**EXHIBIT
99.3**





**MANAGEMENT’S
DISCUSSION & ANALYSIS**





FOR THE
PERIOD ENDED DECEMBER 31, 2004





Management’s
Discussion and Analysis (MD&A) is intended to help you understand the
dynamics of our business and the key factors underlying our financial results.
It explains trends in our financial condition and results of our operations for
the year ended December 31, 2004 compared with our operating results for the
year ended December 31, 2003. It also compares our balance sheet as at December
31, 2004 to our balance sheet as at December 31, 2003. This MD&A should be
read in conjunction with our Audited Consolidated Financial Statements for
December 31, 2004.





‘The
information in this MD&A is as of February 21, 2005 and in this MD&A
‘we’, ‘us’, and ‘our’ refers to Call-Net Enterprises Inc. (Call-Net). Additional
information relating to our company, including our Annual Information Form
(AIF), is available on SEDAR at www.sedar.com .





FORWARD-LOOKING
STATEMENTS


Securities
laws encourage companies to disclose forward-looking information so that
investors can get a better understanding of the company’s future prospects and
make informed investment decisions. Statements that are not historical fact and
are based on current expectations, estimates and assumptions are forward-looking
statements.





This
MD&A contains forward-looking statements about our business. Inherent in
these statements are known and unknown risks, uncertainties, and other factors
that may cause the results, performance or achievements of our Company to differ
materially from those expressed or implied by such statements. Such factors
include, among others, general economic and business conditions, demographic
changes, regulation, major technology changes, timing of product introductions,
competition and our ability to attract and retain key employees.





NON
GAAP FINANCIAL MEASURES


Certain
financial measures used in this MD&A do not have any standardized meaning
under Canadian generally accepted accounting principles (GAAP). Below is a
definition of each of the non-GAAP financial measures used in this MD&A. At
the point where each non-GAAP financial measure is first discussed, a table has
been provided to reconcile that financial information to the most directly
comparable GAAP measure.





EBITDAEarnings
      before interest, taxes, depreciation and amortization (EBITDA) is a
      financial metric used to analyze operating results. We define EBITDA as
      revenue less carrier charges and operating costs. We use EBITDA as a
      benchmark of operating performance and as a performance threshold in the
      management incentive plan. We caution you that EBITDA as calculated by us
      may not be comparable to similarly titled amounts reported by other
      companies.FREE
      CASH FLOWWe
      define free cash flow as EBITDA less financing costs (including interest
      expense on long-term debt, servicing fees, bank charges and any late
      payment charges), cash income taxes paid, net capital expenditures and the
      cash component of changes in deferred costs. We use free cash flow as a
      measure of our ability to maintain operations and service
      debt.




Call-Net
      Enterprises Inc.
    Page
      1
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      & Q4 Managements Discussion &
Analysis











**OVERVIEW**





**CALL-NET’S
BUSINES****S**




We are
a national, full-service, facilities-based telecommunications alternative to the
long-established telephone companies, known as incumbent local exchange
carriers, or ILECs. Primarily through our wholly-owned subsidiary Sprint Canada
Inc. (Sprint Canada), we offer home phone, long distance, wireless, and dial-up
Internet access services to residential customers targeting Canada’s largest
metropolitan areas. We also offer local, long distance, data and Internet
Protocol (IP) solutions (including access) to Canadian businesses and
governments of all sizes.





We
provide services to three types of customers: consumers, businesses and other
telecommunications companies. Services to the first two are offered largely
under the Sprint Canada brand, while services to the third group, sometimes
called carriers, are delivered under the Call-Net brand.




****


**BUSINESS
STRATEGY**





Our
mission is to leverage proven technologies and outstanding people to deliver
telecommunications services in a smart and simple way.





In
order to deliver on that mission, our business plan identifies five areas of
focus:





1.
    Identify,
      develop, and exploit profitable segments within the Canadian
      telecommunications marketplace2.
    Provide
      competitive services and solutions that optimize partner relationships,
      internal capabilities and the regulatory environment3.
    Hire,
      train and recognize outstanding people that exemplify our
      values4.
    Differentiate
      through superior sales and customer service5.
    Be
      financially prudent with respect to cash flow, capital expenditure and
      acquisitions.




****


**KEY
PERFORMANCE DRIVERS**




Our
business success and financial performance will be driven principally by our
success at identifying and managing the following performance drivers in our
industry.





*CUSTOMER
DEMAND*


Customer
demand for telecommunications services is generally growing, although the growth
rate varies, sometimes substantially, by product. For example, we believe that
long distance usage, as measured by the number of long distance minutes, is
growing despite the fact that industry long distance revenues are generally
declining. In addition, the number of local lines in service in Canada has been
growing, albeit quite modestly. Wireless service and high speed Internet
services are currently growing at more substantial rates, generally greater than
10 per cent per year. Our company is less sensitive to the growth rate of any
given telecommunications product or service because we have a very small share
of the markets in which we operate. Underlying growth in demand for the products
we sell helps, but we do not currently need to rely on industry growth to drive
revenue growth.





*COMPETITIVE
INTENSITY AND INDUSTRY PRICING*


The
Canadian telecommunications industry is very competitive. The industry is
dominated by a small number of very large incumbent firms that have benefited
from historical advantages of scale resulting from the fact that they were able
to build their networks and capital and customer bases while under protection as
statutory monopolies. In spite of the steps taken over the past several years to
deregulate the market for telecommunication services and the investments made by
competitors in infrastructure to compete, the incumbent advantage has proven to
be very difficult to overcome, with most competitors having failed over the past
five years. Competition continues to be based primarily on price, although we
are establishing ourselves based on our service capabilities as well. However,
because of this price competition and because of technological changes discussed
later, per-unit pricing in the telecommunications industry has been falling for
several years in many product categories. We have been successful at bringing
costs down at a rate that exceeds the rate of decline in per-unit pricing and so
our profitability has been improving, and we must be careful to maintain
profitability in the face of continued competition.





*OPERATIONAL
EFFICIENCY*


In part
because of falling prices, we must become ever more operationally efficient.
Each year, we set objectives for reducing our carrier charges and improving
operational efficiencies. We have generally met these objectives, improving our
gross margins over the past two years while growing business volumes and keeping
our network operations and corporate costs stable. We must continue to improve
efficiencies in the future to be assured of having a successful, long-term
enterprise.





Call-Net
      Enterprises Inc.
    Page
      2
    2004
      & Q4 Managements Discussion &
Analysis








*FAIR
REGULATION*


We
continue to pursue regulatory reforms to lower carrier costs and remove
operational barriers to competition in the telecommunications industry. While,
in general, we are satisfied with the regulatory regime as currently constructed
by the Canadian Radio-television and Telecommunications Commission (CRTC), we
are engaged in a number of follow-up proceedings resulting from the price cap
decisions to lower our access costs. Our business strategy does not depend on
additional relief from the CRTC on access costs, but we do depend on the
regulator to ensure that incumbents are implementing and respecting the
decisions it makes.




**QUARTERLY
SUMMARY INFORMATION**




In
order to track our financial performance and condition, we pay particular
attention to the measures summarized in the following table of quarterly
information.





**2004
Quarterly Information**





(in
      millions Canadian $)
    
    **Q4**
    
    **Q3**
    
    **Q2**
    
    **Q1**Revenue
    
    
    211.1
    
    
    204.2
    
    
    200.8
    
    
    202.5Gross
      profit
    
    
    109.2
    
    
    101.1
    
    
    100.3
    
    
    107.4Operating
      income
    
    
    (11.5
    )
    
    (7.8
    )
    
    (13.3
    )
    
    (10.3
    )Net
      income
    
    
    (13.8
    )
    
    (1.6
    )
    
    (33.1
    )
    
    (29.9
    )Earnings
      per share (EPS)
    
    
    (0.39
    )
    
    (0.05
    )
    
    (0.93
    )
    
    (0.84
    )EBITDA
      (1)
    
    
    31.9
    
    
    24.1
    
    
    22.4
    
    
    26.5Net
      capital expenditures
    
    
    14.9
    
    
    15.9
    
    
    10.2
    
    
    14.0Free
      cash flow (1)
    
    
    8.4
    
    
    (1.6
    )
    
    2.6
    
    
    1.4Local
      equivalent line count (2)
    
    
    464,900
    
    
    371,300
    
    
    336,800
    
    
    301,600Churn
      (3)
    
    
    2.1
    %
    
    2.7
    %
    
    2.1
    %
    
    2.2
    %





(1)
    See
      reconciliation in the ‘MD&A Summary Information’ table found on the
      final page of this document.(2)
    Includes
      primary rate interfaces (PRIs) quantified as 23 individual business lines
      (IBLs)(3)
    Equals
      monthly disconnections divided by the average number of lines per
      month.





**2003
Quarterly Information**





(in
      millions Canadian $)
    
    **Q4**
    
    **Q3**
    
    **Q2**
    
    **Q1**Revenue
    
    
    204.1
    
    
    204.9
    
    
    194.1
    
    
    202.2Gross
      profit
    
    
    107.3
    
    
    96.4
    
    
    95.7
    
    
    96.0Operating
      income
    
    
    (13.7
    )
    
    (15.8
    )
    
    (23.0
    )
    
    (15.7
    )Net
      income
    
    
    (16.9
    )
    
    (30.2
    )
    
    2.0
    
    
    7.6Earnings
      per share (EPS)
    
    
    (0.48
    )
    
    (1.15
    )
    
    0.08
    
    
    0.32EBITDA
    
    
    24.9
    
    
    23.0
    
    
    23.7
    
    
    24.5Net
      capital expenditures
    
    
    13.3
    
    
    12.8
    
    
    4.8
    
    
    5.4Free
      cash flow
    
    
    0.9
    
    
    (1.7
    )
    
    6.5
    
    
    6.3Local
      equivalent line count
    
    
    267,600
    
    
    234,900
    
    
    208,600
    
    
    188,500Churn
    
    
    2.7
    %
    
    3.3
    %
    
    3.6
    %
    
    3.2
    %





The
factors affecting these metrics over the past eight quarters are discussed
throughout this MD&A.




Call-Net
      Enterprises Inc.
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Analysis










**CALL-NET’S
2004 RESULT** **S**




**2004
IN REVIEW**




In
2004, we set out to return Call-Net to growth. After several years of declining
revenue, brought about by persistent industry-wide declines in the per-unit
pricing of the products and services we sell, as well as unprecedented changes
in the structure of our industry, we hoped to be able to return to
year-over-year growth in both revenue and EBITDA. We are pleased to report
success on this front in 2004; marking another turning point in the evolution of
our business.





**Selected
      Financial Information**
    
    For
      the years ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **2002**Revenue
    
    
    **818.6**
    
    
    805.3
    
    
    800.7Net
      income
      (loss)
    
    
    **(78.4**
    **)**
    
    (37.5
    )
    
    (151.1
    )Earnings
      (loss) per share (EPS) - basic
    
    
    **(2.20**
    **)**
    
    (1.36
    )
    
    (N/A
    )Total
      assets
    
    
    **648.9**
    
    
    839.1
    
    
    921.6Long-term
      financial liabilities
    
    
    **321.8**
    
    
    436.2
    
    
    518.6EBITDA
    
    
    **104.9**
    
    
    96.1
    
    
    46.6Net
      capital expenditures
    
    
    **(55.0**
    **)**
    
    (36.3
    )
    
    (71.7
    )Free
      cash flow
    
    
    **10.8**
    
    
    12.0
    
    
    (105.7
    )




*REVENUE IS
GROWING*


Revenue
in 2004 was $818.6 million and includes the results of our acquisition of the
Bell/360 customer base. Prior to the inclusion of the Bell/360 acquisition, our
revenue was $811.0 million, up by $5.7 million, or approximately one per cent
from 2003.





•
    *Acquisitions
      have accelerated revenue growth and product
      diversification*





On May
25, 2004, we entered into an agreement with Bell Canada to acquire certain
assets of 360networks Corporation including significant portions of its business
customer base and specific network facilities in Ontario, Quebec and Atlantic
Canada (the ’Bell/360 acquisition’). The closing of this transaction occurred on
November 20, 2004, at which time more than 50 former employees of 360networks
joined our company.





