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(CALLNET LOGO)











A   N   N   U   A   L      R   E   P   O   R   T





2 0 0 2











CALL-NET ENTERPRISES INC.

(SPRINT CANADA LOGO)





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TABLE OF CONTENTS



|                                                  |  |  |  |  |  |  |  | 
|------------------------------------------------- |  |  |  |  |  |  |  | 
|Financial Highlights                             
|A Message to Shareholders                        
|Managements Discussion and Analysis             
|Managements Responsibility                      
|Auditors Report                                 
|Consolidated Balance Sheets                      
|Consolidated Statements of Operations and Deficit
|Consolidated Statements of Cash Flows            
|Notes to Consolidated Financial Statements       
|Articles of Arrangement                          
|General By-law No. 1                             
|Amended and Restated Agreement                   
|Supplemental and Amending Agreement              
|Global Settlement Agreement                      
|Subsidiaries of Call-Net Enterprises Inc.        
|Glossary                                         
|Audited Consolidated Financial Statements        
|Section 906 Certification                        



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Profile

Call-Net Enterprises Inc. is a publicly owned Canadian facilities-based
telecommunications company offering local and long distance voice, data,
networking and online services to consumers and businesses primarily through
its wholly-owned subsidiary Sprint Canada Inc. Headquartered in Toronto,
Call-Net owns and operates an extensive national fibre network, maintains
network facilities in the United States and the United Kingdom, and has over
134 co-locations in nine Canadian metropolitan markets.

The Common Shares and Class B Non-Voting Shares of Call-Net Enterprises
Inc. trade on the Toronto Stock Exchange under the symbols TSX: FON, FON.B,
respectively.

Contents

|    |                                           
|--- | ------------------------------------------
|IFC | Financial Highlights                      
|1   | Message to Shareholders                   
|4   | Managements Discussion and Analysis      
|24  | Managements Responsibility               
|24  | Auditors Report                          
|25  | Consolidated Financial Statements         
|28  | Notes to Consolidated Financial Statements
|56  | Additional Financial Information          
|IBC | Corporate Directory                       
|IBC | Shareholder Information                   




Financial Highlights

|                                                |  |               |       |               |  |                      |          |            |  |  |          |   |  |  |         |  
|----------------------------------------------- |  | ------------- | ----- | ------------- |  | -------------------- | -------- | ---------- |  |  | -------- | - |  |  | ------- | -
|                                                |  |               |       |               |  | Pre-recapitalization
|                                                |  |               |       |               |  |                     
|                                                |  | Nine Months   |       | Three Months  |  | Year Ended           |          | Year Ended
|(millions of Canadian dollars)                  |  | Ended
Dec. 31 |       | Ended
Mar. 31 |  | Dec. 31              |          | Dec. 31   
|                                                |  | 2002          |       | 2002          |  | 2001                 |          | 2000      
|                                                |  |               |       |               |  |                      |          |           
|Revenue                                         |  |               | 598.9 |               |  |                      | 201.8    |            |  |  | 928.4    |   |  |  | 1,250.2 |  
|Gross profit                                    |  |               | 263.2 |               |  |                      | 85.0     |            |  |  | 419.5    |   |  |  | 405.6   |  
|Gross margin                                    |  |               | 43.9  | %             |  |                      | 42.1     | %          |  |  | 45.2     | % |  |  | 32.4    | %
|EBITDA before unusual items                     |  |               | 35.9  |               |  |                      | 11.9     |            |  |  | 134.8    |   |  |  | 30.1    |  
|Net loss                                        |  |               | (57.7 | )             |  |                      | (91.8    | )          |  |  | (1,524.7 | ) |  |  | (501.2  | )
|Cash provided by (used in) operating activities |  |               | 29.5  |               |  |                      | (23.4    | )          |  |  | (27.2    | ) |  |  | (80.3   | )
|Capital assets                                  |  |               | 600.0 |               |  |                      | 736.2    |            |  |  | 749.7    |   |  |  | 858.7   |  
|Long-term liabilities                           |  |               | 511.8 |               |  |                      | 2,662.9  |            |  |  | 2,626.2  |   |  |  | 2,347.4 |  
|Shareholders
equity (deficiency)               |  |               | 248.6 |               |  |                      | (1,515.1 | )          |  |  | (1,423.3 | ) |  |  | 101.4   |  





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|                          |  |  |   | 
|------------------------- |  |  | - | 
|A Message to Shareholders |  |  | 1 | 

2002 has been a tumultuous year in the Canadian telecommunications
industry characterized by regulatory change, bankruptcies among
competitors, volatile markets and significant pricing pressures. For
Call-Net Enterprises Inc. (Call-Net) however, 2002 was a year in
which we improved the value of our enterprise. We continued our
operational turnaround, delivering on  or exceeding  each
objective, as we restored and strengthened our financial position,
generating free cash flow by years end.

In May, the Canadian Radio-television and Telecommunications
Commission (CRTC) set out its regulatory framework for the next four
years through the price cap decision. This decision was meant to
balance the interests of all parties  consumers, incumbents and
competitors. What resulted instead was a debate on the poor state of
competition in Canada. The CRTCs own annual report shows that
incumbent telephone companies continue to enjoy 96 per cent of the
business local market share and 99 per cent of the residential local
market share. Clearly, there is something wrong when the only
participants who are thriving are the incumbents who had a 100-year
head start.

The debate and subsequent pressure from Call-Net and other
competitive telecom companies, led to a number of pro-competitive
CRTC decisions late in the year including the establishment of
interim rates for digital network access, access tandem and direct
connection services. We also received a commitment from the regulator
to be more vigilant in putting an end to the anti-competitive
behaviour of the incumbents.

But much more remains to be done on the regulatory front if a
truly competitive level playing field is to be achieved. The Federal
governments approach to competition must change from one that
permitscompetition to one that promotescompetition, in order to
achieve sustainability.

For our part, throughout 2002 we focused our business on four key
initiatives:



| |  | Leveraging the existing infrastructure and asset base by
building the consumer, enterprise and wholesale business in
geographically specific, profitable, core segments.                                                                            
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Creating stakeholder value by generating free cash flow;
growing earnings before interest, taxes, depreciation and
amortization (EBITDA) through profitable revenue growth;
replacing fixed costs with variable costs; and continued debt
reduction.
| 
| |  | Aggressively pursuing regulatory relief and pressing Industry
Canada to simplify the telecommunications business model.                                                                                                                             
| 
| |  | Leveraging and maximizing the benefits of our relationship with
Sprint Communications Company L.P. (Sprint).                                                                                                                                        

On April 10, 2002, we completed a capital restructuring through
a Plan of Arrangement (Plan). The Plan deleveraged the balance sheet,
eliminating $2 billion in debt and providing the financial and
operational flexibility required to execute our business strategy. As
a result of the recapitalization, effective April 1, 2002, the
Company adopted fresh start accounting. The Plan and the fresh
start accounting implications are fully described in the notes to
the Consolidated Financial Statementsin this annual report.

Our business focus was and remains on selling bundled long
distance and local service to consumers and businesses; selling
continental and global solutions to multi-nationals in conjunction
with Sprint; selling bundled IVR/toll free products to call centres;
and using our carrier systems, relationships and national network to
sell to other carriers through our wholesale unit. This strategy has
allowed us to keep and grow customers despite continued pricing
deterioration in the long distance market, our dominant product.





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|                                      |  |  |  |  |   | 
|------------------------------------- |  |  |  |  | - | 
|A Message to Shareholders (continued) |  |  |  |  | 2 | 

FINANCIAL HIGHLIGHTS

Call-Nets total revenue for the year was $800.7 million, down 13.8
per cent over 2001 primarily due to lower average revenue per minute
in long distance traffic. EBITDA before unusual items was $47.8
million in 2002 compared to $134.8 million in 2001, again due to
lower pricing in long distance and data markets and delayed
regulatory cost relief. After a difficult start to 2002, revenue and
EBITDA, before unusual items, grew on a quarter over quarter basis in
the third and fourth quarters.

In the fourth quarter, we achieved cash flow self-sufficiency
after interest and capital expenditures, a full quarter ahead of
projection, strengthening our cash and short-term investments to $125
million by year end. This provides us with sufficient resources to
fund our 2003 business plan.

2002 HIGHLIGHTS

The following lists some of our other achievements that strengthened our
financial position.



| |  |  | We entered into a new 10-year agreement with Sprint, giving us
exclusive access to the brand, technology and know-how required
to offer the full suite of Sprint existing and future wireline
services. We continued to leverage our combined North American
network, routing Sprint traffic through our network. We made
great progress with Sprint on cross-border sales to
multi-national corporations resulting in wins with FedEx Express
and SYSCO Canada.                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We aggressively marketed our local service in Canadas nine
most populous metropolitan markets. We are the only national
competitor offering local service to consumers and small
businesses. By years end we had installed over 171,200 local
service lines across Canada.                                                                                                                                                                                                                                         
|
| |  |  | The enterprise side of our business began to turn around in the
latter part of the year as we added several well-known companies
to our growing list of customers including Accutel Conferencing
Systems, Air Liquide, Laurentian Bank and Delta Cable
Communications. In addition, we continued to strengthen and
develop key customer relationships such as Neiman Marcus. Bookings
for the first quarter of 2003 continue to be strong.                                                                           
|
| |  |  | To augment our suite of call centre management solutions, we
acquired a majority interest in Time iCR, an enhanced voice
recognition solution provider. This capability, in part, helped
us with major business wins such as Air Canada. We also launched
several new products for business customers including
asymmetrical digital subscriber line (high-speed access) with
greater variety of speeds to suit a range of business needs and
we made enhancements to our successful virtual private network
product.
|
| |  |  | We continued to take costs out of our operations by
restructuring our internal organization to further streamline and
focus operations. In the wake of the price cap decision, we
slowed the expansion of competitive local telephone service and
delayed the launch of several new services including our
residential high-speed Internet access product. We further
reduced our workforce by 15 per cent or 350 positions.                                                                                         





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|                                      |  |  |  |  |   | 
|------------------------------------- |  |  |  |  | - | 
|A Message to Shareholders (continued) |  |  |  |  | 3 | 



| |  |  | In the third quarter, we repurchased approximately $123 million of
long-term debt.                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | As a result, we ended the year with $473 million of long-term
debt due in 2008 and have annual interest expenses in 2003 of
approximately $49 million.                                                                
|
| |  |  | We continued to press the CRTC to maximize the savings from the
price cap decision and through a number of subsequent filings,
were able to achieve a $50 million annualized reduction in
carrier costs by years end.

GOVERNANCE

Investor confidence in the telecommunications sector was shaken
during 2002 when industry giants fell. As a result, governance
practices within corporations continued to gain prominence.
Governance is of paramount importance to the board of Call-Net. We
have established high standards of corporate governance and
constantly review, evaluate and modify the program to ensure its
ongoing effectiveness. We will continue to be vigilant on matters of
governance.

LOOKING AHEAD

Our business plan for 2003 is an extension of our successful 2002
strategy. We will continue to focus on sustaining cash flow
self-sufficiency. We will leverage our assets, including our
state-of-the-art fibre network and Internet Protocol backbone; a
first-class back office support system; the Sprint Canada brand; a
large, loyal consumer and business customer base; and the dedication
of our 1,700 employees.

We will focus on making our core business stronger and hold
operating expenditures at 2002 levels. We will continue to partner in
order to broaden the scope of products and services available to our
customers and we expect to generate single-digit,
quarter-over-quarter revenue growth with a resulting EBITDA (before
unusual items) in the $80  $100 million range. We intend to invest
$40 million in capital improvements focused primarily on improving
the provisioning and billing systems.

Despite the significant challenges, Call-Net has emerged as a
well-run, lean, self-sufficient business, positioned to lead industry
change. We believe we have the people, the facilities and the right
strategies to build on our renewed financial strength.

The transformation of our company has been made possible because
of the loyalty of our customers, the support of our Board of
Directors, the confidence of our investors and the passion and
commitment of our employees.

Our fundamental business model remains strong. We look forward
to achieving great things in 2003.

|                                              |  |                                                                             
|--------------------------------------------- |  | ----------------------------------------------------------------------------
|/s/ Lawrence G. TappLawrence G. Tapp
CHAIRMAN |  | /s/ William W. LintonWilliam W. Linton
PRESIDENT AND CHIEF EXECUTIVE OFFICER





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 4 | 

Call-Net Enterprises Inc.s (Call-Net) management is responsible for
the preparation and presentation of the annual consolidated financial
statements and Managements Discussion and Analysis (MD&A). The MD&A
has been prepared in accordance with the requirements of security
regulators including Ontario Securities Rule 51-501 and Form
44-101F2.

The consolidated financial statements and information and
analysis in the MD&A necessarily includes amounts and conclusions
based on informed judgements and estimates of the expected effects of
current events and transactions with appropriate consideration to
materiality. In addition, in preparing the financial information,
management must interpret the requirements described above, make
determinations as to the relevancy of information to be included, and
make estimates and assumptions that affect reported information.
Certain statements in managements discussion and analysis also
constitute forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or
achievements of Call-Net, or industry results, to be materially
different from any future results, performance or achievements of
Call-Net, or industry results expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, demographic
changes, regulation, major technology changes, timing of product
introductions, competition, and the ability of Call-Net to attract
and retain key employees. See Risk Factors.

The Board of Directors (Board) is responsible for reviewing and
approving the financial information contained in the consolidated
financial statements and the MD&A, as well as overseeing managements
responsibilities for the preparation and presentation of financial
information. Other Board responsibilities include maintenance of
appropriate internal controls, management and control of major risk
areas and assessment of significant and related party transactions,
if any. The Board delegates these responsibilities as appropriate to
its Audit Committee comprised of outside directors.

The MD&A below explains trends in Call-Nets financial condition
and results of operations for the year ended December 31, 2002
compared with the operating results for the year ended December 31,
2001. This MD&A also explains trends in Call-Nets financial condition
and results of operations for the quarter ended December 31, 2002
compared with the operating results for the quarters ended September
30, 2002 and December 31, 2001. This MD&A is intended to help
shareholders and other readers understand the dynamics of Call-Nets
business and the key factors underlying its current financial results
and future prospects. The following MD&A should be read in conjunction
with the audited consolidated financial statements for December 31,
2002.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to select
accounting policies and make estimates and assumptions that affect
the reported amounts of 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 major accounting
changes during 2002 and the main areas where estimates are required.
The following information should be read in conjunction with
Call-Nets audited consolidated financial statements and notes
thereto.

Fresh Start Accounting

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

Pursuant to the Plan of Arrangement, there was a substantial
realignment of the equity and non-equity interests of Call-Net on
April 10, 2002. For accounting purposes, Call-Net has used an





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 5 | 

effective date of April 1, 2002. Call-Nets consolidated balance
sheet as at April 1, 2002 was prepared on a fresh start basis after
giving effect to the Plan of Arrangement in accordance with The
Canadian Institute of Chartered Accountants Section 1625,
Comprehensive Revaluation of Assets and Liabilities.

Under fresh start accounting, Call-Nets assets and liabilities
were recorded at managements best estimate of their fair market
values and the deficit was eliminated by a reduction of capital
stock. Management reviewed all amounts on the consolidated balance
sheet and performed appropriate analysis and due diligence to
determine fair values. The book values of assets and liabilities at
April 1, 2002 approximated their fair values, with the exception of
capital assets and future tax liabilities. Independent third party
analysis was used by management to arrive at the fair value of
capital assets. Future tax liabilities were valued based on the
temporary differences and tax losses that are available to Call-Net.

The changes as a result of both the recapitalization and
application of fresh start accounting are detailed further in note 1
to the audited consolidated financial statements.

Generally, CICA Handbook Section 1625 suggests prior period
figures not be included in the financial statements of an enterprise
that has comprehensively revalued its assets and liabilities as a
result of a financial reorganization. However, pursuant to regulatory
requirements, we have provided pre-recapitalization comparative
consolidated financial statements and where relevant, this MD&A
contains related comparative commentary.

New Accounting Policies

During 2002, Call-Net did not make any changes to its accounting
policies except as mandated by the CICA and outlined in note 2 of the
audited consolidated financial statements.

Changes in Accounting Presentation

Effective April 1, 2002, Call-Net reclassified the long-term portion
of its right-of-way liability to long-term liabilities. The
comparative figures in the consolidated financial statements have
been restated to conform to this presentation.

Accounting Estimates

The major areas where estimates are required are discussed below.

Accounts Receivable

An industry accepted predictive model is used to determine the
allowance required on the accounts receivable for the residential
portion of the business. In other areas, a more detailed review of
the accounts receivable balances and specific customer circumstances
is performed to determine the allowance for doubtful accounts
required at each month end. Management experience and knowledge is
used to determine overall reserve amounts in this area.

Carrier Cost Payables

In the normal course of business, there are disputes with other
carriers over the charges being billed. Call-Nets policy is to
review the disputes on a monthly basis and apply probability of
winning disputed items to determine the amount of the reserve
required.

From time to time, the Canadian Radio-television and
Telecommunications Commission (CRTC) issues decisions that are
retroactive or require some interpretation as to application and
require estimation at a period end as to amounts to be recorded. For
example, as at December 31, 2002, Call-Net estimated a $10.0 million
refund is due from the incumbent local exchange carriers (ILECs) due
to a decision on digital network access (DNA) rates which were
approved on December 23, 2002. The uncertainty surrounding the refund
amount arises due to the complexities and interpretations required in
determining what is covered by the DNA decision and the calculations
involved. To determine the amount to record, Call-Net reviewed the
CRTC decision, internally interpreted the decision as to the costs
which would be affected and estimated the refund that would be owed
by the ILECs.





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 6 | 

Customer Relationships

Intangible assets with a definite life are assessed for impairment
when events or circumstances indicate their carrying amount may not
be recoverable. When the net carrying amount of an intangible asset
with a definite life is not recoverable, and exceeds its fair value,
the asset is written down with a charge against income in the period
that such determination is made. Management reviewed the carrying
value of the customer relationships and the amortization period when
fresh start accounting was adopted in April 2002 and concluded that
the carrying amount approximated fair value. At December 31, 2002,
management determined no major events or circumstances had occurred
that would indicate an impairment since the April 2002 assessment.

Capitalized Costs

Direct labour costs incurred to develop or construct new assets or
upgrade existing assets is capitalized. Direct and indirect overhead
costs, general and administrative costs and interest costs are not
capitalized. Direct labour costs of $17.6 million and $16.9 million
were capitalized in 2002 and 2001, respectively.

