                         

Fresh Start Accounting

Pursuant to the Plan of Arrangement, there was a substantial realignment of the
equity and non-equity interests of the Company on April 10, 2002. For
accounting purposes, the Company has used an effective date of April 1, 2002.
The Companys consolidated balance sheet as at April 1, 2002 was prepared on a
fresh start basis after giving effect to the Plan of Arrangement in accordance
with The Canadian Institute of Chartered Accountants [CICA] Section 1625,
Comprehensive Revaluation of Assets and Liabilities. Under fresh start
accounting, the Companys assets and liabilities were recorded at managements
best estimate of their fair market values and the deficit was eliminated by a
reduction of capital stock. The book values of assets and liabilities at April
1, 2002 approximated their fair values, with the exception of capital assets
and future tax liabilities. Independent third party analysis was used by
management to arrive at the fair value of capital assets. Future tax
liabilities were valued based on the temporary differences and tax losses that
are available to the Company.

2





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

The completion of the Companys capital reorganization and comprehensive
revaluation of assets and liabilities under fresh start accounting had the
following effects:

|                                                        |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|------------------------------------------------------- |  | ----------------- | -------- | -------------- |  | -------------- | -------- | ------------- |  |  | -------- | ---- |  |  | ------- | 
|                                                        |  | April 1, 2002     |          | Re-            |  | Writedowns and |          | April 1, 2002
|                                                        |  | Balance prior to  |          | capitalization |  | fresh start    |          | Balance after
|                                                        |  | re-capitalization |          | adjustments    |  | adjustments    |          | adjustments  
|                                                        |  |                   |          |                |  |                |          |              
|                                                        |  | [Restated]        |          |                |  |                |          |              
|ASSETS                                                  |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|Cash and cash equivalents                               |  |                   | 190.6    |                |  |                | (111.8   | )(1)(2)(3)    |  |  |         |      |  |  | 78.8    | 
|Short-term investments                                  |  |                   | 103.2    |                |  |                |         |               |  |  |         |      |  |  | 103.2   | 
|Accounts receivable                                     |  |                   | 110.6    |                |  |                |         |               |  |  |         |      |  |  | 110.6   | 
|Other current assets                                    |  |                   | 58.4     |                |  |                | (2.0     | )(3)          |  |  |         |      |  |  | 56.4    | 
|Capital assets                                          |  |                   | 736.2    |                |  |                |         |               |  |  | (89.7    | )(4) |  |  | 646.5   | 
|Other assets                                            |  |                   | 166.1    |                |  |                | (45.9    | )(5)          |  |  | (0.1     | )    |  |  | 120.1   | 
|                                                        |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|Total assets                                            |  |                   | 1,365.1  |                |  |                | (159.7   | )             |  |  | (89.8    | )    |  |  | 1,115.6 | 
|                                                        |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|LIABILITIES                                             |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|Accounts payable and accrued liabilities                |  |                   | 182.9    |                |  |                | (13.1    | )(6)          |  |  |         |      |  |  | 169.8   | 
|Future income tax liability                             |  |                   | 34.4     |                |  |                |         |               |  |  | (34.4    | )    |  |  |        | 
|Long-term liabilities                                   |  |                   | 2,662.9  |                |  |                | (2,023.4 | )(1)          |  |  |         |      |  |  | 639.5   | 
|SHAREHOLDERS EQUITY (DEFICIENCY)                       |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|Capital stock                                           |  |                   |         |                |  |                | 1,342.6  | (1)(2)(3)     |  |  | (1,036.3 | )    |  |  | 306.3   | 
|Pre-recapitalization capital stock                      |  |                   | 1,336.1  |                |  |                | (1,336.1 | )(1)          |  |  |         |      |  |  |        | 
|Deficit                                                 |  |                   | (2,851.2 | )              |  |                | 1,870.3  | (7)           |  |  | 980.9    |      |  |  |        | 
|                                                        |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 
|Total liabilities and shareholders
equity (deficiency) |  |                   | 1,365.1  |                |  |                | (159.7   | )             |  |  | (89.8    | )    |  |  | 1,115.6 | 
|                                                        |  |                   |          |                |  |                |          |               |  |  |          |      |  |  |         | 

|    |  |                                                                          
|--- |  | -------------------------------------------------------------------------
|   
|(1) |  | Under the Plan of Arrangement, the Noteholders received a combination of:



| | a. |  | U.S.$72.7 of cash on the effective date of the transaction in
addition to U.S.$9.2 paid in February 2002,
| | -- |  | ---------------------------------------------------------------------------------------------------------
|
| | b. |  | shares equal to approximately 80% of the equity of the
recapitalized Company and,                        
|
| | c. |  | U.S.$377.0 Senior Secured Notes due 2008.                                                                



|    |  | Determined in each case on a pro rata basis, with respect to each
Noteholder, by the ratio equal to the dollar value of the accreted principal
plus interest as of December 31, 2001 of the Pre-recapitalization Notes
owned by such Noteholder divided by the total Pre-recapitalization Note
value.                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Immediately after the Plan of Arrangement, Sprint Communications Company
L.P. [Sprint] invested $25.0 in exchange for 5% of the
post-recapitalization equity of the Company. Sprint also received $4.9
for the royalty payment relating to the three months ended March 31, 2002.                                               
|   
|(3) |  | Costs directly incurred to effect the recapitalization that were paid in
advance of the effective date of the transaction totaling $2.0 were
transferred to capital stock. In addition, the opening cash and cash
equivalents balance was adjusted for $16.5 of transaction costs to be paid
on the completion of the transaction.
|   
|(4) |  | Prior to the application of fresh start accounting, the Company performed
an assessment for impairment of the carrying values of its long-lived
assets. Based on this assessment, assets available                                                                                                                                

3





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]



|    |  | for sale of $78.6 were
written down to nil. The value of capital assets was further reduced by
$11.1 as part of the implementation of fresh start accounting.                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | The write-off of the unamortized balance of deferred financing costs,
trademarks, as well as technology and product rights associated with the
prior agreement with Sprint.                                              
|   
|(6) |  | Under the Plan of Arrangement, the accrued interest on all
Pre-recapitalization Notes was eliminated and interest on the Senior
Secured Notes due 2008 was accrued for the period from January 1, 2002 to
March 31, 2002.
|   
|(7) |  | The Company used unrecorded tax loss carryforward balances of
approximately $1,533 against the gain on retirement of the long-term debt.                                                                                 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New Pronouncements

Effective January 1, 2003, the Company adopted the guidelines relating to the
disclosure by a guarantor in its financial statements about obligations under
certain types of guarantees that it has issued as required by the Canadian
Institute of Chartered Accountants [CICA] Accounting Guideline No. 14,
Disclosure of Guarantees. See note 11 for full disclosure as required by
this guideline.

During 2003, the CICA made changes to Section 3870, Stock-Based Compensation
and Other Stock-Based Payments requiring equity instruments awarded to
employees be measured and expensed using the fair value method. The main
impact for the Company will be to record compensation expense relating to the
award of stock options to employees which the Company had previously chosen to
disclose (note 9). The Company will adopt these changes effective January 1,
2004 on a retroactive basis with restatement of prior periods. This change will
result in an increase to net loss of $1.7 for the year ended December 31, 2003,
an increase to the net loss of $1.2 for the nine months ended December 31,
2002, an increase to deficit of $2.9 as at December 31, 2003 and an increase to
deficit of $1.2 as at
December 31, 2002.

Effective January 1, 2004, the Company will adopt CICA Section 3063,
Impairment of Long-Lived Assets that was issued during 2003. Adopting this
section will impact the recognition, measurement and disclosure of the
impairment of long-lived assets on a prospective basis. A loss is recognized on
a long-lived asset held for use when its carrying value exceeds the
undiscounted cash flows from its use and disposition. The amount of the loss is
determined by deducting the assets fair value (based on discounted cash flows)
from its carrying value. Previously, the loss was determined by deducting the
assets net recoverable value (based on undiscounted cash flows) from its
carrying value. The Company has reviewed its policies and determined there is
no impact as a result of the Company adopting this section.

During 2003, the CICA issued Section 3110, Asset Retirement Obligations which
establishes standards for the recognition, measurement and disclosure of asset
retirement obligations and related asset retirement costs. The Company, which
will adopt this section effective January 1, 2004, is currently reviewing the
impact to the Company of this pronouncement.

During 2003, the CICA issued Accounting Guideline No. 15, Consolidation of
Variable Interest Entities (AcG-15). AcG-15 sets out criteria for
identifying variable interest entities and criteria for determining

4





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

what
entity, if any, should consolidate them. The Company will adopt the disclosure
requirements of AcG-15 effective January 1, 2004 and is currently reviewing the
impact of the guideline.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The Companys interest in its joint venture,
NorthPoint Canada Enterprises Inc. (subsequently amalgamated and changed its
name to 3989828 Canada Inc.), was accounted for by the proportionate
consolidation method prior to becoming a wholly-owned subsidiary on January 10,
2001 [note 13]. All significant intercompany balances and transactions have
been eliminated on consolidation.

Short-term Investments

Short-term investments are recorded at the lower of cost and market value.
Short-term investments include investments with original maturities of 90 days
or greater. Investments with maturities less than 90 days are classified as
cash and cash equivalents.

Sale of Receivables

Transfers of receivables in securitization transactions are recognized as sales
when the Company is deemed to have surrendered control over the transferred
receivables and consideration other than for its retained interest in the
transferred receivables has been received. When the Company sells its
receivables, it derecognizes all receivables sold, recognizes at fair value the
assets received and liabilities incurred, and records the gain or loss on sale
in Interest and other income (expense). Such gain or loss depends in part on
the allocation of the previous carrying amount of the receivables transferred
which is allocated between the receivables sold and the Companys retained
interest in the receivables transferred based on their relative fair market
value at the date of transfer. The Company estimates the fair value of its
retained interest based on the expected cash flows to be realized from the
retained interest using managements best estimates of the credit losses.
Retained interests are initially recorded at their allocated carrying amount.
Any subsequent impairment in the value of the retained interest, other than a
temporary decline, is recorded as a reduction to income.

Capital Assets

Capital assets are recorded at cost. Depreciation on all assets commences when
the assets are put into service. Depreciation and amortization are being
provided based on the estimated useful lives of the assets on a straight-line
basis as follows:

|                                         |  |                  
|---------------------------------------- |  | -----------------
|Multiplex and telephone switch equipment |  | 10 years         
|Fibre optic cable                        |  | 20 years         
|Computer equipment and software          |  | 3 years          
|Buildings                                |  | 15 to 40 years   
|Leasehold improvements                   |  | term of the lease
|Furniture and fixtures                   |  | 5 years          

Fibre optic cable acquired or sold under an indefeasible right of use [IRU]
agreement is included in capital assets. Any gain or loss resulting from a sale
under an IRU agreement is recorded as a gain or loss on sale of capital assets.

Long-term Investments

5





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Long-term investments are recorded at cost.A decline in the value of an
investment that is considered to be an other than temporary impairment in value
is charged against income in the period that such determination is made.

Other Assets

Intangible Assets

Technology and product rights, customer relationships, trademarks and other
intangible assets are recorded at cost.

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.

Amortization of intangible assets is provided on a straight-line basis as
follows:

|                              |  |                      
|----------------------------- |  | ---------------------
|Financing costs               |  | term of the financing
|Customer relationships        |  | 3 to 10 years        
|Technology and product rights |  | 10 years             
|Trademarks                    |  | 10 years             

Revenue Recognition

Substantially all of the Companys revenues are derived from long distance,
data, local and wireless telecommunications services. Revenues from these
services are recognized based on either customer usage as measured by the
Companys switches or by contractual agreement when provided.

Revenues from the sale of goods are recognized when goods are delivered and
accepted by customers.

Revenues from wireless communications services are recognized as the services
are provided. The Company expenses equipment subsidies related to the
acquisition of new wireless service customers upon activation. Other sales and
marketing expenses are recognized as incurred.

Stock-based Compensation Plans

The Company has three stock-based compensation plans [note 9]. Under the
Option Plan no compensation expense is recognized when stock options with no
cash settlement features are issued to employees or directors. Direct awards
of stock to employees and stock options awarded to non-employees are accounted
for in accordance with the fair value method of accounting for stock-based
compensation. Any consideration paid by employees, directors or non-employees
on exercise of stock
options is credited to capital stock. Under the RSUP, the Company recognizes
compensation expense based on the current market value of the underlying
shares. Under the Deferred Share Unit Plan [DSUP], compensation expense is
recognized in the amount of the participants remuneration as their services
are provided. The related accrued liability is adjusted to the market price of
the underlying shares as applicable at each balance sheet date.

Translation of Foreign Currencies

6





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Foreign currency transactions entered into by the Company and the accounts of
its foreign subsidiaries are translated into Canadian dollars using the
temporal method. Under this method, monetary assets and liabilities in foreign
currencies are translated into Canadian dollars at the year-end rate of
exchange and any gains or losses are reflected in income. Capital and other
assets are translated at rates prevailing at the time of the transaction.
Revenues and expenses are translated into Canadian dollars at the rate of
exchange prevailing at the time of the transaction, except for depreciation and
amortization, which are translated at exchange rates prevailing when the
related assets were acquired. Long-term debt denominated in foreign currencies
is translated into Canadian dollars at the year-end rate of exchange. Exchange
gains or losses on translating this long-term debt are reflected in income.