At
closing, we entered into a two-year transitional services agreement with Bell
Canada under which it will provide technical and operational services to the
newly acquired customer base and in exchange be paid approximately 70 per cent
of the total revenue subject to a minimum monthly amount of approximately $2.0
million. We will have an option at the end of the term of the agreement to
acquire certain CLEC network assets used to service these customers. This CLEC
network is one of the most significant telecommunications networks in Central
and Atlantic Canada connecting over 1,000 office buildings.





The
acquisition price for the business customer base totaled $17.6 million,
representing three months of acquired revenue plus acquisition costs, and will
be paid in four installments over the life of the transition services agreement.
The $17.6 million was recorded as a customer relationship intangible asset
and is being amortized over 30 months.





In the
fourth quarter, revenue from the Bell/360 customer base accounted for
approximately $7.6 million of our consolidated revenue and contributed
approximately $1.2 million of recurring EBITDA. The Bell/360 customer base and
the employees we acquired to support and grow this base are in the process of
being integrated into our company. In December, the acquired customer base
received its first invoices from Sprint Canada.





In
2005, we expect to be able to grow both the number of customers on this network
and the total revenue on the network without compromising any of our other
Business Services activities. Already, significant work is underway on a number
of strong business opportunities.




Call-Net
      Enterprises Inc.
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    2004
      & Q4 Managements Discussion &
Analysis











•
    *Consumer
      and business services revenue continues to
grow*











We
operate two growth businesses; Consumer Services and Business Services. The
revenues in each of these businesses grew in 2004; Consumer Services by 10 per
cent and Business Services by six per cent. Growth was fueled by our ongoing
migration into new products and services. In Consumer Services, this means
bundled home phone service, while in Business Services, it means local and
IP-enabled data services. Our Carrier Services business declined by 16 per cent
in 2004 reflecting industry-wide weakness in this market.





•
    *We
      continue to diversify our revenue base*











We have
historically been a long distance services company and long distance services
have been a very profitable product for us to sell. But several years ago we
realized that being a long distance only company was not a viable long term
strategy. Accordingly, we began to diversify our revenue base. In 2004, we saw
our growth businesses - business and consumer - add significantly to the local
and data services we offer, more than offsetting the decline in long distance
revenues. In 2004, 52 per cent of our revenue came from long distance while 48
per cent came from these other products and services. The effects of this
diversification are more dramatic at the divisional level, where in both
Consumer Services and Business Services, long distance is no longer our largest
product by revenue.





*OUR NETWORK AND
OPERATIONS ARE MORE EFFICIENTLY MANAGED*


In 2004
we realized significant improvements in the efficiency of our network and in our
various processes supporting both the provisioning and servicing of our
customers. Our aim has been to create operational efficiencies with the dollar
savings being reinvested to create growth.





•
    *Carrier
      charges were less than 50 per cent of
revenue*





In
2004, we were successful at keeping carrier charges below 50 per cent of
revenue. As our local business grows, we are able to take advantage of scale
economies in co-location operations and in back-haul. A co-location site and the
associated back-haul is generally a fixed cost. As we add more customers in a
co-location the per customer cost drops. Our increased scale also gives us the
opportunity to make small changes in our network to replace leased with owned
facilities. In 2004, we constructed Metro Area Networks (MANs) in Toronto and
Ottawa, complementing MANs already existing in Montreal and Vancouver. These
MANs allow us to bring our traffic to our switch sites over fibre that we own,
rather than fibre leased from other telecommunications companies, reducing our
carrier charges as a result. In addition, the cost of terminating calls in
Canada, the United States and internationally continues to drop reflecting the
overall decline in the costs of operating telecommunications companies
world-wide. For example, in 2004 we had an 40 per cent increase in
international traffic, but our total costs for terminating international traffic
dropped by nine per cent.




Call-Net
      Enterprises Inc.
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    2004
      & Q4 Managements Discussion &
Analysis











•
    *Provisioning
      efficiency improved*





We have
made significant investments in becoming smarter in our provisioning operations.
Because of the growth rate of our local business, and because we are the only
telecommunications company in Canada that has been significantly growing its
local customer base, we have established a provisioning operation that rivals
those of ILECs that may be 10 or 20 times our size. Because of our smaller size,
however, it is important, that we become ever more efficient in provisioning so
that this cost does not grow in step with our local revenues. In 2004 our total
expenditures in provisioning were essentially unchanged from 2003. This despite
the fact that we activated 40 per cent more customers in 2004 than 2003, and
processed more than 150,000 moves, adds, and changes in the year. During
business hours in 2004, our provisioning operation successfully completed an
average of one provisioning order every 15 seconds.





•
    *Network
      operating expenses remain stable*





While
operating costs grew from $299.3 million in 2003 to $313.1 million in 2004, this
growth was deliberate and limited to the ongoing investment in the growth of our
Business Services and Consumer Services customer base. Expenses related to
network operations and corporate services actually declined despite a 10 per
cent increase in long distance minutes from 2003 to 2004 and a 76 per cent
increase in the number of local line equivalents in service on the Call-Net
network.





*CONSUMER
SERVICES IS GROWING AND DIVERSIFYING*


Our
revenue diversification has come in part from our successful penetration of the
home phone service business in Canada. As we grow the number of customers in
this part of our business, we also expect to grow the revenue per customer as we
bundle home phone service with long distance, wireless and, in 2005, DSL
service. In addition to providing top line revenue growth, this strategy allows
us to diversify our consumer revenue stream so that we are less dependent on any
one product.





•
    *Continued
      profitable growth in local service
lines*





We
continued our success in adding local and home phone service customers,
adding 92,500 net consumer lines and 98,500 net equivalent business lines
for a total of 197,300 lines in the year. This brings our total number of
local line equivalents to 464,900. Of the increase in net business local
equivalent lines, 61,900 comes from the inclusion of the Bell/360 acquisition in
the fourth quarter.





**Selected
      Key Performance Indicators**
    
    For
      the years ended December 31**2004**
    
    **2003**
    
    **2002**Net
      local line additionsConsumer
      home phone service
    
    
    **104,800**
    
    
    65,000
    
    
    79,900Business
      local line equivalents
    
    
    **92,500**
    
    
    31,400
    
    
    33,100Total
      net additions
    
    
    **197,300**
    
    
    96,400
    
    
    113,000Local
      linesConsumer
      home phone service lines
    
    
    **310,800**
    
    
    206,000
    
    
    141,000Business
      local line equivalents*
    
    
    **154,100**
    
    
    61,600
    
    
    30,200Total
      local lines
    
    
    **464,900**
    
    
    267,600
    
    
    171,200Average
      monthly churn**
    
    
    **2.2**
    **%**
    
    3.0
    %
    
    4.3
    %Consumer
      customers
    
    
    **578,000**
    
    
    645,125
    
    
    584,536Business
      customers
    
    
    **20,000**
    
    
    11,400
    
    
    6,300





*
    Includes
      primary rate interfaces (PRIs) quantified as 23 individual business lines
      (IBLs)**
    Equals
      monthly disconnections divided by the average number of lines per
      month.






•
    *Home
      phone service bundles continue to grow*





We have
focused on selling product bundles to our consumer customers using home phone
service as the foundation product, as a means of increasing customer loyalty,
increasing our share of our customers’ monthly communications spend, and
reducing customer churn. In the fourth quarter of 2004, 69 per cent of consumer
services revenue came from customers who purchase more than one product from us,
as compared to 50 per cent in the fourth quarter of 2003. Most of these
customers purchase a bundle of home phone and long distance services with some
taking a third product such as a wireless second line or dial-up Internet
access.





Average
revenue per line (ARPL) includes revenue from home phone and long distance
services together with additional bundled revenues from services such as Fido®
wireless and dial-up Internet, all divided by the average number of lines. The
additional products and services added to the home phone bundle in 2004 have
allowed us to offset declines in long distance revenue per line per month.




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      Enterprises Inc.
    Page
      6
    2004
      & Q4 Managements Discussion &
Analysis








We
believe that our bundled home phone service business has many characteristics
desirable in consumer telecommunications including: a relatively stable monthly
spend consisting of basic service, features and long distance service, a healthy
contribution to margin,; low churn, a reliable cost of acquisition and the
potential for significant growth to the customer base.





Finally,
our cost of acquisition and provisioning continues to fall. In the fourth
quarter, we spent an average of $269 to acquire and provision a home phone
service line, down from $315 in the fourth quarter of 2003. For the full year,
2004, our cost of acquisition averaged $304 per line. We have seen efficiency
improvements in both selling and marketing and in provisioning new customers.





•
    *Churn
      is stable*





After a
modest run up in the third quarter of 2004, fourth quarter overall churn
returned to the levels of earlier in the year - about 2.1 per cent. Overall
churn for the year was 2.2 per cent, down from 3.0 per cent last year.





Customer
churn in home phone service in the quarter averaged 2.5 per cent, and allowed us
to average 2.6 per cent consumer churn for the year. Over the past year, we have
been able to reduce churn by focusing on customer retention and improving the
credit profile of customers. In addition, two CRTC decisions, have helped. The
extension of the ’no-winback’ period from three months to 12 months
(Telelcom Decision CRTC 2004-04), and the direction that ILECs unbundle home
phone service from their offerings (Telelcom Decision CRTC 2003-49). According
to customer surveys done at the time of disconnect, the principal element of
voluntary churn continues to be a desire to have high-speed Internet (via DSL)
and home phone service provided by one supplier. We will address this with the
launch of our own facilities-based high-speed Internet product in the second
half of 2005.





•
    *VoIP
      - planning for tomorrow, without sacrificing
today*





In
2004, we launched a voice over Internet protocol (VoIP) service under the name
Sprint Canada Internet Phone Service. Customer take-up of this offering is
modest - consistent with our expectations. We have committed to try to deliver
the highest quality VoIP service available because we believe that consumers buy
service first and technology second. VoIP is an important investment for the
future because we believe that consumer adoption of Internet phone services will
continue to grow as the reliability of the service improves.





*BUSINESS
SERVICES ENHANCES FOCUS ON NEXT- GENERATION DATA AND LOCAL
SERVICES*




•
    *IP
      Enabled Solutions continues to win
converts*





After
the launch of *IP
Enabled Solutions* in
late 2003, we saw revenue growth in excess of 40 per cent in Internet protocol
(IP) based services in 2004 as we began to focus on IP as a dominant networking
solution. Our IP solution allows our customers to leverage the benefits of this
technology through hybrid networks and has several advantages:





•
    A
      single flexible network that encompasses a range of access types from xDSL
      to Ethernet allowing a customer to tailor a solution to precisely match
      the requirements of each site•
    A
      migration path from legacy frame relay services that delivers more
      bandwidth, more flexibility and a platform for emerging converged IP
      applications•
    An
      opportunity to simplify customers’ data solutions, moving from disparate
      services to a single IP platform.





•
    *Cross-border
      services are an important source of growth and
  profits*





We
continue to succeed in our initiative with Sprint to win a greater share of the
cross-border market. Our revenue from cross border initiatives grew by 32 per
cent in 2004 and is now 15 percent of our Business Services revenue. Sprint and
Sprint Canada offer a unique value proposition to North American business in the
provision of seamless North American telecommunications services. We expect
continued success in 2005. **





•
    *Local
      service bundles are attractive in the business
  market*





The
small and medium enterprise (SME) market in Canada has been an important source
of growth in local service bundles. Not only do we offer SMEs the benefits of
local access and long distance services at reduced rates, but we also provide
high-speed Internet access. In 2004, business local services revenue increased
by $14.6 million, or 47 per cent and contributed to average churn levels of less
than one per cent.


Call-Net
      Enterprises Inc.
    Page
      7
    2004
      & Q4 Managements Discussion &
Analysis













**FOURTH
QUARTER 2004 OPERATING HIGHLIGHTS**





**Fourth
Quarter Revenue by Product**





For
      the three months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long
      distance services
    
    
    101.7
    
    
    119.9
    
    
    (18.2
    )
    
    (15.2
    )%Data
      services
    
    
    53.5
    
    
    48.6
    
    
    4.9
    
    
    10.1
    %Local
      services
    
    
    52.8
    
    
    34.1
    
    
    18.7
    
    
    54.8
    %Wireless
      services
    
    
    3.1
    
    
    1.5
    
    
    1.6
    
    
    106.7
    %**Total
      revenue**
    
    
    **211.1**
    
    
    **204.1**
    
    
    **7.0**
    
    
    **3.4**
    **%**





In the
fourth quarter of 2004, our total revenue grew by $7.0 million, or three per
cent, from the fourth quarter of 2003 to $211.1 million. Fourth quarter
revenue includes the impact of the Bell/360 acquisition from the date of
closing, which contributed approximately $7.6 million of revenue in the quarter.