BUSINESS OVERVIEW

Call-Net, primarily through its wholly-owned subsidiary Sprint Canada
Inc. (Sprint Canada), is one of Canadas leading national
communications solutions companies offering data and network
solutions, online services and local and long distance voice services
across Canada. A full range of such services is offered to businesses,
residential customers, governments and other telecommunications
carriers. With headquarters in Toronto, Ontario, Call-Net operates in
13 locations across Canada, owns and operates an extensive
transcontinental fibre network, and maintains network facilities in
the United States and the United Kingdom. At December 31, 2002
Call-Net employed approximately 1,700 people based on full-time
equivalency.

Based on revenue at December 31, 2002, Call-Net had an estimated
5.4%, 1.7% and 0.9% share of the $6.1 billion Canadian long distance
market, $7.9 billion Canadian data market and $7.6 billion Canadian
local access market, respectively. Approximately 28% of Call-Nets
revenue for 2002 was generated by data services, as compared to
approximately 30% for fiscal 2001. Local services accounted for 9% of
Call-Nets revenues in 2002 compared to 3% in 2001. Local service
revenue is expected to become a more important component of total
revenue as Call-Net continues marketing its local services to
consumers and small businesses in 2003. Long distance was still the
dominant revenue source at 63% of total revenue for 2002, down from
67% in 2001.

In addition to operating a national Cisco IP network in Canada,
at December 31, 2002, Call-Net was active in 131 co-locations in nine
of Canadas most populous urban regions. In Montreal, five of these
co-locations were connected to Call-Nets local switch by a metro
area fibre network. By co-locating in 131 of the incumbents switch
centres, Call-Net can sell local access to an addressable consumer
and business market estimated at 4.0 million and 2.6 million lines,
respectively. Call-Nets operational North American fibre network
extends over 14,000 route kilometres (8,600 route miles). This
network provides a significant North American geographic footprint
connecting Canadas largest markets while also reaching key U.S.
markets. Call-Net also has connected its North American network with
Europe through international gateway switches in New York City,
London and a trans-Atlantic fibre indefeasible right of usage (IRU).

Since its inception in 1986, Call-Net has derived substantially
all of its revenues from the sale of long distance and data services.
Since the formation of a strategic alliance with Sprint
Communications Company L.P. (Sprint) of Westwood, Kansas in 1993,
Call-Net has offered these services primarily using the
Sprint() brand name. Call-Nets long distance and data services are offered in
Canada to businesses and consumers primarily through Sprint Canada.
In 1998, Call-Net significantly increased its asset and revenue base
when it acquired fONOROLA Inc., a leading facilities-based
alternative provider of switched voice long distance and data
services.





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 7 | 

In February 1999, Call-Net also entered the local phone services
market in Calgary and made significant investments to enter eight
other major Canadian urban markets. However, in 2000 Call-Net
deferred its plan to become a national competitor in the local
services market until the pricing structure established by the CRTC
was determined to be economic. As a result of the CRTC rebanding
decision in April 2001 that significantly reduced the amount that
incumbents can charge for access to local loops, Call-Net relaunched
its local service initiative in Montreal, Toronto, Calgary and
Vancouver.

In 2001, management established five key objectives to build a
strong business base from which to increase future enterprise value.
These objectives were:



| |  |  | Obtaining a consensual agreement with its
noteholders and existing shareholders that would deleverage the
balance sheet and provide the financial and operational flexibility
required to execute a favourable business strategy;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Improving on
Call-Nets very important relationship with Sprint so that Call-Net
would be able to extend and expand on its 1993 agreement before
August of 2002;                                                                 
|
| |  |  | Developing a practical and realistic business
strategy that was executable in the current economic and business
environment and that was supported broadly within Call-Net;                                                      
|
| |  |  | Moving
significantly towards cash flow self-sufficiency by further reducing
its operating and capital expenditures to appropriate levels; and                                                                                    
|
| |  |  | Obtaining fair regulatory relief so that Call-Net could compete on a
level playing field over the long-term in the Canadian
telecommunication markets.                                                                           

In 2002, Call-Net continued to focus on these same five
objectives that it felt were necessary precursors to Call-Net
continuing to participate in the highly competitive, capital
intensive, and technologically challenging Canadian
telecommunications industry. As outlined below, under 2002 Key
Events, Call-Net completed the first two of its five objectives and
made progress on the remaining three objectives.

Business Strategy

Primarily through Sprint Canada, Call-Net is a leading national
facilities based provider of local access, long distance, and
data/Internet services to Canadian consumers and businesses. Call-Net
intends to leverage its existing network and customer base to the
greatest possible extent by focusing its investments and resources on
customers within the areas in which it has pre-existing network
facilities (its geographic footprint). This on-net based strategy
is designed to limit near-term capital investment while maximizing
gross margin.

In 2002, Call-Net invested $78.4 million in capital assets
toward its strategy. The investment program included the addition of
34 new co-locations in areas contiguous to the co-location sites
already in place and entering the local services market in Ottawa.
Call-Net also invested in the purchase and installation of
asymmetrical digital subscriber line (ADSL) equipment in 50
co-location sites in 2002 so it could provide high-speed Internet
services to businesses and consumers. By the end of 2002, Call-Net
was able to reach 4.0 million residential and 2.6 million business
network access subscribers or approximately 40% of the Canadian
addressable local market.

Within its geocentric-based strategy, Call-Net is focusing on
high-end residential and small medium enterprise (SME) business
customers. It plans to meet the needs of these core customer segments
by offering attractively priced simple bundles of products. These
bundles include a combination of local access, long distance and
data/Internet services, and currently ADSL for business customers. A
new sales group and additional sales agents were hired and trained in
2002 to focus exclusively on the SME community. This initiative
contributed to Call-Net increasing its active local business access
line count by 22,100 lines in 2002. A print-based and telemarketing
program was used to acquire 77,000 residential customers in 2002.

With regard to larger enterprises, the Companys focus is on
providing voice, data and IP networking to Canadian enterprise
customers in specific market segments. For example, Call-Net





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 8 | 

has prioritized the contact centre market and has developed
innovative solutions for customers with sophisticated needs such as
voice recognition and on-line real-time activity reporting.

Call-Nets other significant large corporation revenue growth
initiative in 2002 related to partnering with Sprint to provide an
integrated North American network for voice and data traffic.
Call-Net was able to acquire a number of large cross-border business
customers as a result of this initiative.

2002 Key Events

On February 20, 2002, Call-Net announced a comprehensive
recapitalization plan to reduce its debt by over $2 billion.
Simultaneously, Call-Net announced an agreement in principle with
Sprint to enter a new 10-year branding and technology services
agreement. Both of these transactions, completed on April 10, 2002,
provide Call-Net with a fresh start at successfully executing its
business plan to become a viable and valuable competitor in the
Canadian telecommunications market.

As part of this business plan, Call-Net significantly increased
the amount it was spending to acquire local residential customers in
the first and second quarters of 2002. After the cost savings from
the May 30 price cap decision turned out to be far less than
anticipated, Call-Net curtailed this acquisition spending to conserve
its financial resources. Consequently the acquisition rate, which
peaked at an average of 712 new lines a day in the second quarter,
decelerated in the third and fourth quarters. In the fourth quarter,
Call-Net acquired an average of 346 new lines per day. In 2002,
Call-Net increased its local residential and business line count by
79,100 and 22,100, respectively. Call-Net ended the year with 133,200
active residential lines and 38,000 active business lines.

Despite the disappointing May 30 price cap decision, the interim
pricing established in the third and fourth quarters moved Call-Net
closer to its objective of a more level playing field in which it can
profitably compete. Call-Nets carrier costs paid to the ILECs,
estimated at $210 million annually at May 30, were immediately
reduced by approximately $14 million or 7%. Prior to May 30, the
annual amounts paid to the Canadian ILECs represented approximately
44% of Call-Nets total carrier costs. This initial relief fell far
short of what Call-Net had been expecting. However, on July 17, the
ILECs filed new Phase II cost studies in respect of direct access and
tandem access services. Call-Net uses these services in originating
and terminating long distance calls over the ILECs local networks.
These studies revealed that Call-Net had been paying substantially
more than the ILECs costs for the services. Call-Net immediately
requested that the price it was paying be adjusted on an interim
basis to the pricing indicated by the cost studies. The CRTC ruled in
favour of Call-Net on September 30, providing a further monthly
reduction in carrier charges of approximately $1.0 million or 6% of
the amount previously paid to the ILECs.

In September, the ILECs filed additional Phase II cost studies
in respect of certain DNA services. These studies revealed that
Call-Net was paying 60% to 70% more than the cost for these services
essential to carrying data traffic for its customers. Again, Call-Net
requested that interim pricing be immediately established based on
the cost studies. While the ILECs tried to block this application, on
December 23, the CRTC again ruled in favour of Call-Net by making the
pricing interim and retroactive to May 30, 2002. As a result
Call-Nets carrier costs in the fourth quarter were lowered by $10.0
million. On an annualized basis, the DNA interim pricing should
reduce Call-Nets Canadian ILEC carrier costs by a further 10%, or
between $20 and $25 million. In aggregate, to December 31, 2002, the
price cap related decisions have reduced Call-Nets annualized
carrier charges by approximately $50 million or 25% of the amount
previously paid to Canadian ILECs.

In the third quarter, Call-Net purchased for cancellation
U.S.$77.5 million of its 10.625% Senior Secured Notes due December
31, 2008 at market prices. The total cost of these purchases to
Call-Net was $29.7 million, including commissions. The purchase of
these Notes further reduced Call-Nets annual interest expense by
approximately $13 million. Call-Net recorded a gain of $93.1 million
in respect of these purchases as an unusual item. After the
repurchase, Call-Nets





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|                                     |  |  |   | 
|------------------------------------ |  |  | - | 
|Managements Discussion and Analysis |  |  | 9 | 

long-term debt was reduced to approximately $473 million with
annualized interest expense of approximately $49 million.

Capital investments in 2002 totalled $78.4 million compared to
$101.5 million in the previous year. The much lower capital
expenditure program was a result of Call-Nets commitment to become
cash flow self-sufficient as quickly as possible and no later than
the first quarter of 2003. In fact, Call-Net achieved its goal of
cash flow self-sufficiency in the fourth quarter of 2002. The
majority of Call-Nets 2002 capital expenditures are related to its
local growth initiative.

In summary, in 2002, Call-Net completed two of the five
objectives it first set for itself in 2001 and made progress to a
greater or lesser extent on the remaining three objectives. Call-Net
completed a comprehensive recapitalization of Call-Net and it
renegotiated a new 10-year agreement with Sprint. While initially
disappointed with the May 30, 2002 price cap decision, Call-Nets
regulatory group continued its efforts to level the competitive
playing field and won a number of helpful decisions in 2002 related
to both costs and the Companys ability to acquire and retain bundled
local customers. Call-Net also met its objective of becoming cash
flow self-sufficient in the fourth quarter.

Call-Net also made progress in executing its business strategy
to transition towards becoming a provider of bundled local, long
distance and data services. However, in June, management determined,
based on the disappointing CRTC price cap decision and continuing
difficult market conditions, that Call-Nets financial resources
could only support a slower growth profile. Accordingly on June 27,
2002, Call-Net announced it was slowing the introduction of its
competitive residential telephone service in certain markets,
delaying the introduction of other competitive services and
restructuring its internal organization to further streamline and
focus its operations in order to achieve its primary financial goal
of being cash flow self-sufficient. As part of the internal
restructuring, Call-Net reduced its workforce by 15% or approximately
350 positions in the third quarter. In addition, operating expenses
and capital expenditures related to the growth programs were cut in
the third and fourth quarters. These cuts to costs, capital and head
count had the anticipated results  cash was conserved but local
revenue growth slowed as resources were curtailed.

OPERATING RESULTS

Fourth Quarter Highlights

Quarter Ended December 31, 2002 Compared to Quarter Ended September 30, 2002

Call-Nets fourth quarter financial performance was within the range
of managements expectations. Revenue at $202.4 million was up $3.8
million or 1.9% from the previous quarter.

Business revenue rose $4.1 million or 2.9% as $4.2 million
higher data and $1.4 million higher local services revenue more than
offset the $1.5 million decline in long distance revenue. Business
long distance revenue continued to dip as a 3.9% decline in average
revenue per minute could not be fully offset by a 1.2% increase in
traffic. An increase of 9,200 active local business lines accounted
for the improvement in local revenue, while the increase in data
revenue related primarily to the settlement of a long-time carrier
dispute and a one-time charge to a major customer in the quarter.

Residential revenue declined $0.3 million from the third
quarter. The decline in long distance and data revenue of $1.3
million and $0.4 million, respectively, was a result of customer
churn. Local revenue improved by $1.4 million as the number of active
residential lines rose by 3,300 to 133,200.

Earnings before interest, taxes, depreciation and amortization
(EBITDA) before unusual items, improved from $15.0 million in the
third quarter to $30.6 million this quarter. This $15.6 million
improvement was primarily attributable to the $14.3 million
improvement in gross margin related to lower carrier charges. The
decline in carrier charges was primarily a result of the CRTC
decision, announced on December 23, 2002, to set interim pricing in
respect of certain DNA costs retroactive to May 30, 2002. As a
result, Call-Net accrued a $10.0 million refund in respect of DNA
services purchased since May 30, 2002. Approximately $5.7 million of
the refund related to services received prior to the fourth quarter.
Excluding this $5.7 million prior period amount, Call-Nets carrier
charges for the





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 10 | 

fourth quarter would have been $109.1 million resulting in a 46.1%
gross margin. A $1.3 million decline in operating expenses compared
to the third quarter, related to lower marketing and advertising
expense, also contributed to the improved EBITDA.

After depreciation and amortization expense of $41.1 million,
interest expense of $12.8 million, $1.6 million of other expenses, a
foreign exchange gain of $2.2 million and income tax expense of $1.7
million  Call-Nets fourth quarter net loss of $24.4 million
resulted in a loss per share of $1.02.

|                                   |  |                                                          |        |      |  |    |       |    |  |    |          |    |  |    |        |    |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|---------------------------------- |  | -------------------------------------------------------- | ------ | ---- |  | -- | ----- | -- |  | -- | -------- | -- |  | -- | ------ | -- |  | - | ------ | - |  | - | ----- | - |  | - | ----- |  |  | - | ----- | -
|                                   |  | Pre-Recapitalization                                     |        |      |  |    |       |    |  |    |          |    |  |   
|                                   |  |                                                          |        |      |  |    |       |    |  |    |          |    |  |   
|                                   |  | 2001                                                     |        | 2002
|                                   |  |                                                          |        |     
|                                   |  | Q1                                                       |        | Q2   |  | Q3 |       | Q4 |  | Q1 |          | Q2 |  | Q3 |        | Q4
|                                   |  |                                                          |        |      |  |    |       |    |  |    |          |    |  |    |        |   
|                                   |  | (Restated)(1)                                            |       
|                                   |  | (in millions of Canadian dollars, except per share data)
|Statement of Operations            |  |                                                          |        |      |  |    |       |    |  |    |          |    |  |    |        |    |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Revenue                            |  | $                                                        | 263.1  |      |  | $  | 227.2 |    |  | $  | 223.0    |    |  | $  | 215.1  |    |  | $ | 201.8  |   |  | $ | 197.9 |   |  | $ | 198.6 |  |  | $ | 202.4 |  
|Net income (loss)                  |  |                                                          | (185.9 | )    |  |    | 17.8  |    |  |    | (1,258.4 | )  |  |    | (98.2  | )  |  |   | (91.8  | ) |  |   | (62.4 | ) |  |   | 29.1  |  |  |   | (24.4 | )
|Earnings (loss)
per share, basic   |  |                                                          | (41.08 | )    |  |    | 3.93  |    |  |    | (278.10  | )  |  |    | (21.70 | )  |  |   | (20.26 | ) |  |   | (2.62 | ) |  |   | 1.22  |  |  |   | (1.02 | )
|Earnings (loss)
per share, diluted |  |                                                          | (41.08 | )    |  |    | 3.93  |    |  |    | (278.10  | )  |  |    | (21.70 | )  |  |   | (20.26 | ) |  |   | (2.62 | ) |  |   | 1.22  |  |  |   | (1.02 | )
|                                   |  |                                                          |        |      |  |    |       |    |  |    |          |    |  |    |        |    |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2002, Call-Net changed its method of
accounting for foreign currency translations as required by The
Canadian Institute of Chartered Accountants Section 1650, Foreign
Currency Translations. The most important change for Call-Net is the elimination of the
requirement to defer and amortize foreign exchange gains and losses
on long-term monetary items over the remaining lives of such items.
All exchange gains and losses are to be included in the operations
of the period. The prior year figures have been restated to conform
to the retroactive application of this change in policy.

Quarter Ended December 31, 2002 Compared to Quarter Ended December 31, 2001

Revenue at $202.4 million was down $12.7 million or 5.9% from the
fourth quarter of the previous year. Business revenue declined $18.1
million or 10.9%, as $12.3 million lower long distance revenue and
$10.7 million lower data revenue was partially offset by a $4.9
million increase in local revenue. Business long distance revenue
fell 12.3%, as a 20.3% decline in average revenue per minute was only
partially offset by a 8.9% increase in traffic. The decrease in data
revenue related primarily to lower pricing. An increase of 22,100
active local lines accounted for the improvement in local revenue.

Residential revenue rose $5.4 million from the fourth quarter of
the previous year. The increase in local revenue of $8.7 million was
only partially offset by $1.7 million lower long distance revenue and
$1.6 million lower data revenue. Local revenue improved as the number
of active lines rose by 79,100 to 133,200. Long distance and data
revenue declined as the number of stand-alone long distance customers
and dial-up data customers fell by 90,000 and 17,000, respectively.

EBITDA before unusual items, improved from $20.6 million in the
fourth quarter of 2001 to $30.6 million this quarter. This $10.0
million improvement was primarily attributable to the $14.6 million
improvement in gross profit related to lower carrier charges. The
decline in carrier charges was primarily a result of the price cap
decision of May 30, 2002. The initial decision was augmented by the
follow-up CRTC decision, announced on December 23, 2002, to set
interim pricing in respect of certain DNA costs retroactive to May
30, 2002. This subsequent announcement resulted in Call-Net accruing
a $10.0 million refund in respect of DNA services in the fourth
quarter. The improved gross margin was partially offset by $4.6
million higher operating expenses, attributable primarily to the new
2.5% Sprint royalty on revenue.

Call-Nets fourth quarter net loss of $24.4 million resulting in
a loss per share of $1.02, compared favourably to a $98.2 million
loss or $21.70 loss per share in the fourth quarter of 2001. The
lower





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 11 | 

loss was attributable to the improvement in EBITDA as well as $46.4
million lower interest expense as a result of the $2.1 billion lower
debt level. A foreign exchange gain of $2.2 million this quarter,
compared to a foreign exchange loss of $21.5 million in the fourth
quarter of last year, also contributed to the improvement in the net
loss.