Derivative Financial Instruments

In the past, the Company entered into cross-currency swap agreements to manage
risks associated with its U.S. dollar denominated Senior Discount Notes and
Senior Notes. The net receipt or payment under these agreements was recorded
on an accrual basis as an adjustment to interest expense. The costs associated
with entering into the cross-currency swaps were amortized over the term of the
loan on a straight-line basis. When such agreements designated as hedges were
terminated, the resulting gain or loss was recognized in net income in the year
of termination. To the extent the Company enters into derivative contracts,
which do not qualify for hedge accounting, such derivative contracts are
recorded at fair value and are marked to market.

The Company does not enter into financial instruments for trading or
speculative purposes.

Income Taxes

Income taxes are accounted for using the liability method of tax allocation
accounting. Temporary differences arising from the difference between the tax
basis of an asset or liability and its carrying amount on the balance sheet are
used to calculate future income tax liabilities or assets. Future income tax
liabilities or assets are calculated using substantively enacted tax rates
anticipated to apply in the periods that the temporary differences are expected
to reverse. The effect of a change in income tax rates on future income tax
liabilities or assets is recognized in income in the period that the change
occurs.

Use of Estimates

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

3. ACCOUNTS RECEIVABLE

|                                |  |      |      |      |  |  |       |  
|------------------------------- |  | ---- | ---- | ---- |  |  | ----- | -
|                                |  | 2003 |      | 2002
|                                |  |      |      |     
|Trade receivables               |  |      | 46.5 |      |  |  | 98.9  |  
|Other                           |  |      | 2.4  |      |  |  | 4.1   |  
|Allowance for doubtful accounts |  |      | (6.2 | )    |  |  | (13.7 | )
|                                |  |      |      |      |  |  |       |  
|                                |  |      | 42.7 |      |  |  | 89.3  |  
|                                |  |      |      |      |  |  |       |  

7





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

In 2003, the Company entered into a five-year accounts receivable
securitization program whereby the Company will sell on an on-going basis, an
undivided co-ownership interest in certain of its trade receivables to a
securitization trust (the Trust) to a maximum of $55.0, of which $10.0 was
utilized as at December 31, 2003. The Company will remain exposed to certain
risks of default on the amount of the receivables under securitization. The
Company will retain servicing responsibilities, and will have a retained
interest in the securitized receivables and rights to future excess cash flows
generated by the Trust. The sales will be on a fully-serviced basis and the
Company will not receive any fees for its on-going servicing responsibilities.
The Trust and its investors have no recourse on the Companys other assets for
failure of debtors to pay when due, other than the retained interest of the
Trust.

During the year ended December 31, 2003, the Company recognized a loss of $3.6
(2002  nil) on the securitization of receivables, and a loss on servicing of
$0.3 (2002  nil). In 2003, the Company measured the loss on securitization by
applying the same methodology used to estimate the allowance for doubtful
accounts. The result is a provision for anticipated credit losses of
approximately 2.7% to 2.9%. The sensitivity of the current fair value of the
retained interest to a 10 to 20 per cent adverse change in this assumption is
not material.

Cash flows from the securitization for the year are as follows:

|                                                                              |  |      |       | 
|----------------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                              |  | 2003
|                                                                              |  |     
|Proceeds from new securitizations during the year                             |  |      | 10.0  | 
|Proceeds from collections reinvested during the year                          |  |      | 85.8  | 
|Proceeds from collections pertaining to the retained interest during the year |  |      | 162.2 | 

4. OTHER CURRENT ASSETS

|                                             |  |      |      |      |  |  |     | 
|-------------------------------------------- |  | ---- | ---- | ---- |  |  | --- | 
|                                             |  | 2003 |      | 2002
|                                             |  |      |      |     
|Retained interest in securitized receivables |  |      | 41.2 |      |  |  |    | 
|Other                                        |  |      | 7.7  |      |  |  | 4.4 | 
|                                             |  |      |      |      |  |  |     | 
|                                             |  |      | 48.9 |      |  |  | 4.4 | 
|                                             |  |      |      |      |  |  |     | 

8





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

5. CAPITAL ASSETS

|                                         |  |      |       |              |  |                |       |      |  |              |       |                |  |  |       |                  |  |  |       |  |  |  |       | 
|---------------------------------------- |  | ---- | ----- | ------------ |  | -------------- | ----- | ---- |  | ------------ | ----- | -------------- |  |  | ----- | ---------------- |  |  | ----- |  |  |  | ----- | 
|                                         |  | 2003 |       | 2002        
|                                         |  |      |       |             
|                                         |  |      |       |              |  | Accumulated    |       |      |  |              |       |                |  |  |       |                  |  |  |       |  |  | 
|                                         |  |      |       |              |  | Depreciation   |       |      |  |              |       |                |  |  |       | Accumulated      |  |  |       | 
|                                         |  |      |       |              |  | and            |       |      |  |              |       |                |  |  |       | Depreciation and |  |  |       | 
|                                         |  | Cost |       | Amortization |  | Net Book Value |       | Cost |  | Amortization |       | Net Book Value
|                                         |  |      |       |              |  |                |       |      |  |              |       |               
|Multiplex and telephone switch
equipment |  |      | 467.4 |              |  |                | 128.8 |      |  |              | 338.6 |                |  |  | 452.3 |                  |  |  | 56.5  |  |  |  | 395.8 | 
|Fibre optic cable                        |  |      | 106.1 |              |  |                | 12.5  |      |  |              | 93.6  |                |  |  | 108.8 |                  |  |  | 5.5   |  |  |  | 103.3 | 
|Computer equipment and software          |  |      | 144.8 |              |  |                | 87.1  |      |  |              | 57.7  |                |  |  | 115.1 |                  |  |  | 46.8  |  |  |  | 68.3  | 
|Buildings                                |  |      | 14.1  |              |  |                | 0.7   |      |  |              | 13.4  |                |  |  | 14.6  |                  |  |  | 0.3   |  |  |  | 14.3  | 
|Leasehold improvements                   |  |      | 11.1  |              |  |                | 6.2   |      |  |              | 4.9   |                |  |  | 10.8  |                  |  |  | 1.6   |  |  |  | 9.2   | 
|Furniture and fixtures                   |  |      | 10.4  |              |  |                | 3.9   |      |  |              | 6.5   |                |  |  | 10.4  |                  |  |  | 1.9   |  |  |  | 8.5   | 
|Land                                     |  |      | 0.5   |              |  |                |      |      |  |              | 0.5   |                |  |  | 0.6   |                  |  |  |      |  |  |  | 0.6   | 
|                                         |  |      |       |              |  |                |       |      |  |              |       |                |  |  |       |                  |  |  |       |  |  |  |       | 
|                                         |  |      | 754.4 |              |  |                | 239.2 |      |  |              | 515.2 |                |  |  | 712.6 |                  |  |  | 112.6 |  |  |  | 600.0 | 
|                                         |  |      |       |              |  |                |       |      |  |              |       |                |  |  |       |                  |  |  |       |  |  |  |       | 

Details of depreciation expense are as follows:

|             |  |      |       |              |  |                   |       |                    |  |                      |      |  |  |  |       | 
|------------ |  | ---- | ----- | ------------ |  | ----------------- | ----- | ------------------ |  | -------------------- | ---- |  |  |  | ----- | 
|             |  |      |       |              |  |                   |       |                    |  | Pre-recapitalization
|             |  |      |       |              |  |                   |       |                    |  |                     
|             |  |      |       |              |  | Nine Months Ended |       | Three Months Ended |  |                      |      | 
|             |  | 2003 |       | Dec 31, 2002 |  | Mar 31, 2002      |       | 2001              
|             |  |      |       |              |  |                   |       |                   
|Depreciation |  |      | 129.4 |              |  |                   | 102.0 |                    |  |                      | 33.2 |  |  |  | 135.9 | 

Included in capital assets are assets under construction and not yet
depreciating of $18.0 (2002 - $19.9).

Included in fibre optic cable assets are right-to-use fibres under IRU
agreements with original terms extending to 20 years and net book value
totalling $3.3 (2002 - $5.8).

In 2003, the Company entered into an agreement to provide an indefeasible right
of use for fibre optic cable having a net book value of $0.5 for proceeds of
$0.8, and to provide certain maintenance services. The Company also entered
into an agreement to dispose of fibre optic cable having a net book value of
$2.3 and to provide certain maintenance services. Related expenses to complete
the agreement were $0.1 and proceeds were $3.6. The resulting gains on
disposal of $0.3 and $1.2, respectively, will be recognized ratably over the
20-year term of the service agreements.

The Company also disposed of a customer call centre and capital assets having a
book value of $0.6 and related expenses of $0.3 for proceeds of $0.9, and
equipment having a net book value of $0.3 for proceeds of $0.3, resulting in a
net gain/loss of $nil.

In 2002, the Company reached an agreement to settle several unresolved matters
relating to fibre swaps. As a result of this settlement, the Company received
cash proceeds of $4.4 and has recorded a gain of $4.9. The Company also
disposed of certain intangible rights under a licensing agreement for cash
proceeds of $2.3, and a receivable of $2.2, resulting in a gain of $4.5. The
remaining cash proceeds were received in 2003.

9





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

In 2001, the Company disposed of certain non-revenue generating switch
equipment having a book value of $4.3 for proceeds of $0.9 resulting in a loss
of $3.4. In addition, the Company realized gains of $9.4 on sales of certain
assets and settlement of certain fibre swaps.

6. OTHER ASSETS

|                              |  |      |       |              |  |             |      |          |  |              |      |       |  |             |       |          |  |  |      |  |  |  |       | 
|----------------------------- |  | ---- | ----- | ------------ |  | ----------- | ---- | -------- |  | ------------ | ---- | ----- |  | ----------- | ----- | -------- |  |  | ---- |  |  |  | ----- | 
|                              |  | 2003 |       | 2002        
|                              |  |      |       |             
|                              |  |      |       |              |  | Accumulated |      | Net Book |  |              |      |       |  | Accumulated |       | Net Book
|                              |  | Cost |       | Amortization |  | Value       |      | Cost     |  | Amortization |      | Value
|                              |  |      |       |              |  |             |      |          |  |              |      |      
|Customer relationships        |  |      | 113.8 |              |  |             | 45.7 |          |  |              | 68.1 |       |  |             | 104.4 |          |  |  | 18.3 |  |  |  | 86.1  | 
|Prepaid right of way          |  |      | 6.9   |              |  |             |     |          |  |              | 6.9  |       |  |             | 8.6   |          |  |  |     |  |  |  | 8.6   | 
|Deferred costs                |  |      | 5.3   |              |  |             |     |          |  |              | 5.3  |       |  |             | 6.0   |          |  |  |     |  |  |  | 6.0   | 
|Investment in Cybersurf Corp. |  |      | 0.4   |              |  |             |     |          |  |              | 0.4  |       |  |             | 0.4   |          |  |  |     |  |  |  | 0.4   | 
|                              |  |      |       |              |  |             |      |          |  |              |      |       |  |             |       |          |  |  |      |  |  |  |       | 
|                              |  |      | 126.4 |              |  |             | 45.7 |          |  |              | 80.7 |       |  |             | 119.4 |          |  |  | 18.3 |  |  |  | 101.1 | 
|                              |  |      |       |              |  |             |      |          |  |              |      |       |  |             |       |          |  |  |      |  |  |  |       | 

Details of amortization expense are as follows:

|             |  |      |      |              |  |                   |      |                    |  |                      |     |  |  |  |      | 
|------------ |  | ---- | ---- | ------------ |  | ----------------- | ---- | ------------------ |  | -------------------- | --- |  |  |  | ---- | 
|             |  |      |      |              |  |                   |      |                    |  | Pre-recapitalization
|             |  |      |      |              |  |                   |      |                    |  |                     
|             |  |      |      |              |  | Nine Months Ended |      | Three Months Ended |  |                      |     | 
|             |  | 2003 |      | Dec 31, 2002 |  | Mar 31, 2002      |      | 2001              
|             |  |      |      |              |  |                   |      |                   
|Amortization |  |      | 27.4 |              |  |                   | 18.3 |                    |  |                      | 8.6 |  |  |  | 77.2 | 

During 2003, the Company acquired customer relationships valued at $13.7 and
recorded a reduction of $4.3 [2002  nil] relating to the benefit of tax items
that arose prior to the application of fresh start accounting.

10





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

|                                              |  |      |       |      |  |  |       | 
|--------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                              |  | 2003 |       | 2002
|                                              |  |      |       |     
|Accrued liabilities and trade payables        |  |      | 72.3  |      |  |  | 61.1  | 
|Carrier payables                              |  |      | 49.5  |      |  |  | 68.7  | 
|Commodity, capital and income tax liabilities |  |      | 19.6  |      |  |  | 16.4  | 
|Payroll related liabilities                   |  |      | 14.8  |      |  |  | 7.4   | 
|Other                                         |  |      | 2.9   |      |  |  | 5.8   | 
|                                              |  |      |       |      |  |  |       | 
|                                              |  |      | 159.1 |      |  |  | 159.4 | 
|                                              |  |      |       |      |  |  |       | 

8. LONG-TERM LIABILITIES

|                                  |  |               |        |      |  |      |       |  |  |  |       | 
|--------------------------------- |  | ------------- | ------ | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                  |  | Interest Rate |        | 2003 |  | 2002
|                                  |  |               |        |      |  |     
|(a) Senior Secured Notes due 2008 |  |               | 10.625 | %    |  |      | 387.1 |  |  |  | 473.1 | 
|(b) Right of way liability        |  |               | 10.0   | %    |  |      | 37.0  |  |  |  | 38.7  | 
|                                  |  |               |        |      |  |      |       |  |  |  |       | 
|                                  |  |               |        |      |  |      | 424.1 |  |  |  | 511.8 | 
|                                  |  |               |        |      |  |      |       |  |  |  |       | 

(a) Senior Secured Notes due 2008

During 2002, the Company purchased for cancellation a total of U.S.$77.5 of the
outstanding U.S.$377.0 Senior Secured Notes due 2008 at market prices. The
total cost of these purchases to the Company was $29.7 resulting in a gain of
$93.1.