**Fourth
Quarter Revenue by Business**





For
      the three months ended December 31, 2004(in
      millions Canadian $)
    
    **Total**
    
    **Consumer**
    
    **Business**
    
    **Carrier**Long
      distance services
    
    
    101.7
    
    
    33.7
    
    
    37.7
    
    
    30.3Data
      services
    
    
    53.5
    
    
    2.9
    
    
    39.5
    
    
    11.1Local
      services
    
    
    52.8
    
    
    35.9
    
    
    14.7
    
    
    2.2Wireless
      services
    
    
    3.1
    
    
    3.1
    
    
    -
    
    
    -**Total
      revenue**
    
    
    **211.1**
    
    
    **75.6**
    
    
    **91.9**
    
    
    **43.6**





We
continue to grow non-long distance services, including local and home phone
service as well as IP-based data offerings. As a result, the proportion of
local, wireless and data revenue in our business mix continues to increase as
long distance declines. Long distance comprised 48 per cent of total revenue in
the quarter, down from 59 per cent in the fourth quarter of 2003.











In our
consumer services division, local or home phone service is now our biggest
single product segment at 47 per cent of consumer revenue. Long distance
services comprise 45 per cent of revenues, while the remaining eight per cent of
revenue comes from dial-up and wireless services.





In the
fourth quarter, we made a change to the allocation of the system access fee
(SAF) charged to our consumer customers.  Historically, 100 percent of this
SAF had been allocated to long distance revenue.  The SAF charge is more
properly described as a customer charge, rather than a product charge, so we
have changed the allocation of the SAF to one based on revenues from each
product.  We have applied this change retroactively in our consumer
services division.  As a result, in the fourth quarter $3.9 million long
distance revenue was reallocated to local services ($3.3 million), data services
($0.3 million) and wireless services ($0.3 million).


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In our
business services group, data service is our biggest single product segment at
43 per cent of business revenue. Long distance services comprise 41 per cent of
revenues, while the remaining 16 per cent of revenue comes from local
services.










In our
carrier services division, long distance continues to be our biggest single
product segment at 70 per cent of revenue. Data services comprise 25 per cent of
revenues, while the remaining five per cent of revenue comes from local
services.





**Fourth
Quarter Carrier Charges & Gross Margin**





For
      the three months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change****Carrier
      charges**
    
    
    **101.9**
    
    
    **96.8**
    
    
    **5.1**
    
    
    **5.3**
    **%**%
      of revenue
    
    
    48.3
    %
    
    47.4
    %
    
    0.9
    %**Gross
      margin**
    
    
    **109.2**
    
    
    **107.3**
    
    
    **1.9**
    
    
    **1.8**
    **%**%
      of revenue
    
    
    51.7
    %
    
    52.6
    %
    
    (0.9
    )%





Carrier
charges in the fourth quarter were $101.9 million, or 48 per cent of revenue.
This is up by $5.1 million from the same quarter last year. The growth in
carrier charges primarily reflects costs associated with growth in revenue.





In the
fourth quarter we received a beneficial decision from the CRTC (Telecom Decision
CRTC 2004-72) reducing primary inter-exchange carrier (PIC) charges by up to 90
per cent in some cases. This decision also has a retroactive component totaling
$1.7 million that has been included in the fourth quarter as a credit
against carrier charges.





**Fourth
Quarter Operating Costs**





For
      the three months ended December 31(in
      millionsCanadian$)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Consumer
      Services
    
    
    28.0
    
    
    28.0
    
    
    -
    
    
    0.0
    %Business
      Services
    
    
    23.2
    
    
    16.6
    
    
    6.6
    
    
    39.8
    %Carrier
      Services
    
    
    2.7
    
    
    0.3
    
    
    2.4
    
    
    800.0
    %Network
      operations & corporate
    
    
    23.4
    
    
    37.5
    
    
    (14.1
    )
    
    (37.6
    )%**Total
      operating costs**
    
    
    **77.3**
    
    
    **82.4**
    
    
    **(5.1**
    **)**
    
    **(6.2**
    **)%**





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Operating
costs fell in the quarter, reflecting the positive impact of our organizational
realignment. We undertook the realignment in order to consolidate and streamline
provisioning, reduce the number of levels of management and consolidate
marketing and development activities across divisions. As a result of corporate
reorganizations over the past year, changes in operating costs in business
services and network operations reflect the movement of personnel between these
divisions, rather than a significant change in the costs associated with these
personnel. As a result, operating costs for these groups are not directly
comparable across quarters. An apparent increase in the operating costs in
carrier services in the fourth quarter reflects the reversal of a portion of our
bad debt reserve in 2003.




**Fourth
Quarter EBITDA & Operating Profit (Loss)**





For
      the three months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**EBITDA
    
    
    31.9
    
    
    24.9
    
    
    7.0
    
    
    28.1
    %Depreciation
      & amortization
    
    
    (36.9
    )
    
    (38.6
    )
    
    1.7
    
    
    (4.4
    )%Realignment
      & other charges
    
    
    (6.5
    )
    
    -
    
    
    (6.5
    )
    
    -**Operating
      profit (loss)**
    
    
    **(11.5**
    **)**
    
    **(13.7**
    **)**
    
    **2.2**
    
    
    **(16.1**
    **)%****EBITDA
      as a % of revenue**
    
    
    **15.1**
    **%**
    
    **12.2**
    **%**
    
    **2.9**
    **%**





Fourth
quarter EBITDA was $31.9 million. This is $7.0 million above the level of the
same period in 2003, and is equivalent to approximately 15 per cent of revenue.
Much of the increase in EBITDA reflects the positive impact of our realignment
and the effect of the PIC decision referred to above. We recorded a charge
of $6.5 million in the fourth quarter reflecting the severance costs associated
with our realignment, announced on September 29, 2004. The realignment directly
affected approximately 135 of our employees.





**Home
Phone Service Bundles**





For
      the three months ended December 31**2004**
    
    **2003**
    
    **Change****Consumer
      home phone service lines**Gross
      additions
    
    
    48,000
    
    
    46,600
    
    
    1,400Net
      additions
    
    
    25,500
    
    
    30,600
    
    
    (5,100
    )Churn
    
    
    2.5
    %
    
    2.8
    %
    
    (0.3
    )%Average
      monthly revenue per line
    
    $
    60.28
    
    $
    60.45
    
    
    ($0.17
    )**Cost
      of acquisition (millions)**Selling
      and marketing costs
    
    $
    7.9
    
    $
    9.3
    
    
    ($1.4
    )Activation
      costs
    
    
    5.0
    
    
    5.4
    
    
    (0.4
    )**Total
      cost of acquisition**
    
    **$**
    **12.9**
    
    **$**
    **14.7**
    
    
    **($1.8**
    **)****Cost
      of acquisition per line**
    
    **$**
    **269**
    
    **$**
    **315**
    
    
    **($46**
    **)**




We had
another good quarter in our home phone business in consumer services. We added
48,000 gross and 25,500 net new home phone service lines at a cost of
acquisition of $269 per line. Our net line additions dropped by 5,100 from the
level of the fourth quarter of 2003 as a result of higher disconnects in the
home phone customer base. As our base of home phone service grows, a similar
percentage churn level will result in a higher number of disconnects just as a
result of the larger customer base. Churn in the quarter returned to the level
we have been targeting of 2.5 per cent as a result of refocusing certain of our
customer retention strategies and activities.





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Analysis








**2004
OPERATING RESULTS**




For the
full year, 2004, our total revenue grew by $13.3 million, or two per cent, to
$818.6 million. 2004 revenue includes the impact of the Bell/360 acquisition
from the date of closing, and contributed approximately $7.6 million of revenue
in the fourth quarter and full year.




**2004
Revenue by Product**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long
      distance services
    
    
    427.8
    
    
    482.2
    
    
    (54.4
    )
    
    (11.3
    )%Data
      services
    
    
    202.8
    
    
    201.1
    
    
    1.7
    
    
    0.8
    %Local
      services
    
    
    177.7
    
    
    120.4
    
    
    57.3
    
    
    47.6
    %Wireless
      services
    
    
    10.3
    
    
    1.6
    
    
    8.7
    
    
    543.8
    %**Total
      revenue**
    
    
    **818.6**
    
    
    **805.3**
    
    
    **13.3**
    
    
    **1.7**
    **%**





We
continue to grow non-long distance services, including local, home phone and
wireless service as well as IP-based data offerings. As a result, the proportion
of long distance revenue in our business mix continues to decline. However,
local, wireless and data services revenue grew by $67.7 million, or 21 per cent
over 2003, more than offsetting the $54.4 million, or 11 per cent decline in
long distance revenue. For the full year, long distance services revenue
comprised 52 per cent of revenue.





**2004
Revenue by Business**





For
      the 12 months ended December 31, 2004(in
      millions Canadian $)
    
    **Total**
    
    **Consumer**
    
    **Business**
    
    **Carrier**Long
      distance services
    
    
    427.8
    
    
    147.4
    
    
    150.9
    
    
    129.5Data
      services
    
    
    202.8
    
    
    13.1
    
    
    142.5
    
    
    47.2Local
      services
    
    
    177.7
    
    
    124.8
    
    
    45.6
    
    
    7.3Wireless
      services
    
    
    10.3
    
    
    10.3
    
    
    -
    
    
    -**Total
      revenue**
    
    
    **818.6**
    
    
    **295.6**
    
    
    **339.0**
    
    
    **184.0**





Our
revenue is also well diversified by customer segment, with $295.6 million, or 36
per cent of our revenue coming from consumer services and 41 per cent and 23
percent coming from each of business and carrier services. Consistent with the
recent past, year-over-year growth in our consumer and business services revenue
has offset declines in carrier services revenue.





**CONSUMER
SERVICE** **S** ****




In the
consumer segment, we provide home phone, long distance, dial-up Internet access
and wireless services to residences and small office home office (SOHO)
customers targeting five major urban areas that incorporates more than 33
different municipalities.









Over
the past year, consumer revenue has grown by $26.6 million or 10 per cent to
$295.6 million. In general, growth has been driven by our success in
selling home phone and wireless service.





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**2004
Consumer Services Revenue**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long
      distance services
    
    
    147.4
    
    
    165.8
    
    
    (18.4
    )
    
    (11.1
    )%Data
      services
    
    
    13.1
    
    
    17.0
    
    
    (3.9
    )
    
    (22.9
    )%Home
      phone services
    
    
    124.8
    
    
    84.6
    
    
    40.2
    
    
    47.5
    %Wireless
      services
    
    
    10.3
    
    
    1.6
    
    
    8.7
    
    
    543.8
    %**Consumer
      services revenue**
    
    
    **295.6**
    
    
    **269.0**
    
    
    **26.6**
    
    
    **9.9**
    **%**Consumer
      services operating costs
    
    
    119.3
    
    
    98.3
    
    
    21.0
    
    
    21.4
    %




*CONSUMER
SERVICES LONG DISTANCE SERVICES REVENU**E*


In
2004, we made a change to the allocation of the system access fee charged to our
consumer customers.  Historically, 100 per cent of this SAF had been
allocated to long distance revenue.  This charge is more properly described
as a customer charge, rather than a product charge, so we have changed the
allocation of the SAF to one based on revenues from each product.  We have
applied this change retroactively in our consumer services division.  In
2004, this change resulted in $13.8 million of revenue being reallocated from
long distance services to local services ($11.6 million), data services ($1.2
million) and wireless services ($1.0 million).  Historical periods have
also been restated to reflect this change.