Annual Results

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue

For the year ended December 31, 2002, Call-Nets consolidated revenue
was $800.7 million compared to $928.4 million, a 13.8% decrease.
However, the more recent quarter-over-quarter trend, summarized in
the Sequential Quarterly Revenue Change Analysis table below is more
representative of the current and expected trend for 2003, which is
for very modest revenue growth.

Sequential Quarterly Revenue Change Analysis

|                  |  |       |       |       |  |       |       |       |  |      |       |       |  |       |       |       |  |       |       |      |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |   
|----------------- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | ---- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ---- |  |  | ----- | -- |  |  | ----- | -- |  |  | ----- | -- |  |  | ----- | -- |  |  | ----- | --
|                  |  | 1Q 01 |       | 2Q 01 |  | 3Q 01 |       | 4Q 01 |  | 2001 |       | 1Q 02 |  | 2Q 02 |       | 3Q 02 |  | 4Q 02 |       | 2002
|                  |  |       |       |       |  |       |       |       |  |      |       |       |  |       |       |       |  |       |       |     
|Long distance     |  |       | 185.8 |       |  |       | 154.1 |       |  |      | 148.3 |       |  |       | 136.3 |       |  |       | 624.5 |      |  |  | 130.7 |    |  |  | 125.5 |    |  |  | 125.1 |    |  |  | 122.3 |    |  |  | 503.6 |   
|Sequential change |  |       | (16.3 | %)    |  |       | (17.1 | %)    |  |      | (3.8  | %)    |  |       | (8.1  | %)    |  |       | (33.4 | %)   |  |  | (4.1  | %) |  |  | (4.0  | %) |  |  | (0.3  | %) |  |  | (2.2  | %) |  |  | (19.4 | %)
|Data              |  |       | 72.7  |       |  |       | 68.1  |       |  |      | 67.8  |       |  |       | 69.1  |       |  |       | 277.7 |      |  |  | 58.9  |    |  |  | 56.6  |    |  |  | 53.0  |    |  |  | 56.8  |    |  |  | 225.3 |   
|Sequential change |  |       | (3.1  | %)    |  |       | (6.3  | %)    |  |      | (0.4  | %)    |  |       | 1.9   | %     |  |       | (5.4  | %)   |  |  | (14.8 | %) |  |  | (3.9  | %) |  |  | (6.4  | %) |  |  | 7.2   | %  |  |  | (18.9 | %)
|Local             |  |       | 4.6   |       |  |       | 5.0   |       |  |      | 6.9   |       |  |       | 9.7   |       |  |       | 26.2  |      |  |  | 12.2  |    |  |  | 15.8  |    |  |  | 20.5  |    |  |  | 23.3  |    |  |  | 71.8  |   
|Sequential change |  |       | 4.5   | %     |  |       | 8.7   | %     |  |      | 38.0  | %     |  |       | 40.6  | %     |  |       | 35.1  | %    |  |  | 25.8  | %  |  |  | 29.5  | %  |  |  | 29.7  | %  |  |  | 13.7  | %  |  |  | 174.0 | % 
|                  |  |       |       |       |  |       |       |       |  |      |       |       |  |       |       |       |  |       |       |      |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |   
|Total Revenue     |  |       | 263.1 |       |  |       | 227.2 |       |  |      | 223.0 |       |  |       | 215.1 |       |  |       | 928.4 |      |  |  | 201.8 |    |  |  | 197.9 |    |  |  | 198.6 |    |  |  | 202.4 |    |  |  | 800.7 |   
|                  |  |       |       |       |  |       |       |       |  |      |       |       |  |       |       |       |  |       |       |      |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |    |  |  |       |   
|Sequential change |  |       | (12.7 | %)    |  |       | (13.6 | %)    |  |      | (1.8  | %)    |  |       | (3.5  | %)    |  |       | (25.7 | %)   |  |  | (6.2  | %) |  |  | (1.9  | %) |  |  | 0.4   | %  |  |  | 1.9   | %  |  |  | (13.8 | %)

For the quarter and year ended December 31, 2002, Call-Nets revenue is
analyzed by business segment and product category in the table below.

Revenue Analysis

|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  
|------------- |  | ------------------ | ----- | ---------- |  | ----------------- | ----- | ----- |  | ---------- | ----- | - |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  | - | ---- | ------- |  | ------- | ---- | - |  |  | ----- |  |  |  | ----- |  |  |  | ------ | - |  |  | ----- | -
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  | Variance from |       | Variance from |  | Twelve Months |       | Variance from
|              |  | Three Months Ended |       | Prior Year |  | Preceding Quarter |       | Ended |  | Prior Year
|              |  |                    |       |            |  |                   |       |       |  |           
|              |  | Dec 31,            |       | Dec 31,    |  | Sept 30,          |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      | Dec 31, |  | Dec 31, |      |   |  |  |       |  |  | 
|($ Millions)  |  | 2002               |       | 2001       |  | 2002              |       | $     |  | %          |       | $ |  | %             |       | 2002          |  | 2001          |       | $             |  | %
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |  
|Long distance |  |                    | 87.5  |            |  |                   | 99.8  |       |  |            | 89.0  |   |  |               | (12.3 | )             |  |               | (12.3 | )             |  |   | (1.5 | )       |  |         | (1.7 | ) |  |  | 364.8 |  |  |  | 454.2 |  |  |  | (89.4  | ) |  |  | (19.7 | )
|Data          |  |                    | 52.4  |            |  |                   | 63.1  |       |  |            | 48.2  |   |  |               | (10.7 | )             |  |               | (17.0 | )             |  |   | 4.2  |         |  |         | 8.7  |   |  |  | 205.6 |  |  |  | 249.7 |  |  |  | (44.1  | ) |  |  | (17.7 | )
|Local         |  |                    | 7.8   |            |  |                   | 2.9   |       |  |            | 6.4   |   |  |               | 4.9   |               |  |               | 169.0 |               |  |   | 1.4  |         |  |         | 21.9 |   |  |  | 23.1  |  |  |  | 8.0   |  |  |  | 15.1   |   |  |  | 188.8 |  
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  
|Business      |  |                    | 147.7 |            |  |                   | 165.8 |       |  |            | 143.6 |   |  |               | (18.1 | )             |  |               | (10.9 | )             |  |   | 4.1  |         |  |         | 2.9  |   |  |  | 593.5 |  |  |  | 711.9 |  |  |  | (118.4 | ) |  |  | (16.6 | )
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  
|Long distance |  |                    | 34.8  |            |  |                   | 36.5  |       |  |            | 36.1  |   |  |               | (1.7  | )             |  |               | (4.7  | )             |  |   | (1.3 | )       |  |         | (3.6 | ) |  |  | 138.8 |  |  |  | 170.3 |  |  |  | (31.5  | ) |  |  | (18.5 | )
|Data          |  |                    | 4.4   |            |  |                   | 6.0   |       |  |            | 4.8   |   |  |               | (1.6  | )             |  |               | (26.7 | )             |  |   | (0.4 | )       |  |         | (8.3 | ) |  |  | 19.7  |  |  |  | 28.0  |  |  |  | (8.3   | ) |  |  | (29.6 | )
|Local         |  |                    | 15.5  |            |  |                   | 6.8   |       |  |            | 14.1  |   |  |               | 8.7   |               |  |               | 127.9 |               |  |   | 1.4  |         |  |         | 9.9  |   |  |  | 48.7  |  |  |  | 18.2  |  |  |  | 30.5   |   |  |  | 167.6 |  
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  
|Residential   |  |                    | 54.7  |            |  |                   | 49.3  |       |  |            | 55.0  |   |  |               | 5.4   |               |  |               | 11.0  |               |  |   | (0.3 | )       |  |         | (0.5 | ) |  |  | 207.2 |  |  |  | 216.5 |  |  |  | (9.3   | ) |  |  | (4.3  | )
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  
|Total         |  |                    | 202.4 |            |  |                   | 215.1 |       |  |            | 198.6 |   |  |               | (12.7 | )             |  |               | (5.9  | )             |  |   | 3.8  |         |  |         | 1.9  |   |  |  | 800.7 |  |  |  | 928.4 |  |  |  | (127.7 | ) |  |  | (13.8 | )
|              |  |                    |       |            |  |                   |       |       |  |            |       |   |  |               |       |               |  |               |       |               |  |   |      |         |  |         |      |   |  |  |       |  |  |  |       |  |  |  |        |   |  |  |       |  

Revenue from Business Customers

Call-Nets revenue from business customers decreased by 16.6% to
$593.5 million in 2002 from $711.9 million in 2001. The total decline
in business revenue of $118.4 million was a result of an $89.4
million decline in long distance revenue, a $44.1 million decline in
data revenue and a $15.1 million increase in local service revenue.





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 12 | 

In the business segment, the reduction in Call-Nets average
revenue per long distance minute (ARPM) by 1.30 cents to 5.14 cents
or 19.7%, accounted for all of the $89.4 million long distance
revenue decline, as the volume of minutes transported for business
customers increased by 0.4% to 7.1 billion minutes. Heightened
competitive activity in the Canadian market place, resulting from the
two dominant ILECs attempting to gain market share in the other
ILECs geographic market, contributed to the continued erosion in
ARPM. Pricing was also the primary factor in the 17.7% lower data
revenue. Local service revenue increased 188.8% as Call-Net actively
marketed its bundled local offering. The active line count, including
23 lines for each Primary Rate Interface (PRI), increased by 22,100
in 2002 to end the year with 38,000 active local lines.

Call-Net intends to mitigate the risk of pricing pressure
causing a further erosion in ARPM in 2003 by continuing its efforts
to sell a bundled local and long distance offering to small and
medium size businesses and to focus on selected customer and product
opportunities at the higher end of the market. In addition, Call-Net
plans on marketing its ability to provide, with Sprint Corp., a
ubiquitous North American network to larger companies. Call-Nets
objective is to maintain business revenue at current levels in 2003.

Revenue from Residential Customers

Call-Nets revenue from residential customers declined by $9.3
million or 4.3% to $207.2 million from $216.5 million in 2001. A
decline in long distance and data revenue of $31.5 million and $8.3
million, respectively, was substantially offset by $30.5 million
higher local service revenue. The long distance revenue decline was
primarily a result of a higher churn rate in stand-alone long
distance customers. The stand-alone customer count declined by 90,000
to 280,000 at December 31, 2002. This decline was partially offset by
local service. This result is consistent with Call-Nets strategy for
the residential marketplace of replacing more volatile stand-alone
long distance customers with a more stable base of local customers,
with long distance offered as part of a feature bundle. During 2002,
the number of bundled local and long distance customers increased by
67,000. On a net basis, long distance customers declined by 34,000.
In 2002, Call-Nets residential long distance traffic declined by 269
million minutes to 1.03 billion minutes while ARPM (after including
the effect of the monthly network service charge implemented in July
2002) improved 0.37 cents to 13.53 cents.

Call-Net intends to mitigate its risk in respect of churn in
2003 by marketing its bundled local service offering out of at least
131 co-locations in Montreal, Ottawa, Toronto, Calgary and Vancouver,
as well as in a number of small population centres in Southern
Ontario. These co-locations include 4.0 million addressable
residential lines. Call-Nets objective is to increase its
residential line count by up to 50,000 in 2003.

Residential data revenue declined by $8.3 million to $19.7
million from $28.0 million in 2001. This drop was primarily the
result of a decrease of 19,300 dial-up Internet customers, lost to
high-speed cable or ADSL offerings. Call-Net expects its revenue from
Internet customers will continue to decline, although at a somewhat
slower rate than in 2002, until it has an ADSL high-speed offering
available. However, currently, Call-Net does not have any plans that
would allow it to offer ADSL to its residential customers.

Local service revenue increased by $30.5 million to $48.7
million from $18.2 million in 2001. Call-Net ended the year with
133,200 active residential lines compared to 54,100 active lines at
the end of 2001. As noted above, Call-Net expects to add a further
50,000 lines by the end of 2003 by offering competitively priced
bundles in most major urban centres in Canada. Call-Net will market
its bundled service, combining local, long distance and Internet
services, using a unified campaign in newspapers and direct mail, as
well as telemarketing. Recent CRTC decisions restricting the ILECs
ability to winback residential customers are expected to assist
Call-Net by lowering the number of customers that churn back to the
incumbents. Call-Net has also made an application to the CRTC to
require the ILECs to unbundle their retail ADSL offering from local
retail. If the CRTC accepts this application, Call-Nets ability to
acquire and retain customers should improve.

Call-Nets objective is to grow its residential revenue by more than 10% in
2003.





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 13 | 

Carrier Charges and Gross Profit

Carrier costs decreased from $508.9 million in 2001 to $452.5 million
in 2002. Gross profit as a percentage of revenue declined from 45.2%
to 43.5% in 2002. The 1.7% decline in the gross profit was the result
of a number of netting factors including:



| |  |  | a significant reduction in both the ARPM paid for voice and the revenue received for data
transmission by business customers;                                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $9.5 million in fees paid in 2002 to the ILECs in respect of the acquisition of 143,615 local
residential and business local lines compared to $4.7 million in 2001;
|
| |  |  | the change in revenue mix from higher gross margin long distance revenue to lower gross margin local services business;                                             
|
| |  |  | the estimated $24.7 million of carrier cost relief as a result of the May 30 price cap and follow-up decisions; and                                                 
|
| |  |  | other carrier cost reduction negotiated with non-regulated domestic, U.S. and International carriers.                                                               

In the fourth quarter, Call-Nets gross profit improved 6.3% to
48.9% from 42.6% in the third quarter of 2002. This improvement was
primarily the result of the enactment of retroactive interim pricing
back to May 30, 2002 on certain DNA services that Call-Net buys from
the ILECs. Call-Net accrued a $10.0 million refund in the fourth
quarter in respect of this CRTC decision, of which approximately $5.7
million related to the period prior to the fourth quarter. Excluding
this $5.7 million prior period amount, Call-Nets carrier charges for
the fourth quarter would have been $109.1 million resulting in a
46.1% gross profit, that is more representative of Call-Nets
on-going gross margin. The $10.0 million refund recorded in the
fourth quarter is a conservative estimate of the amounts to be
refunded by the ILECs. The uncertainty surrounding the refund amount
arises due to the complexities and interpretations required in
determining what is covered by the DNA decision and the calculations
involved. We expect the amounts will be finalized within the first
half of 2003. In 2003, Call-Net expects its gross profit will
continue to be under some pricing pressure as a result of competitive
activity, as well as its continued transition towards a bundled
local, long distance and data services offering. Call-Nets objective
is to maintain an average gross profit of between 44% and 46% in
2003.

Operating Costs

Operating costs increased from $284.7 million or 30.7% of revenue in
2001 to $300.4 million or 37.5% of revenue in 2002. The 2.5% Sprint
royalty on revenue, initiated on January 1, 2002, accounted for $14.6
million of the increase. Higher advertising, marketing and
provisioning expenses and other costs associated with the local
services growth initiative incurred in the first six months of the
year also contributed to the increase. Bad debt expense also
increased by $16.5 million in 2002 compared to 2001 due to the
financial difficulties of several carrier customers, as well as
higher bad debts related to Call-Net entering the local residential
services market. These higher costs were partially offset by lower
general and administration charges associated with the head count
reduction and cost containment program initiated in the third quarter
of 2002.

As a result of the cost reduction program announced on June 27,
2002, operating costs declined from $89.2 million in the second
quarter to $68.4 million in the fourth quarter. This $20.8 million
decline related primarily to $9.9 million lower employee costs, $7.5
million lower marketing and advertising costs and $5.0 million lower
bad debt expense. Employee and certain other out-of-pocket expenses
are expected to continue to trend somewhat lower in 2003. However,
since a substantial headcount reduction is not expected to be
replicated in 2003, the amount of any further operating expense
improvement will be modest. Similarly, as Call-Nets bad debt
experience returned to more normal historical levels in the fourth
quarter, after a sharp increase in the second quarter, a further
improvement in bad debt expense is unlikely. Accordingly, Call-Net
expects operating costs will average between 33% and 35% of revenue
in 2003.





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 14 | 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA is a financial metric used by many investors to compare
companies in the telecommunications industry on the basis of
operating results and the ability to incur and service debt. The
disclosure of EBITDA is not intended to replace, but only augment,
the discussion of financial results from operations or cash flow.
Readers are cautioned that EBITDA, as calculated by Call-Net in its
Consolidated Financial Statements, may not be comparable to similarly
titled amounts reported by other companies.

EBITDA was $119.8 million in 2002, compared to negative $968.8
million in 2001. However, after adjusting for unusual items, EBITDA
in 2002 was $47.8 million compared to $134.8 million in 2001. The
$87.0 million decrease was a result of the $71.3 million decrease in
gross profit and the increase of $15.7 million in operating expenses
as discussed above.

In the fourth quarter, Call-Nets EBITDA totalled $30.6 million.
However, as Call-Net accrued $5.7 million as a refund in respect of
prior period DNA costs, an amount of $24.9 million is more
representative of Call-Nets actual fourth quarter EBITDA
performance.

Included in unusual items in 2002, as further described in note
15 to the Consolidated Financial Statements, were:



| |  |  | a $93.1 million gain on the repurchase of long-term debt;                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | a $30.5 million special charge for severance, facility and lease termination and a provision
for redundant assets; and
|
| |  |  | a $9.4 million gain on the sale of capital assets and rights.                                                         

Included in unusual items in 2001, as further described in note
15 to the Consolidated Financial Statements, were:



| |  |  | a $1,071.1 million writedown of goodwill;                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | a $21.2 million loss on the closure of Call-Nets wholly-owned subsidiary, ascenda Inc.;                              
|
| |  |  | a $17.4 million special charge for severance, facility and lease termination
and a provision for redundant assets; and
|
| |  |  | a $6.1 million gain on the sale of capital assets.                                                                    

Depreciation and Amortization

Depreciation and amortization decreased by 23.9% to $162.1 million
from $213.1 million in 2001 primarily as a result of the writeoff of
approximately $1.1 billion of goodwill at the end of the third
quarter of 2001.

Depreciation is expected to decline modestly in 2003 as Call-Net
intends to limit its capital expenditures to the amount necessary to
maintain its current network and infrastructure until the telecom
market or regulatory environment improves. Amortization in 2003 is
expected to be similar to 2002.

Interest on Long-Term Debt

In 2002, interest on long-term debt decreased by $122.5 million to
$104.2 million from $226.7 million in 2001 as a result of the Plan of
Arrangement completed on April 10, 2002 that reduced Call-Nets debt
by more than $2.0 billion. Assuming CDN $1.55 = $1.00 U.S., the
interest expense on the U.S.$377.0 million of new 10.625% senior
secured debt due December 31, 2008, (new notes) issued under the Plan
of Arrangement would be approximately $62.0 million annually.
However, in September 2002, Call-Net purchased and cancelled
U.S.$77.5 million of the new notes. Consequently, the interest
expense for 2003 on the U.S.$299.5 million currently outstanding
(converted at CDN $1.55 = $1.00 U.S.) is expected to be approximately
$49.0 million.