The Companys remaining outstanding U.S.$299.5 Senior Secured Notes mature on
December 31, 2008. The Senior Secured Notes were issued in 2002 at
approximately par value and are collateralized by substantially all of the
assets of the Company.

The Senior Secured Notes bear interest at 10.625% per annum from December 31,
2001, or from the most recent date to which interest has been paid or provided
for, payable semi-annually on June 30 and December 31 in each year, commencing
June 30, 2002. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.

The Senior Secured Notes are senior secured obligations of the Company and will
rank pari passuin right of payment to any future senior unsecured debt and
senior to the Companys future subordinated secured debt. The Senior Secured
Notes are governed by trust indentures which contain certain covenants which,
among other things, restrict the ability of the Company to incur additional
indebtedness, consummate certain sales of assets, make certain investments,
engage in sale-leaseback transactions, pay dividends or repurchase the
Companys capital stock.

On or after January 1, 2006, the Senior Secured Notes will be redeemable, at
the Companys option, in whole or in part, at any time or from time to time at
the following redemption prices, plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period commencing on
January 1, 2006 at 105.313%, January 1, 2007 at 102.657% and January 1, 2008
and thereafter at 100.000% of the principal amount.

11





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

In the event of a change of control, the Company is required to offer to
purchase all outstanding notes at a purchase price of 101% of their principal
amount plus accrued and unpaid interest to the date of purchase.

(b) Right of way liability

The right of way liability represents the net present value of payments to be
made under right of way agreements with terms ranging from 1 to 20 years. The
associated assets for the right of ways are recorded in capital assets.

The future payments for the next five years and thereafter are as follows:

|                              |  |  |       |  
|----------------------------- |  |  | ----- | -
|2004                          |  |  | 4.8   |  
|2005                          |  |  | 4.9   |  
|2006                          |  |  | 4.8   |  
|2007                          |  |  | 4.8   |  
|2008                          |  |  | 4.8   |  
|Thereafter                    |  |  | 44.1  |  
|                              |  |  |       |  
|Total future minimum payments |  |  | 68.2  |  
|Less imputed interest at 10%  |  |  | (29.9 | )
|                              |  |  |       |  
|                              |  |  | 38.3  |  
|Less current portion          |  |  | (1.3  | )
|                              |  |  |       |  
|                              |  |  | 37.0  |  
|                              |  |  |       |  

9. CAPITAL STOCK

Common Shares

The Company is authorized to issue an unlimited number of the Common Shares.
The holders of the Common Shares are entitled to one vote for each share held
at any meeting of shareholders of the Company. The Common Shares are
convertible, at the option of the Common Shareholders at any time into Class B
Non-Voting Shares on a share-for-share basis. The Common Shares may be subject
to constraints on transfer to ensure the Companys compliance with the foreign
ownership provisions of the Telecommunications Act (Canada). The Common Shares
rank pari passuwith the Class B Non-Voting Shares on a per share basis with
respect to the payment of dividends and the right to participate in a
distribution of assets of the Company on winding up, dissolution or otherwise.

Class B Non-Voting Shares

The Company is authorized to issue an unlimited number of the Class B
Non-Voting Shares. The holders of the Class B Non-Voting Shares are not
entitled to vote at any meeting of shareholders of the Company except for votes
affecting Class B Non-Voting Shares. The Class B Non-Voting Shares are
convertible, at the option of the Class B Shareholders, at any time into Common
Shares on a share-for-share basis, in certain circumstances. The Class B
Non-Voting Shares rank pari passuwith the Common Shares on a per share basis
with respect to the payment of dividends and the right to participate in a
distribution of assets of the Company on winding up, dissolution or otherwise.

12





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Preferred Shares

The Company is authorized to issue an unlimited number of the Preferred Shares,
although no Preferred Shares were issued in connection with the Plan of
Arrangement. However, as part of consideration for entering into a commercial
agreement with the Company [note 11], Sprint was issued one Preferred Share
(for a value of 1 dollar) and is the first holder of the Preferred Shares.
There were no other Preferred Shares outstanding at December 31, 2003. The
Preferred Shares are generally non-voting and have no right to dividends.
Preferred Shares entitle the holder to nominate and elect two directors of the
Company. The Preferred Shares also have a priority right over all other
classes of shares to receive a return of capital equal to 1 dollar per
Preferred Share upon the liquidation, dissolution or winding up of the Company.

|                                                                                                 |  |        |           |         |  |           |            |   |  |  |   | 
|------------------------------------------------------------------------------------------------ |  | ------ | --------- | ------- |  | --------- | ---------- | - |  |  | - | 
|Number of Shares                                                                                 |  | Common |           | Class B |  | Preferred
|                                                                                                 |  |        |           |         |  |          
|Balance, December 31, 2002                                                                       |  |        | 4,051,227 |         |  |           | 19,788,411 |   |  |  | 1 | 
|Issued during the twelve months ended December 31, 2003                                          |  |        |          |         |  |           | 11,500,000 |   |  |  |  | 
|Issued pursuant to restricted stock units                                                        |  |        | 239,499   |         |  |           |           |   |  |  |  | 
|Issued pursuant to stock options                                                                 |  |        | 883       |         |  |           |           |   |  |  |  | 
|Converted during the twelve months ended December 31, 2003, net                                  |  |        | (80,751   | )       |  |           | 80,751     |   |  |  |  | 
|Fractional shares eliminated due to conversions during the twelve
months ended December 31, 2003 |  |        | (19       | )       |  |           | (10        | ) |  |  |  | 
|                                                                                                 |  |        |           |         |  |           |            |   |  |  |   | 
|Balance, December 31, 2003                                                                       |  |        | 4,210,839 |         |  |           | 31,369,152 |   |  |  | 1 | 
|                                                                                                 |  |        |           |         |  |           |            |   |  |  |   | 

|                                                                |  |        |      |         |  |           |       |  |  |  |   | 
|--------------------------------------------------------------- |  | ------ | ---- | ------- |  | --------- | ----- |  |  |  | - | 
|Dollars                                                         |  | Common |      | Class B |  | Preferred
|                                                                |  |        |      |         |  |          
|Balance, December 31, 2002                                      |  |        | 50.3 |         |  |           | 256.0 |  |  |  |  | 
|Issued during the twelve months ended December 31, 2003         |  |        |     |         |  |           | 40.6  |  |  |  |  | 
|Issued pursuant to restricted stock units                       |  |        | 0.5  |         |  |           |      |  |  |  |  | 
|Issued pursuant to stock options                                |  |        |     |         |  |           |      |  |  |  |  | 
|Converted during the twelve months ended December 31, 2003, net |  |        | (1.0 | )       |  |           | 1.0   |  |  |  |  | 
|                                                                |  |        |      |         |  |           |       |  |  |  |   | 
|Balance, December 31, 2003                                      |  |        | 49.8 |         |  |           | 297.6 |  |  |  |  | 
|                                                                |  |        |      |         |  |           |       |  |  |  |   | 

During 2003, the Company issued 11,500,000 Class B Non-Voting shares at a price
of $3.75 per share. Net proceeds to the Company after deducting fees and
expenses was $40.6.

Stock Options

Under the Option Plan, the Company currently has reserved a total maximum of
2,261,000 Common and Class B Non-Voting Shares. Options granted under the
Option Plan will be non-assignable and will expire no more than 10 years from
their date of grant or as determined by the Board of Directors. The number of
Common Shares and Class B Non-Voting Shares reserved for issuance in the
aggregate to any one eligible person pursuant to the Option Plan shall not
exceed 5% of the aggregate outstanding Common Shares and Class B Non-Voting
Shares. All shares reserved for issuance under the Option Plan are granted
under the terms and conditions of the Plan of Arrangement. The Option Plan
permits the granting or repricing of options at a price no less than the
closing price of the applicable shares on the Toronto Stock Exchange on the
business day preceding the date on which the option is granted, or re-priced,
as the case may be. Vesting of the options occurs in three yearly installments
of 33.3% each. Vesting of those options carrying an exercise price of $8.50 is
also dependent on the stock price reaching certain performance levels.

The following is a continuity of stock options outstanding for which Common
Shares have been reserved:

13





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

|                                                      |  |                   |           |                |  |                    |      | 
|----------------------------------------------------- |  | ----------------- | --------- | -------------- |  | ------------------ | ---- | 
|                                                      |  | December 31, 2003
|                                                      |  |                  
|                                                      |  |                   |           |                |  | Weighted
 Average
|                                                      |  | Number            |           | Exercise Price
|Common Shares                                         |  | Outstanding       |           | Per Share     
|                                                      |  |                   |           |               
|Balance, December 31, 2002                            |  |                   | 926,250   |                |  |                    | 8.25 | 
|Granted during the twelve months ended Dec 31, 2003   |  |                   | 517,500   |                |  |                    | 2.42 | 
|Exercised during the twelve months ended Dec 31, 2003 |  |                   | (883      | )              |  |                    | 0.65 | 
|Cancelled during the twelve months ended Dec 31, 2003 |  |                   | (86,800   | )              |  |                    | 6.99 | 
|                                                      |  |                   |           |                |  |                    |      | 
|Balance, December 31, 2003                            |  |                   | 1,356,067 |                |  |                    | 6.11 | 
|                                                      |  |                   |           |                |  |                    |      | 
|Exercisable, December 31, 2003                        |  |                   | 9,100     |                |  |                    | 0.66 | 
|                                                      |  |                   |           |                |  |                    |      | 

The following table summarizes information about the Common Shares stock
options outstanding at
December 31, 2003:

Common Shares

|                  |      |                    |        |                     |         |                     |  |                    |      |                    |      |              |       |  |   |                    |      |  |   |  |      |  |      |  | 
|----------------- | ---- | ------------------ | ------ | ------------------- | ------- | ------------------- |  | ------------------ | ---- | ------------------ | ---- | ------------ | ----- |  | - | ------------------ | ---- |  | - |  | ---- |  | ---- |  | 
|                  |      |                    |        | Options Outstanding |         | Options Exercisable
|                  |      |                    |        |                     |         |                    
|                  |      |                    |        |                     |         |                     |  | Weighted
 Average |      |                    |      |              |       |  |   |                    |      |  |   |  |      |  |      | 
|                  |      |                    |        |                     |         |                     |  | Remaining          |      | Weighted  Average |      |              |       |  |   | Weighted  Average |      |  |   | 
|Range of Exercise |      | Number Outstanding |        | Contractual Life in |         | Exercise Price      |  | Number Exercisable |      | Exercise Price     |      |              |       | 
|Prices            |      | at Dec 31, 2003    |        | Years               |         | Per Share           |  | at Dec 31, 2003    |      | Per
Share          |      | Expiry Dates
|$0.65 to $0.80    |      |                    | 29,067 |                     |         | 5.6                 |  | $                  | 0.66 |                    |      |              | 9,100 |  |   | $                  | 0.66 |  |   |  | 2009 | 
|$                 | 1.80 |                    |        |                     | 377,500 |                     |  | 6.2                |      | $                  | 1.80 |              |       |  |  |                    |      |  |  |  |      |  | 2010 | 
|$                 | 4.35 |                    |        |                     | 108,000 |                     |  | 6.6                |      | $                  | 4.35 |              |       |  |  |                    |      |  |  |  |      |  | 2010 | 
|$                 | 5.15 |                    |        |                     | 11,800  |                     |  | 6.8                |      | $                  | 5.15 |              |       |  |  |                    |      |  |  |  |      |  | 2010 | 
|$                 | 8.50 |                    |        |                     | 829,700 |                     |  | 5.3                |      | $                  | 8.50 |              |       |  |  |                    |      |  |  |  |      |  | 2009 | 
|                  |      |                    |        |                     |         |                     |  |                    |      |                    |      |              |       |  |   |                    |      |  |   |  |      |  |      | 

During the twelve months ended December 31, 2003, there were no stock options
granted for which Class B Non-Voting Shares have been reserved. As at December
31, 2003, there were no Class B Non-Voting Shares stock options outstanding.
For stock options granted to employees, had the Company determined compensation
costs based on their fair values at grant dates of the stock options consistent
with the method prescribed by CICA Handbook Section 3870, the Companys
income/(loss) would have been reported as the pro forma amounts below:

14





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

|                                           |  |      |       |              |  |                   |       |                    |  |                      |        |   |  |  |          |  
|------------------------------------------ |  | ---- | ----- | ------------ |  | ----------------- | ----- | ------------------ |  | -------------------- | ------ | - |  |  | -------- | -
|                                           |  |      |       |              |  |                   |       |                    |  | Pre-recapitalization
|                                           |  |      |       |              |  |                   |       |                    |  |                     
|                                           |  |      |       |              |  | Nine Months Ended |       | Three Months Ended |  |                      |        |  
|                                           |  | 2003 |       | Dec 31, 2002 |  | Mar 31, 2002      |       | 2001              
|                                           |  |      |       |              |  |                   |       |                   
|Loss                                       |  |      | (35.3 | )            |  |                   | (57.7 | )                  |  |                      | (91.8  | ) |  |  | (1,524.7 | )
|Pro forma loss                             |  |      | (37.0 | )            |  |                   | (58.9 | )                  |  |                      | (91.8  | ) |  |  | (1,524.7 | )
|Pro forma basic and diluted loss per share |  |      | (1.34 | )            |  |                   | (2.47 | )                  |  |                      | (20.26 | ) |  |  | (336.95  | )

The weighted average fair value for options granted during the year ended
December 31, 2003 is $1.61 and the nine month period ended December 31, 2002 is
$5.60. The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:

|                                       |  |                  |     |                |  |            |   |   |   |  |   | 
|-------------------------------------- |  | ---------------- | --- | -------------- |  | ---------- | - | - | - |  | - | 
|                                       |  | 2003             |     | 2002           |  | 2001      
|                                       |  |                  |     |                |  |           
|Risk free interest rate                |  | 2.85% to 3.50%   |     | 3.26% to 5.47% |  |            |  |  
|Expected dividend yield                |  |                  | 0   | %              |  |            | 0 | % |   |  |  | 
|Expected volatility, Common Shares     |  | 107.6% to 108.3% |     | 64.8% to 90.7% |  |            |  |  
|Expected time until exercise, in years |  |                  | 3.0 |                |  | 3.0 to 7.0 |   |   |  | 

For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period on a
straight-line basis.