After
changes relating to the allocation of SAF revenue, consumer long distance
revenue was $147.4 million, down $18.4 million from last year. This decline is a
result of declines in the average per minute charge for long distance services.
The total volume of long distance minutes grew by approximately 16 per cent
during 2004, driven by a large increase in North American calling under our
North American unlimited plan. In 2004, long distance revenue now accounted for
approximately 50 per cent of our total consumer services revenue; however, most
of this revenue comes from customers who also buy home phone service from us.
Sprint Canada-branded long distance only customers account for 15 per cent of
our consumer revenue, while indirect long distance programs, including affinity
programs, and alternative long distance products, comprise another 12 per
cent.











The
average revenue per minute (ARPM) of our per-minute long distance plans fell by
almost 10 per cent in 2004. However, the growth in popularity in unlimited plans
caused a significant increase in the number of minutes in these plans. For
example, our consumer U.S. bound minute volumes grew by 38 per cent in 2004,
driven by the popularity of the North American Unlimited Plan. The popularity of
these unlimited plans caused our overall consumer ARPM to decline by 23 per cent
in 2004. Due to continued improvements in the cost structure of our business and
our on-going efforts at cost reduction, average cost per minute for consumer
services declined by 34 per cent.




*CONSUMER
SERVICES HOME PHONE SERVICE REVENUE*


Home
phone, service revenue was $124.8 million in the year, an increase of 48 per
cent or $40.2 million from 2003. The growth in customer count has been
consistent and the average monthly home phone service revenue per customer has
been stable. This stability has resulted from a number of factors offsetting one
another, including the mix of wireless in the bundle, revenue promotions, as
well as changes in revenue from features such as voice mail and calling line
identification.





*Call-Net
      Enterprises Inc.
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**


*CONSUMER
SERVICES DATA REVENU* *E*


Revenue
from dial-up customers was $13.1 million for the year, a decline of $3.9
million, or 23 per cent from 2003. The number of subscribers stood at 51,700 at
year-end, down 21 per cent from last year. We activated more than 26,000 new
dial-up customers during the year, but this was offset by the continued
migration of Canadian households to high-speed Internet services. We expect to
begin to offset the decline in consumer data revenues in 2005 with the
deployment of our own consumer high-speed Internet offering using DSL
technology.





*CONSUMER
SERVICES WIRELESS REVENU* *E*


Under
our bundled wireless service offering using the Fido® brand, we activated
17,800 net new lines in the year and ended the year with
28,900 customers and 30,600 lines. Revenue from wireless services was
$10.3 million, in this first full year of offering the service. Churn in
wireless services was stable throughout the year at approximately 2.4 per
cent.




*CONSUMER
SERVICES OPERATING COSTS*


Operating
costs in consumer services were $119.3 million, up $21.0 million, or 21 per cent
from last year. The increase in operating costs year-over-year is primarily the
result of the transfer of certain provisioning operations amounting to $11.1
million into consumer services. After adjusting for this change, Consumer
Services operating costs were up by $9.9 million from last year. This increase
resulted from an increase in marketing programs and investments in customer
care.





**BUSINESS
SERVICE** **S**




We
continue to focus on four initiatives in the business market in Canada:





•
    Maintaining
      and developing our working relationship with Sprint to offer
      multi-national corporations (MNCs) single-service, single-invoice,
      seamless North American network services;•
    Delivering
      our*IP
      Enabled Solutions*at
      substantial cost savings and time efficiencies to Canadian customers
      allowing them to integrate legacy systems with next-generation services in
      an efficient and cost-effective manner;•
    Continuing
      our Enhanced Voice Services (EVS) initiative by penetrating the call
      centre sector with complex interactive voice response (IVR) and advanced
      voice recognition (AVR) applications; and•
    Bundling
      long distance, local, and high-speed access for small and medium-sized
      enterprises (SME).





To
these four initiatives we have added a fifth; maximizing the value of the
Bell/360 acquisition by fully integrating the people, products, and new
customers, and by making the best possible use of the future opportunities
afforded by the acquisition.




*BUSINESS
SERVICES REVENU**E*


In
2004, our Business Services revenue was $339.0 million, up $20.4 million from
last year. The Bell/360 acquisition contributed approximately $7.6 million to
growth, while the remaining $12.8 million was organic growth, split between
local and data services.





**2004
Business Services Revenue**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long
      distance services
    
    
    150.9
    
    
    153.6
    
    
    (2.7
    )
    
    (1.8
    )%Data
      services
    
    
    142.5
    
    
    134.0
    
    
    8.5
    
    
    6.3
    %Local
      services
    
    
    45.6
    
    
    31.0
    
    
    14.6
    
    
    47.1
    %**Business
      Services revenue**
    
    
    **339.0**
    
    
    **318.6**
    
    
    **20.4**
    
    
    **6.4**
    **%**Business
      Services operating costs
    
    
    78.2
    
    
    63.2
    
    
    15.0
    
    
    23.7
    %




*BUSINESS
SERVICES LONG DISTANCE REVENUE*


Business
Services long distance revenue declined by two per cent compared to last year.
Revenue decline was the result of a nine per cent decrease in ARPM, partially
offset by an eight per cent increase in minute volumes.





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Long
distance, as a percentage of business services revenue, continues to decline
from a level of 48 per cent of business services revenue in 2003 to 45 per cent
of revenue in this year.





*BUSINESS
SERVICES LOCAL REVENUE*


Business
local line equivalents grew by 92,500 lines, or 150 per cent, in 2004. Most of
that growth came from the addition of the Bell/360 business customers who used
approximately 61,900 local line equivalents at year-end. Revenue from business
local services grew by 47 per cent from last year and contributed $14.6 million
of the increase in revenue during the year.




*BUSINESS
SERVICES DATA REVENUE*


Business
data revenue also grew in the year 2004. We continue to have success in selling *IP
Enabled Solutions* and
the growth of this offering has generally compensated for the decline in legacy
data revenues. In 2004, we recorded $142.5 million of data revenue, up 6 per
cent from 2003. The growth in data revenue in the year caused this product
category in the fourth quarter to surpass long distance as the dominant product
sold to our business customers.





*BUSINESS
SERVICES OPERATING COST* *S*


Business
services operating costs totaled $78.2 million in 2004, an increase of $15.0
million over 2003. This increase is primarily the result of the transfer of
certain provisioning operations, amounting to $7.0 million, into Business
Services. This coupled with the Bell/360 acquisition, contributed approximately
$3.0 million to operating costs. Adjusting for this transfer and acquisition,
operating costs in Business Services grew by $5.0 million, reflecting an
increase in people and marketing costs necessary to support increased
volumes.





**CARRIER
SERVICE** **S**




Our
strategy is to optimize the contribution from carrier services by focusing on
profitability rather than revenue growth. The wholesale market has been under
substantial pricing pressure for the past several years and the ongoing results
of this division reflect this industry trend.




*CARRIER
SERVICES REVENU* *E*




**2004
Carrier Services Revenue**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long
      distance services
    
    
    129.5
    
    
    162.8
    
    
    (33.3
    )
    
    (20.5
    )%Data
      services
    
    
    47.2
    
    
    50.1
    
    
    (2.9
    )
    
    (5.8
    )%Local
      services
    
    
    7.3
    
    
    4.8
    
    
    2.5
    
    
    52.1
    %**Carrier
      services revenue**
    
    
    **184.0**
    
    
    **217.7**
    
    
    **(33.7**
    **)**
    
    **(15.5**
    **)%**Carrier
      services operating costs
    
    
    9.7
    
    
    6.9
    
    
    2.8
    
    
    40.6
    %







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Carrier
Services revenue in the year totaled $184.0 million; a 16 per cent
decline from 2003. Long distance services led the decline, down 21 per cent from
2003. Minute volumes grew by 10 per cent in the year while ARPMs were down
significantly, 27 per cent. Much of this ARPM decline can be attributed to
changes in the mix of minutes. For example, in international traffic, where
rates and costs are declining the fastest, we saw a 47 per cent increase in
minute volume and a 45 per cent reduction in ARPM. In 2004, Carrier Services
revenue comprised approximately 22 per cent of consolidated revenue and was 70
per cent long distance. Average costs per minute (ACPM), especially for
international traffic, has been declining at similar rates to
ARPMs.










*CARRIER
SERVICES OPERATING COST* *S*


Carrier
Services operating costs were $9.7 million, up in the year relative to the $6.9
million recorded in the last year. The apparent increase in costs was largely a
result of changes in 2003 to the provision for bad debt. Excluding this factor,
operating costs were $0.6 million higher in 2004, the result of increased people
costs.




**CARRIER
CHARGE** **S
& GROSS PROFIT**




Carrier
charges were $400.6 million in 2004, or 49 per cent of revenue, down from $409.9
million or 51 per cent of revenue in 2003. This $9.3 million improvement
reflects, in part, targeted efforts at carrier cost reduction - a focus on
network efficiencies and maximizing the benefits of the regulatory environment.
In 2004, we set targets for savings from operational efficiencies and targets
for regulatory cost savings based on our run rate at the beginning of the year.
The success of these programs, combined with revenue growth, offset by declines
in ARPM, resulted in the carrier charges improvement noted. None of the cost
benefits of the recent CRTC decision (Telecom Decision CRTC 2005-6) on CDN
services rates is reflected in 2004 results.





**2004
Carrier Charges & Gross Profit**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Carrier
      charges
    
    
    400.6
    
    
    409.9
    
    
    (9.3
    )
    
    (2.3
    )%%
      of revenue
    
    
    48.9
    %
    
    50.9
    %
    
    (2.0
    )%Gross
      profit
    
    
    418.0
    
    
    395.4
    
    
    22.6
    
    
    5.7
    %Gross profit margin
    
    
    51.1
    %
    
    49.1
    %
    
    2.0
    %





The
reduction in carrier charges translated into an increased gross profit and a
higher gross margin. Gross profit was up by $22.6 million, $9.3 million of
which came from a net reduction in carrier charges and $13.3 million of which
came from revenue growth. On a consolidated basis, our profit margin from long
distance services was unchanged from 2003, while there were gross margin
increases in local, data and wireless services. The underlying profitability of
our non-long distance services continues to improve as we gain economies of
scale in local service, and as we make more effective use of the benefits of our
hybrid network, leasing when appropriate and building when the economics
warrant.




**Call-Net
      Enterprises Inc.
    Page
      15
    2004
      & Q4 Managements Discussion &
Analysis**





****


**OPERATING
COST****S**




Overall,
in 2004 operating costs were $313.1 million, up $13.8 million from $299.3
million in 2003. Operating costs as a percentage of revenue were 38 per cent in
2004, as compared to 37 per cent of revenue in 2003. The increase in operating
costs reflects investments in sales and customer care in both consumer and
business services. The changes in consumer, business and carrier operating costs
was discussed earlier.





**2004
Operating Costs**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Consumer
      services
    
    
    119.3
    
    
    98.3
    
    
    21.0
    
    
    21.4
    %Business
      services
    
    
    78.2
    
    
    63.2
    
    
    15.0
    
    
    23.7
    %Carrier
      services
    
    
    9.7
    
    
    6.9
    
    
    2.8
    
    
    40.6
    %Network
      operations & corporate
    
    
    105.9
    
    
    130.9
    
    
    (25.0
    )
    
    (19.1
    )%**Total
      operating costs**
    
    
    **313.1**
    
    
    **299.3**
    
    
    **13.8**
    
    
    **4.6**
    **%**%
      of revenue
    
    
    38.2
    %
    
    37.2
    %
    
    1.0
    %





*NETWORK
OPERATIONS AND CORPORATE COST* *S*


Network
operations and corporate costs in 2004 were $105.9 million, down from $130.9
million in 2003.  Approximately $15.7 million of this reduction
related to the movement of our provisioning operations from network operations
to consumer and business services. The remaining reduction in costs is
attributed to human resource costs, due in part to the organizational
realignment and to lower incentive payments.





**OPERATING
PROFIT (LOSS** **)**




*EBITD* *A*


Primarily
as a result of the previously mentioned increase in gross profit, together with
decreases in operating costs, EBITDA for 2004 was $104.9 million, an
increase of $8.8 million or nine per cent from 2003.