Interest and Other Income (Expense)

In 2002, Call-Net had $3.7 million of interest and other expense
compared to $15.2 million of interest and other income in 2001.
Interest income from Call-Nets short-term investment portfolio
declined $13.5 million year-over-year as the portfolios size
declined and short-term interest rates fell to approximately 2%.
Call-Net sold $229.5 million of its short-term investment portfolio





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 15 | 

in 2002 to help fund a portion of its investment in fixed assets, to
fund the approximate $128.0 million net cash pay out under the Plan
of Arrangement and to buy back U.S.$77.5 million of the Senior
Secured Notes.

Other interest income in 2002 decreased by $5.4 million due to
lower interest income on cash held in trust and a gain recorded in
2001 on the termination of cross currency swaps. As in 2002, interest
and other income or expense is not expected to be a material amount
in 2003.

Foreign Exchange

In 2002, with the adoption of new Canadian accounting standard, CICA
1650 Foreign Currency Translation, the deferral and amortization of
foreign exchange gains and losses on long-term debt is no longer
permitted. Any gain or loss on Call-Nets U.S. denominated debt
outstanding is immediately credited to or charged against income.

In 2002, Call-Net had a foreign exchange gain of $2.3 million
compared to a loss of $139.2 million in 2001. The magnitude of the
loss in 2001 was a result of Call-Net having a much larger amount of
unhedged U.S. denominated debt outstanding in 2001. Currently, with
$473.1 million of unhedged U.S. dollar denominated debt, Call-Net
continues to be exposed to currency movements. However, management
believes this risk is acceptable and has no plans to hedge the risk.

Income Taxes Benefit (Expense)

In 2002, Call-Net expensed $1.6 million in respect of the federal
large corporations tax, all of which related to proposed reassessment
of prior years. Call-Net expects it will expense approximately $1.5
million in 2003 in respect of the federal large corporations tax.

In 2002, Call-Net did not tax benefit its operating losses
because of the lack of certainty such losses could be used in the
future. At December 31, 2002, Call-Net had approximately $860.0
million in losses available for Canadian income tax purposes to
reduce taxable income in future years.

Net Income (Loss)

Call-Nets net loss for 2002 was $149.5 million compared to $1.52
billion in 2001. The primary reasons for the $1.37 billion lower loss
in 2002 were unusual items. In 2002, Call-Net recognized unusual
gains of $72.0 million compared to incurring unusual losses of $1.10
billion last year. These unusual items are outlined in note 15 to the
Consolidated Financial Statements. Other favourable factors included:



| |  |  | a $2.3 million foreign exchange gain in 2002 compared to a $139.2 million loss last year;                     
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | $50.3 million lower amortization expense, as a result of the goodwill writedown in 2001; and                  
|
| |  |  | $122.5 million lower interest expense resulting from the Plan of Arrangements $2.0
billion reduction in debt.

These favourable factors were partially offset by:



| |  |  | an $87.0 million decrease in EBITDA before unusual items; and                 
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | an $18.9 million unfavourable variance in interest and other income
(expense).

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue

For the year ended December 31, 2001, Call-Nets consolidated revenue
was $928.4 million compared to $1.25 billion, a 25.7% decrease.

Revenue from Business Customers

Call-Nets revenue from business customers decreased by 23.9% to
$711.9 million in 2001 from $934.9 million in 2000. The total decline
in business revenue of $223.0 million was a result of a $223.8
million decline in long distance revenue, a $2.9 million decline in
data revenue and a $3.7 million increase in local service revenue.





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 16 | 

Lower long distance minute volume accounted for $75.0 million of
the reduction, while a reduction in the average revenue per long
distance minute (price) accounted for $148.8 million. Approximately
$95.0 million of the price reduction was related to a number of
long-standing settlement agreements with other carriers that were
revised to market rates in the first and second quarter of 2001.
Revenue recognized under these contracts declined by 56.0% compared
to 2000 because of the significant decline in market pricing.
Excluding these contracts, the average revenue per minute declined by
approximately 19.9% from 2000 to 2001. Lower long distance volume,
caused by managements initiative to tighten credit and gross margin
requirements, as well as a number of customers who were lost due to
bankruptcy or insolvency also contributed to the drop in revenue.

Revenue from Residential Customers

Call-Nets revenue from residential customers declined by $98.8
million or 31.3% to $216.5 million from $315.3 million in 2000. A
decline in long distance revenue of $89.0 million accounted for most
of the decrease. Of the total decrease in long distance revenue,
$83.8 million was due to a decrease in volume as a result of customer
churn. Call-Nets decision to cancel the unprofitable fixed price
unlimited long distance program resulted in a planned, but
significant, reduction in its residential customer base. Long
distance customer count declined by 182,000 during 2001. During the
fourth quarter the customer count declined by 42,000.

Residential data revenue dropped by $12.9 million to $28.0
million from $40.9 million in 2000. This drop was primarily the
result of a decrease of 38,000 dial-up Internet customers, lost
primarily to high-speed cable or ADSL offerings.

Local service revenue increased by $3.1 million to $18.2 million
from $15.1 million in 2001. Call-Net ended the year with 53,600 local
customers compared to 25,900 at the end of 2000.

Carrier Charges and Gross Profit

Carrier costs decreased from $844.6 million in 2000 to $508.9 million
in 2001. The gross profit as a percentage of revenue improved from
32.4% to 45.2% in 2001. The improvement in gross profit as a
percentage of revenue was primarily due to three factors:



| |  |  | a $72.0
million reduction in the amount Call-Net paid on long distance
revenue to support local telephone services under the contribution
regime established by the CRTC as a result of a change in the taxing
mechanism at January 1, 2001;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a reduction in the standard rates
used to price minutes swapped with other carriers under certain
settlement agreements, mirroring an identical drop in business
revenue; and                                                               
|
| |  |  | ongoing efforts to reduce carrier costs by
renegotiating agreements with other carriers and migrating off of
leased facilities to our own lines.                                                                                            

Operating Costs

Operating costs declined by $90.8 million to $284.7 million from
$375.5 million in 2000, a 24.2% decrease. Operating costs for 2001
represented 30.7% of consolidated revenue compared to 30.0% in 2000.
Lower advertising, marketing and volume-related customer support
costs, reduced administrative costs and improved bad debt experience
all contributed to this significant decline in operating costs. The
15% or 300 employee workforce reduction announced and substantially
completed on May 8, 2001 also contributed to lowering operating costs
in 2001 compared to 2000.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA was negative $968.8 million in 2001, compared to negative
$97.2 million in 2000. However, before unusual items, EBITDA in 2001
was $134.8 million, a $104.7 million improvement over the $30.1
million in 2000. The improvement in EBITDA before unusual items came
from a number of sources, the largest of which was the change in the
CRTCs contribution regime on January 1, 2001. The change lowered
Call-Nets carrier charges by an estimated $72.0 million. However,
Call-Net believes this change also contributed an indeterminable
portion of the decline





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 17 | 

in long distance pricing. Consequently, Call-Net cannot accurately
quantify the net benefit of the change in contribution rates and
believes it is reasonably likely that other carrier cost reductions
and the overall expenditure reduction program contributed at least an
equal amount to the significant EBITDA improvement.

Depreciation and Amortization

Depreciation and amortization declined to $213.1 million from $230.7
million in 2000 primarily as a result of the writeoff of goodwill at
the end of the third quarter. Depreciation of $135.9 million in 2001
was in line with the $136.5 million expensed in 2000.

Interest on Long-Term Debt

In 2001, interest on long-term debt increased by $20.6 million to
$226.7 million from $206.1 million in 2000. This increase was
primarily the result of the accretion of interest expense on the
Senior Discount Notes. Interest on long-term debt expense for 2001
included $95.9 million of cash interest paid during the year.
Non-cash interest of $130.8 million related to interest accreted on
the principal balance of the Senior Discount Notes.

Interest and Other Income (Expense)

Call-Nets interest and other income decreased from income of $34.2
million in 2000 to $15.2 million in 2001. This change was the result
primarily of a lower level of short-term investments. Lower interest
rates also contributed to the decline.

Foreign Exchange

In 2001, Call-Net had a foreign exchange loss of $139.2 million
compared to a loss of $51.7 million in 2000. The increase in the
$87.5 million loss was a result primarily of the larger depreciation
in the Canadian dollar in 2001 compared to 2000. The foreign exchange
loss was primarily in respect of Call-Nets U.S. dollar denominated
long-term debt.

Income Tax Benefit

Call-Nets income tax benefit declined from $50.3 million in 2000 to
$7.9 million in 2001. In 2000, the income tax benefit included $35.9
million of income tax benefit related to the sale of non-revenue
producing fibre optic cable assets and a $9.0 million change in the
value of the future tax liability due to federal income tax rate
changes. In 2001, income tax benefit includes $4.0 million for a
change in the value of the future tax liability due to provincial
income tax rate changes.

The income tax benefit was partially offset by an expense for
the federal large corporations tax of $2.9 million in 2001 and of
$2.2 million in 2000.

In 2001, Call-Net did not tax benefit its operating losses
because of the lack of certainty such losses could be used in the
future. At December 31, 2001 Call-Net had approximately $1.1 billion
in losses available for Canadian income tax purposes to reduce future
years taxable income. Call-Net also had approximately $1.0 billion
of capital losses available.

Net Income (Loss)

Call-Nets net loss for 2001 was $1.525 billion compared to $501.2
million in 2000, a $1.024 billion increase from the prior year. The
year-over-year increase in the net loss was primarily the result of a
$976.3 million increase in expenses associated with unusual items
(see note 15 to the Consolidated Financial Statements). The $104.7
million improvement in EBITDA before unusual items and $17.6 million
decrease in depreciation and amortization expense were more than
offset by:



| |  |  | the $20.6 million increase in interest expense on
long-term debt;
| | - |  | -----------------------------------------------------------------
|
| |  |  | the $19.0 million decrease in interest and other
income;         
|
| |  |  | the $87.5 million increase in the foreign exchange loss;
and     
|
| |  |  | the $42.4 million decrease in income taxes benefit.              





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 18 | 

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, Call-Nets current assets were $218.7 million
and its current liabilities were $159.4 million. During 2002, net
working capital decreased to $59.3 million compared to $316.6 million
at December 31, 2001. Cash, cash equivalents and short-term
investments at December 31, 2002 totalled $125.0 million compared to
$335.9 million at December 31, 2001. At December 31, 2002, $123.9
million of these funds were invested in liquid Canadian dollar
denominated securities maturing in no more than one year and having
one of the two highest ratings obtainable from either the Standard
and Poors Rating Group or the Moodys Investors Service, Inc.

This $125.0 million of liquid assets comprise substantially all
of Call-Nets liquidity and a significant portion of its capital
resources. As Call-Net currently expects to be cash flow
self-sufficient in 2003, Call-Net believes its current liquid assets
and projected future cash flow from operations are sufficient to
finance its current business plan.

With the exception of cash collateralized letters of credit of
approximately $0.2 million, Call-Net had no operational bank lines at
December 31, 2002.

At year-end, Call-Net had $473.1 million of long-term debt
outstanding compared to shareholders equity of $248.6 million.
Call-Nets long-term debt to total capitalization ratio was 0.66.

Call-Net is not required to repay any of its 10.625% Senior
Secured Notes until December 31, 2008. The Senior Secured Notes do
not contain any covenants often contained in debt indentures, the
failure of which would accelerate the maturity date on the debt.

Call-Nets current business plan is not dependent on it raising
any external financing in the foreseeable future.

Plan of Arrangement

The Plan of Arrangement constituted a comprehensive recapitalization
that reduced Call-Nets debt by approximately $2.0 billion and
significantly lowered the interest expense. The new capital structure
provided a stronger financial base.

Under the terms of the Plan of Arrangement, all of Call-Nets
$2.6 billion of Senior Notes and Senior Discount Notes were exchanged
for U.S.$377.0 million of new 10.625% Senior Secured Notes debt due
December 31, 2008, approximately U.S.$81.9 million in cash and 80% of
the equity in the recapitalized Call-Net. The existing shareholders
of Call-Net retained 20% of Call-Nets equity.

Immediately after the Plan of Arrangement, Sprint invested $25.0
million in exchange for 5% of the post-recapitalization equity of
Call-Net.

The Plan of Arrangement substantially improved the capital
structure of Call-Net by reducing the proportion of debt to levels
acceptable to North American capital markets. The Plan of Arrangement
enhanced Call-Nets ability to raise capital (see Risk Factors) as
necessary to execute its business plan. In addition to the benefit of
improved capital markets access, the reduction in debt resulted in
suppliers, and more importantly customers, feeling more comfortable
dealing with a company whose financial situation and long-term
prospects were more certain.

Cash Flow from Operating Activities

In 2002, Call-Nets operating activities before changes in non-cash
working capital used $45.9 million of cash compared to providing $35.9
million of cash in its operating activities before changes in
non-cash working capital in 2001. This $81.8 million deterioration
related primarily to the factors affecting operating profitability
outlined under the EBITDA heading above. Lower EBITDA was partially
offset by lower cash interest payments in 2002 compared to 2001
because of the reduction in debt associated with the
recapitalization.

After a $52.0 million increase in non-cash working capital,
operating activities provided $6.1 million of cash in 2002, compared
to using $27.2 million in 2001. The decrease in non-cash working
capital related primarily to the release of $53.9 million of cash
held in two trust accounts. This source of cash was partially offset
by a $53.0 million decline in accounts payable compared to a $44.4
million decline in accounts receivable. Lower sales and an improved
days sales





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 19 | 

outstanding ratio accounted for the lower accounts receivable while
lower carrier costs and lower interest payable accounted for the
decline in accounts payable.

In 2003, cash flow from operations is expected to be sufficient
to fund Call-Nets investment activities. However, the net change in
non-cash working capital is not expected to be either a significant
source or use of cash.

Cash Flow from Investment Activities

Call-Nets investment activities in 2002 provided $154.2 million in
2002 compared to using $262.9 million in 2001. In 2002 Call-Net
monetized $229.5 million of short-term investments to fund the
approximate $128.0 million net cash payment under the Plan of
Arrangement, $78.4 million for capital expenditures related mainly to
its local residential initiative, and $29.7 million to buy back
U.S.$77.5 million of notes.

In 2002, Call-Net invested $78.4 million in capital asset
additions. The largest investments related to the expansion of its
local footprint by adding 34 co-locations and adding ADSL service to
50 co-locations. The investment program was weighted to the beginning
of the year. In the fourth quarter Call-Net invested only $9.4
million in capital assets. Call-Net intends to maintain this
conservative level of investments until such time as regulatory
and/or industry conditions improve.

Call-Nets capital spending for 2003 is expected to be in the
range of $40 million. This investment program will be targeted
towards maintaining current operations, growing existing product
platforms as well as cost savings and service improvement
initiatives.

Cash Flow from Financing Activities

Because of fresh start accounting, Call-Nets largest financial
activity, the Plan of Arrangement, is not reflected in the
Consolidated Statements of Cash Flows. These activities, however, are
discussed above under the heading Plan of Arrangement.

In 2002, Call-Nets financing activities used $29.9 million of
cash of which $29.7 million related to the repurchase of U.S.$77.5
million of long-term debt in September 2002.

Call-Net will continue to evaluate on an ongoing basis the most
effective use of its capital and may make market purchases of Senior
Secured Notes in the future depending upon market opportunities,
capital requirements and its liquidity needs.

COMMITMENTS AND GUARANTEES

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

On April 10, 2002, Call-Net and Sprint executed an agreement
(the Sprint Agreement) that was contingent upon the approval and
completion of the Plan of Arrangement. The term of the Sprint
Agreement is for a period of 10 years commencing April 1, 2002. The
Sprint Agreement includes a provision that Sprint or its affiliates
will provide Call-Net such products and services as it requests from
time to time. In addition, Call-Net continues to have exclusive use
of the Sprint trademark in Canada for all Sprint wireline services.
Call-Net and Sprint have agreed to treat each other with preferred
partner status. In connection with the granting of the technology
license and the trademark license, Call-Net will pay a 2.5% royalty
to Sprint on substantially all revenue for the first five years and
2.0% for the remaining five years.

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





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 20 | 

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

In 1998, a predecessor to Call-Net received a right to use fibre
from Metromedia Fibre Networks (MFN). In August 2000, some of the
fibre provided by MFN was transferred to a third party. MFN, which
filed for Chapter 11 in May 2001, has asserted that it intends to
reject Call-Nets right to such fibre under the protection of
bankruptcy legislation. Should MFN prevail in its position, Call-Net
will work to provide the third party another fibre solution, or it
may be required to indemnify it.

Occasionally, in the normal course of business, Call-Net
provides guarantees of third party performance in respect of customer
lease arrangements. The current total of these obligations is
approximately $1.0 million.

RELATED PARTY TRANSACTIONS

During 2002, Call-Net sold Sprint $20.4 million of telecommunication
services and purchased $45.1 million of similar services from Sprint.
These transactions resulted from the normal termination of traffic
over each others network. The pricing in respect of these
transactions is in line with equivalent arrangements with other U.S.
carriers with whom Call-Net has similar levels of cross-border
traffic. In addition, royalty costs based on revenues were paid to
Sprint that amounted to $19.5 million in 2002. Of this $19.5 million
amount, $14.6 million was included in 2002 operating expenses while
$4.9 million was included as a component of the fresh start
adjustments.

Also during 2002, in the normal course of business, Call-Net has
engaged in sales of telecommunication services to Cybersurf Corp.
amounting to $2.4 million. These transactions were made at market
prices under normal trade terms and conditions.

FUTURE OUTLOOK

In 2003, Call-Net intends to continue to conservatively invest in its
on-net strategy. This investment may from, quarter to quarter,
require both higher operating expense, as well as capital
expenditures compared to the fourth quarter of 2002. The higher
operating expenses will be focused on acquiring and retaining new
customers customers that are both on-net and on strategy. The
planned capital expenditures of approximately $40.0 million will be
focused on supporting growth on our existing product platforms, in
lowering our cost structure and in enhancing our ability to provision
and service our customer base. Call-Net may, depending on cash flow,
also consider modestly expanding its co-location footprint, most
likely around the urban centres in which it has already established
local service. In aggregate, however, Call-Net currently expects the
capital expenditure program will be financed primarily out of
operating cash flow, though expenditures could accelerate in the
right market conditions. In addition, modest investments in IP
services and value-added contact centre solutions will continue to
support the focussed strategy for enterprise customers.