Shareholders Rights Plan

The Rights Plan was adopted to ensure that if a person or group is seeking to
acquire beneficial ownership of 15% or more of the Common Shares, or 20% of the
aggregate Shares of the Company, the shareholders and the Board of Directors
are given sufficient time to evaluate the transaction, negotiate with the
proposed acquirer, encourage competing bids to emerge, and ensure that all
alternatives to the transaction designed to maximize shareholder value have
been considered. The term of the Rights Plan is until the termination of the
Companys 2004 annual shareholders meeting. Under the Rights Plan, one right
was issued in respect of each share outstanding immediately following the
implementation of the Plan of Arrangement. In addition, one right will be
issued in respect of each new share issued thereafter. When exercisable, each
right will permit the holder to purchase shares with a market value of 200
dollars on payment of 100 dollars.

Restricted Stock Unit Plan

Restricted stock units
[RSUs] are subject to vesting provisions, which may
include, at the discretion of the Board of Directors, the achievement of
performance criteria. RSU grants are settled by the delivery of shares to the
participant or, at the participants option, the delivery of the cash
equivalent market value of the shares based on the five trading day average of
the closing price of the Common Shares on the Toronto Stock Exchange. If
shares are to be delivered, the Company will have the option to deliver shares
issued from treasury or shares purchased on the Toronto Stock Exchange by an
independent administrator. The RSUP provides that the maximum number of shares
deliverable to participants under the RSUP shall be 678,000 shares. The
maximum term for any RSU is three years. The outstanding RSUs vest in three
annual installments of 33.3% each. The resulting compensation expense recorded
for the twelve months ended December 31, 2003 is $1.6 [2002
 $0.1].

The following is a continuity of RSUs outstanding for which Common Shares have
been reserved:

15





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Restricted Stock Units

|                                            |  |                    |          |  
|------------------------------------------- |  | ------------------ | -------- | -
|                                            |  | December 31, 2003 
|                                            |  |                   
|                                            |  | Number Outstanding
|                                            |  |                   
|Balance, December 31, 2002                  |  |                    | 585,500  |  
|Settled during year ended December 31, 2003 |  |                    | (239,499 | )
|                                            |  |                    |          |  
|Balance, December 31, 2003                  |  |                    | 346,001  |  
|                                            |  |                    |          |  

Deferred Share Unit Plan

On July 29, 2003 the Company adopted a Deferred Share Unit Plan [DSUP].
Participants of the DSUP can elect to receive a portion of their annual
compensation in the form of Deferred Share Units
[DSUs]. The number of
DSUs received is calculated using the amount of compensation directed to the
plan, divided by the share price, based on the five trading day average of the
closing price of the Common Shares or Class B Non-Voting Shares as applicable
on the Toronto Stock Exchange. DSUs are redeemable upon the departure of the
participant from the Company by the delivery of Common Shares or Class B
Non-Voting Shares as applicable, equal to the number of DSUs credited to the
participant, or at the participants option, the delivery of cash equal to the
number of DSUs credited to the participants account multiplied by the five
trading day average of the closing price of the applicable shares on the
Toronto Stock Exchange on the date of termination. If shares are to be
delivered, the shares will be purchased on the Toronto Stock Exchange by an
independent administrator. The resulting additional compensation expense
recorded during the twelve months ended December 31, 2003 is negligible.

The following is a continuity of DSUPs outstanding for which Common Shares
have been reserved:

Deferred Share Units

|                                                |  |                    |        |  
|----------------------------------------------- |  | ------------------ | ------ | -
|                                                |  | December 31, 2003 
|                                                |  |                   
|                                                |  | Number Outstanding
|                                                |  |                   
|Balance, December 31, 2002                      |  |                    |       |  
|Issued during the year ended December 31, 2003  |  |                    | 8,892  |  
|Settled during the year ended December 31, 2003 |  |                    | (1,694 | )
|                                                |  |                    |        |  
|Balance, December 31, 2003                      |  |                    | 7,198  |  
|                                                |  |                    |        |  

Pre-recapitalization Common Shares

The Company was authorized to issue an unlimited number of Common Shares. The
holders of Common Shares were entitled to one vote for each share held at any
meeting of shareholders of the Company. The Common Shares were subject to
constraints on transfer to ensure the Companys compliance with the foreign
ownership provisions of the Telecommunications Act (Canada).

16





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Pre-recapitalization Preferred Shares

The Company was authorized to issue in series an unlimited number of Preferred
Shares of which none were outstanding at December 31, 2002 and 2001. The
Board of Directors determined the rights and attributes when each series was
issued.

Pre-recapitalization Class B Non-Voting Shares

The Class B Non-Voting Shares were created in October 1993 when each Common
Share then outstanding was converted into one Common Share and one Class B
Non-Voting Share.

The Class B Non-Voting Shares ranked pari passuwith the Common Shares and
Class C Non-Voting Shares on a per share basis with respect to the payment of
dividends and the right to participate in a distribution of assets of the
Company on winding up, dissolution or otherwise. The holders of Class B
Non-Voting Shares were not entitled to vote at any meeting of shareholders of
the Company.

Pre-recapitalization Class C Non-Voting Shares

The Class C Non-Voting Shares could not be held by parties other than Sprint,
its affiliates and permitted associates. The Class C Non-Voting Shares ranked
pari passuwith Common Shares and Class B Non-Voting Shares on a per share
basis with respect to the payment of dividends and the right to participate in
a distribution of assets of the Company on winding up, dissolution or
otherwise. The holders of Class C Non-Voting Shares were not entitled to vote
at any meeting of shareholders of the Company. However, the holders of the
Class C Non-Voting Shares were entitled to elect up to three directors of the
Company as long as they maintained a significant equity interest in the
Company.

The Class C Non-Voting Shares could be converted into Class B Non-Voting Shares
(on a share-for-share basis) at any time or Common Shares and Class B
Non-Voting Shares (on the basis of one-half Common Share and one-half Class B
Non-Voting Share for each Class C Non-Voting Share) in certain circumstances.

|                                                   |  |        |             |         |  |         |             |   |  |  |             |  
|-------------------------------------------------- |  | ------ | ----------- | ------- |  | ------- | ----------- | - |  |  | ----------- | -
|Number of Pre-recapitalization Shares              |  | Common |             | Class B |  | Class C
|                                                   |  |        |             |         |  |        
|Balance, December 31, 2000 and 2001                |  |        | 17,580,396  |         |  |         | 51,093,362  |   |  |  | 21,775,017  |  
|Issued pursuant to options                         |  |        |            |         |  |         | 142,218     |   |  |  |            |  
|Cancelled pursuant to Plan of Arrangement [note 1] |  |        | (17,580,396 | )       |  |         | (51,235,580 | ) |  |  | (21,775,017 | )
|                                                   |  |        |             |         |  |         |             |   |  |  |             |  
|Balance, December 31, 2002                         |  |        |            |         |  |         |            |   |  |  |            |  
|                                                   |  |        |             |         |  |         |             |   |  |  |             |  

|                                                   |  |        |        |         |  |         |        |   |  |  |        |  
|-------------------------------------------------- |  | ------ | ------ | ------- |  | ------- | ------ | - |  |  | ------ | -
|Dollars, pre-recapitalization                      |  | Common |        | Class B |  | Class C
|                                                   |  |        |        |         |  |        
|Balance, December 31, 2000 and 2001                |  |        | 124.8  |         |  |         | 863.5  |   |  |  | 347.8  |  
|Issued pursuant to options                         |  |        |       |         |  |         |       |   |  |  |       |  
|Cancelled pursuant to Plan of Arrangement [note 1] |  |        | (124.8 | )       |  |         | (863.5 | ) |  |  | (347.8 | )
|                                                   |  |        |        |         |  |         |        |   |  |  |        |  
|Balance, December 31, 2002                         |  |        |       |         |  |         |       |   |  |  |       |  
|                                                   |  |        |        |         |  |         |        |   |  |  |        |  

17





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

2002 Transactions

All pre-recapitalization Common Shares, pre-recapitalization Class B Non-Voting
Shares and pre-recapitalization Class C Shares were cancelled pursuant to the
Plan of Arrangement [note 1].

Pre-recapitalization Stock Options

All pre-recapitalization options of the Company were granted pursuant to the
Plan from shares reserved for issuance upon the exercise of options granted
under such Plan. At December 31, 2001, the Plan reserved a maximum of
2,640,333 Common Shares and 9,392,734 Class B Non-Voting Shares for issuance
upon the exercise of options granted including shares reserved for issuance
under options outstanding at the Plan initiation date, December 21, 1995. All
shares reserved for issuance under the Plan were granted under the terms and
conditions of the Plan. This Plan permitted the granting of options at a price
no less than the closing price of the Common Shares or Class B Non-Voting
Shares, as applicable, on the Toronto Stock Exchange on the first day preceding
the date on which the option was granted that such shares trade, and for a term
not to exceed 10 years from the date of grant. Options granted January 1, 1999
and onwards vested in three yearly installments of 33.3% each. Options granted
prior to January 1, 1999 vested in four yearly installments of 15%, 20%, 25%
and 40% respectively. During 2002, all outstanding pre-recapitalization
options of the Company were cancelled pursuant to the Plan of Arrangement [note
1].

Pre-recapitalization Employee Plan

Effective July 1, 1999, the Company amended the Employee Plan to advance funds
[employer contributions] to employees at the rate of $0.50 for each dollar
contributed by the employee towards the purchase of Common Shares. Employer
contributions vested 12 months after the funds were advanced. Effective
January 31, 2002, employee contributions to the Employee Plan were suspended.

Prior to July 1, 1999, the Company contributed $0.15 for each dollar
contributed by the employee toward the purchase of Class B Non-Voting Shares.
Employees contributions were generally capped at 10% of gross wages. Shares
acquired by employees were not subject to any vesting criteria.

All shares purchased under the Employee Plan were purchased on the open market.

18





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

10. INCOME TAXES

The reconciliation of income tax computed at the statutory tax rates to the
provision for income taxes is as follows:

|                                                                                                 |  |      |       |              |  |                   |       |                    |  |                      |       |   |  |  |        |  
|------------------------------------------------------------------------------------------------ |  | ---- | ----- | ------------ |  | ----------------- | ----- | ------------------ |  | -------------------- | ----- | - |  |  | ------ | -
|                                                                                                 |  |      |       |              |  |                   |       |                    |  | Pre-recapitalization
|                                                                                                 |  |      |       |              |  |                   |       |                    |  |                     
|                                                                                                 |  |      |       |              |  | Nine Months Ended |       | Three Months Ended |  |                      |       |  
|                                                                                                 |  | 2003 |       | Dec 31, 2002 |  | March 31, 2002    |       | 2001              
|                                                                                                 |  |      |       |              |  |                   |       |                   
|Income tax recovery based on the combined statutory rate of
37% (39% - 2002; 42% - 2001)         |  |      | 10.7  |              |  |                   | 21.5  |                    |  |                      | 36.2  |   |  |  | 643.7  |  
|Tax effect of items not taxable (deductible) for tax                                             |  |      | 9.6   |              |  |                   | 35.2  |                    |  |                      | (3.7  | ) |  |  | (449.7 | )
|Unrecognized tax benefits of losses and temporary differences                                    |  |      | (20.3 | )            |  |                   | (56.7 | )                  |  |                      | (35.8 | ) |  |  | (187.2 | )
|Realization of income tax assets not recognized on
implementation of fresh start accounting      |  |      | (4.3  | )            |  |                   |      |                    |  |                      |      |   |  |  |       |  
|Large corporations tax                                                                           |  |      | (2.0  | )            |  |                   | (2.6  | )                  |  |                      | 1.0   |   |  |  | (2.9   | )
|Reduction in future income tax liability resulting from
substantively enacted tax rate reduction |  |      |      |              |  |                   |      |                    |  |                      | 3.3   |   |  |  | 4.0    |  
|                                                                                                 |  |      |       |              |  |                   |       |                    |  |                      |       |   |  |  |        |  
|Income taxes benefit (expense)                                                                   |  |      | (6.3  | )            |  |                   | (2.6  | )                  |  |                      | 1.0   |   |  |  | 7.9    |  
|                                                                                                 |  |      |       |              |  |                   |       |                    |  |                      |       |   |  |  |        |  

The benefit of tax items that arose prior to the application of fresh start
accounting of $4.3 [2002  nil] are recorded through a reduction of unamortized
customer relationships.