**2004
EBITDA & Operating Profit (Loss)**





For
      the 12 months ended December 31(in
      millions $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change****Operating
      profit (loss)**
    
    
    **(42.9**
    **)**
    
    **(68.2**
    **)**
    
    **25.3**
    
    
    **(37.1**
    **)%**Depreciation
      & amortization
    
    
    146.6
    
    
    157.3
    
    
    (10.7
    )
    
    (6.8
    )%Realignment
      & other charges
    
    
    1.2
    
    
    7.0
    
    
    (5.8
    )
    
    (82.9
    )%**EBITDA**
    
    
    **104.9**
    
    
    **96.1**
    
    
    **8.8**
    
    
    **9.2**
    **%**





Depreciation
and amortization charges totaled $146.6 million, a seven per cent
decrease from 2003. Depreciation and amortization has generally been falling as
our ongoing capital spending program has declined.





We
recorded a net expense of $1.2 million in the year for realignment and
other charges. This expense was the result of a $7.8 million realignment
charge reflecting the severance costs of employees directly affected by the
realignment, offset by a $6.6 million gain resulting from the reversal of
the provision taken in 2003, for maintenance costs associated with certain dark
fibre. During 2004, we came to an agreement with the owner of the fibre whereby
we abandoned these routes and allowed this party to abandon certain other routes
on which we were collecting maintenance fees.





As a
consequence of the above factors, operating loss was $42.9 million for the
year, an improvement of $25.3 million, or 37 per cent from last
year.




Call-Net
      Enterprises Inc.
    Page
      16
    2004
      & Q4 Managements Discussion &
Analysis







**OTHER
EXPENSE** **S**





**2004
Other Expenses**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Loss
      on repurchase of long-term debt
    
    
    (4.0
    )
    
    -
    
    
    (4.0
    )
    
    -Reversal
      of change in control provision
    
    
    4.7
    
    
    -
    
    
    4.7
    
    
    -Net
      loss on the sale of capital assets
    
    
    (0.9
    )
    
    -
    
    
    (0.9
    )
    
    -**Sub-total**
    
    
    **(0.2**
    **)**
    
    **-**
    
    
    **(0.2**
    **)**
    
    **-**





In
2004, we recorded several items that are non-recurring by nature. In the
first quarter of 2004, we made market purchases for cancellation of
approximately U.S.$76.4 million of long term debt ($100.8 million), recording a
loss on repurchase of $4.0 million. The repurchases served to reduce our
interest expense on long term debt by U.S.$8.1 million per year.





In the
first quarter, we also recorded a gain of $4.7 million in connection with the
elimination of a reserve established in connection with the application brought
by Montreal Trust Company of Canada (now Compushare Investor Services),
discussed in note 12 of the audited consolidated financial statements. Both the
initial decision and subsequent appeal were ruled in our favour and the
plaintiffs in the case did not seek leave to appeal further.





In the
second quarter, we recorded a loss on the sale of assets. Capital equipment with
a book value of $1.3 million was sold for proceeds of $0.4 million, resulting in
a $0.9 million loss.





**2004
Interest Expense, Other Income and Foreign Exchange Gains &
Losses**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change****Interest
      expense**
    
    
    **(32.7**
    **)**
    
    **(43.2**
    **)**
    
    **10.5**
    
    
    **(24.3**
    **)%****Interest
      income & other expense**
    
    
    **(13.4**
    **)**
    
    **(5.7**
    **)**
    
    **(7.7**
    **)**
    
    **135.1**
    **%****Foreign
      exchange gain (loss)**
    
    
    **17.1**
    
    
    **85.9**
    
    
    **(68.8**
    **)**
    
    **(80.1**
    **)%**





Interest
expense on long-term debt in the year was $32.7 million, down from
$43.2 million in 2003. This $10.5 million reduction was a result of two
factors: 1) the market purchase of U.S.$76.4 million (approximately
$100.8 million) of senior secured notes in March 2004 and the
consequent elimination of $8.8 million in interest costs associated with the
repurchased notes; and 2) fluctuations in the Canadian dollar exchange
rate, which resulted in $1.7 million less in Canadian dollar interest payments
on our senior secured notes as these notes are denominated in U.S. dollars.





As a
result of our accounts receivable securitization program, certain of our gains
and losses related to bad debt are classified as gains or losses on
securitization and appear as an ‘other’ expense. In 2004 these losses totaled
$9.8 million, and comprised 73 per cent of the $13.4 million of net other
expenses. Other expenses also grew in 2004 reflecting the first full year impact
of the accounts receivable securitization program.





In
2004, we recorded a foreign exchange gain of $17.1 million as the result of the
appreciation in the Canadian dollar against the U.S. dollar. Of this gain, $17.8
million related to a change in the principal amount of our long-term debt and
the remaining $(0.7) million represented a net loss, during the year, on
the foreign exchange related component of our operations. While the foreign
exchange gain in 2004 is significant, it was much less than the $85.9 million
gain recorded in 2003, itself the result of the strong Canadian dollar
favourably impacting both operations and our balance sheet.





A one
cent change in the value of the Canadian dollar against the U.S. dollar changes
the principal amount of our long-term debt by approximately $3.3
million.





**NET
INCOME (LOSS** **)**




As a
consequence of the above factors, we recorded a net loss in the year of
$78.4 million, or $2.20 per share, compared with a net loss of
$37.5 million, or $1.36 per share in 2003. A 109 per cent increase in net
loss translated into a 62 per cent increase in net loss per share as a
consequence of an increase in the weighted average number of shares outstanding
in 2004.


Call-Net
      Enterprises Inc.
    Page
      17
    2004
      & Q4 Managements Discussion &
Analysis











**2004
Net Income (Loss)**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change****Net
      income (loss)**
    
    
    **(78.4**
    **)**
    
    **(37.5**
    **)**
    
    **(40.9**
    **)**
    
    **109.1**
    **%**Earnings
      per share - basic
    
    
    (2.20
    )
    
    (1.36
    )
    
    (0.84
    )
    
    61.8
    %





**LIQUIDITY
AND CAPITAL RESOURCE** **S**




Our
plan is to remain cash flow positive, meaning that we will generate more than
enough EBITDA to cover interest and other financing costs, capital expenditures
and cash taxes. This should leave our cash balance relatively intact and allow
us to keep these cash resources for general corporate purposes, opportunistic
investments or acquisitions, or to further reduce our debt levels.





Cash,
cash equivalents and short-term investments are generally invested in liquid
Canadian and U.S. dollar denominated securities with maturities no greater than
one year and having one of the two highest ratings by either the Standard and
Poor’s Rating Group or Moody’s Investor Service, Inc.





**CASH
FLO** **W**




*CASH
FLOW FROM OPERATING ACTIVITIE* *S*


Operating
activities before changes in non-cash working capital provided
$59.0 million of cash in 2004 compared with $41.2 million in 2003.
This $17.8 million, or 43 per cent increase in operating cash flow was assisted
by higher EBITDA of $8.8 million, and lower interest payments of $10.5 million,
consistent with our strategy of growing profitability and giving us greater
opportunities to re-invest in our business. Cash flow from operating activities
grew relative to the last year as changes in non-cash working capital provided
$25.3 million of cash. Over the past two years, changes in non-cash working
capital have provided $30.3 million of cash. This change has resulted from a
number of activities including proceeds from the sale of accounts receivable
partly offset by the effect of normalizing our payment relationships with
carrier suppliers to reduce the overall level of carrier disputes.




**2004
Cash Flow from Operating Activities**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Net
      income (loss)
    
    
    (78.4
    )
    
    (37.5
    )
    
    (40.9
    )
    
    109.1
    %Depreciation
      & amortization
    
    
    146.6
    
    
    157.3
    
    
    (10.7
    )
    
    (6.8
    )%Foreign
      exchange gain (loss)
    
    
    (17.8
    )
    
    (85.9
    )
    
    68.1
    
    
    (79.3
    )%Reversal
      of provisions
    
    
    (4.7
    )
    
    -
    
    
    (4.7
    )
    
    -Loss
      on repurchase of debt
    
    
    4.0
    
    
    -
    
    
    4.0
    
    
    -Future
      income taxes
    
    
    3.9
    
    
    4.3
    
    
    (0.4
    )
    
    (9.3
    )%Interest
      income & other expense
    
    
    2.7
    
    
    3.0
    
    
    (0.3
    )
    
    (10.0
    )%Loss
      on sale of assets
    
    
    0.9
    
    
    -
    
    
    0.9
    
    
    -Realignment
      & other charges
    
    
    1.2
    
    
    -
    
    
    1.2
    
    
    -**Operating
      cash flow**
    
    
    **58.4**
    
    
    **41.2**
    
    
    **17.2**
    
    
    **41.8**
    **%**Change
      in non-cash working capital
    
    
    28.4
    
    
    2.5
    
    
    25.9
    
    
    1,036.0
    %**Cash
      flow from operating activities**
    
    
    **86.8**
    
    
    **43.7**
    
    
    **43.1**
    
    
    **98.6**
    **%**Per
      share - basic
    
    $
    2.43
    
    $
    1.59
    
    $
    0.84
    
    
    52.8
    %





*CASH FLOW FROM
INVESTING ACTIVITIE**S*


Overall,
investment activities in 2004 generated $2.8 million of cash compared with a use
of cash of $59.7 million in 2003. However, we have combined capital
expenditures, acquisitions, dispositions, and changes in deferred costs,
long-term assets and other, into investing cash flow. This measure reflects the
net change in operating assets of the business, assets on which we expect to
make operating returns. In total we spent slightly less in 2004 on operating
assets than in 2003 ($56.0 million in 2004, as compared to $57.0 million in
2003). In order for us to meet our cash flow self sufficiency goals, we intend
to keep this investment in operating assets in the range of seven to eight per
cent of revenue.





Call-Net
      Enterprises Inc.
    Page
      18
    2004
      & Q4 Managements Discussion &
Analysis








Capital
investments of $55.4 million were made in 2004 to expand local services, improve
existing systems, enhance cost efficiency, and accommodate new products. The
increase of $11.3 million from 2003 reflects principally the increased scale of
our local operations.








**2004
Cash Flow from Investing Activities**





For
      the 12 ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Acquisition
      of capital assets
    
    
    (55.4
    )
    
    (44.1
    )
    
    (11.3
    )
    
    25.6
    %Change
      in deferred costs & other
    
    
    (0.3
    )
    
    (1.0
    )
    
    0.7
    
    
    (70.0
    )%Increase
      in long term assets
    
    
    (0.2
    )
    
    -
    
    
    (0.2
    )
    
    -Net
      proceeds from disposals
    
    
    0.4
    
    
    7.8
    
    
    (7.4
    )
    
    (94.9
    )%Acquisitions
    
    
    (0.5
    )
    
    (19.7
    )
    
    19.2
    
    
    (97.5
    )%**Investing
      cash flow**
    
    
    **(56.0**
    **)**
    
    **(57.0**
    **)**
    
    **1.0**
    
    
    **(1.8**
    **)%**%
      of revenue
    
    
    (6.8
    )%
    
    (7.1
    )%
    
    0.3
    %Change
      in short-term investments
    
    
    58.8
    
    
    (2.7
    )
    
    61.5
    
    
    (2,277.8
    )%**Cash
      flow from investing activities**
    
    
    **2.8**
    
    
    **(59.7**
    **)**
    
    **62.5**
    
    
    **(104.7**
    **)%**





Most of
the $62.5 million change in cash flow from investing activities between 2003 and
2004 is from changes in short-term investments which provided $61.5 million
more cash in 2004 than in the prior year.





*CASH
FLOW FROM FINANCING ACTIVITIE* *S*


Financing
activities consumed $107.2 million in 2004. This compares to 2003 when
financing activities generated $38.4 million of cash. In 2004, financing
activities were dominated by the repurchase of long term debt for $104.8
million, while in 2003 activities were dominated by the issuance of equity in
the amount of $40.6 million. The combined effect of these two events was a
$145.4 million swing between the two years. Excluding the effects of the
equity issuance, and the debt repurchase cash flow from financing activities has
been stable and limited to the costs incurred in connection with the retirement
of the right-of-way liability.