In the business segment, Call-Net will invest in expanding its
presence in the small and medium-sized general business markets by
offering a bundled offering of local, long distance and data that
leverages the on-net co-locations. With the recent failure of many
startup CLECs, Call-Net views these as under-serviced markets with
significant opportunity for its bundled offerings. Call-Net also
intends to continue its focus on specific market segments within the
medium and large enterprise customers. In particular Call-Net is
positioned to leverage the long-term relationship with Sprint to grow
marketshare with North American based multi-national corporations
(MNCs) who are looking for consistency in service offerings,
technology evolution, and account management. Contact centres are
another area of focus where Call-Net has developed significant
momentum and expertise including value-added managed services through
the ownership stake in Time iCR. Finally, Call-Net is deploying IP
solutions based on Sprint technology that will bring innovative new
technology options to domestic Canadian data customers to move them
from legacy data network into the world of IP networking.





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 21 | 

In the residential segment, Call-Net will continue to advertise
its local service to consumers in its core urban centres. Call-Net
also intends to partner with other companies to enhance the economics
of acquiring and retaining local and long distance customers. Its
goal this year is to acquire over 50,000 new local bundled
residential customers in Canadas largest urban markets. Call-Nets
key to success in the residential market relates to its ability to
economically acquire and retain bundled local customers. In 2003,
Call-Net intends to introduce targeted price increases, promotions to
existing and prospective customers, as well as new simplified invoice
statements delivering one to one marketing messages, and secure even
more sales and service activities through our enhanced IVR and WEB
Platforms.

In 2002, Call-Net worked with the CRTC to ensure a fairer
regulatory framework. These efforts were rewarded, in December 2002,
when the CRTC approved Call-Nets application for interim pricing on
certain DNA costs resulting in the Company booking the $10.0 million
reduction in carrier costs in the fourth quarter. As well, in
December 2002, based on several applications filed by Call-Net and
other competitors, the CRTC issued a series of decisions that are
directed at enforcing competitive safeguards in the market in
relation to the ILECs market behavior. These decisions limit the
ability of the ILECs to target competitors local customers for
winback, strengthen the rules regulating the manner in which the
ILECs can bundle tariffed services with untariffed services and
constrain the ability of the ILECs to use unregulated affiliates,
such as Bell Nexxia and Bell West, to avoid competitive safeguards.
Further, in January 2003, the CRTC suspended all new ILEC promotions
that are, among other things, targeted at or could have the effect of
winning back customers of competitors like Call-Net in the local
service market. These decisions, which demonstrate a greater CRTC
commitment to promoting competition, should help Call-Net in
retaining new business and residential customers as well as growing
its customer base in 2003.

Call-Net remains committed to offering Canadians a competitive
choice when it comes to telephone service  and while the decisions
above are helpful, the success of the Companys program continues to
be gated by the regulatory environment. Accordingly in 2003, Call-Net
will continue, as it did in 2002, to aggressively pursue changes to
the regulatory regime necessary in order to ensure that Call-Net can
compete fairly and efficiently against the ILECs. These efforts
include an application filed by Call-Net to unbundle the ILECs ADSL
from their retail local services and on-going proceedings to set the
terms and conditions for resale of the ILECs ADSL services. In
addition, Call-Net is engaged in a number of follow-up proceedings
resulting from the price cap decision to expand the categories of
carrier services that are subject to the cost plus 15% price regime,
including three additional components of DNA. If successful,
Call-Nets revenue growth should be further augmented while its cost
structure is lowered.

In conclusion, Call-Net intends to fund its 2003 investment in
its revenue growth initiatives out of internal cash flow.
Consequently, neither revenue nor operating profits are expected to
grow dramatically from current levels. However, the corollary is that
Call-Net will maintain its cash resources to have them available for
the opportunities todays unstable environment is likely to provide.

RISK FACTORS

Call-Net faces a number of significant operational, regulatory,
financial and other risks. The commentary above addressed some of the
key risks. The discussion below summarizes the operational,
regulatory, and financial risks and mitigating factors that are key
to Call-Nets future financial prospects.

OPERATIONAL RISK

The international telecommunications industry is changing rapidly due
to deregulation, privatization, technological improvements, expansion
of infrastructure and the globalization of the worlds economies. In
order to compete effectively, the Company must adjust its
contemplated plan of development to meet changing market conditions.





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|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 22 | 

Operational risks inherent in executing Call-Nets strategy include:



| |  |  | a continuing or accelerated erosion in average revenue per long distance minute. Each one
cent decline in average revenue per minute reduces Call-Nets revenue by approximately $80.0 million;                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a continuing or accelerated erosion of Call-Nets stand-alone residential long distance or dial-up Internet customer base. The average revenue per long distance customer is $280 per year and
the average revenue per dial-up Internet customer is approximately $240 per year;
|
| |  |  | acquiring and retaining local customers at an economically viable cost;                                                                                                                                                                                                         
|
| |  |  | a reliance on its agreement
with Sprint in respect of its Sprint trademark as well as certain long distance and data services technology and know how;                                                                                                                         
|
| |  |  | competing effectively with competitors, many of whom have larger operational and financial
resources than Call-Net, including the risk that Call-Net will not be able to effectively
participate in the consolidation of the industry;                                          
|
| |  |  | adapting to, and as necessary financing, the high level of technological change in the telecommunications industry;                                                                                                                                                             
|
| |  |  | profitably developing, marketing and provisioning new products on a timely basis that are
acceptable to its target markets;                                                                                                                                                     
|
| |  |  | hiring and retaining qualified management and staff;                                                                                                                                                                                                                            
|
| |  |  | maintaining and protecting the key assets of Call-Net, including both its network and the
Sprint brand from damage or loss;                                                                                                                                                     
|
| |  |  | additional bankruptcies or insolvencies in the telecommunication sector impacting the results
of Call-Nets on-going revenue, as well as the immediate expense associated with bad debts;                                                                                       
|
| |  |  | a reliance on other competitive carriers to access its customers or to deliver its data and
voice traffic; and                                                                                                                                                                  
|
| |  |  | the effective implementation of its relationship with Sprint and on Sprints ability to overcome
its own operational risks.                                                                                                                                                     

Call-Net uses a variety of strategies to mitigate these operational risks where possible including:



| |  |  | transitioning its marketing focus away from long distance and towards its local and data/IP
offerings;                                                                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | launching a variety of new long distance residential products to meet the needs of a broad
range of consumers, as well as transitioning the majority of its marketing and advertising
budget to promote its bundled local offering;
|
| |  |  | entering into an expanded technological agreement with Sprint to improve its access to new
technology on a timely and cost-effective basis;                                                                                        
|
| |  |  | improving its demographic market information by obtaining information on the specific needs
and wants of its target markets;                                                                                                       
|
| |  |  | designing a competitive compensation package and training programs, as well as other
human resource related strategies, to maintain its ability to hire and retain qualified managers
and staff;                                   
|
| |  |  | designing and implementing an effective risk management program, including purchasing an
appropriate level of general and business interruption insurance; and                                                                     
|
| |  |  | developing and sustaining a strong operational relationship with Sprint.                                                                                                                                                           

However, investors
should recognize that a number of the operating risks are not within Call-Nets control and such risks could adversely affect its results.





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##### Table of Contents



|                                     |  |  |    | 
|------------------------------------ |  |  | -- | 
|Managements Discussion and Analysis |  |  | 23 | 

FINANCIAL RISKS

Availability of Capital Resources

Call-Net currently has a significant risk associated with the level
of debt on its consolidated balance sheet and the debt servicing
costs associated with the debt. In spite of extinguishing $2.0
billion of debt by way of the Plan of Arrangement, if Call-Nets
plans change or its projections prove inaccurate and the funds
currently available as cash, cash equivalents and short-term
investments prove insufficient to fully fund its business plan, then
Call-Net may be required to seek additional financing sooner than it
currently expects. Additional sources of financing may include public
or private equity or debt financing, capital and operating leases and
other financing arrangements. To the extent sufficient funding is not
available, Call-Net may limit which markets it enters and the degree
to which it penetrates a particular market.

Call-Net can give no assurance that such additional financing
will be available to it or, if available, that it can be obtained on
a timely basis and on acceptable terms or within the limitations
contained in Call-Nets financing arrangements. Failure to obtain
such financing could result in the delay or abandonment of some or
all of Call-Nets business plan, which would harm its financial
condition and operating results. Such a failure could also limit its
ability to make principal and interest payments on its indebtedness.
Call-Net cannot assure anyone that financing, if required, will be
available in the future or that, if such financing were available, it
would be available on terms and conditions acceptable to it.

Currency Risk

Call-Nets revenue is generated primarily in Canadian dollars, while
substantial amounts of its current and future liabilities, including
interest and principal obligations on its long-term debt, are and
will be payable in U.S. dollars. As at December 31, 2002, Call-Net
had no cross-currency swaps on its outstanding U.S. dollar
denominated debt. Based on its December 31, 2002 balances, a 1%
change in the foreign currency exchange rate between the Canadian and
U.S. dollar would have an impact of approximately $4.8 million on its
long-term debt. Any substantial increase in the U.S. dollar relative
to the Canadian dollar could affect Call-Nets results of operations
and its ability to meet its future payment obligations on its
long-term debt.

REGULATORY RISKS

Call-Nets long distance services are subject to regulation by the
CRTC and to the provisions of the Telecommunications Act (Canada).
Since 1992, the CRTCs stated policy has been to recognize the value
and importance of competition in the long distance market. However,
the CRTCs policy may change in the future. The CRTC has refrained,
in part, from regulating some of the public long distance services
offered by the incumbents.

Because neither the CRTC nor the courts have interpreted certain
aspects of the Telecommunications Act (Canada)and its regulations,
it is impossible to predict what impact, if any, these provisions
will have on Call-Net. Any change in policy, regulations or
interpretations could have a material adverse effect on Call-Nets
operations and financial condition. In addition, the CRTCs decisions
are subject to review under the Telecommunications Act (Canada)at
any time and may be appealed to the Federal Court of Appeal (Canada)
within 30 days of a decision or challenged by a petition to the
Federal Cabinet of Canada within 90 days of a decision. The CRTCs
decisions necessary to implement competition in the long distance and
local services markets may be appealed or challenged or changed upon
review.





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|                            |  |  |    | 
|--------------------------- |  |  | -- | 
|Managements Responsibility |  |  | 24 | 

Management is responsible for the preparation and presentation of the
consolidated financial statements and all other information in the annual
report. This responsibility includes the selection of appropriate
accounting methods, in addition to making the judgements and estimates
necessary to prepare consolidated financial statements in accordance with
generally accepted accounting principles. It also includes ensuring that
the other financial information presented elsewhere in the annual report
is consistent with the consolidated financial statements.

To safeguard assets and to provide reasonable assurance that
relevant and reliable financial information is being produced, management
maintains a system of internal controls. The consolidated financial
statements have been audited by the independent shareholders auditors,
Ernst & Young LLP, whose report follows.

The Board of Directors, acting through an Audit Committee, is
responsible for determining that management fulfils its responsibilities
in the preparation of consolidated financial statements and the financial
control of operations. The Board of Directors recommends the independent
auditors for appointment by the shareholders. The Audit Committee meets
regularly with financial management and the independent auditors to
discuss internal controls, auditing matters and financial reporting
issues. The independent auditors have unrestricted access to the Audit
Committee. The Audit Committee reviewed the consolidated financial
statements and managements discussion and analysis prior to the Board of
Directors approving them for inclusion in the annual report.

|                                                        |  |                                     |  |                                                             
|------------------------------------------------------- |  | ----------------------------------- |  | ------------------------------------------------------------
|/s/ William W. Linton                                   |  | /s/ Jim Laramie                     |  | /s/ John Laurie                                             
|William W. Linton
PRESIDENT AND
CHIEF EXECUTIVE OFFICER |  | Jim Laramie
VICE PRESIDENT, FINANCE |  | John
Laurie
VICE PRESIDENT,
TREASURER
AND INVESTOR RELATIONS




Auditors Report

To the Shareholders of Call-Net Enterprises Inc.

We have audited the consolidated balance sheets of Call-Net Enterprises
Inc.as at December 31, 2002 and 2001 and the consolidated statements of
operations and deficit and cash flows for each of the periods in the
three years ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and 2001 and the results of its operations and
its cash flows for each of the periods in the three years ended December
31, 2002 in accordance with Canadian generally accepted accounting
principles.

As disclosed in note 2 to the Consolidated Financial Statements, in
2002 the Company changed its method of accounting for Foreign Currency
Translations.

|                                  |  |                                            
|--------------------------------- |  | -------------------------------------------
|TORONTO, CANADA
FEBRUARY 14, 2003 |  | /s/ Ernst & Young LLP
CHARTERED ACCOUNTANTS





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##### Table of Contents






|                            |  |  |    | 
|--------------------------- |  |  | -- | 
|Consolidated Balance Sheets |  |  | 25 | 

|                                                        |                                                                      |      |       |       |  |  |                      |       | 
|------------------------------------------------------- | -------------------------------------------------------------------- | ---- | ----- | ----- |  |  | -------------------- | ----- | 
|                                                        |                                                                      |      |       |       |  |  | Pre-recapitalization
|                                                        |                                                                      |      |       |       |  |  |                     
|As at December 31 [millions of Canadian dollars]        |                                                                      | 2002 |       | 2001 
|                                                        |                                                                      |      |       |      
|                                                        |                                                                      |      |       |       |  |  | [Restatednote 1]   
|ASSETS                                                  |                                                                      |      |       |       |  |  |                      |      
|Cash and cash equivalents                               |                                                                      |      | 34.1  |       |  |  | 15.5                 |      
|Short-term investments                                  |                                                                      |      | 90.9  |       |  |  | 320.4                |      
|Accounts receivable [note 3]                            |                                                                      |      | 89.3  |       |  |  | 133.7                |      
|Other current assets [note 4]                           |                                                                      |      | 4.4   |       |  |  | 59.4                 |      
|                                                        |                                                                      |      |       |       |  |  |                      |      
|Total current assets                                    |                                                                      |      | 218.7 |       |  |  | 529.0                |      
|                                                        |                                                                      |      |       |       |  |  |                      |      
|Capital assets [note 5]                                 |                                                                      |      | 600.0 |       |  |  | 749.7                |      
|Other assets [note 6]                                   |                                                                      |      | 101.1 |       |  |  | 173.4                |      
|                                                        |                                                                      |      |       |       |  |  |                      |      
|Total assets                                            |                                                                      |      | 919.8 |       |  |  | 1,452.1              |      
|                                                        |                                                                      |      |       |       |  |  |                      |      
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)       |                                                                      |      |       |       |  |  |                      |      
|Accounts payable and accrued liabilities[note 7]        |                                                                      |      | 159.4 |       |  |  | 212.4                |      
|Future income tax liability[note 10]                    |                                                                      |      |      |       |  |  | 36.8                 |      
|Long-term liabilities[note 8]                           |                                                                      |      | 511.8 |       |  |  | 2,626.2              |      
|Commitments and contingencies [notes 8, 11 and 12]      |                                                                      |      |       |       |  |  |                      |      
|Shareholders equity (deficiency)                       |                                                                      |      |       |       |  |  |                      |      
|Capital stock [note 9]                                  |                                                                      |      |       |       |  |  |                      |      
|                                                        | Common Shares, unlimited authorized                                  |      |       | 50.3  |  |  |                      |      | 
|                                                        | Class B Non-Voting Shares, unlimited authorized                      |      |       | 256.0 |  |  |                      |      | 
|                                                        | Preferred Shares, unlimited authorized                               |      |       |      |  |  |                      |      | 
|Pre-recapitalization Capital Stock [note 9]            
|                                                        | Pre-recapitalization Common Shares, unlimited
authorized             |      |       |      |  |  |                      | 124.8 | 
|                                                        | Pre-recapitalization Class B Non-Voting Shares,
unlimited authorized |      |       |      |  |  |                      | 863.5 | 
|                                                        | Pre-recapitalization Class C Non-Voting Shares,
unlimited authorized |      |       |      |  |  |                      | 347.8 | 
|Deficit                                                 |                                                                      |      | (57.7 | )     |  |  | (2,759.4             | )    
|                                                        |                                                                      |      |       |       |  |  |                      |      
|Total shareholders equity (deficiency)                 |                                                                      |      | 248.6 |       |  |  | (1,423.3             | )    
|                                                        |                                                                      |      |       |       |  |  |                      |      
|Total liabilities and shareholders equity (deficiency) |                                                                      |      | 919.8 |       |  |  | 1,452.1              |      
|                                                        |                                                                      |      |       |       |  |  |                      |      

See accompanying notes

On behalf of the Board:

|                                              |  |                                            
|--------------------------------------------- |  | -------------------------------------------
|/s/ Lawrence G. TappLawrence G. Tapp
CHAIRMAN |  | /s/ David A. RatteeDavid A. Rattee
DIRECTOR