Future income tax liability consists of tax (benefits) liabilities arising
from:

|                                  |                                                          |  |        |        |      |  |        |        |  
|--------------------------------- | -------------------------------------------------------- |  | ------ | ------ | ---- |  | ------ | ------ | -
|                                  |                                                          |  | 2003   |        | 2002
|                                  |                                                          |  |        |        |     
|Benefits:                         |                                                          |  |        |        |      |  |        |       
|                                  | Taxable loss carryforwards                               |  |        | (383.8 | )    |  |        | (297.0 | )
|                                  | Accounting values of liabilities in excess of tax values |  |        | (56.9  | )    |  |        | (38.9  | )
|                                  |                                                          |  |        |        |      |  |        |        |  
|Total future tax benefit          |                                                          |  | (440.7 | )      |      |  | (335.9 | )     
|                                  |                                                          |  |        |        |      |  |        |        |  
|Liabilities:                      |                                                          |  |        |        |      |  |        |       
|                                  | Accounting values of assets in excess of tax values      |  |        | 44.6   |      |  |        | 5.7    |  
|                                  |                                                          |  |        |        |      |  |        |        |  
|Total future income tax liability |                                                          |  | 44.6   |        |      |  | 5.7    |       
|                                  |                                                          |  |        |        |      |  |        |        |  
|Net future income tax benefit     |                                                          |  | (396.1 | )      |      |  | (330.2 | )     
|Valuation allowance               |                                                          |  | 396.1  |        |      |  | 330.2  |       
|                                  |                                                          |  |        |        |      |  |        |        |  
|Net future income tax liability   |                                                          |  |       |        |      |  |       |       
|                                  |                                                          |  |        |        |      |  |        |        |  

19





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

At December 31, 2003, the Company had approximately $985.1 in losses available
for Canadian income tax purposes to reduce future years taxable income.
Income tax losses will expire as follows:

|     |  |  |      
|---- |  |  | -----
|2006 |  |  | 221.2
|2007 |  |  | 304.0
|2008 |  |  | 207.4
|2009 |  |  | 208.4
|2010 |  |  | 44.1 
|     |  |  |      
|     |  |  | 985.1
|     |  |  |      

At December 31, 2003, the Company had approximately $94.2 in losses available
for U.S. income tax purposes to reduce future years taxable income. Income
tax losses will expire as follows:

|     |  |  |     
|---- |  |  | ----
|2021 |  |  | 8.6 
|2022 |  |  | 72.0
|2023 |  |  | 13.6
|     |  |  |     
|     |  |  | 94.2
|     |  |  |     

11. FINANCIAL COMMITMENTS AND GUARANTEES

The Company leases office space under operating leases that expire through
2013. The Company also has agreements with certain telephone companies that
guarantee the long-term supply of network facilities at discounts to full rates
and agreements relating to the operations and maintenance of the network. In
addition, the Company enters into agreements with suppliers to provide services
and products that include minimum spend commitments.

The future minimum payments under these agreements in aggregate and for each of
the next five years and thereafter are as follows:

|           |  |        |      |            |  |                |      |  |  |  |      | 
|---------- |  | ------ | ---- | ---------- |  | -------------- | ---- |  |  |  | ---- | 
|           |  | Office |      | Network    |  | Other Services
|           |  | Space  |      | Facilities |  | & Products    
|           |  |        |      |            |  |               
|2004       |  |        | 14.3 |            |  |                | 21.5 |  |  |  | 26.1 | 
|2005       |  |        | 13.7 |            |  |                | 13.1 |  |  |  | 23.5 | 
|2006       |  |        | 13.0 |            |  |                | 3.9  |  |  |  | 15.9 | 
|2007       |  |        | 4.9  |            |  |                | 2.5  |  |  |  |     | 
|2008       |  |        | 2.7  |            |  |                | 1.8  |  |  |  |     | 
|Thereafter |  |        | 5.7  |            |  |                | 10.0 |  |  |  |     | 
|           |  |        |      |            |  |                |      |  |  |  |      | 
|           |  |        | 54.3 |            |  |                | 52.8 |  |  |  | 65.5 | 
|           |  |        |      |            |  |                |      |  |  |  |      | 

20





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

On April 10, 2002, the Company and Sprint executed an agreement [the Sprint
Agreement] that was contingent upon the approval and completion of the Plan of
Arrangement. The term of the Sprint Agreement is for a period of 10 years
commencing April 1, 2002. The Sprint Agreement requires Sprint or its
affiliates to provide various products and services to the Company. In
addition, the Company continues to have exclusive use of the Sprint trademark
in Canada for these services. The Company and Sprint have agreed to treat each
other with preferred partner status. In connection with the granting of the
technology license and the trademark license, the Company will pay a 2.5%
royalty to Sprint on substantially all revenue for the first five years and
2.0% for the remaining five years of the term.

Periodically in the normal course of conducting its business, the Company
enters into various dispositions of its excess fibre, land interests, switch
equipment and other related assets. The terms of these agreements generally
include representations and warranties concerning the assets being sold. As
well, indemnities for breach of these representations and warranties may be
provided to the purchaser, usually limited to the value of the particular
transaction.

A review of the major dispositions of the Company and its predecessors has been
conducted to establish a summary of the outstanding indemnities. Terms of
agreements generally provide for a limitation of losses and to the best of its
knowledge the Company considers the exposure under the indemnities it has
provided are unlikely to result in claims representing a material amount.

Occasionally, in the normal course of business the Company provides guarantees
of third party performance in respect of customer lease arrangements. The
current total of these obligations is approximately $0.6.

12. CONTINGENCIES

Litigation

On March 1, 2002, the Company was notified of an appeal to the Superior Court
of Ontario decision with respect to an application brought by Montreal Trust
Company of Canada (now Computershare Investor Services Inc.) on April 27, 2000
concerning the payment of $30.0 held in trust under a change in control
agreement with certain senior management dated September 9, 1999. The Superior
Court of Ontario ruled that no change of control had occurred. On February 20,
2004, the Court of Appeal decided in favour of the Company on the appeal of the
Superior Court decision [note 21]. The funds held in trust by Computershare
Investor Services Inc. were released during 2002.

In the ordinary course of business activities, the Company may be contingently
liable for litigation and claims with customers, suppliers and former
employees. Management believes that adequate provisions have been recorded in
the accounts where required. Although it is not possible to estimate the
potential costs and losses, if any, management believes that the ultimate
resolution of such contingencies will not have a material adverse effect on the
consolidated financial position of the Company.

21





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

13. ACQUISITIONS

On July 15, 2003, the Company acquired certain assets of Mosaic Performance
Solutions Canada (MPS Canada), a reseller of private label long distance
services, from its parent group Mosaic Group Inc. The assets acquired include
working capital valued at $3.3, computer equipment, software, furniture and
fixture assets valued at $2.7 and customer relationships valued at $13.7. This
acquisition has been accounted for as a business acquisition using the purchase
method, and the results of operations were included in these consolidated
financial statements from the date of acquisition. The purchase price was
allocated to net identifiable assets acquired based on their estimated fair
values. This business will operate as eForce, a division of a subsidiary of the
Company.

On September 27, 2002, the Company acquired 75% of the non-voting shares and
24% of the voting shares in Time iCR Inc., a provider of customized, managed
and hosted call processing solutions, for $1.0. The assets and liabilities
acquired were less than $2.6 and $2.6 respectively. The Company also has a
call right under a contractual arrangement with a member of the Companys
management who owns 51% of the outstanding voting rights of Time iCR Inc. As a
result, while the Company does not have voting control of Time iCR Inc., the
Company has determined under generally accepted accounting principles it will
consolidate its interest in Time iCR Inc.. On February 13, 2004 the Company
acquired the remaining 25% non-voting shares and 76% voting shares of Time iCR.

On January 10, 2001, the Company acquired the 50% interest in NorthPoint Joint
Venture owned by NorthPoint Communications Group Inc. for $8.0 by way of
redemption of shares. As a result, NorthPoint Canada Enterprises Inc., which
subsequently amalgamated and changed its name to 3989828 Canada Inc., is now a
wholly-owned subsidiary.

These acquisitions were accounted for using the purchase method, and the
results of operations were included in these consolidated financial statements
from the dates of acquisition. In each acquisition, the purchase price was
allocated to the net identifiable assets acquired based on their estimated fair
values.

14. RELATED PARTY TRANSACTIONS

In the normal course of business, for each of the periods in the three years
ended December 31, the Company has engaged in significant sales and purchases
of telecommunication services with Sprint, which maintains an approximate 6.7%
equity interest in the Company, through its subsidiary, Sprint. These
transactions were made at market prices under normal trade terms and
conditions. In addition, a royalty payment based on revenues is paid to Sprint
[note 11]. At December 31, 2003, the net balance due to Sprint and its
affiliates is $12.9 [2002 - $16.1]. Revenue, carrier charges and royalty costs
transactions with Sprint and its affiliates for each of the periods in the
three years ended December 31 are as follows:

|                |  |      |      |              |  |                   |      |                    |  |                      |      |  |  |  |      | 
|--------------- |  | ---- | ---- | ------------ |  | ----------------- | ---- | ------------------ |  | -------------------- | ---- |  |  |  | ---- | 
|                |  |      |      |              |  |                   |      |                    |  | Pre-recapitalization
|                |  |      |      |              |  |                   |      |                    |  |                     
|                |  |      |      |              |  | Nine Months Ended |      | Three Months Ended |  |                      |      | 
|                |  | 2003 |      | Dec 31, 2002 |  | March 31, 2002    |      | 2001              
|                |  |      |      |              |  |                   |      |                   
|Revenue         |  |      | 27.0 |              |  |                   | 14.9 |                    |  |                      | 5.5  |  |  |  | 23.3 | 
|Carrier charges |  |      | 27.6 |              |  |                   | 33.7 |                    |  |                      | 11.4 |  |  |  | 37.9 | 
|Royalty costs   |  |      | 19.5 |              |  |                   | 19.5 |                    |  |                      |     |  |  |  |     | 

22





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

In the normal course of business, for each of the periods in the three years
ended December 31, the Company has engaged in sales of telecommunication
services with Cybersurf Corp., in which the Company maintains an approximate 5%
equity interest and has a right to appoint two positions on its Board. These
transactions were made at market prices under normal trade terms and
conditions. At December 31, 2003, the net balance prepaid by Cybersurf Corp.
is $0.1 [2002  $0.3]. Included in revenue are transactions with Cybersurf
Corp. for each of the periods in the three years ended December 31 as follows:

|        |  |      |     |              |  |                   |     |                    |  |                      |     |  |  |  |     | 
|------- |  | ---- | --- | ------------ |  | ----------------- | --- | ------------------ |  | -------------------- | --- |  |  |  | --- | 
|        |  |      |     |              |  |                   |     |                    |  | Pre-recapitalization
|        |  |      |     |              |  |                   |     |                    |  |                     
|        |  |      |     |              |  | Nine Months Ended |     | Three Months Ended |  |                      |     | 
|        |  | 2003 |     | Dec 31, 2002 |  | March 31, 2002    |     | 2001              
|        |  |      |     |              |  |                   |     |                   
|Revenue |  |      | 3.2 |              |  |                   | 1.8 |                    |  |                      | 0.6 |  |  |  | 2.9 | 

15. RESTRUCTURING AND OTHER CHARGES

|                                            |  |      |     |      |  |                   |      |                    |  |                      |   |  |  |  |         | 
|------------------------------------------- |  | ---- | --- | ---- |  | ----------------- | ---- | ------------------ |  | -------------------- | - |  |  |  | ------- | 
|                                            |  |      |     |      |  |                   |      |                    |  | Pre-recapitalization
|                                            |  |      |     |      |  |                   |      |                    |  |                     
|                                            |  |      |     |      |  | Nine Months Ended |      | Three Months Ended |  |                      |   | 
|                                            |  |      |     |      |  | Dec 31,           |      | March 31,          |  |                      |   | 
|                                            |  | 2003 |     | 2002 |  | 2002              |      | 2001              
|                                            |  |      |     |      |  |                   |      |                   
|Non-recoverable fibre maintenance costs (a) |  |      | 7.0 |      |  |                   |     |                    |  |                      |  |  |  |  |        | 
|Special charge (b)                          |  |      |    |      |  |                   | 30.5 |                    |  |                      |  |  |  |  | 17.4    | 
|Writedown of goodwill (c)                   |  |      |    |      |  |                   |     |                    |  |                      |  |  |  |  | 1,071.1 | 
|Loss on closure of subsidiary (d)           |  |      |    |      |  |                   |     |                    |  |                      |  |  |  |  | 21.2    | 
|                                            |  |      |     |      |  |                   |      |                    |  |                      |   |  |  |  |         | 
|                                            |  |      | 7.0 |      |  |                   | 30.5 |                    |  |                      |  |  |  |  | 1,109.7 | 
|                                            |  |      |     |      |  |                   |      |                    |  |                      |   |  |  |  |         | 



|(a) |  | During 2003, the Company recorded a special charge of $7.0 for fibre
maintenance costs that will be incurred by the Company under contracts for
up to 15 years in length without any foreseeable future economic benefit
and for which the Company has determined there is no reasonable prospect
of recovery.                                                                                                                                                                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | In 2002, the Company recorded a special charge of $19.8 for severance,
facility, lease and contract termination costs incurred as part of its
plan to further streamline and focus its operations. As well, during this
period the Company recorded a special charge of $10.7 for a provision on
redundant assets. As at December 31, 2003, $4.7 of the provision was
included in accounts payable and accrued liabilities. Approximately $0.3
will be paid by March 31, 2004 and the remainder will be paid over the
terms of the related leases up to a maximum period of 7 years.
|   
|    |  | During 2001, the Company recorded a special charge of $8.0 for severance,
facility and lease termination costs incurred as part of its plan to focus
on profitability. As well, during this period, the Company recorded a
special charge of $9.4 for an additional provision on redundant assets. As
at December 31, 2003, none of the provision was included in accounts payable
and accrued liabilities.                                                                                                                                                                         
|   
|(c) |  | In 2001, the Company performed an assessment for impairment of the
carrying values of its long-lived assets. The assessment was performed
due to: (i) deterioration of the economic environment; (ii) the
substantial decline of market value of companies in the telecommunications
services sector; and (iii)                                                                                                                                                                                                                                                                     