**2004
Cash Flow from Financing Activities**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Change
      in right-of-way liability
    
    
    (2.4
    )
    
    (2.2
    )
    
    (0.2
    )
    
    9.1
    %Repurchase
      of long term debt
    
    
    (104.8
    )
    
    -
    
    
    (104.8
    )
    
    -Issuance
      of class B shares
    
    
    -
    
    
    40.6
    
    
    (40.6
    )
    
    (100.0
    )%**Cash
      flow from financing activities**
    
    
    **(107.2**
    **)**
    
    **38.4**
    
    
    **(145.6**
    **)**
    
    **(379.2**
    **)%**






*FREE
CASH FLO* *W*


In
2004, we had free cash flow of $10.8 million, which is $1.2 million, or 10 per
cent, lower than 2003. Consistent with our strategy of reinvestment to the
extent of discretionary cash flow availability, all of the $8.8 million
improvement in EBITDA and the $7.4 million improvement in financing costs
was reinvested in capital expenditures, which grew by $18.7
million.





Call-Net
      Enterprises Inc.
    Page
      19
    2004
      & Q4 Managements Discussion &
Analysis











**2004
Free Cash Flow**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**EBITDA
    
    
    104.9
    
    
    96.1
    
    
    8.8
    
    
    9.2
    %Financing
      costs
    
    
    (37.4
    )
    
    (44.8
    )
    
    7.4
    
    
    (16.5
    )%Cash
      income taxes paid
    
    
    (1.4
    )
    
    (2.0
    )
    
    0.6
    
    
    (30.0
    )%Net
      capital expenditures
    
    
    (55.0
    )
    
    (36.3
    )
    
    (18.7
    )
    
    51.5
    %Cash
      component of change in deferred costs
    
    
    (0.3
    )
    
    (1.0
    )
    
    0.7
    
    
    (70.0
    )%**Free
      cash flow**
    
    
    **10.8**
    
    
    **12.0**
    
    
    **(1.2**
    **)**
    
    **(10.0**
    **)%**Change
      in non-cash working capital & other
    
    
    20.7
    
    
    (5.6
    )
    
    26.3
    
    
    (469.6
    )%Acquisitions
    
    
    (0.5
    )
    
    (19.7
    )
    
    19.2
    
    
    (97.5
    )%Increase
      in long-term investments
    
    
    (0.2
    )
    
    -
    
    
    (0.2
    )
    
    -Change
      in right-of-way liability
    
    
    (2.4
    )
    
    (2.2
    )
    
    (0.2
    )
    
    9.1
    %Repurchase
      of long-term debt
    
    
    (104.8
    )
    
    -
    
    
    (104.8
    )
    
    -Issuance
      of equity
    
    
    -
    
    
    40.6
    
    
    (40.6
    )
    
    (100.0
    %)**Change
      in cash, cash equivalents & short-term investments**
    
    
    **(76.4**
    **)**
    
    **25.1**
    
    
    **(101.5**
    **)**
    
    **(404.4**
    **)%**Increase
      (decrease) in short-term investments
    
    
    58.8
    
    
    (2.7
    )
    
    61.5
    
    
    (2,277.8
    )%**Change
      in cash & cash equivalents**
    
    
    **(17.6**
    **)**
    
    **22.4**
    
    
    **(40.0**
    **)**
    
    **(178.6**
    **)%**





**FINANCIAL
POSITIO** **N**




At
December 31, 2004, we had current assets of $126.7 million and current
liabilities of $149.7 million. Net working capital was a negative $23.0 million,
a decline from the positive $92.3 million at December 31, 2003. This $115.3
million change primarily reflects our decision to use $104.8 million of cash to
repurchase notes in 2004.





**2004
Working Capital Changes**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Accounts
      receivable & other current assets
    
    
    126.7
    
    
    241.7
    
    
    (115.0
    )
    
    (47.6
    )%Accounts
      payable & accrued liabilities
    
    
    149.7
    
    
    149.4
    
    
    0.3
    
    
    0.2
    %**Net
      working capital**
    
    
    **(23.0**
    **)**
    
    **92.3**
    
    
    **(115.3**
    **)**
    
    **(124.9**
    **)%**Current
      ratio
    
    
    0.9
    
    
    1.6
    
    
    (0.7
    )
    
    (43.8
    )%Accounts
      receivable days sales outstanding
    
    
    32
    
    
    32
    
    
    0





In
2004, long-term debt (LTD) decreased by $118.6 million to $268.5 million
resulting from positive effects of the repurchase of senior secured notes, which
accounted for $100.8 million, and the strong Canadian dollar, which accounted
for $17.8 million.







Call-Net
      Enterprises Inc.
    Page
      20
    2004
      & Q4 Managements Discussion &
Analysis











Other
long-term liabilities, which include the right-of-way liability, the long-term
portion of Bell/360 acquisition account payable, lease exit costs and asset
retirement obligations, have increased by $4.2 million to $53.3 million. Apart
from the Bell/360 acquisition related changes, factors contributing to the year
over year change include the accretion of the asset retirement obligation,
offset partly by the reversal of the dark fibre maintenance charge, and the
continuing amortization of our right-of-way liability.




**2004
Capital Structure**





For
      the 12 months ended December 31(in
      millions Canadian $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Long-term
      debt
    
    
    268.5
    
    
    387.1
    
    
    (118.6
    )
    
    (30.6
    )%Right-of-way
      liability
    
    
    38.3
    
    
    37.0
    
    
    1.3
    
    
    3.5
    %Less:Cash
      & short-term investments
    
    
    73.7
    
    
    150.1
    
    
    (76.4
    )
    
    (50.9
    )%Prepaid
      right-of-way
    
    
    5.9
    
    
    6.9
    
    
    (1.0
    )
    
    (14.5
    )%**Total
      net debt**
    
    
    **227.2**
    
    
    **267.1**
    
    
    **(39.9**
    **)**
    
    **(14.9**
    **)%**Total
      shareholders’ equity
    
    
    177.4
    
    
    253.5
    
    
    (76.1
    )
    
    (30.0
    )%**Total
      capitalization**
    
    
    **404.6**
    
    
    **502.6**
    
    
    **(98.0**
    **)**
    
    **(19.5**
    **)%**Net
      debt to capitalization
    
    
    56.2
    %
    
    53.1
    %
    
    3.1
    %
    
    5.8
    %Common
      & class B shares outstanding at end of period
    
    
    35.8
    
    
    35.6
    
    
    0.2
    
    
    0.6
    %Options
      outstanding at end of period
    
    
    1.7
    
    
    1.4
    
    
    0.3
    
    
    21.4
    %





Our net
debt to net capitalization ratio stood at 56 per cent at the end of the fourth
quarter, as compared to 53 per cent at the end of 2003. The increase is because
net debt declined by 15 per cent, while capitalization declined by 19 per cent.
The increased decline in capitalization is the result of a decline in
shareholders’ equity, driven primarily by our net loss of $78.4 million
during 2004.




**LIQUIDITY**




*LONG-TERM
CONTRACTUAL OBLIGATIONS*




**2004
Long Term Contractual Obligations**





(in
      millions Canadian $)
    
    **Total**
    
    **<1
      Year**
    
    **1-3
      Years**
    
    **4-5
      years**
    
    **>
      5 years**Long-term
      debt
    
    
    268.5
    
    
    -
    
    
    -
    
    
    268.5
    
    
    -Interest
      payments on debt (1)
    
    
    114.1
    
    
    28.5
    
    
    57.1
    
    
    28.5
    
    
    -Right-of-way
      liability
    
    
    77.6
    
    
    5.3
    
    
    10.3
    
    
    10.8
    
    
    51.2Operating
      leases
    
    
    41.9
    
    
    14.3
    
    
    19.0
    
    
    5.1
    
    
    3.5Network
      facilities
    
    
    62.6
    
    
    21.2
    
    
    26.9
    
    
    14.3
    
    
    0.2Other
      long-term obligations
    
    
    125.8
    
    
    36.7
    
    
    37.4
    
    
    14.8
    
    
    35.4**Total
      contractual obligations**
    
    
    **690.5**
    
    
    **106.0**
    
    
    **150.7**
    
    
    **342.0**
    
    
    **90.3**





(1)
    Converted
      to Canadian dollars at the year-end exchange rate of
    $1.2036





**CAPITAL
RESOURCES**





We have certain
commitments to capital expenditures and to payments in respect of acquisitions.
In the normal course of business we make commitments to purchase capital
equipment that will be invoiced in future periods. At year-end 2004, our
commitments to purchase capital equipment that had not yet been received totaled
$1.6 million. These commitments are expected to be realized in the first quarter
of 2005.





On November 20,
2004, we purchased the Eastern Canadian business customers of 360networks from
Bell Canada. Excluding transaction costs, the purchase price of this acquisition
is expected to total $16.7 million and will be paid in four installments. Two of
these installments, totaling $6.7 million, or 40 per cent of the purchase price,
will be paid in 2005, while the remaining two installments, totaling $10
million, will be paid in 2006.





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      Enterprises Inc.
    Page
      21
    2004
      & Q4 Managements Discussion &
Analysis








**OFF
BALANCE SHEET ARRANGEMENTS**




In
2003, we entered into a five-year accounts receivable securitization program
whereby we sell, on an on-going basis, an undivided co-ownership interest in
certain of our trade receivables to a securitization trust to a maximum of $55.0
million. At December 31, 2004, the program was fully utilized. We are exposed to
certain risks of default on the amount of the receivables under securitization.
We retain ongoing servicing responsibilities, and have a retained interest in
the securitized receivables and rights to future excess cash flows generated by
the trust. The sales are on a fully-serviced basis and we do not receive any
fees for our on-going servicing responsibilities. In the event of a failure of
debtors to pay when due, the trust and its investors have recourse to the
retained interest of the trust, but have no recourse to our other
assets.





During
the year ended December 31, 2004, we recognized a loss of $9.8 million on the
securitization of receivables. We measure the loss on securitization by applying
the same methodology used to estimate our allowance for doubtful accounts. The
result is a provision for anticipated credit losses of approximately one per
cent of the accounts receivable balance.





**RELATED
PARTY TRANSACTIONS**




We
engage in significant sales and purchases of telecommunication services with
Sprint, which maintains an approximate 6.6 per cent equity interest in our
company. These transactions are made at market prices under normal trade terms
and conditions. In addition, a royalty payment based on revenues is paid to
Sprint, see note 11 of consolidated financial statements. 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:




**2004
Transactions with Sprint**





(in
      millions $)
    
    **2004**
    
    **2003**
    
    **Change**
    
    **%
      Change**Revenue
    
    
    30.4
    
    
    27.0
    
    
    3.4
    
    
    12.6
    %Carrier
      charges
    
    
    42.4
    
    
    44.0
    
    
    (1.6
    )
    
    (3.6
    )%Royalty
      costs
    
    
    19.7
    
    
    19.5
    
    
    0.2
    
    
    1.0
    %





We also
engage in sales of telecommunication services with a company in which we
maintain an approximate 7.5% equity interest and have a right to two board
seats. These transactions were made at market prices under normal trade terms
and conditions. Revenue derived from this company was $3.5 million in 2004 and
$3.2 million in 2003.




Furthermore,
we engage in sales of telecommunication services with companies to which various
members of our company’s board of directors are related. These transactions were
made at market prices under normal trade terms and conditions, and total less
than $1.5 million.




**OUTSTANDING
SHARE DAT** **A**




Our
authorized share capital consists of an unlimited number of common shares, class
B non-voting shares and preferred shares.





The
holders of the common shares are entitled to one vote for each share held at any
meeting of our shareholders. 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.





In
certain circumstances, the class B non-voting shares are convertible, at the
option of the class B shareholders, into common shares on a share-for-share
basis.





The
common shares and class B non-voting shares rank *pari
passu* on a
per share basis with respect to payment of dividends and the right to
participate in a distribution of assets on winding up, dissolution or
otherwise.





We are
authorized to issue an unlimited number of the preferred shares. We issued
Sprint one preferred share (of a value of $1.00) as part of the consideration
for entering into a commercial agreement with us. The preferred shares are
generally non-voting and have no right to dividends, but do entitle the holder
to nominate and elect two directors to our board. The preferred shares also have
a priority right over all other classes of shares to receive a return of capital
equal to $1.00 per preferred share on winding up, dissolution or
otherwise.