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##### Table of Contents






|                                                  |  |  |    | 
|------------------------------------------------- |  |  | -- | 
|Consolidated Statements of Operations and Deficit |  |  | 26 | 

|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|-------------------------------------------------------------------------------- |  | ------------- | ------ | ------------- |  | -------------------- | -------- | ---- |  | ---------- | -------- | ---------- |  |  | -------- | -
|                                                                                 |  |               |        |               |  | Pre-recapitalization
|                                                                                 |  |               |        |               |  |                     
|                                                                                 |  | Nine Months   |        | Three Months  |  |                      |          |      |  |            |          |           
|Years ended December 31                                                          |  | Ended Dec. 31 |        | Ended Mar. 31 |  |                      |          |      |  |            |          |           
|[millions of Canadian dollars, except per share amounts]                         |  | 2002          |        | 2002          |  | 2001                 |          | 2000
|                                                                                 |  |               |        |               |  |                      |          |     
|                                                                                 |  |               |        |               |  |                      |          |      |  | [Restated |          | [Restated
|                                                                                 |  |               |        |               |  |                      |          |      |  | note 1]    |          | note 1]   
|Revenue                                                                          |  |               | 598.9  |               |  |                      | 201.8    |      |  |            | 928.4    |            |  |  | 1,250.2  |  
|Carrier charges                                                                  |  |               | 335.7  |               |  |                      | 116.8    |      |  |            | 508.9    |            |  |  | 844.6    |  
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Gross profit                                                                     |  |               | 263.2  |               |  |                      | 85.0     |      |  |            | 419.5    |            |  |  | 405.6    |  
|Operating costs                                                                  |  |               | 227.3  |               |  |                      | 73.1     |      |  |            | 284.7    |            |  |  | 375.5    |  
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Earnings before interest, taxes, depreciation and
amortization and unusual items |  |               | 35.9   |               |  |                      | 11.9     |      |  |            | 134.8    |            |  |  | 30.1     |  
|Unusual items [note 15]                                                          |  |               | 72.0   |               |  |                      |         |      |  |            | (1,103.6 | )          |  |  | (127.3   | )
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Earnings (loss) before interest, taxes, depreciation
and amortization            |  |               | 107.9  |               |  |                      | 11.9     |      |  |            | (968.8   | )          |  |  | (97.2    | )
|Depreciation and amortization                                                    |  |               | (120.3 | )             |  |                      | (41.8    | )    |  |            | (213.1   | )          |  |  | (230.7   | )
|Interest on long-term debt                                                       |  |               | (43.9  | )             |  |                      | (60.3    | )    |  |            | (226.7   | )          |  |  | (206.1   | )
|Interest and other income (expense)                                              |  |               | (2.9   | )             |  |                      | (0.8     | )    |  |            | 15.2     |            |  |  | 34.2     |  
|Foreign exchange gain (loss)                                                     |  |               | 4.1    |               |  |                      | (1.8     | )    |  |            | (139.2   | )          |  |  | (51.7    | )
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Loss before taxes                                                                |  |               | (55.1  | )             |  |                      | (92.8    | )    |  |            | (1,532.6 | )          |  |  | (551.5   | )
|Income tax benefit (expense) [note 10]                                           |  |               | (2.6   | )             |  |                      | 1.0      |      |  |            | 7.9      |            |  |  | 50.3     |  
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Net loss for the period                                                          |  |               | (57.7  | )             |  |                      | (91.8    | )    |  |            | (1,524.7 | )          |  |  | (501.2   | )
|Deficit, beginning of period                                                     |  |               |       |               |  |                      | (2,759.4 | )    |  |            | (1,234.7 | )          |  |  | (733.5   | )
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Deficit, end of period                                                           |  |               | (57.7  | )             |  |                      | (2,851.2 | )    |  |            | (2,759.4 | )          |  |  | (1,234.7 | )
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  
|Basic earnings (loss) per share[note 16]                                         |  |               | (2.42  | )             |  |                      | (20.26   | )    |  |            | (336.95  | )          |  |  | (110.83  | )
|Fully diluted earnings (loss) per share[note 16]                                 |  |               | (2.42  | )             |  |                      | (20.26   | )    |  |            | (336.95  | )          |  |  | (110.83  | )
|                                                                                 |  |               |        |               |  |                      |          |      |  |            |          |            |  |  |          |  

See accompanying notes





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|                                      |  |  |    | 
|------------------------------------- |  |  | -- | 
|Consolidated Statements of Cash Flows |  |  | 27 | 

|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |       |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------- | ----------- | ------------- | ------------ | ---- | -------------------- | ---- | - |  | ---------- | ------- | ---------- |  | ------ | ----- | -
|                                                                                 |                                                                    |               |             |               |              |      | Pre-recapitalization
|                                                                                 |                                                                    |               |             |               |              |      |                     
|                                                                                 |                                                                    |               | Nine Months |               | Three Months |      |                      |      |   |  |            |         |           
|Years ended December 31                                                          |                                                                    | Ended Dec. 31 |             | Ended Mar. 31 |              |      |                      |      |   |  |            |        
|[millions of Canadian dollars, except per share amounts]                         |                                                                    | 2002          |             | 2002          |              | 2001 |                      | 2000
|                                                                                 |                                                                    |               |             |               |              |      |                      |     
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  | [Restated |         | [Restated
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  | note 1]    |         | note 1]   
|OPERATING ACTIVITIES                                                             |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Net loss for the period                                                          |                                                                    |               | (57.7       | )             |              |      | (91.8                | )    |   |  | (1,524.7   | )       |            |  | (501.2 | )    
|Add (deduct) operating items not requiring cash:                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|                                                                                 | Depreciation and amortization                                      |               |             | 120.3         |              |      |                      | 41.8 |   |  |            | 213.1   |            |  |        | 230.7 |  
|                                                                                 | Gain on repurchase of long-term debt [note 15]                     |               |             | (93.1         | )            |      |                      |     |   |  |            |        |            |  |        |      |  
|                                                                                 | Interest and other (income) expense                                |               |             | 3.2           |              |      |                      | (0.2 | ) |  |            | (1.9    | )          |  |        | (15.9 | )
|                                                                                 | Foreign exchange (gain) loss on long-term debt                     |               |             | (4.8          | )            |      |                      | 1.8  |   |  |            | 137.6   |            |  |        | 51.1  |  
|                                                                                 | Interest on long-term debt                                         |               |             |              |              |      |                      | 35.7 |   |  |            | 130.8   |            |  |        | 113.3 |  
|                                                                                 | Net losses on disposals and writedowns of
capital assets [note 15] |               |             | 1.3           |              |      |                      |     |   |  |            | 21.9    |            |  |        | 135.7 |  
|                                                                                 | Writedown of goodwill [note 15]                                    |               |             |              |              |      |                      |     |   |  |            | 1,071.1 |            |  |        |      |  
|                                                                                 | Writedown of investment [note 15]                                  |               |             |              |              |      |                      |     |   |  |            |        |            |  |        | 11.5  |  
|                                                                                 | Gain on sale of various subsidiaries [note 15]                     |               |             |              |              |      |                      |     |   |  |            |        |            |  |        | (19.9 | )
|                                                                                 | Future income taxes                                                |               |             |              |              |      |                      | (2.4 | ) |  |            | (12.0   | )          |  |        | (52.5 | )
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Cash provided by (used in) operations before changes
in non-cash working capital |                                                                    |               | (30.8       | )             |              |      | (15.1                | )    |   |  | 35.9       |         |            |  | (47.2  | )    
|Net change in non-cash working capital balances
related to operations [note 17]  |                                                                    |               | 60.3        |               |              |      | (8.3                 | )    |   |  | (63.1      | )       |            |  | (33.1  | )    
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Cash provided by (used in) operating activities                                  |                                                                    |               | 29.5        |               |              |      | (23.4                | )    |   |  | (27.2      | )       |            |  | (80.3  | )    
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|INVESTING ACTIVITIES                                                             |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|(Increase) decrease in short-term investments                                    |                                                                    |               | 12.3        |               |              |      | 217.2                |      |   |  | (201.2     | )       |            |  | (115.0 | )    
|Acquisition of capital assets [note 17]                                          |                                                                    |               | (62.4       | )             |              |      | (16.0                | )    |   |  | (101.5     | )       |            |  | (192.4 | )    
|Net proceeds on disposal of capital assets
and rights [note 15]                  |                                                                    |               | 6.7         |               |              |      |                     |      |   |  | 37.9       |         |            |  | 296.9  |      
|Acquisition of Time iCR Inc. [note 13]                                           |                                                                    |               | (1.0        | )             |              |      |                     |      |   |  |           |         |            |  |       |      
|Increase in deferred costs                                                       |                                                                    |               |            |               |              |      | (2.6                 | )    |   |  |           |         |            |  |       |      
|Cash acquired from additional investment in
NorthPoint Canada [note 13]          |                                                                    |               |            |               |              |      |                     |      |   |  | 1.9        |         |            |  |       |      
|Net proceeds on sale of various subsidiaries [note 15]                           |                                                                    |               |            |               |              |      |                     |      |   |  |           |         |            |  | 11.1   |      
|Other                                                                            |                                                                    |               |            |               |              |      |                     |      |   |  |           |         |            |  | (6.0   | )    
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Cash provided by (used in) investing activities                                  |                                                                    |               | (44.4       | )             |              |      | 198.6                |      |   |  | (262.9     | )       |            |  | (5.4   | )    
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|FINANCING ACTIVITIES                                                             |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Repurchase of long-term debt [note 8]                                            |                                                                    |               | (29.7       | )             |              |      |                     |      |   |  |           |         |            |  |       |      
|Increase (decrease) in right-of-way liability                                    |                                                                    |               | (0.1        | )             |              |      | (0.1                 | )    |   |  | 4.6        |         |            |  | 5.7    |      
|Termination of cross-currency swaps [note 8(d)]                                  |                                                                    |               |            |               |              |      |                     |      |   |  | 1.1        |         |            |  | 23.9   |      
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Cash provided by (used in) financing activities                                  |                                                                    |               | (29.8       | )             |              |      | (0.1                 | )    |   |  | 5.7        |         |            |  | 29.6   |      
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Net increase (decrease) in cash and cash equivalents
during the period           |                                                                    |               | (44.7       | )             |              |      | 175.1                |      |   |  | (284.4     | )       |            |  | (56.1  | )    
|Cash and cash equivalents, beginning of
period [note 1]                          |                                                                    |               | 78.8        |               |              |      | 15.5                 |      |   |  | 299.9      |         |            |  | 356.0  |      
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      
|Cash and cash equivalents, end of period                                         |                                                                    |               | 34.1        |               |              |      | 190.6                |      |   |  | 15.5       |         |            |  | 299.9  |      
|                                                                                 |                                                                    |               |             |               |              |      |                      |      |   |  |            |         |            |  |        |      

See accompanying notes





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|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 28 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

1. BASIS OF PRESENTATION

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

Comparative Figures

Comparative consolidated financial statements for periods prior to April
1, 2002 have been presented pursuant to regulatory requirements. In
reviewing the comparative consolidated financial statements, readers are
reminded that they do not reflect the effects of the financial
reorganization or the application of fresh start accounting described
below. In addition, certain comparative consolidated financial statement
balances have been restated to conform to the current year consolidated
financial statement presentation as described in note 2 and note 8(c).

Financial Reorganization

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

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



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

Fresh Start Accounting

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

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 29 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

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



|(1) |  | Under the Plan of Arrangement, the Noteholders received a
combination of:
a. U.S.$72.7 of cash on the effective date of the
transaction in addition to U.S.$9.2 paid in February 2002,
b. shares
equal to approximately 80% of the equity of the recapitalized Company,
and
c. U.S.$377.0 Senior Secured Notes due 2008.
Determined in each case on a pro rata basis, with respect to each
Noteholder, by the ratio equal to the dollar value of the accreted
principal plus interest as of December 31, 2001 of the
Pre-recapitalization Notes owned by such Noteholder divided by the
total Pre-recapitalization Note value.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Immediately after the Plan of Arrangement, Sprint Communications
Company L.P. (Sprint) invested $25.0 in exchange for 5% of the
post-recapitalization equity of the Company. Sprint also received $4.9
for the royalty payment relating to the three months ended March 31,
2002.                                                                                                                                                                                                                                                                                                                                             
|   
|(3) |  | Costs directly incurred to effect the recapitalization that were
paid in advance of the effective date of the transaction totaling $2.0
were transferred to capital stock. In addition, the opening cash and
cash equivalents balance was adjusted for $16.5 of transaction costs to
be paid on the completion of the transaction.                                                                                                                                                                                                                                                                                            
|   
|(4) |  | Prior to the application of fresh start accounting, the Company
performed an assessment for impairment of the carrying values of its
long-lived assets. Based on this assessment, assets available for sale
of $78.6 were written down to nil. The value of capital assets was
further reduced by $11.1 as part of the implementation of fresh start
accounting.                                                                                                                                                                                                                                                              
|   
|(5) |  | The writeoff of the unamortized balance of deferred financing costs,
trademarks, as well as technology and product rights associated with the
prior agreement with Sprint.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(6) |  | Under the Plan of Arrangement, the accrued interest on all
Pre-recapitalization Notes was eliminated and interest on the Senior
Secured Notes due 2008 was accrued for the period from January 1, 2002
to March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(7) |  | The Company used unrecorded tax loss carry
forward balances of approximately $1,533 against the gain on retirement
of the long-term debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 30 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

During 2002, the Company adopted the following policies pursuant to
changes in Canadian GAAP.



|(a) |  | Effective January 1, 2002, the Company
changed its method of accounting for foreign currency translations as
required by CICA Handbook Section 1650, Foreign Currency Translations.
The most important change for the Company is the elimination of the
requirement to defer and amortize foreign exchange gains and losses on
long-term monetary items over the remaining lives of such items. All
exchange gains and losses are to be included in the operations of the
period. The prior year figures have been restated to conform to the
retroactive application of this change in policy. The effect of this
change resulted in an increase to net loss of $123.2 for the year ended
December 31, 2001, an increase to net loss of $49.4 for the year ended
December 31, 2000, a decrease to other assets and an increase to deficit
of $156.2 as at December 31, 2001, and an increase to deficit of $33.0
as at December 31, 2000, and a decrease to deficit of $16.4 as at
December 31, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | On January 1, 2002, the Company adopted the recommendations in CICA
Handbook Section 3870, Stock-Based Compensation and Other Stock-Based
Payments. The new recommendations are generally applicable only to
awards granted after the date of adoption, except for awards settled in
cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Stock-based compensation awarded to non-employees is accounted
for using the fair value method. Awards granted under the Companys
RSUP can be settled in cash at the employees option. As a result,
these awards are accounted for as a liability and the compensation
expense is remeasured at each reporting period based on the current
market value of the underlying shares. No compensation expense for
stock options granted to employees under the Companys Option Plan is
recognized, but pro-forma disclosure of net income and earnings per
share is provided as if these awards were accounted for using the
fair value method. Consideration paid on the exercise of stock
options and warrants is credited to capital stock. See note 9 for
full disclosure as required by this standard.                                                                                                                                                                                              
|   
|(c) |  | Effective January 1, 2002, the Company adopted the recommendations
of CICA Handbook Section 3062, Goodwill and Other Intangible Assets.
Under the new standard, goodwill and intangible assets with indefinite
useful lives are no longer amortized but are subject to an annual
impairment review.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | On adoption, the Company does not have any goodwill and determined
that it has no intangible assets of indefinite life. As a result, the
adoption of the new recommendations did not impact the consolidated
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Principles of Consolidation

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

Short-term Investments

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 31 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

Capital Assets

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

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

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

Long-term Investments

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

Other Assets

Goodwill

Goodwill represents the excess of the purchase price of the Companys
interest in subsidiary companies over the fair value of the underlying
net identifiable assets of the business acquired. Goodwill is assessed
for future recoverability or impairment on an annual basis by estimating
future net undiscounted cash flows excluding interest expense. Any
permanent impairment of the value of the unamortized portion of goodwill
is written down with a charge against income in the period that such
determination is made. Under the accounting policy of the Company in
effect during fiscal 2001 [note 2(c)], goodwill was assessed for
impairment and the Company determined a permanent impairment had
occurred [note 15]. Prior to this determination, goodwill was being
amortized on a straight-line basis over 20 years.

Other Intangible Assets

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

Intangible assets with a definite life are assessed for impairment
when events or circumstances indicate their carrying amount may not be
recoverable. When the net carrying amount of an intangible asset with a
definite life is not recoverable, and exceeds its fair value, the asset
is written down with a charge against income in the period that such
determination is made.

Intangible assets with an indefinite life are assessed for future
recoverability or impairment on an annual basis by estimating future net
undiscounted cash flows. When the net carrying amount of an intangible
asset exceeds the estimated net recoverable amount, the asset is written
down with a charge against income in the period that such determination
is made.

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

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 32 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

Revenue Recognition

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

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

Stock-Based Compensation Plans

The Company has two stock-based compensation plans [note 9]. Under the
Option Plan no compensation expense is recognized when stock options
with no cash settlement features are issued to employees or directors.
Direct awards of stock to employees and stock options awarded to
non-employees are accounted for in accordance with the fair value method
of accounting for stock-based compensation. Any consideration paid by
employees, directors or consultants on exercise of stock options is
credited to capital stock. Under the RSUP, the Company recognizes
compensation expense based on the current market value of the underlying
shares.

Translation of Foreign Currencies

Foreign currency transactions entered into by the Company and the
accounts of its foreign subsidiaries are translated into Canadian
dollars using the temporal method. Under this method, monetary assets
and liabilities in foreign currencies are translated into Canadian
dollars at the year-end rate of exchange and any gains or losses are
reflected in income. Capital and other assets are translated at rates
prevailing at the time of the transaction. Revenues and expenses are
translated into Canadian dollars at the rate of exchange prevailing at
the time of the transaction, except for depreciation and amortization,
which are translated at exchange rates prevailing when the related
assets were acquired. Long-term debt denominated in foreign currencies
is translated into Canadian dollars at the year-end rate of exchange.
Exchange gains or losses on translating this long-term debt are
reflected in income [note 2(a)].

Derivative Financial Instruments

In the past, the Company entered into cross-currency swap agreements to
manage risks associated with its U.S. dollar denominated Senior Discount
Notes and Senior Notes. The net receipt or payment under these
agreements was recorded on an accrual basis as an adjustment to interest
expense. The costs associated with entering into the cross-currency
swaps were amortized over the term of the loan on a straight-line basis.
When such agreements designated as hedges were terminated, the resulting
gain or loss was deferred and amortized over the remaining term of the
previously hedged item. As a result of the adoption of the amendments to
CICA Handbook Section 1650 [note 2(a)]the resulting gains or losses
have been recognized in net income in the year of termination. To the
extent the Company entered into derivative contracts, which did not
qualify for hedge accounting, such derivative contracts were recorded at
fair value and were marked to market.