23





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]



|    |  | the decrease in the Companys revenue base.
The assessment indicated that the decline within the industry was
significant and other than a temporary impairment.                                                                                                                                                                                                                                                                                                                                             
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | A comparison of projected undiscounted cash flows to the carrying value of
the long-lived assets, including goodwill, indicated that an impairment
charge was required. The amount of the impairment charge was determined by
comparing the excess of the carrying value of the long-lived assets over
their estimated fair value based on a number of scenarios and considering
the probability of their expected outcome.                                                                                  
|   
|    |  | Fair value was estimated by projecting a range of future discounted cash
flows excluding interest expense. The cash flow period used was 4 years and
the terminal values were estimated based on an analysis of a range of
industry-wide comparable EBITDA multiples. The Company evaluated a range of
discount rates used as the Companys average cost of capital. The
assumptions supporting the estimated future cash flows, discount rate and
terminal values were based on managements best estimates.
|   
|(d) |  | In 2001, the Company recorded a charge of $21.2 relating to the closure
of its wholly-owned subsidiary, ascenda Inc., as part of its plan to focus
on the profitable deployment of capital resources in core operations. The
charge included $18.6 for writedown of capital assets and $2.6 for
severance and contract termination costs.                                                                                                                                                                    

16. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share have been calculated on the basis of income (loss)
divided by the weighted average number of Common Shares and Class B Non-Voting
Shares outstanding during the period after recapitalization
[December 31, 2003  27,484,447; December 31,
2002  23,839,638]. Earnings (loss) per share for
the prior years and three months ended March 31, 2002 have been calculated on
the basis of income (loss) divided by the weighted average number of
Pre-recapitalization Common Shares, Pre-recapitalization Class B Non-Voting
Shares and Pre-recapitalization Class C Non-Voting Shares outstanding during
the year. The Pre-recapitalization weighted average number of shares
outstanding has been restated to give effect to the 1:20 stock consolidation
which occurred April 15, 2002 [March 31, 2002  4,529,550]. Due to a loss for
all periods presented, no incremental shares from the potential exercise of
stock options are included because the effect would be anti-dilutive.

24





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

17. CONSOLIDATED STATEMENTS OF CASH FLOWS

Net Change in Non-Cash Working Capital Balances

|                                                                      |  |      |       |              |  |                   |      |                    |  |                      |       |   |  |  |        |  
|--------------------------------------------------------------------- |  | ---- | ----- | ------------ |  | ----------------- | ---- | ------------------ |  | -------------------- | ----- | - |  |  | ------ | -
|                                                                      |  |      |       |              |  |                   |      |                    |  | Pre-recapitalization
|                                                                      |  |      |       |              |  |                   |      |                    |  |                     
|                                                                      |  |      |       |              |  | Nine Months Ended |      | Three Months Ended |  |                      |       |  
|                                                                      |  | 2003 |       | Dec 31, 2002 |  | March 31, 2002    |      | 2001              
|                                                                      |  |      |       |              |  |                   |      |                   
|Accounts receivable                                                   |  |      | 37.8  |              |  |                   | 24.0 |                    |  |                      | 23.1  |   |  |  | 44.5   |  
|Other current assets                                                  |  |      | (43.3 | )            |  |                   | 40.7 |                    |  |                      | 1.0   |   |  |  | 21.8   |  
|Accounts payable and accrued liabilities                              |  |      | (2.0  | )            |  |                   | (4.4 | )                  |  |                      | (32.4 | ) |  |  | (129.4 | )
|                                                                      |  |      |       |              |  |                   |      |                    |  |                      |       |   |  |  |        |  
|Net change in non-cash working capital
balances related to operations |  |      | (7.5  | )            |  |                   | 60.3 |                    |  |                      | (8.3  | ) |  |  | (63.1  | )
|                                                                      |  |      |       |              |  |                   |      |                    |  |                      |       |   |  |  |        |  

Non-Cash Transactions

Acquisition of capital assets as shown in the consolidated statements of cash
flows and changes in accounts payable and accrued liabilities were increased
(reduced) by accrued amounts as follows:

|                |  |      |      |              |  |                   |     |                    |  |                      |      |   |  |  |      |  
|--------------- |  | ---- | ---- | ------------ |  | ----------------- | --- | ------------------ |  | -------------------- | ---- | - |  |  | ---- | -
|                |  |      |      |              |  |                   |     |                    |  | Pre-recapitalization
|                |  |      |      |              |  |                   |     |                    |  |                     
|                |  |      |      |              |  | Nine Months Ended |     | Three Months Ended |  |                      |      |  
|                |  | 2003 |      | Dec 31, 2002 |  | Mar 31, 2002      |     | 2001              
|                |  |      |      |              |  |                   |     |                   
|Accrued amounts |  |      | (2.2 | )            |  |                   | 8.2 |                    |  |                      | (3.8 | ) |  |  | (2.0 | )

During 2003, the Company entered into an agreement to swap fibre valued at $1.9
in exchange for consideration of fibre valued at the same amount. Accordingly,
this transaction is not reflected in the consolidated statements of cash flows.

During 2002, the Company acquired capital assets of $13.2 in exchange for
consideration of cash in trust of $13.2. Accordingly, this transaction is not
reflected in the consolidated statements of cash flows.

During 2001, the Company disposed of capital assets of $15.0 in exchange for
consideration of capital assets of $15.0. Accordingly, these transactions are
not reflected in the consolidated statements of cash flows.

25





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Other Information

|                                       |  |      |      |              |  |                   |      |                    |  |                      |      |  |  |  |      | 
|-------------------------------------- |  | ---- | ---- | ------------ |  | ----------------- | ---- | ------------------ |  | -------------------- | ---- |  |  |  | ---- | 
|                                       |  |      |      |              |  |                   |      |                    |  | Pre-recapitalization
|                                       |  |      |      |              |  |                   |      |                    |  |                     
|                                       |  |      |      |              |  | Nine Months Ended |      | Three Months Ended |  |                      |      | 
|                                       |  | 2003 |      | Dec 31, 2002 |  | March 31, 2002    |      | 2001              
|                                       |  |      |      |              |  |                   |      |                   
|Cash received for interest             |  |      | 4.2  |              |  |                   | 3.4  |                    |  |                      | 6.2  |  |  |  | 18.1 | 
|Cash paid for interest                 |  |      | 46.8 |              |  |                   | 52.3 |                    |  |                      | 18.3 |  |  |  | 99.7 | 
|Cash paid for capital and income taxes |  |      | 3.4  |              |  |                   | 9.9  |                    |  |                      | 0.5  |  |  |  | 2.2  | 

18. ADDITIONAL FINANCIAL INFORMATION

[a] Fair Values

The carrying amounts and estimated fair values of the Companys financial
instruments as at December 31, 2003 and 2002 are as follows:

|                                         |  |          |       |            |  |          |       |            |  |  |       |  |  |  |       | 
|---------------------------------------- |  | -------- | ----- | ---------- |  | -------- | ----- | ---------- |  |  | ----- |  |  |  | ----- | 
|                                         |  | 2003     |       | 2002      
|                                         |  |          |       |           
|                                         |  | Carrying |       | Estimated  |  | Carrying |       | Estimated 
|                                         |  | Amount   |       | Fair Value |  | Amount   |       | Fair Value
|                                         |  |          |       |            |  |          |       |           
|Financial assets                         |  |          |       |            |  |          |       |            |  |  |       |  |  |  |       | 
|Cash and cash equivalents                |  |          | 56.5  |            |  |          | 56.5  |            |  |  | 34.1  |  |  |  | 34.1  | 
|Short-term investments                   |  |          | 93.6  |            |  |          | 93.6  |            |  |  | 90.9  |  |  |  | 90.9  | 
|Accounts receivable                      |  |          | 42.7  |            |  |          | 42.7  |            |  |  | 89.3  |  |  |  | 89.3  | 
|Other current assets                     |  |          | 48.9  |            |  |          | 48.9  |            |  |  | 4.4   |  |  |  | 4.4   | 
|Investment in Cybersurf Corp.            |  |          | 0.4   |            |  |          | 0.3   |            |  |  | 0.4   |  |  |  | 0.2   | 
|Financial liabilities                    |  |          |       |            |  |          |       |            |  |  |       |  |  |  |       | 
|Accounts payable and accrued liabilities |  |          | 159.1 |            |  |          | 159.1 |            |  |  | 159.4 |  |  |  | 159.4 | 
|Long-term liabilities                    |  |          | 424.1 |            |  |          | 422.7 |            |  |  | 511.8 |  |  |  | 293.4 | 

The fair values of the Companys financial instruments have been determined as
outlined below, however, the estimated fair values do not necessarily represent
amounts that the Company could potentially realize or be obligated to pay in a
current market exchange between arms length parties.



| |  | Cash and cash equivalents, short-term investments, accounts receivable,
other current assets, accounts payable and accrued liabilities                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The carrying values of the Companys cash and cash equivalents, short-term
investments, accounts receivable, other current assets, and accounts payable
and accrued liabilities approximate fair values due to their current nature.
|
| |  | Investment in Cybersurf Corp.                                                                                                                                                                                                       
|
| |  | The fair value of the Companys investment in Cybersurf Corp. is based on
the closing price on The Canadian Venture Exchange.                                                                                                       

26





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]



|    |  | Long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys debt trades over-the-counter and is not listed on an exchange.
The fair value of the Companys long-term debt is estimated based on
current trading values using best estimates. The fair value of the
Companys right of way liability is based on discounted future cash flows
and approximates carrying value.                                                                                         
|   
|[b] |  | Other Disclosures                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Short-term investments are placed exclusively with entities having ratings
of at least A-1, A-2, P-1 or P-2 by recognized debt rating agencies.                                                                                                                                                                                                                                                                         
|   
|    |  | The Companys accounts receivable are not subject to any concentration of
credit risk. The portfolio is diversified as to both geographic and
industry concentrations.                                                                                                                                                                                                                                                  
|   
|    |  | Currency Agreements                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Company has not entered into any cross-currency swap agreements to
mitigate its exposure to fluctuations in the relationship between the
Canadian and U.S. dollars created by the Companys U.S. dollar denominated
debt obligation. As a result, the Company is exposed to risk of currency
fluctuation for the U.S. $458.6 that will be paid in principal and interest
over the remaining term of this instrument.

19. SEGMENTED INFORMATION

The Company is a facilities-based carrier of long distance, data, local and
wireless telecommunications services. It offers different products or services
to three market segments: (i) Consumer Services including residential and small
office and home office customers (ii) Business Solutions, including small,
medium and large business and government customers and (iii) Carrier Services
including other providers and carriers of telecommunications services. During
2003, the Company changed the presentation by customer segment to better align
with the management structure. Accordingly, segmented information of previous
periods has been restated to reflect this change. Substantially all of the
Companys assets are located in Canada, and revenues are derived from long
distance, data and local telecommunications services provided in Canada.
Assets, including the fibre optic cable network, are not segmented by business
unit as assets are shared by all segments.

27





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Customer Segments

|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  
|------------------------------- |  | -------- | ----- | --------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  |  | ------ | - |  |  | ------ | -
|Twelve months ended             |  | Consumer |       | Business  |  | Carrier  |       | Corporate |  |       |       |  
|December 31, 2003               |  | Services |       | Solutions |  | Services |       | and other |  | Total
|                                |  |          |       |           |  |          |       |           |  |      
|Long distance                   |  |          | 176.5 |           |  |          | 153.6 |           |  |       | 162.8 |   |  |  |       |   |  |  | 492.9  |  
|Data                            |  |          | 15.2  |           |  |          | 134.0 |           |  |       | 50.1  |   |  |  |       |   |  |  | 199.3  |  
|Local                           |  |          | 75.9  |           |  |          | 31.0  |           |  |       | 4.8   |   |  |  |       |   |  |  | 111.7  |  
|Wireless                        |  |          | 1.4   |           |  |          |      |           |  |       |      |   |  |  |       |   |  |  | 1.4    |  
|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  
|Total revenues                  |  |          | 269.0 |           |  |          | 318.6 |           |  |       | 217.7 |   |  |  |       |   |  |  | 805.3  |  
|Operating costs                 |  |          | (95.3 | )         |  |          | (63.0 | )         |  |       | (7.9  | ) |  |  | (131.4 | ) |  |  | (297.6 | )
|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  
|                                |  |          | 173.7 |           |  |          | 255.6 |           |  |       | 209.8 |   |  |  | (131.4 | ) |  |  | 507.7  |  
|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  
|Carrier costs                   |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (409.9 | )
|Restructuring and other charges |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (7.0   | )
|Depreciation and amortization   |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (156.8 | )
|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  
|Operating loss                  |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (66.0  | )
|                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |        |  

|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  
|--------------------------------------------- |  | -------- | ----- | --------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  |  | ----- | - |  |  | ------ | -
|Nine months ended                             |  | Consumer |       | Business  |  | Carrier  |       | Corporate |  |       |       |  
|December 31, 2002                             |  | Services |       | Solutions |  | Services |       | and other |  | Total
|                                              |  |          |       |           |  |          |       |           |  |      
|Long distance                                 |  |          | 136.7 |           |  |          | 110.6 |           |  |       | 125.6 |   |  |  |      |   |  |  | 372.9  |  
|Data                                          |  |          | 15.5  |           |  |          | 107.3 |           |  |       | 43.6  |   |  |  |      |   |  |  | 166.4  |  
|Local                                         |  |          | 43.3  |           |  |          | 14.2  |           |  |       | 2.1   |   |  |  |      |   |  |  | 59.6   |  
|Wireless                                      |  |          |      |           |  |          |      |           |  |       |      |   |  |  |      |   |  |  |       |  
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  
|Total revenues                                |  |          | 195.5 |           |  |          | 232.1 |           |  |       | 171.3 |   |  |  |      |   |  |  | 598.9  |  
|Operating costs                               |  |          | (71.3 | )         |  |          | (43.7 | )         |  |       | (13.7 | ) |  |  | (98.6 | ) |  |  | (227.3 | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  
|                                              |  |          | 124.2 |           |  |          | 188.4 |           |  |       | 157.6 |   |  |  | (98.6 | ) |  |  | 371.6  |  
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  
|Carrier costs                                 |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | (335.7 | )
|Restructuring and other charges               |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | (30.5  | )
|Gain on repurchase of long-term debt          |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | 93.1   |  
|Net gain on sale of capital
assets and rights |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | 9.4    |  
|Depreciation and amortization                 |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | (120.3 | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  
|Operating loss                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  | (12.4  | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |       |   |  |  |        |  