**Outstanding
      as at****Authorized
      Share Capital**
    **Dec
      31 2004**Common
      shares
    
    
    4,302,011Class
      B non-voting shares
    
    
    31,462,025**Total**
    
    
    **35,764,036****Preferred
      shares**
    
    
    **1**




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      Enterprises Inc.
    Page
      22
    2004
      & Q4 Managements Discussion &
Analysis








**RISKS
AND UNCERTAINTIES**




*FINANCING*


We are
cash flow self sufficient, and have been for several years. However, our debt
level relative to our EBITDA and our book capitalization is high in comparison
to many Canadian telecommunications firms, although not higher than the Canadian
universe of communications companies in general such as cable and broadcast
media. While this leverage has given us access to important capital that we have
used to build our business, we must manage our business so that this long term
debt can be repaid or refinanced on or before maturity.





*TECHNOLOGY
CHANGES*


There
are several technologies that either will, or will have the capacity to, cause
fundamental changes in the way our services are delivered. These technologies
include voice over Internet protocol (VoIP), IP-based virtual private networks
(IP-VPNs), as well as broadband wireless access (BWA). These technologies may
result in significantly different cost structures for the users of the
technologies and may consequently affect the long-term viability of our
technologies. We have responded to this threat by ensuring that we too, have
access to these new technologies both through our relationship with Sprint and
by working closely with equipment manufacturers.





*THREAT
OF NEW ENTRANTS*


Some of
these technologies may allow competitors to enter our markets with similar
products or services that have different cost structures. Some of these
competitors may be larger with more access to financial resources than we have.
In the face of this potential competition, we must be vigilant to protect our
existing customer base and ensure that new customer acquisition continues to be
a profitable enterprise.





*NETWORK
FAILURES*


With an
average of 99.999 per cent availability, our wireline network is very reliable.
Generally, our long-haul network has built-in redundancy by virtue of its SONET
ring configuration, so we are protected in most circumstances from incidents
such as a fibre cut. However, the failure of our network or a component of our
network would, in some circumstances result in an indefinite loss of service for
our customers. In addition, we rely on business partners to complete certain
calls. The failure of one of these carriers might also cause an interruption in
service for our customers that would last until we could reroute the traffic to
an alternative carrier.


**


*RELIANCE
ON PARTNERS*


We rely
on partners to deliver certain telecommunications services. We have a
long-standing technology and services provisioning agreement with Sprint under
which we have access to the brand-name, software updates, new product
technologies and product enhancements to keep our interconnections
seamless.





We also
have a partnership agreement with Microcell Solutions Inc. under which we have
been granted rights to use its wireless spectrum and its network to offer
wireless services to our home phone service customers. In 2004, Microcell
Solutions Inc. was acquired by Rogers Wireless, a subsidiary of Rogers
Communications Inc. While the revenue from wireless customers is modest in
comparison with the other products we sell, we do rely on having access to this
product to complement our bundled home phone service offering for consumers. The
loss of this agreement could adversely affect our consumer services
strategy.




**CRITICAL
ACCOUNTING ESTIMATES AND POLICIE** **S
2004**




The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to select accounting policies and make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the period, the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities at the date of the financial
statements. The following discussion highlights the critical accounting policies
and the main areas where estimates are required. See note 2 to the 2004 annual
consolidated financial statements for a more comprehensive discussion of our
significant accounting policies.





**CRITICAL
ACCOUNTING ESTIMATES**




*Revenue
Recognition:* Substantially
all of our revenues are derived from long distance, data, local and wireless
telecommunications services. Products and services are sold either stand-alone
or together as a multiple service arrangement or a bundled solution. Components
of multiple service arrangements are separately accounted for provided the
delivered elements have stand-alone value to the customer and the fair value of
any undelivered elements can be objectively and reliably
determined.





We
recognize revenue once persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, fees are fixed or determinable and
collectability is reasonably assured. We record provisions against related
revenue for service discounts, promotions, achievement credits and incentives
related to telecommunication services. These revenue allowances are based on
estimates derived from factors that include, but are not limited to, historical
results, current economic trends and changes in demand. The provisions for
revenue adjustments are recorded as a reduction of revenue when incurred or
ratably over a contract period.





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      Enterprises Inc.
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    2004
      & Q4 Managements Discussion &
Analysis








Revenues
from telecommunication services are recognized based on either customer usage as
measured by our switches or by contractual agreement when provided. Revenues
from the sale of goods are recognized when goods are delivered and accepted by
customers. Where
services to certain customers are provisioned through the use of subcontractor
agents, revenue is recognized based on the fees charged to the customer provided
that we are acting as the principal in the arrangement.





*Allowance
for Doubtful Accounts:* **** We use
a predictive model as well as specific assessment to determine the allowance
required for doubtful accounts and to estimate the fair value of the retained
interest in securitized receivables. An industry accepted predictive model that
is representative of our own experience is applied to the accounts receivable
for the consumer portion of the business. In other areas, a more detailed review
of the accounts receivable balances and specific customer circumstances is
performed at each month-end. Management experience and knowledge is used to
determine overall reserve amounts in this area.





*Carrier
Charge Payable Reserves:* Carrier
charges are incurred for the transmission of voice and data over other carriers’
networks. These costs consist of both fixed payments and variable amounts based
on actual usage and negotiated or regulated contract rates. We record carrier
charges as incurred. Accordingly, at each balance sheet date, we record our best
estimate of the carrier charge incurred but not billed based on internal usage
reports and, for disputed amounts, a reserve based on an analysis of the
probability of paying the disputed amount.





*Impairment
of Long-lived Assets* : The
carrying value of long-lived assets to be held and used, including capital
assets and intangible assets with definite useful lives, is reviewed for
impairment on an ongoing basis whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Intangible assets with
a definite useful life are also assessed for impairment at least annually. An
impairment loss is recognized when the carrying value exceeds the projected
undiscounted future cash flows expected from its use and disposal, and is
measured as the amount by which the carrying value of the asset exceeds its fair
value. At December 31, 2004, we determined that no major events or
circumstances had occurred during the year that would indicate
impairment.





*Capitalized
Costs:* Direct
and indirect labour costs incurred to develop or construct new assets or upgrade
existing assets are capitalized. Indirect overhead costs, general and
administrative costs and interest costs are not capitalized. Direct labour costs
of $11.0 million and $10.4 million were capitalized in 2004 and 2003,
respectively.





*Accrued Liabilities:* In the
ordinary course of business activities we are required to make accounting
estimates to report certain liabilities at the reporting date. Management
experience and knowledge and any other sources of information available are used
to make these estimates.


**


*Stock-based
Compensation* : We
have three stock-based compensation plans ** and
account for stock-based compensation using the fair value method. The fair value
of stock options is estimated at the grant date using the Black-Scholes options
pricing model. This model requires the input of a number of assumptions
including dividend yields, expected stock price volatility, expected life of the
option and risk-free interest rates. Although the assumptions used reflect our
best estimates, they involve uncertainties based on market conditions generally
outside of our control. The estimated fair value of the options is amortized to
expense on a straight line basis over the vesting period of the option.
Stock-based compensation expense is recorded in operating costs in our statement
of operations and deficit, and credited to contributed surplus on the balance
sheet, until the award is exercised, at which time it is transferred to capital
stock.





Stock-based
awards that are settled or may be settled in cash or shares purchased on the
open market at the option of employees or directors are recorded as liabilities.
The measurement of the liability and compensation cost for these awards is based
on the intrinsic value of the award, determined based on the market price of the
underlying shares as applicable at each balance sheet date. Compensation cost
determined is recognized over the vesting period of the award. We recognize
compensation expense related to restricted stock units based on the market value
of the underlying shares at the time of award. We also recognize compensation
expense related to deferred share units in the amount of the participants’
remuneration as their services are provided. Changes in the payment obligation
subsequent to vesting of the award and prior to the settlement date are recorded
into operating costs in the consolidated statements of operations and
deficit each period.





**NEW
ACCOUNTING POLICIES AND ACCOUNTING CHANGES**




**STOCK-BASED
COMPENSATION AND OTHER STOCK-BASED PAYMENTS**




Effective
January 1, 2004, we adopted the changes made to CICA Section 3870, ‘Stock-Based
Compensation and Other Stock-Based Payments’ requiring that all stock-based
compensation awarded to both employees and non-employees be measured and
recognized using the fair value method. Previously, we had elected to use the
settlement method to account for stock option grants to employees. The main
impact for us was to measure and recognize compensation expense using the fair
value method relating to the award of stock options to employees that we had
previously chosen to disclose on a pro forma basis within the notes to the
financial statements. We adopted this change on a retroactive basis with
restatement of prior periods to reflect the expensing of the fair value of stock
options granted subsequent to January 1, 2002. The result of this change is
reflected in operating expenses in the consolidated statements of operations and
deficit. It contributed surplus and capital stock on the consolidated balance
sheets.


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      Enterprises Inc.
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      24
    2004
      & Q4 Managements Discussion &
Analysis








The
effect of the prior-period restatements was an increase to net loss (net of tax
of nil) for the year ended December 31, 2003 and nine months ended
December 31, 2002 of $1.7 million and $1.2 million respectively, with
corresponding increases to deficit of $2.9 million as at December 31, 2003. The
impact of the restatement increased both basic and diluted loss per share by
$0.06 and $0.05, respectively, for the same periods.





**ASSET
RETIREMENT OBLIGATIONS**




Effective
January 1, 2004, we retroactively adopted, with restatement of prior periods,
the new CICA Handbook Section 3110, ‘Asset Retirement Obligations’ [ARO], which
establishes standards for the recognition, measurement and disclosure of
liabilities for asset retirement obligations and the associated retirement
costs. This section applies to legal obligations associated with the retirement
of tangible long-lived assets that result from their acquisition, lease,
construction, development or normal operation. The offset to the initial ARO is
an increase in the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its future value, and the asset is depreciated over
the useful life of the related asset. The accretion expense related to the ARO
is recorded in depreciation and amortization expense within the consolidated
statement of operations and deficit. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. This standard was effective on a retroactive basis with
restatement of prior periods.





We have
reviewed our obligations and determined that we have AROs associated with
retiring fibre optic cable and leasehold improvement assets at the maturity of
the facility leases. As at January 1, 2004, the cumulative effect of the
retroactive adjustment was an increase to fibre optic cable assets and leasehold
improvements of $1.5 million, an increase to other long-term liabilities of $2.4
million, and an increase to opening deficit of $0.9 million. The prior period
restatement increased depreciation expense and net loss for the year ended
December 31, 2003 and nine months ended December 31, 2002 by $0.5 million and
$0.4 million respectively. The impact of the restatement also increased both
basic and diluted loss per share by $0.02 and $0.02, respectively, for the same
periods.





**IMPAIRMENT
OF LONG-LIVED ASSETS**




Effective
January 1, 2004, we adopted, on a prospective basis, the guidance in CICA
Section 3063, ’Impairment of Long-Lived Assets‘. Under Section 3063, an
impairment loss is recognized on a long-lived asset held for use when its
carrying value exceeds the undiscounted cash flows from its use and eventual
disposition. The amount of the loss is measured by deducting the asset’s fair
value (based on discounted cash flows) from its carrying value. Prior to the
adoption of Section 3063, an impairment loss was measured by deducting the
asset’s net recoverable value (based on undiscounted cash flows) from its
carrying value. Adoption of Section 3063 did not have an impact on results of
operations during the current year; however, it could impact the measurement of
an impairment loss in the future.





**REVENUE
RECOGNITION**




Effective
January 1, 2004, we adopted the CICA’s Emerging Issues Committee Abstract 141,
‘Revenue Recognition’ [EIC 141]. EIC 141 incorporates the principles in the
Securities and Exchange Commission’s [SEC] Staff Accounting Bulletin [SAB’ 101,
’Revenue Recognition in Financial Statements‘ which has been since superseded by
SAB 104 ‘Revenue Recognition’. We have reviewed our policies and determined
there was no impact as a result of us adopting this guidance.





Also
effective January 1, 2004, we adopted, on a prospective basis, EIC 142, ‘Revenue
Arrangements with Multiple Deliverables’ [EIC 142]. EIC 142 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. EIC 142 also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. We have reviewed our policies and determined
there was no impact as a result of us adopting this guidance.





**RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS**





**VENDOR
REBATES**




In
January 2005, the CICA amended EIC-144, ‘Accounting by a customer (including a
reseller) for certain consideration received from a vendor.’ The standard is
effective retroactively for periods commencing on or after February 15, 2005.
The standard requires companies to recognize the benefit of non-discretionary
rebates for achieving specified cumulative purchasing levels, as a reduction of
the cost of purchases over the relevant period, provided the rebate is probable
and reasonably able to be estimated. Otherwise, the rebates would be recognized
as purchasing milestones are achieved. We are assessing the impact of the new
standard but do not expect it to have a material impact on the consolidated
financial statements.


Call-Net
      Enterprises Inc.
    Page
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    2004
      & Q4 Managements Discussion &
Analysis













**MD&A
SUMMARY INFORMATION**


**Three
      Months Ended**(millions
      of Canadian dollars, except per share and minutes data)
    **Dec
      31,**
    
    **Sept
      30,**
    
    **June
      30,**
    
    **Mar
      31,**
    
    **Dec
      31,**
    
    **Sept
      30,**
    
    **June
      30,**
    
    **Mar
      31,****2004**
    
    **2004**
    
    **2004**
    
    **2004**
    
    **2003**
    
    **2003**
    
    **2003**
    
    **2003****Consumer
      Home Phone Service Bundles**Gross
      additions
    
    
    **48,000**
    
    
    51,700
    
    
    44,700
    
    
    40,600
    
    
    46,600
    
    
    35,200
    
    
    28,600
    
    
    17,400Net
      additions
    
    
    **25,500**
    
    
    26,800
    
    
    27,300
    
    
    25,200
    
    
    30,600
    
    
    18,300
    
    
    12,600
    
    
    3,600Churn
    
    
    **2.5**
    **%**
    
    3.1
    %
    
    2.4
    %
    
    2.3
    %
    
    2.8
    %
    
    3.4
    %
    
    3.5
    %
    
    3.2
    %End
      of period lines
    
    **310,800**
    
    
    285,300
    
    
    258,500
    
    
    231,200
    
    
    206,000
    
    
    175,400
    
    
    157,100
    
    
    144,600Line
      growth (per quarter)
    
    
    **8.9**
    **%**
    
    10.4
    %
    
    11.8
    %
    
    12.2
    %
    
    17.4
    %
    
    11.6
    %
    
    8.6
    %
    
    2.5
    %Average
      monthly revenue per line (ARPL)
    
    
    **60.28**
    
    
    61.03
    
    
    59.86
    
    
    61.25
    
    
    60.45
    
    
    62.10
    
    
    62.04
    
    
    64.54Selling
      & marketing
    
    
    **7.9**
    
    
    8.2
    
    
    9.7
    
    
    10.1
    
    
    9.3
    
    
    9.2
    
    
    6.8
    
    
    4.5Activation
      costs
    
    
    **5.0**
    
    
    5.5
    
    
    5.5
    
    
    4.5
    
    
    5.4
    
    
    4.8
    
    
    3.6
    
    
    2.5Total
      cost of acquisition ($M)
    
    
    **12.9**
    
    
    13.7
    
    
    15.2
    
    
    14.6
    
    
    14.7
    
    
    **14.0**
    
    
    **10.4**
    
    
    **7.0**Cost
      of acquisition per line
    
    
    **269**
    
    
    265
    
    
    339
    
    
    359
    
    
    315
    
    
    398
    
    
    363
    
    
    398**Long-Distance
      Minutes (in thousands of minutes)**Consumer
      Services
    
    
    **418,450**
    
    
    391,818
    
    
    397,920
    
    
    400,990
    
    
    390,739
    
    
    366,248
    
    
    305,650
    
    
    325,471Business
      Services
    
    
    **773,629**
    
    
    743,139
    
    
    742,930
    
    
    782,815
    
    
    713,172
    
    
    725,348
    
    
    692,606
    
    
    690,831Carrier
      Services
    
    
    **1,241,533**
    
    
    1,259,324
    
    
    1,257,978
    
    
    1,261,622
    
    
    1,250,727
    
    
    1,102,970
    
    
    1,086,160
    
    
    1,138,578**Total
      Revenue**Consumer
      ServicesLong
      distance
    
    
    **33.7**
    
    
    36.0
    
    
    37.7
    
    
    40.0
    
    
    42.5
    
    
    44.0
    
    
    37.8
    
    
    41.5Data
    
    
    **2.9**
    
    
    3.2
    
    
    3.4
    
    
    3.6
    
    
    3.8
    
    
    4.0
    
    
    4.4
    
    
    4.8Local
    
    
    **35.9**
    
    
    33.1
    
    
    29.0
    
    
    26.8
    
    
    24.1
    
    
    21.7
    
    
    19.6
    
    
    19.2Wireless
    
    
    **3.1**
    
    
    2.8
    
    
    2.5
    
    
    1.9
    
    
    1.5
    
    
    0.1
    
    
    0.0
    
    
    0.0**75.6**
    
    
    75.1
    
    
    72.6
    
    
    72.3
    
    
    71.9
    
    
    69.8
    
    
    61.8
    
    
    65.5Business
      ServicesLong
      distance
    
    
    **37.7**
    
    
    36.2
    
    
    37.5
    
    
    39.5
    
    
    37.8
    
    
    38.5
    
    
    38.3
    
    
    39.0Data
    
    
    **39.5**
    
    
    34.4
    
    
    35.1
    
    
    33.5
    
    
    33.0
    
    
    33.9
    
    
    33.9
    
    
    33.2Local
    
    
    **14.7**
    
    
    11.2
    
    
    10.4
    
    
    9.3
    
    
    8.8
    
    
    8.3
    
    
    7.4
    
    
    6.5**91.9**
    
    
    81.8
    
    
    83.0
    
    
    82.3
    
    
    79.6
    
    
    80.7
    
    
    79.6
    
    
    78.7Carrier
      ServicesLong
      distance
    
    
    **30.3**
    
    
    32.8
    
    
    31.6
    
    
    34.8
    
    
    39.6
    
    
    41.8
    
    
    38.3
    
    
    43.1Data
    
    
    **11.1**
    
    
    12.6
    
    
    11.7
    
    
    11.8
    
    
    11.8
    
    
    11.5
    
    
    13.1
    
    
    13.7Local
    
    
    **2.2**
    
    
    1.9
    
    
    1.9
    
    
    1.3
    
    
    1.2
    
    
    1.1
    
    
    1.3
    
    
    1.2**43.6**
    
    
    47.3
    
    
    45.2
    
    
    47.9
    
    
    52.6
    
    
    54.4
    
    
    52.7
    
    
    58.0Total
      revenue
    
    
    **211.1**
    
    
    204.2
    
    
    200.8
    
    
    202.5
    
    
    204.1
    
    
    204.9
    
    
    194.1
    
    
    202.2**Carrier
      Charges, Operating Costs, Operating Profit & Net
    Income**Carrier
      charges
    
    
    **101.9**
    
    
    103.1
    
    
    100.5
    
    
    95.1
    
    
    96.8
    
    
    108.5
    
    
    98.4
    
    
    106.2Gross
      profit
    
    
    **109.2**
    
    
    101.1
    
    
    100.3
    
    
    107.4
    
    
    107.3
    
    
    96.4
    
    
    95.7
    
    
    96.0Operating
      costsConsumer
      Services
    
    
    **28.0**
    
    
    28.8
    
    
    31.2
    
    
    31.3
    
    
    28.0
    
    
    26.6
    
    
    23.2
    
    
    20.5Business
      Services
    
    
    **23.2**
    
    
    18.4
    
    
    18.3
    
    
    18.3
    
    
    16.6
    
    
    15.9
    
    
    15.4
    
    
    15.3Carrier
      Services
    
    
    **2.7**
    
    
    2.6
    
    
    2.2
    
    
    2.2
    
    
    0.3
    
    
    1.2
    
    
    2.6
    
    
    2.8Corporate
    
    
    **23.4**
    
    
    27.2
    
    
    26.2
    
    
    29.1
    
    
    37.5
    
    
    29.7
    
    
    30.8
    
    
    32.9**77.3**
    
    
    77.0
    
    
    77.9
    
    
    80.9
    
    
    82.4
    
    
    73.4
    
    
    72.0
    
    
    71.5Operating
      loss
    
    
    **(11.5**
    **)**
    
    (7.8
    )
    
    (13.3
    )
    
    (10.3
    )
    
    (13.7
    )
    
    (15.8
    )
    
    (23.0
    )
    
    (15.7
    )Depreciation
      & amortization
    
    
    **(36.9**
    **)**
    
    (37.2
    )
    
    (35.7
    )
    
    (36.8
    )
    
    (38.6
    )
    
    (38.8
    )
    
    (39.7
    )
    
    (40.2
    )Realignment
      & other charges
    
    
    **(6.5**
    **)**
    
    5.3
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (7.0
    )EBITDA
    
    
    **31.9**
    
    
    **24.1**
    
    
    **22.4**
    
    
    **26.5**
    
    
    **24.9**
    
    
    **23.0**
    
    
    **23.7**
    
    
    **24.5**Net
      Income (loss)
    
    
    **(13.8**
    **)**
    
    (1.6
    )
    
    (33.1
    )
    
    (29.9
    )
    
    (16.9
    )
    
    (30.2
    )
    
    2.0
    
    
    7.6Earnings
      per share, basic
    
    
    **(0.39**
    **)**
    
    (0.05
    )
    
    (0.93
    )
    
    (0.84
    )
    
    (0.48
    )
    
    (1.15
    )
    
    0.08
    
    
    0.32Gross
      profit as a % of revenue
    
    
    **51.7**
    **%**
    
    49.5
    %
    
    50.0
    %
    
    53.0
    %
    
    52.6
    %
    
    47.0
    %
    
    49.3
    %
    
    47.5
    %EBITDA
      as a % of revenue
    
    
    **15.1**
    **%**
    
    11.8
    %
    
    11.2
    %
    
    13.1
    %
    
    12.2
    %
    
    11.2
    %
    
    12.2
    %
    
    12.1
    %**Free
      cash flow**Free
      cash flow
    
    
    **8.4**
    
    
    (1.6
    )
    
    2.6
    
    
    1.4
    
    
    0.9
    
    
    (1.7
    )
    
    6.5
    
    
    6.3Change
      in non-cash working capital and other charges
    
    
    **(7.4**
    **)**
    
    3.7
    
    
    (8.3
    )
    
    32.7
    
    
    (6.8
    )
    
    5.1
    
    
    0.4
    
    
    (4.3
    )Acquisitions
    
    
    **(0.5**
    **)**
    
    -
    
    
    -
    
    
    -
    
    
    0.3
    
    
    (20.0
    )
    
    -
    
    
    -Increase
      in long-term investments
    
    
    **-**
    
    
    -
    
    
    (0.2
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Proceeds
      from sale of accounts receivable
    
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Change
      in right-of-way liability
    
    
    **(0.8**
    **)**
    
    (0.7
    )
    
    (0.5
    )
    
    (0.4
    )
    
    (0.3
    )
    
    (0.7
    )
    
    (0.5
    )
    
    (0.7
    )Repurchase
      of long-term debt
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (104.8
    )
    
    -
    
    
    -
    
    
    -
    
    
    -Equity
      issued
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    5.4
    
    
    35.2
    
    
    -
    
    
    -**Change
      in cash, cash equivalents & short term investments**
    
    
    **(0.3**
    **)**
    
    **1.4**
    
    
    **(6.4**
    **)**
    
    **(71.1**
    **)**
    
    **(0.5**
    **)**
    
    **17.9**
    
    
    **6.4**
    
    
    **1.3**Increase
      (decrease) in short-term investments
    
    
    11.3
    
    
    (0.8
    )
    
    (17.7
    )
    
    66.0
    
    
    (0.1
    )
    
    (17.2
    )
    
    (30.5
    )
    
    45.1**Change
      in cash and cash equivalents**
    
    
    **11.0**
    
    
    **0.6**
    
    
    **(24.1**
    **)**
    
    **(5.1**
    **)**
    
    **(0.6**
    **)**
    
    **0.7**
    
    
    **(24.1**
    **)**
    
    **46.4**


Call-Net
      Enterprises Inc.
    Page
      26
    2004
      & Q4 Managements Discussion &
Analysis