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

Income Taxes

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

Use of Estimates

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 33 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

3. ACCOUNTS RECEIVABLE

|                                |  |      |       |      |  |                     |       |  
|------------------------------- |  | ---- | ----- | ---- |  | ------------------- | ----- | -
|                                |  |      |       |      |  | Pre-recapitalzation
|                                |  |      |       |      |  |                    
|                                |  | 2002 |       | 2001
|                                |  |      |       |     
|Trade receivables               |  |      | 98.9  |      |  |                     | 134.4 |  
|Other                           |  |      | 4.1   |      |  |                     | 18.2  |  
|Allowance for doubtful accounts |  |      | (13.7 | )    |  |                     | (18.9 | )
|                                |  |      |       |      |  |                     |       |  
|Total accounts receivable       |  |      | 89.3  |      |  |                     | 133.7 |  
|                                |  |      |       |      |  |                     |       |  

4. OTHER CURRENT ASSETS

|                           |  |      |     |      |  |                     |      | 
|-------------------------- |  | ---- | --- | ---- |  | ------------------- | ---- | 
|                           |  |      |     |      |  | Pre-recapitalzation
|                           |  |      |     |      |  |                    
|                           |  | 2002 |     | 2001
|                           |  |      |     |     
|Cash in trust              |  |      |    |      |  |                     | 57.1 | 
|Other                      |  |      | 4.4 |      |  |                     | 2.3  | 
|                           |  |      |     |      |  |                     |      | 
|Total other current assets |  |      | 4.4 |      |  |                     | 59.4 | 
|                           |  |      |     |      |  |                     |      | 

5. CAPITAL ASSETS

|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  |                     |         |             |  |  |       |  |  |  |       | 
|---------------------------------------- |  | ---- | ----- | ------------ |  | ------------ | ----- | ---- |  | ------------ | ----- | ----- |  | ------------------- | ------- | ----------- |  |  | ----- |  |  |  | ----- | 
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  | Pre-recapitalzation
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  |                    
|                                         |  | 2002 |       | 2001        
|                                         |  |      |       |             
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  | [Restated]         
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  |                    
|                                         |  |      |       |              |  | Accumulated  |       |      |  |              |       |       |  |                     |         | Accumulated |  |  |       | 
|                                         |  |      |       |              |  | Depreciation |       | Net  |  |              |       |       |  | Depreciation        |         | Net        
|                                         |  |      |       |              |  | and          |       | Book |  |              |       |       |  | and                 |         | Book       
|                                         |  | Cost |       | Amortization |  | Value        |       | Cost |  | Amortization |       | Value
|                                         |  |      |       |              |  |              |       |      |  |              |       |      
|Multiplex and telephone switch
equipment |  |      | 452.3 |              |  |              | 56.5  |      |  |              | 395.8 |       |  |                     | 669.9   |             |  |  | 257.1 |  |  |  | 412.8 | 
|Fibre optic cable                        |  |      | 108.8 |              |  |              | 5.5   |      |  |              | 103.3 |       |  |                     | 186.0   |             |  |  | 53.6  |  |  |  | 132.4 | 
|Computer equipment and software          |  |      | 115.1 |              |  |              | 46.8  |      |  |              | 68.3  |       |  |                     | 252.6   |             |  |  | 155.5 |  |  |  | 97.1  | 
|Buildings                                |  |      | 14.6  |              |  |              | 0.3   |      |  |              | 14.3  |       |  |                     | 13.9    |             |  |  | 1.5   |  |  |  | 12.4  | 
|Leasehold improvements                   |  |      | 10.8  |              |  |              | 1.6   |      |  |              | 9.2   |       |  |                     | 35.2    |             |  |  | 23.3  |  |  |  | 11.9  | 
|Furniture and fixtures                   |  |      | 10.4  |              |  |              | 1.9   |      |  |              | 8.5   |       |  |                     | 30.3    |             |  |  | 26.4  |  |  |  | 3.9   | 
|Land                                     |  |      | 0.6   |              |  |              |      |      |  |              | 0.6   |       |  |                     | 0.6     |             |  |  |      |  |  |  | 0.6   | 
|Assets available for sale                |  |      |      |              |  |              |      |      |  |              |      |       |  |                     | 103.6   |             |  |  | 25.0  |  |  |  | 78.6  | 
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  |                     |         |             |  |  |       |  |  |  |       | 
|Total capital assets                     |  |      | 712.6 |              |  |              | 112.6 |      |  |              | 600.0 |       |  |                     | 1,292.1 |             |  |  | 542.4 |  |  |  | 749.7 | 
|                                         |  |      |       |              |  |              |       |      |  |              |       |       |  |                     |         |             |  |  |       |  |  |  |       | 

Included in capital assets are assets under construction and not yet
depreciating of $19.9 (2001  $36.2).

Included in fibre optic cable assets are right-to-use fibres under
IRU agreements with original terms extending to 20 years and net book
value totalling $5.8 (2001  $95.8).

Prior to the application of fresh start accounting, the assets
available for sale were written down to a value of nil due to the
prolonged period of time for which no formal offers to purchase had come
forward.

In connection with fresh start accounting, accumulated depreciation
balances are reset to nil and cost represents managements best
estimates of fair market values on April 1, 2002, which were generally
supported by recent independent third party analysis [note 1]. As part
of this exercise, management reassessed the remaining useful life of the
capital assets. As a result, the remaining useful life of furniture and
fixtures was increased to four years.

Included in accumulated depreciation and amortization is the writedown of
certain capital assets
[note 15].





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 34 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

Included in assets available for sale for 2001 is non-revenue
generating fibre optic cable in Canada and the United States.

During 2002, 2001 and 2000, the Company recorded unusual items as a
result of disposing of certain assets and settling certain fibre swaps
[note 15].

6. OTHER ASSETS

|                              |  |      |       |              |  |             |      |      |  |              |       |       |  |                      |       |      |  |  |       |     |  |  |       | 
|----------------------------- |  | ---- | ----- | ------------ |  | ----------- | ---- | ---- |  | ------------ | ----- | ----- |  | -------------------- | ----- | ---- |  |  | ----- | --- |  |  | ----- | 
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  | Pre-recapitalization
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  |                     
|                              |  | 2002 |       | 2001        
|                              |  |      |       |             
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  | [Restated]          
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  |                     
|                              |  |      |       |              |  |             |      |      |  | Net          |       |       |  |                      |       |      |  |  |       | Net
|                              |  |      |       |              |  | Accumulated |      | Book |  |              |       |       |  | Accumulated          |       | Book
|                              |  | Cost |       | Amortization |  | Value       |      | Cost |  | Amortization |       | Value
|                              |  |      |       |              |  |             |      |      |  |              |       |      
|Customer relationships        |  |      | 104.4 |              |  |             | 18.3 |      |  |              | 86.1  |       |  |                      | 200.0 |      |  |  | 90.5  |     |  |  | 109.5 | 
|Prepaid right-of-way          |  |      | 8.6   |              |  |             |     |      |  |              | 8.6   |       |  |                      | 9.8   |      |  |  |      |     |  |  | 9.8   | 
|Deferred costs                |  |      | 6.0   |              |  |             |     |      |  |              | 6.0   |       |  |                      | 5.0   |      |  |  |      |     |  |  | 5.0   | 
|Investment in Cybersurf Corp. |  |      | 0.4   |              |  |             |     |      |  |              | 0.4   |       |  |                      | 0.5   |      |  |  |      |     |  |  | 0.5   | 
|Financing costs               |  |      |      |              |  |             |     |      |  |              |      |       |  |                      | 53.6  |      |  |  | 16.8  |     |  |  | 36.8  | 
|Technology and product rights |  |      |      |              |  |             |     |      |  |              |      |       |  |                      | 44.7  |      |  |  | 35.9  |     |  |  | 8.8   | 
|Trademarks                    |  |      |      |              |  |             |     |      |  |              |      |       |  |                      | 14.9  |      |  |  | 11.9  |     |  |  | 3.0   | 
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  |                      |       |      |  |  |       |     |  |  |       | 
|Total other assets            |  |      | 119.4 |              |  |             | 18.3 |      |  |              | 101.1 |       |  |                      | 328.5 |      |  |  | 155.1 |     |  |  | 173.4 | 
|                              |  |      |       |              |  |             |      |      |  |              |       |       |  |                      |       |      |  |  |       |     |  |  |       | 

In connection with fresh start accounting, the accumulated amortization
balance for customer relationships is reset to nil and cost represents
managements best estimates of the fair market value on April 1, 2002
[note 1]. As part of this exercise, management reassessed the remaining
useful life of the customer relationships and determined no change was
required.

Pursuant to the Plan of Arrangement, the unamortized balances of
the financing costs, technology and product rights, and trademarks were
included within the recapitalization adjustments [note 1]. The reduction
was recorded as a charge against the deficit.

Under fresh start accounting, the Companys long-term investment in
Cybersurf Corp. was written down by $0.1. This writedown was included
within the fresh start adjustments [note 1].

During 2001, the Company recorded a writedown of goodwill of $1,071.1 [note
15].

During 2001, the Company also reviewed the estimated useful life of
the remaining long-lived assets and determined that the useful life of
the fONOROLA customer relationship should be reduced from 10 years to 8
years on a prospective basis beginning October 1, 2001. The annual
impact on amortization expense is $6.3.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

|                                               |  |      |       |      |  |                      |       | 
|---------------------------------------------- |  | ---- | ----- | ---- |  | -------------------- | ----- | 
|                                               |  |      |       |      |  | Pre-recapitalization
|                                               |  |      |       |      |  |                     
|                                               |  | 2002 |       | 2001
|                                               |  |      |       |     
|                                               |  |      |       |      |  | [Restated]          
|Accrued liabilities and trade payables         |  |      | 61.1  |      |  |                      | 88.0  | 
|Carrier payables                               |  |      | 68.7  |      |  |                      | 65.4  | 
|Commodity, capital and income tax liabilities  |  |      | 16.4  |      |  |                      | 16.2  | 
|Payroll related liabilities                    |  |      | 7.4   |      |  |                      | 15.5  | 
|Accrued interest                               |  |      |      |      |  |                      | 19.9  | 
|Other                                          |  |      | 5.8   |      |  |                      | 7.4   | 
|                                               |  |      |       |      |  |                      |       | 
|Total accounts payable and accrued liabilities |  |      | 159.4 |      |  |                      | 212.4 | 
|                                               |  |      |       |      |  |                      |       | 





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 35 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

Effective April 1, 2002, the Company reclassified the long-term portion of its
right-of-way liability to long-term liabilities. The comparative figures have
been restated to conform to this presentation.

8. LONG-TERM LIABILITIES

|                                                        |  |               |        |      |  |      |       |  |  |                      |         | 
|------------------------------------------------------- |  | ------------- | ------ | ---- |  | ---- | ----- |  |  | -------------------- | ------- | 
|                                                        |  |               |        |      |  |      |       |  |  | Pre-recapitalization
|                                                        |  |               |        |      |  |     
|                                                        |  | Interest Rate |        | 2002 |  | 2001
|                                                        |  |               |        |      |  |     
|                                                        |  |               |        |      |  |      |       |  |  | [Restated]          
|(a) Senior Secured Notes due 2008                       |  |               | 10.625 | %    |  |      | 473.1 |  |  |                      |        | 
|(b) Pre-recapitalization Senior Discount Notes due 2007 |  |               | 9.270  | %    |  |      |      |  |  |                      | 412.5   | 
|(b) Pre-recapitalization Senior Notes due 2007          |  |               | 8.375  | %    |  |      |      |  |  |                      | 100.0   | 
|(b) Pre-recapitalization Senior Discount Notes due 2008 |  |               | 8.940  | %    |  |      |      |  |  |                      | 602.1   | 
|(b) Pre-recapitalization Senior Notes due 2008          |  |               | 8.000  | %    |  |      |      |  |  |                      | 278.7   | 
|(b) Pre-recapitalization Senior Discount Notes due 2009 |  |               | 10.800 | %    |  |      |      |  |  |                      | 477.3   | 
|(b) Pre-recapitalization Senior Notes due 2009          |  |               | 9.375  | %    |  |      |      |  |  |                      | 716.7   | 
|                                                        |  |               |        |      |  |      |       |  |  |                      |         | 
|Long-term debt                                          |  |               |        |      |  |      | 473.1 |  |  |                      | 2,587.3 | 
|(c) Right-of-way liability                              |  |               | 10.0   | %    |  |      | 38.7  |  |  |                      | 38.9    | 
|                                                        |  |               |        |      |  |      |       |  |  |                      |         | 
|Total long-term liabilities                             |  |               |        |      |  |      | 511.8 |  |  |                      | 2,626.2 | 
|                                                        |  |               |        |      |  |      |       |  |  |                      |         | 

(a) Senior Secured Notes due 2008

During 2002, the Company purchased for cancellation a total of U.S.$77.5
of the outstanding U.S.$377.0 Senior Secured Notes due 2008 at market
prices. The total cost of these purchases to the Company was $29.7. A
gain of $93.1 was recorded as an unusual item [note 15].

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

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

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

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

In the event of a change of control, the Company is required to
offer to purchase all outstanding notes at a purchase price of 101.0% of
their principal amount plus accrued and unpaid interest to the date of
purchase.

(b) Pre-recapitalization Notes

On April 10, 2002, the Company completed a Plan of Arrangement pursuant
to Section 192 of the Canada Business Corporations Actto surrender all
of the Companys $2.6 billion in principal amount of Senior Notes and
Senior Discount Notes in exchange for U.S.$377.0 million of new 10.625%
Senior Secured Notes due 2008, U.S.$81.9 million in cash, and 80% of the
equity in the recapitalized company [note 1].





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 36 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

(c) Right-of-way liability

Effective April 1, 2002, the Company reclassified the long-term portion
of its right-of-way liability to long-term liabilities. The comparative
figures have been restated to conform to this presentation.

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

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

|                              |  |  |       |  
|----------------------------- |  |  | ----- | -
|2003                          |  |  | 5.1   |  
|2004                          |  |  | 5.1   |  
|2005                          |  |  | 5.1   |  
|2006                          |  |  | 5.0   |  
|2007                          |  |  | 5.0   |  
|Thereafter                    |  |  | 52.2  |  
|                              |  |  |       |  
|Total future minimum payments |  |  | 77.5  |  
|Less imputed interest at 10%  |  |  | (37.7 | )
|                              |  |  |       |  
|                              |  |  | 39.8  |  
|Less current portion          |  |  | (1.1  | )
|                              |  |  |       |  
|Total                         |  |  | 38.7  |  
|                              |  |  |       |  

(d) Hedging Activities

The Company had entered into cross-currency swap agreements to reduce its
exposure to fluctuations in the exchange rate of the U.S. dollar as
compared to the Canadian dollar.

During 2001, the Company terminated its remaining cross-currency
swap agreements in place to hedge the pre-recapitalization 2008 Notes and
a portion of both the pre-recapitalization 2008 Discount Notes and the
pre-recapitalization 2009 Notes. Net cash received upon the termination
of cross-currency agreements was $1.1 (2000  $23.9).

9. CAPITAL STOCK

Common Shares

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

Class B Non-Voting Shares

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

Preferred Shares

The Company is authorized to issue an unlimited number of the Preferred
Shares, although none were issued in connection with the Plan of
Arrangement. However, as part of consideration for entering into





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 37 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

a commercial agreement with the Company [note 11], Sprint was issued one
Preferred Share (for a value of one dollar) and is the first holder of the
Preferred Shares. There were no other Preferred Shares outstanding at
December 31, 2002. The Preferred Shares are generally non-voting and have
no right to dividends. Preferred Shares entitle the holder to nominate and
elect two directors of the Company. The Preferred Shares also have a
priority right over all other classes of shares to receive a return of
capital equal to one dollar per Preferred Share upon the liquidation,
dissolution or winding up of the Company.

Shares

|                                                              |  |        |           |         |  |           |            |   |  |  |   | 
|------------------------------------------------------------- |  | ------ | --------- | ------- |  | --------- | ---------- | - |  |  | - | 
|Number of Shares                                              |  | Common |           | Class B |  | Preferred
|                                                              |  |        |           |         |  |          
|Balance, December 31, 2001                                    |  |        |          |         |  |           |           |   |  |  |  | 
|Issued pursuant to Plan of Arrangement                        |  |        | 3,686,833 |         |  |           | 20,152,805 |   |  |  | 1 | 
|Converted during the nine months ended
December 31, 2002, net |  |        | 364,394   |         |  |           | (364,394   | ) |  |  |  | 
|                                                              |  |        |           |         |  |           |            |   |  |  |   | 
|Balance, December 31, 2002                                    |  |        | 4,051,227 |         |  |           | 19,788,411 |   |  |  | 1 | 
|                                                              |  |        |           |         |  |           |            |   |  |  |   | 

|                                                              |  |        |      |         |  |           |       |   |  |  |   | 
|------------------------------------------------------------- |  | ------ | ---- | ------- |  | --------- | ----- | - |  |  | - | 
|Dollars                                                       |  | Common |      | Class B |  | Preferred
|                                                              |  |        |      |         |  |          
|Balance, December 31, 2001                                    |  |        |     |         |  |           |      |   |  |  |  | 
|Issued pursuant to Plan of Arrangement                        |  |        | 45.8 |         |  |           | 260.5 |   |  |  |  | 
|Converted during the nine months ended
December 31, 2002, net |  |        | 4.5  |         |  |           | (4.5  | ) |  |  |  | 
|                                                              |  |        |      |         |  |           |       |   |  |  |   | 
|Balance, December 31, 2002                                    |  |        | 50.3 |         |  |           | 256.0 |   |  |  |  | 
|                                                              |  |        |      |         |  |           |       |   |  |  |   | 

On April 17, 2002, pursuant to the Plan of Arrangement, the Company
completed a private placement of 1,191,987 Class B Non-Voting Shares for
an aggregate purchase price of $25.0 to Sprint. There were no selling
fees or commissions payable and the funds received will be used for
general corporate purposes.

Due to the capital reorganization of the Company [note 1], the
resulting total capital stock balance of $306.3 differs from the legal
stated capital of $200.0 by $106.3. This difference is a result of the
recapitalization and fresh start adjustments [note 1].

Stock Options

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

All options outstanding under the previous plan were cancelled under the Plan
of Arrangement [note 1].