28





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  
|----------------------------- |  | -------- | ----- | --------- |  | -------- | ----- | --------- |  | ----- | ---- | - |  |  | ----- | - |  |  | ------ | -
|Three months ended            |  | Consumer |       | Business  |  | Carrier  |       | Corporate |  |       |      |  
|March 31, 2002                |  | Services |       | Solutions |  | Services |       | and other |  | Total
|                              |  |          |       |           |  |          |       |           |  |      
|Long distance                 |  |          | 46.4  |           |  |          | 39.7  |           |  |       | 44.6 |   |  |  |      |   |  |  | 130.7  |  
|Data                          |  |          | 5.9   |           |  |          | 37.6  |           |  |       | 15.4 |   |  |  |      |   |  |  | 58.9   |  
|Local                         |  |          | 9.4   |           |  |          | 2.5   |           |  |       | 0.3  |   |  |  |      |   |  |  | 12.2   |  
|Wireless                      |  |          |      |           |  |          |      |           |  |       |     |   |  |  |      |   |  |  |       |  
|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  
|Total revenues                |  |          | 61.7  |           |  |          | 79.8  |           |  |       | 60.3 |   |  |  |      |   |  |  | 201.8  |  
|Operating costs               |  |          | (22.7 | )         |  |          | (16.7 | )         |  |       | (2.8 | ) |  |  | (30.9 | ) |  |  | (73.1  | )
|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  
|                              |  |          | 39.0  |           |  |          | 63.1  |           |  |       | 57.5 |   |  |  | (30.9 | ) |  |  | 128.7  |  
|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  
|Carrier costs                 |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  | (116.8 | )
|Depreciation and amortization |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  | (41.8  | )
|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  
|Operating loss                |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  | (29.9  | )
|                              |  |          |       |           |  |          |       |           |  |       |      |   |  |  |       |   |  |  |        |  

|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  
|--------------------------------------------- |  | -------- | ----- | --------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  |  | ------ | - |  |  | -------- | -
|Twelve months ended                           |  | Consumer |       | Business  |  | Carrier  |       | Corporate |  |       |       |  
|December 31, 2001                             |  | Services |       | Solutions |  | Services |       | and other |  | Total
|                                              |  |          |       |           |  |          |       |           |  |      
|Long distance                                 |  |          | 244.1 |           |  |          | 159.9 |           |  |       | 220.5 |   |  |  |       |   |  |  | 624.5    |  
|Data                                          |  |          | 36.3  |           |  |          | 171.3 |           |  |       | 70.1  |   |  |  |       |   |  |  | 277.7    |  
|Local                                         |  |          | 22.4  |           |  |          | 3.4   |           |  |       | 0.4   |   |  |  |       |   |  |  | 26.2     |  
|Wireless                                      |  |          |      |           |  |          |      |           |  |       |      |   |  |  |       |   |  |  |         |  
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  
|Total revenues                                |  |          | 302.8 |           |  |          | 334.6 |           |  |       | 291.0 |   |  |  |       |   |  |  | 928.4    |  
|Operating costs                               |  |          | (92.1 | )         |  |          | (70.4 | )         |  |       | (13.1 | ) |  |  | (109.1 | ) |  |  | (284.7   | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  
|                                              |  |          | 210.7 |           |  |          | 264.2 |           |  |       | 277.9 |   |  |  | (109.1 | ) |  |  | 643.7    |  
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  
|Carrier costs                                 |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (508.9   | )
|Restructuring and other charges               |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (1,109.7 | )
|Net gain on sale of capital assets
and rights |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | 6.1      |  
|Depreciation and amortization                 |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (213.1   | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  
|Operating loss                                |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  | (1,181.9 | )
|                                              |  |          |       |           |  |          |       |           |  |       |       |   |  |  |        |   |  |  |          |  

29





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

20. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

These consolidated financial statements have been prepared in accordance with
Canadian GAAP, which differs in certain respects from U.S. GAAP. The
significant adjustments which are described below would be required in the
consolidated financial statements to comply with U.S. GAAP.

|                                                           |  |      |       |      |  |  |       |  
|---------------------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                                                           |  | 2003 |       | 2002
|                                                           |  |      |       |     
|Balance Sheets  Assets                                    |  |      |       |      |  |  |       |  
|Canadian GAAP - Current Assets                             |  |      | 241.7 |      |  |  | 218.7 |  
|Investment available for sale (a)                          |  |      | 0.3   |      |  |  | 0.2   |  
|                                                           |  |      |       |      |  |  |       |  
|U.S. GAAP  Current Assets                                 |  |      | 242.0 |      |  |  | 218.9 |  
|                                                           |  |      |       |      |  |  |       |  
|Canadian GAAP  Capital Assets                             |  |      | 515.2 |      |  |  | 600.0 |  
|Capitalized interest (c)                                   |  |      | 5.9   |      |  |  | 7.1   |  
|Writedowns and fresh start adjustments (b)                 |  |      | 89.7  |      |  |  | 89.7  |  
|Writedown of assets held for sale (b)                      |  |      | (78.6 | )    |  |  | (78.6 | )
|Depreciation of writedowns and fresh start adjustments (b) |  |      | (3.1  | )    |  |  | (1.6  | )
|Disposal of writedowns and fresh start adjustments (b)     |  |      | (1.7  | )    |  |  |      |  
|                                                           |  |      |       |      |  |  |       |  
|U.S. GAAP  Capital Assets                                 |  |      | 527.4 |      |  |  | 616.6 |  
|                                                           |  |      |       |      |  |  |       |  
|Canadian GAAP  Other Assets                               |  |      | 80.7  |      |  |  | 101.1 |  
|Investment available for sale (a)                          |  |      | (0.4  | )    |  |  | (0.4  | )
|Writedowns and fresh start adjustments (b)                 |  |      | 4.3   |      |  |  |      |  
|                                                           |  |      |       |      |  |  |       |  
|U.S. GAAP  Other Assets                                   |  |      | 84.6  |      |  |  | 100.7 |  
|                                                           |  |      |       |      |  |  |       |  
|U.S. GAAP  Total Assets                                   |  |      | 854.0 |      |  |  | 936.2 |  
|                                                           |  |      |       |      |  |  |       |  

30





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

|                                                                  |  |      |          |      |  |  |          |  
|----------------------------------------------------------------- |  | ---- | -------- | ---- |  |  | -------- | -
|                                                                  |  | 2003 |          | 2002
|                                                                  |  |      |          |     
|Balance Sheets - Liabilities                                      |  |      |          |      |  |  |          |  
|Canadian GAAP   Accounts Payable and Accrued Liabilities         |  |      | 159.1    |      |  |  | 159.4    |  
|Disposal gain not recognized under fresh start accounting (b)     |  |      | (0.9     | )    |  |  |         |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP   Accounts Payable and Accrued Liabilities             |  |      | 158.2    |      |  |  | 159.4    |  
|                                                                  |  |      |          |      |  |  |          |  
|Canadian GAAP  Future Income Tax Liability                       |  |      |         |      |  |  |         |  
|Future income tax liability (b)                                   |  |      | 21.3     |      |  |  | 28.3     |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Future Income Tax Liability                           |  |      | 21.3     |      |  |  | 28.3     |  
|                                                                  |  |      |          |      |  |  |          |  
|Canadian GAAP  Long-term Liabilities                             |  |      | 424.1    |      |  |  | 511.8    |  
|Future interest payments on long-term debt (b)                    |  |      | 205.6    |      |  |  | 301.5    |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Long-term Liabilities                                 |  |      | 629.7    |      |  |  | 813.3    |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Total Liabilities                                     |  |      | 809.2    |      |  |  | 1,001.0  |  
|                                                                  |  |      |          |      |  |  |          |  
|Balance Sheets  Shareholders Equity                             |  |      |          |      |  |  |          |  
|Canadian GAAP - Capital Stock                                     |  |      | 347.4    |      |  |  | 306.3    |  
|Share purchase incentives                                         |  |      | 4.6      |      |  |  | 4.6      |  
|Reduction in stated capital (f)                                   |  |      | 10.7     |      |  |  | 10.7     |  
|Recapitalization adjustments (b)                                  |  |      | (6.5     | )    |  |  | (6.5     | )
|Writedowns and fresh start adjustments (b)                        |  |      | 1,036.3  |      |  |  | 1,036.3  |  
|Issue of capital stock (b)                                        |  |      | 187.9    |      |  |  | 187.9    |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Capital Stock                                         |  |      | 1,580.4  |      |  |  | 1,539.3  |  
|                                                                  |  |      |          |      |  |  |          |  
|Canadian GAAP  Deficit                                           |  |      | (93.0    | )    |  |  | (57.7    | )
|Share purchase incentives                                         |  |      | (4.6     | )    |  |  | (4.6     | )
|Reduction in stated capital (f)                                   |  |      | (10.7    | )    |  |  | (10.7    | )
|Writedowns and fresh start adjustments (b)                        |  |      | (1,671.8 | )    |  |  | (1,671.8 | )
|Reduction of intangible assets (b)                                |  |      | 4.3      |      |  |  |         |  
|Depreciation not recognized under fresh start accounting (b)      |  |      | (3.1     | )    |  |  | (1.6     | )
|Income tax benefit related to future tax liability (b)            |  |      | 14.7     |      |  |  | 6.1      |  
|Interest expense on long-term debt (b)                            |  |      | 88.2     |      |  |  | 43.6     |  
|Gain on repurchase of long-term debt (b)                          |  |      | 81.9     |      |  |  | 81.9     |  
|Foreign exchange gain on long-term debt (b)                       |  |      | 55.2     |      |  |  | 3.9      |  
|Loss on disposal of capital assets                                |  |      | (0.8     | )    |  |  |         |  
|Capitalized interest (c)                                          |  |      | 5.9      |      |  |  | 7.1      |  
|Change in enacted tax rate (e)                                    |  |      | (1.6     | )    |  |  |         |  
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Deficit                                               |  |      | (1,535.4 | )    |  |  | (1,603.8 | )
|                                                                  |  |      |          |      |  |  |          |  
|Canadian GAAP - Other Comprehensive Income (Loss)                 |  |      |         |      |  |  |         |  
|Unrealized losses on investment available for sale                |  |      | (0.2     | )    |  |  | (0.3     | )
|                                                                  |  |      |          |      |  |  |          |  
|U.S. GAAP  Other Comprehensive Income (Loss)                     |  |      | (0.2     | )    |  |  | (0.3     | )
|                                                                  |  |      |          |      |  |  |          |  
|Total U.S. GAAP Shareholders Equity (Deficiency)                 |  |      | 44.8     |      |  |  | (64.8    | )
|                                                                  |  |      |          |      |  |  |          |  
|Total U.S. GAAP Liabilities and Shareholders Equity (Deficiency) |  |      | 854.0    |      |  |  | 936.2    |  
|                                                                  |  |      |          |      |  |  |          |  

31





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Statements of Operations

|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------- | - |  |  | -------- | -
|                                                                                                    |  | 2003 |       | 2002 |  | 2001
|                                                                                                    |  |      |       |      |  |     
|Net income (loss) for the 12 months ended December 31
based on Canadian GAAP                        |  |      | (35.3 | )    |  |      | (149.5  | ) |  |  | (1,524.7 | )
|Recapitalization and fresh start adjustments (b)                                                    |  |      |      |      |  |      | (93.8   | ) |  |  |         |  
|Reduction of intangible assets (b)                                                                  |  |      | 4.3   |      |  |      |        |   |  |  |         |  
|Gain on repurchase of long-term debt (b)                                                            |  |      |      |      |  |      | 81.9    |   |  |  |         |  
|Interest expense on long-term debt (b)                                                              |  |      | 44.6  |      |  |      | 43.6    |   |  |  |         |  
|Foreign exchange gain on long-term debt (b)                                                         |  |      | 51.3  |      |  |      | 3.9     |   |  |  |         |  
|Incremental loss on disposal and writedown regarding
capitalized interest (c)                       |  |      | (0.2  | )    |  |      | (4.6    | ) |  |  | (2.4     | )
|Depreciation not recognized under fresh start accounting (b)                                        |  |      | (1.5  | )    |  |      | (1.6    | ) |  |  |         |  
|Capitalized interest, net of depreciation (c)                                                       |  |      | (1.0  | )    |  |      | (1.0    | ) |  |  | 2.9      |  
|Loss on disposal of capital assets                                                                  |  |      | (0.8  | )    |  |      |        |   |  |  |         |  
|Income tax benefit from future income tax liability (b)                                             |  |      | 8.6   |      |  |      | 6.1     |   |  |  |         |  
|Amortization of integration costs capitalized (d)                                                   |  |      |      |      |  |      |        |   |  |  | (1.0     | )
|Writedown of integration costs capitalized (d)                                                      |  |      |      |      |  |      |        |   |  |  | (22.7    | )
|Change in enacted tax rate (e)                                                                      |  |      | (1.6  | )    |  |      |        |   |  |  | 9.0      |  
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss) before extraordinary items for the 12
months ended December 31 based on U.S. GAAP |  |      | 68.4  |      |  |      | (115.0  | ) |  |  | (1,538.9 | )
|Extraordinary item  gain on debt restructuring (b)                                                 |  |      |      |      |  |      | 1,292.5 |   |  |  |         |  
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss) after extraordinary items for the 12
months ended December 31 based on U.S. GAAP  |  |      | 68.4  |      |  |      | 1,177.5 |   |  |  | (1,538.9 | )
|Unrealized gain (loss) on investment available for sale                                             |  |      | 0.1   |      |  |      | (0.1    | ) |  |  | (0.2     | )
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|Comprehensive income (loss) for the 12 months ended
December 31 based on U.S. GAAP                  |  |      | 68.5  |      |  |      | 1,177.4 |   |  |  | (1,539.1 | )
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|U.S. GAAP Earnings (Loss) Per Share - Basic                                                         |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss) before extraordinary items - basic                                                |  |      | 2.49  |      |  |      | (6.03   | ) |  |  | (17.01   | )
|Extraordinary item  basic                                                                          |  |      |      |      |  |      | 67.75   |   |  |  |         |  
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss) - basic                                                                           |  |      | 2.49  |      |  |      | 61.72   |   |  |  | (17.01   | )
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|U.S. GAAP Earnings (Loss) Per Share - Diluted                                                       |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss) before extraordinary items - diluted                                              |  |      | 2.47  |      |  |      | (6.03   | ) |  |  | (17.01   | )
|Extraordinary item  diluted                                                                        |  |      |      |      |  |      | 67.71   |   |  |  |         |  
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  
|Net income (loss)   diluted                                                                        |  |      | 2.47  |      |  |      | 61.68   |   |  |  | (17.01   | )
|                                                                                                    |  |      |       |      |  |      |         |   |  |  |          |  

32





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##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

Statements of Cash Flows

|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                                                                            |  | 2003 |       | 2002 |  | 2001
|                                                                                                            |  |      |       |      |  |     
|Cash provided by (used in) operating activities based on Canadian GAAP                                      |  |      | 33.7  |      |  |      | 6.1    |   |  |  | (27.2  | )
|Interest expense on long-term debt (b)                                                                      |  |      |      |      |  |      | 43.6   |   |  |  |       |  
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|Cash provided by (used in) operating activities based on U.S. GAAP                                          |  |      | 33.7  |      |  |      | 49.7   |   |  |  | (27.2  | )
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|Cash provided by (used in) investing activities based on Canadian and
U.S. GAAP                             |  |      | (49.7 | )    |  |      | 154.2  |   |  |  | (262.9 | )
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|Cash provided by (used in) financing activities based on Canadian GAAP                                      |  |      | 38.4  |      |  |      | (29.9  | ) |  |  | 5.7    |  
|Recapitalization adjustments (b)                                                                            |  |      |      |      |  |      | (111.8 | ) |  |  |       |  
|Interest expense on long-term debt (b)                                                                      |  |      |      |      |  |      | (43.6  | ) |  |  |       |  
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|Cash provided by (used in) financing activities based on U.S. GAAP                                          |  |      | 38.4  |      |  |      | (185.3 | ) |  |  | 5.7    |  
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  
|Net increase (decrease) in cash and cash equivalents for the 12
months ended December 31 based on U.S. GAAP |  |      | 22.4  |      |  |      | 18.6   |   |  |  | (284.4 | )
|                                                                                                            |  |      |       |      |  |      |        |   |  |  |        |  



|(a) |  | Under Canadian GAAP, portfolio investments are accounted for at the lower
of cost and market. Under U.S. GAAP, portfolio investments classified as
available for sale are carried at market values with unrealized gains or
losses reflected as a component of other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Under Canadian GAAP, the Companys capital reorganization and
comprehensive revaluation of assets and liabilities is accounted for under
fresh start accounting. U.S. GAAP does not recognize the recapitalization
adjustments, writedowns and the elimination of the deficit made under
fresh start accounting [note 1].                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Under U.S. GAAP, the Companys debt restructuring is accounted for in
accordance with Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructuring [SFAS
15]. The fair value of the equity interest granted to Sprint of $25.0 and
the fair value of the equity interest granted to the noteholders of $163.1,
reduced by direct issuance costs of $0.2, are added to capital stock.                                                                                                                                                                                                               
|   
|    |  | Under U.S. GAAP, the impairment in value of assets held for sale of $78.6 is
accounted for in accordance with Accounting for the Impairment or Disposal
of Long-lived Assets [SFAS 144]. The reduction in the value of other
in-use capital assets of $11.1 made under Canadian GAAP does not apply under
U.S. GAAP. Under U.S. GAAP, an additional $1.5 of depreciation would have
been expensed during 2003 [2002 - $1.6].                                                                                                                                                                                                                                  
|   
|    |  | Under Canadian GAAP, the Q1 2002 royalty payment to Sprint of $4.9 was
accounted for under the restructuring. Under U.S. GAAP, the payment is
included in the statement of operations of the current period.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | Under U.S. GAAP, the gain on debt restructuring is determined in accordance
with SFAS 15. The fair value of the assets transferred to the noteholders
include cash and an equity interest, net of issuance costs. The remaining
direct costs of the Plan of Arrangement of $18.3 are deducted in measuring
the gain on restructuring. Also included in the determination of the gain
is the carrying amount of the pre-recapitalization notes cancelled, and
accrued interest thereon, net of related deferred financing costs,
and the carrying amount of the newly issued Senior Secured Notes due 2008,
accrued interest thereon, and future interest payments.

33





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]



|    |  | Under U.S. GAAP, all cash payments under the terms of the Senior Secured
Notes are accounted for as reductions of the liability, and no interest
expense is recognized over the remaining life of the debt. Under Canadian
GAAP, interest expense is recognized in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Under Canadian GAAP, the future income tax liability was valued at nil under
the application of fresh start accounting. Under U.S. GAAP, the value of
the future income tax liability is not impacted by the debt restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Under Canadian GAAP, the benefit of tax items that arose prior to the
application of fresh start accounting of $4.3 [2002  nil] are recorded
through a reduction of unamortized customer relationships. Under U.S. GAAP,
the reduction is not applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Additional information regarding the Companys financial reorganization is
presented in note 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | Under U.S. GAAP, interest expense
to date of $5.9 [2002 - $7.1, 2001 -
$12.7] would have been capitalized as part of the cost of constructing
fibre optic cable and buildings and therefore included in the cost of the
assets in determining the losses on disposal. Under Canadian GAAP, these
amounts have been expensed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(d) |  | Under U.S. GAAP, purchase accounting requires certain integration costs
arising from an acquisition to be capitalized as part of the purchase
equation and would increase goodwill. Therefore, for U.S. GAAP, these
integration costs were included as part of the cost used to determine the
writedown of goodwill which occurred at September 30, 2001 [note 15].
Under Canadian GAAP, these integration costs were previously expensed.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(e) |  | Under Canadian GAAP, future income tax liabilities are valued using the
income tax rates expected to apply when the liability is settled or the
asset is realized based on substantively enacted income tax rates. Under
U.S. GAAP, income tax rates applied are based on those completely enacted
into law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(f) |  | Canadian GAAP allows for the reduction of the stated capital of
outstanding shares with a corresponding offset to deficit. This
reclassification which the Company made in 1992 is not permitted by U.S.
GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(g) |  | Under Canadian GAAP, the Company accounted for its investment in a joint
venture using the proportionate consolidation method in 2000 prior to the
joint venture becoming a wholly-owned subsidiary in 2001. Under U.S.
GAAP, the Company should account for its investment in the joint venture
using the equity method. However, as permitted by the United States
Securities and Exchange Commission, this difference in accounting has not
been reflected in the U.S. GAAP amount above.                                                                                                                                                                                                                                                                                                                                                                                
|   
|(h) |  | Under Canadian GAAP, stock options are accounted for at the date of
exercise when the purchase is recorded as an increase to capital stock.
For purposes of reconciliation to U.S. GAAP, stock options granted to
employees have been accounted for in accordance with Accounting Principles
Board [APB] Opinion 25, such that the excess of the market value of the
shares over the exercise price is expensed and charged to income with a
corresponding increase to capital stock over the vesting period. Certain
stock options are considered to be part of a variable stock option plan
under U.S.
GAAP in accordance with Financial Accounting Standards Board Interpretation
Number 44 and as such compensation expense is recorded for the excess of the
market value of the shares over the exercise price at each reporting period
[2003, 2002 and 2001  nil].

34





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]



|(i) |  | U.S. GAAP SFAS 130 requires the presentation of comprehensive income and
its components. Comprehensive income includes all changes in equity
during a period except shareholder transactions.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(j) |  | U.S. GAAP does not recognize the disclosure of any subtotal of the amount
of cash, cash equivalents and short-term investments in the consolidated
balance sheets.                           
|   
|(k) |  | U.S. GAAP does not recognize the disclosure of a subtotal of the cash
flow from operations before net change in non-cash working capital items
in the consolidated statements of cash flows. 

Additional Information

U.S. GAAP also requires additional disclosures of information shown below.

Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123
[SFAS 123], which
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to December 1994 under the fair
value method of that statement. The Company has utilized the Black-Scholes
option valuation model to estimate the fair value of the options granted based
on the following assumptions:

|                                               |  |                  |     |                |  |                |   |   |     |                |   |  
|---------------------------------------------- |  | ---------------- | --- | -------------- |  | -------------- | - | - | --- | -------------- | - | -
|                                               |  | 2003             |     | 2002           |  | 2001          
|                                               |  |                  |     |                |  |               
|Risk free interest rate                        |  | 2.85% to 3.50%   |     | 3.26% to 5.47% |  | 3.83% to 5.52%
|Expected dividend yield                        |  |                  | 0   | %              |  |                | 0 | % |     |                | 0 | %
|Expected volatility, Common Shares             |  | 107.6% to 108.3% |     | 64.8% to 90.7% |  | 71.1% to 77.8%
|Expected volatility, Class B Non-Voting Shares |  |                  |    |                |  |                |  |   |     | 75.4% to 90.4%
|Expected time until exercise, in years         |  |                  | 3.0 |                |  | 3.0 to 7.0     |   |   | 3.0 |               

The weighted average fair value of all options granted is estimated at $1.61
per share in 2003 [2002 - $5.60, 2001 - $0.63].

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to operating expense over the options vesting period. The
Companys pro forma information is as follows:

|                                                  |  |      |      |      |  |      |         |  |  |  |          |  
|------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ------- |  |  |  | -------- | -
|                                                  |  | 2003 |      | 2002 |  | 2001
|                                                  |  |      |      |      |  |     
|U.S. GAAP pro forma net income (loss)             |  |      | 66.7 |      |  |      | 1,176.2 |  |  |  | (1,539.6 | )
|U.S. GAAP pro forma basic income (loss) per share |  |      | 2.43 |      |  |      | 61.66   |  |  |  | (17.02   | )

Selling, general and administration
costs of $267.5 [2002  $250.4; 2001  $252.0],
advertising costs of $14.2 [2002  $18.4; 2001 - $17.1], lease rental
costs of $15.0 [2002  $15.0; 2001 - $15.5], and
bad debt costs of $0.9 [2002 - $16.6; 2001 - $0.1] were expensed as incurred during the year under both
Canadian and U.S. GAAP.

35





---



##### 



Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003
[millions of Canadian dollars, unless otherwise indicated]

New Pronouncements

The Financial Accounting Standards Board [the FASB] has issued Interpretation
No. 46, Consolidation of Variable Interest Entities in December 2003.
Similar to AcG-15 in Canadian GAAP, Interpretation 46 provides criteria and
guidelines to determine whether an entity is a variable interest entity to the
Company for consolidation purposes. The Company will adopt the requirements
of Interpretation 46 and is currently reviewing the impact of the
Interpretation.

In November 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others [Interpretation 45]. Interpretation 45 requires
disclosure by a guarantor regarding its obligations under certain guarantees it
has issued, effective December 31, 2002. Interpretation 45 also requires
recognition of a liability for the fair value of its obligations under
guarantees issued after December 31, 2002. The Company has reviewed its
policies and determined there is no impact as a result of the Company adopting
these pronouncements.

In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure [SFAS 148]. SFAS 148 amends SFAS
No. 123 to provide alternative methods of transition to SFAS No. 123s fair
value method of accounting for stock-based compensation. The Company has
reviewed its policies and determined there is no impact as a result of the
Company adopting these pronouncements.

21. SUBSEQUENT EVENT

On February 20, 2004, the Court of Appeal of Ontario agreed with the trial
judge and dismissed the appeal of an earlier decision regarding a change in
control agreement [note 12]. The appellants have 60 days in which to seek
leave to appeal to the Supreme Court of Canada.

36