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 38 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

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

Common Shares

|                                                         |  |                   |           |                |  |                  |      | 
|-------------------------------------------------------- |  | ----------------- | --------- | -------------- |  | ---------------- | ---- | 
|                                                         |  | December 31, 2002
|                                                         |  |                  
|                                                         |  |                   |           |                |  | Weighted-Average
|                                                         |  | Number            |           | Exercise Price
|                                                         |  | Outstanding       |           | Per Share     
|                                                         |  |                   |           |               
|Balance, April 1, 2002                                   |  |                   |          |                |  |                  |     | 
|Granted during the nine months ended December 31, 2002   |  |                   | 1,016,150 |                |  |                  | 8.27 | 
|Cancelled during the nine months ended December 31, 2002 |  |                   | (89,900   | )              |  |                  | 8.50 | 
|                                                         |  |                   |           |                |  |                  |      | 
|Balance, December 31, 2002                               |  |                   | 926,250   |                |  |                  | 8.25 | 
|                                                         |  |                   |           |                |  |                  |      | 
|Exercisable, December 31, 2002                           |  |                   |          |                |  |                  |     | 
|                                                         |  |                   |           |                |  |                  |      | 

The following table summarizes information about the Common Shares stock
options outstanding at December 31, 2002:

Common Shares

|                |       |              |                     |               |                     |           |           |              |                |           |          |        |  |  |           |   |  |  |   |   |  |  |      |      | 
|--------------- | ----- | ------------ | ------------------- | ------------- | ------------------- | --------- | --------- | ------------ | -------------- | --------- | -------- | ------ |  |  | --------- | - |  |  | - | - |  |  | ---- | ---- | 
|                |       |              | Options Outstanding |               | Options Exercisable
|                |       |              |                     |               |                    
|                |       |              |                     |               |                     |           | Weighted- |              | Weighted-      |           |          |        |  |  | Weighted- |   |  |  |  
|                |       |              | Number              |               | Average             |           | Average   |              | Number         |           | Average  |        |  |  |          
|                |       |              | Outstanding at      |               | Remaining           |           | Exercise  |              | Exercisable at |           | Exercise |        |  |  |          
|Range of        |       | December 31, |                     | Contractual   |                     | Price     |           | December 31, |                | Price     |          | Expiry
|Exercise Prices |       | 2002         |                     | Life in Years |                     | Per Share |           | 2002         |                | Per Share |          | Dates 
|                |       |              |                     |               |                     |           |           |              |                |           |          |       
|$0.65 to $0.80  |       |              | 29,950              |               |                     |           | 6.6       |              |                | $         | 0.66     |        |  |  |          |   |  |  |  |   |  |  | 2009 |     
|                | $8.50 |              |                     | 896,300       |                     |           |           | 6.3          |                |           | $        | 8.50   |  |  |           |  |  |  |   |  |  |  |      | 2009 | 

During the year, there were no stock options granted for which Class B
Non-Voting Shares were reserved. As at December 31, 2002, there were no
Class B Non-Voting Shares stock options outstanding. For stock options
granted to employees, had the Company determined compensation costs
based on their fair values at grant dates of the stock options
consistent with the method prescribed by CICA Handbook Section 3870, the
Companys loss would have been reported as the pro forma amounts below:

|                                           |  |               |       |               |  |                      |        |      |  |            |          |            |  |  |         |  
|------------------------------------------ |  | ------------- | ----- | ------------- |  | -------------------- | ------ | ---- |  | ---------- | -------- | ---------- |  |  | ------- | -
|                                           |  |               |       |               |  | Pre-recapitalization
|                                           |  |               |       |               |  |                     
|                                           |  | Nine Months   |       | Three Months  |  |                      |        |      |  |            |          |           
|                                           |  | Ended Dec. 31 |       | Ended Mar. 31 |  |                      |        |      |  |            |          |           
|                                           |  | 2002          |       | 2002          |  | 2001                 |        | 2000
|                                           |  |               |       |               |  |                      |        |     
|                                           |  |               |       |               |  |                      |        |      |  | (Restated) |          | [Restated]
|Loss                                       |  |               | (57.7 | )             |  |                      | (91.8  | )    |  |            | (1,524.7 | )          |  |  | (501.2  | )
|Pro forma loss                             |  |               | (58.9 | )             |  |                      | (91.8  | )    |  |            | (1,524.7 | )          |  |  | (501.2  | )
|Pro forma basic and diluted loss per share |  |               | (2.47 | )             |  |                      | (20.26 | )    |  |            | (336.95  | )          |  |  | (110.83 | )

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

|                                       |  |                |   |      |   |      |   |  |   |  |   | 
|-------------------------------------- |  | -------------- | - | ---- | - | ---- | - |  | - |  | - | 
|                                       |  | 2002           |   | 2001 |   | 2000
|                                       |  |                |   |      |   |     
|Risk free interest rate                |  | 3.26% to 5.47% |   |      |  |      |   |  |  | 
|Expected dividend yield                |  |                | 0 | %    |   |      |  |  |   |  |  | 
|Expected volatility, Common Shares     |  | 64.8% to 90.7% |   |      |  |      |   |  |  | 
|Expected time until exercise, in years |  | 3.0 to 7.0     |   |      |  |      |   |  |  | 





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 39 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

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

Shareholder Rights Plan

Pursuant to the Plan of Arrangement, the new Rights Plan was
implemented. The Rights Plan was adopted to ensure that if a person or
group is seeking to acquire beneficial ownership of 10% or more of the
Common Shares, or 20% of the aggregate Shares of the Company, the
shareholders and the Board of Directors are given sufficient time to
evaluate the transaction, negotiate with the proposed acquirer,
encourage competing bids to emerge, and ensure that all alternatives to
the transaction designed to maximize shareholder value have been
considered. The term of the Rights Plan is until the termination of the
Companys 2004 annual shareholders meeting. Under the Rights Plan, one
right was issued in respect of each share outstanding immediately
following the implementation of the Plan of Arrangement. In addition,
one right will be issued in respect of each new share issued thereafter.
When exercisable, each right will permit the holder to purchase shares
with a market value of $200 on payment of $100.

Restricted Stock Unit Plan

Pursuant to the Plan of Arrangement, the new RSUP for key executives was
implemented. Restricted stock units (RSUs) are subject to vesting
provisions, which may include, at the discretion of the Board of
Directors, the achievement of performance criteria. RSU grants are
settled by the delivery of shares to the participant or, at the
participants option, the delivery of the cash equivalent market value
of the shares based on the five trading day average of the closing price
of the Common Shares on the Toronto Stock Exchange. If shares are to be
delivered, the Company will have the option to deliver shares issued
from treasury or shares purchased on the Toronto Stock Exchange by an
independent administrator. The RSUP provides that the maximum number of
shares deliverable to participants under the RSUP shall be 678,000
shares. The maximum term for any RSU is three years. During the
nine-month period ended December 31, 2002, 652,000 RSUs were granted.
During the nine-month period ended December 31, 2002, 66,500 RSUs were
cancelled. The remaining will vest in three annual installments of 33.3%
each. The resulting compensation expense recorded is negligible.

Pre-recapitalization Common Shares

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

Pre-recapitalization Preferred Shares

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

Pre-recapitalization Class B Non-Voting Shares

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

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

Pre-recapitalization Class C Non-Voting Shares

The Class C Non-Voting Shares could not be held by parties other than
Sprint, its affiliates and permitted associates. The Class C Non-Voting
Shares ranked pari passuwith Common Shares and Class B NonVoting Shares
on a per share basis with respect to the payment of dividends and the
right to participate





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 40 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

in a distribution of assets of the Company on winding up, dissolution or
otherwise. The holders of Class C Non-Voting Shares were not entitled to
vote at any meeting of shareholders of the Company. However, the holders
of the Class C Non-Voting Shares were entitled to elect up to three
directors of the Company as long as they maintained a significant equity
interest in the Company.

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

|                                                   |  |        |             |         |  |         |             |   |  |  |             |  
|-------------------------------------------------- |  | ------ | ----------- | ------- |  | ------- | ----------- | - |  |  | ----------- | -
|Number of Pre-recapitalization Shares              |  | Common |             | Class B |  | Class C
|                                                   |  |        |             |         |  |        
|Balance, December 31, 1999                         |  |        | 17,580,396  |         |  |         | 51,088,362  |   |  |  | 21,775,017  |  
|Issued pursuant to options                         |  |        |            |         |  |         | 5,000       |   |  |  |            |  
|                                                   |  |        |             |         |  |         |             |   |  |  |             |  
|Balance, December 31, 2000 and 2001                |  |        | 17,580,396  |         |  |         | 51,093,362  |   |  |  | 21,775,017  |  
|Issued pursuant to options                         |  |        |            |         |  |         | 142,218     |   |  |  |            |  
|Cancelled pursuant to Plan of Arrangement [note 1] |  |        | (17,580,396 | )       |  |         | (51,235,580 | ) |  |  | (21,775,017 | )
|                                                   |  |        |             |         |  |         |             |   |  |  |             |  
|Balance, December 31, 2002                         |  |        |            |         |  |         |            |   |  |  |            |  
|                                                   |  |        |             |         |  |         |             |   |  |  |             |  

|                                                   |  |        |        |         |  |         |        |   |  |  |        |  
|-------------------------------------------------- |  | ------ | ------ | ------- |  | ------- | ------ | - |  |  | ------ | -
|Dollars, Pre-recapitalization                      |  | Common |        | Class B |  | Class C
|                                                   |  |        |        |         |  |        
|Balance, December 31, 1999                         |  |        | 124.8  |         |  |         | 863.5  |   |  |  | 347.8  |  
|Issued pursuant to options                         |  |        |       |         |  |         |       |   |  |  |       |  
|Balance, December 31, 2000 and 2001                |  |        | 124.8  |         |  |         | 863.5  |   |  |  | 347.8  |  
|                                                   |  |        |        |         |  |         |        |   |  |  |        |  
|Issued pursuant to options                         |  |        |       |         |  |         |       |   |  |  |       |  
|Cancelled pursuant to Plan of Arrangement [note 1] |  |        | (124.8 | )       |  |         | (863.5 | ) |  |  | (347.8 | )
|                                                   |  |        |        |         |  |         |        |   |  |  |        |  
|Balance, December 31, 2002                         |  |        |       |         |  |         |       |   |  |  |       |  
|                                                   |  |        |        |         |  |         |        |   |  |  |        |  

2002 Transactions

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

2000 Transactions

All pre-recapitalization Class B Non-Voting Shares were issued pursuant
to the exercise of options under the Employee Incentive Stock Option
Plan [the Plan].

Pre-recapitalization Stock Options

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 41 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

The following is a continuity of pre-recapitalization stock options
outstanding for which pre-recapitalization Common Shares had been
reserved:

Pre-recapitalization Common Shares

|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |       |  |  |           |           |   |  |  |       | 
|-------------------------- |  | ----------- | ---------- | --------- |  | ----------- | ---- | --------- |  | ----------- | ---------- | --------- |  |  | ----- |  |  | --------- | --------- | - |  |  | ----- | 
|                           |  | 2002        |            | 2001      |  | 2000       
|                           |  |             |            |           |  |            
|                           |  |             |            |           |  | Weighted-   |      |           |  |             |            | Weighted- |  |  |       |  |  | Weighted-
|                           |  |             |            |           |  | Average     |      |           |  |             |            | Average   |  |  |       |  |  | Average  
|                           |  |             |            |           |  | Exercise    |      |           |  |             |            | Exercise  |  |  |       |  |  | Exercise 
|                           |  | Number      |            | Price     |  | Number      |      | Price     |  | Number      |            | Price    
|                           |  | Outstanding |            | Per Share |  | Outstanding |      | Per Share |  | Outstanding |            | Per Share
|                           |  |             |            |           |  |             |      |           |  |             |            |          
|Balance, beginning of year |  |             | 1,075,000  |           |  |             | 4.22 |           |  |             | 1,894,909  |           |  |  | 11.28 |  |  |           | 1,720,409 |   |  |  | 13.20 | 
|Granted during the year    |  |             |           |           |  |             |     |           |  |             | 400,000    |           |  |  | 1.27  |  |  |           | 600,000   |   |  |  | 4.78  | 
|Cancelled during the year  |  |             | (1,075,000 | )         |  |             | 4.22 |           |  |             | (1,219,909 | )         |  |  | 14.23 |  |  |           | (425,500  | ) |  |  | 9.86  | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |       |  |  |           |           |   |  |  |       | 
|Balance, end of year       |  |             |           |           |  |             |     |           |  |             | 1,075,000  |           |  |  | 4.22  |  |  |           | 1,894,909 |   |  |  | 11.28 | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |       |  |  |           |           |   |  |  |       | 
|Exercisable, end of year   |  |             |           |           |  |             |     |           |  |             | 708,332    |           |  |  | 5.56  |  |  |           | 1,611,579 |   |  |  | 12.50 | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |       |  |  |           |           |   |  |  |       | 

The following is a continuity of stock options outstanding for which
pre-recapitalization Class B NonVoting Shares had been reserved:

Pre-recapitalization Class B Non-Voting Shares

|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |      |  |  |           |            |   |  |  |       | 
|-------------------------- |  | ----------- | ---------- | --------- |  | ----------- | ---- | --------- |  | ----------- | ---------- | --------- |  |  | ---- |  |  | --------- | ---------- | - |  |  | ----- | 
|                           |  | 2002        |            | 2001      |  | 2000       
|                           |  |             |            |           |  |            
|                           |  |             |            |           |  | Weighted-   |      |           |  |             |            | Weighted- |  |  |      |  |  | Weighted-
|                           |  |             |            |           |  | Average     |      |           |  |             |            | Average   |  |  |      |  |  | Average  
|                           |  |             |            |           |  | Exercise    |      |           |  |             |            | Exercise  |  |  |      |  |  | Exercise 
|                           |  | Number      |            | Price     |  | Number      |      | Price     |  | Number      |            | Price    
|                           |  | Outstanding |            | Per Share |  | Outstanding |      | Per Share |  | Outstanding |            | Per Share
|                           |  |             |            |           |  |             |      |           |  |             |            |          
|Balance, beginning of year |  |             | 5,258,156  |           |  |             | 3.77 |           |  |             | 4,327,306  |           |  |  | 7.82 |  |  |           | 4,347,341  |   |  |  | 10.35 | 
|Granted during the year    |  |             | 11,859     |           |  |             | 0.52 |           |  |             | 3,067,857  |           |  |  | 1.13 |  |  |           | 1,983,720  |   |  |  | 4.46  | 
|Exercised during the year  |  |             | (142,218   | )         |  |             | 0.31 |           |  |             |           |           |  |  |     |  |  |           | (5,000     | ) |  |  | 5.38  | 
|Cancelled during the year  |  |             | (5,127,797 | )         |  |             | 3.86 |           |  |             | (2,137,007 | )         |  |  | 8.30 |  |  |           | (1,998,755 | ) |  |  | 9.37  | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |      |  |  |           |            |   |  |  |       | 
|Balance, end of year       |  |             |           |           |  |             |     |           |  |             | 5,258,156  |           |  |  | 3.77 |  |  |           | 4,327,306  |   |  |  | 7.82  | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |      |  |  |           |            |   |  |  |       | 
|Exercisable, end of year   |  |             |           |           |  |             |     |           |  |             | 2,737,022  |           |  |  | 5.11 |  |  |           | 2,321,751  |   |  |  | 9.43  | 
|                           |  |             |            |           |  |             |      |           |  |             |            |           |  |  |      |  |  |           |            |   |  |  |       | 

Pre-recapitalization Employee Plan

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

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

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 42 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

10. INCOME TAXES

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

|                                                                                                 |  |               |       |               |  |                      |       |      |  |            |        |            |  |  |        |  
|------------------------------------------------------------------------------------------------ |  | ------------- | ----- | ------------- |  | -------------------- | ----- | ---- |  | ---------- | ------ | ---------- |  |  | ------ | -
|                                                                                                 |  |               |       |               |  | Pre-recapitalization
|                                                                                                 |  |               |       |               |  |                     
|                                                                                                 |  | Nine Months   |       | Three Months  |  |                      |       |      |  |            |        |           
|                                                                                                 |  | Ended Dec. 31 |       | Ended Mar. 31 |  |                      |       |      |  |            |        |           
|                                                                                                 |  | 2002          |       | 2002          |  | 2001                 |       | 2000
|                                                                                                 |  |               |       |               |  |                      |       |     
|                                                                                                 |  |               |       |               |  |                      |       |      |  | [Restated] |        | [Restated]
|Income tax recovery based on the combined
statutory rate of 39%(42%  2001; 44%  2000)          |  |               | 21.5  |               |  |                      | 36.2  |      |  |            | 643.7  |            |  |  | 242.6  |  
|Tax effect of expense items not deductible for tax                                               |  |               | 35.2  |               |  |                      | (3.7  | )    |  |            | (449.7 | )          |  |  | (30.3  | )
|Unrecognized tax benefits of losses and temporary
differences                                    |  |               | (56.7 | )             |  |                      | (35.8 | )    |  |            | (187.2 | )          |  |  | (168.8 | )
|Large corporations tax                                                                           |  |               | (2.6  | )             |  |                      | 1.0   |      |  |            | (2.9   | )          |  |  | (2.2   | )
|Reduction in future income tax liability resulting from
substantively enacted tax rate reduction |  |               |      |               |  |                      | 3.3   |      |  |            | 4.0    |            |  |  | 9.0    |  
|                                                                                                 |  |               |       |               |  |                      |       |      |  |            |        |            |  |  |        |  
|Income taxes benefit (expense)                                                                   |  |               | (2.6  | )             |  |                      | 1.0   |      |  |            | 7.9    |            |  |  | 50.3   |  
|                                                                                                 |  |               |       |               |  |                      |       |      |  |            |        |            |  |  |        |  

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

|                                                         |  |      |        |      |  |                      |        |  
|-------------------------------------------------------- |  | ---- | ------ | ---- |  | -------------------- | ------ | -
|                                                         |  |      |        |      |  | Pre-recapitalization
|                                                         |  |      |        |      |  |                     
|                                                         |  | 2002 |        | 2001
|                                                         |  |      |        |     
|                                                         |  |      |        |      |  | [Restated]          
|Benefits:                                                |  |      |        |      |  |                      |        |  
|Taxable loss carry forwards                              |  |      | (265.7 | )    |  |                      | (337.0 | )
|Accounting values of liabilities in excess of tax values |  |      | (17.4  | )    |  |                      | (32.8  | )
|                                                         |  |      |        |      |  |                      |        |  
|Total future tax benefit                                 |  |      | (283.1 | )    |  |                      | (369.8 | )
|                                                         |  |      |        |      |  |                      |        |  
|Liabilities:                                             |  |      |        |      |  |                      |        |  
|Accounting values of assets in excess of tax values      |  |      | 5.7    |      |  |                      | 57.9   |  
|                                                         |  |      |        |      |  |                      |        |  
|Total future income tax liability                        |  |      | 5.7    |      |  |                      | 57.9   |  
|                                                         |  |      |        |      |  |                      |        |  
|Total future income tax benefit                          |  |      | (277.4 | )    |  |                      | (311.9 | )
|Valuation allowance                                      |  |      | 277.4  |      |  |                      | 348.7  |  
|                                                         |  |      |        |      |  |                      |        |  
|Net future income tax liability                          |  |      |       |      |  |                      | 36.8   |  
|                                                         |  |      |        |      |  |                      |        |  

At December 31, 2002, the Company had approximately $860.1 in losses
available for Canadian income tax purposes to reduce future years
taxable income. Income tax losses will expire as follows:

|      |  |  |       | 
|----- |  |  | ----- | 
|2006  |  |  | 138.0 | 
|2007  |  |  | 299.0 | 
|2008  |  |  | 231.6 | 
|2009  |  |  | 191.5 | 
|      |  |  |       | 
|Total |  |  | 860.1 | 
|      |  |  |       | 

Also at December 31, 2002, the Company had no capital losses (2001 
$1,032.9) available to offset future years capital gains, the tax
effect of which has not been recorded in the accounts.





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 43 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

11. FINANCIAL COMMITMENTS AND GUARANTEES

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

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

|           |  |        |      |            |  |                |      |  |  |  |      | 
|---------- |  | ------ | ---- | ---------- |  | -------------- | ---- |  |  |  | ---- | 
|           |  | Office |      | Network    |  | Other Services
|           |  | Space  |      | Facilities |  | & Products    
|           |  |        |      |            |  |               
|2003       |  |        | 15.1 |            |  |                | 23.9 |  |  |  | 17.2 | 
|2004       |  |        | 14.6 |            |  |                | 14.7 |  |  |  | 14.7 | 
|2005       |  |        | 13.9 |            |  |                | 15.9 |  |  |  | 13.8 | 
|2006       |  |        | 13.3 |            |  |                | 3.5  |  |  |  | 10.2 | 
|2007       |  |        | 5.1  |            |  |                | 1.5  |  |  |  |     | 
|Thereafter |  |        | 8.5  |            |  |                | 22.0 |  |  |  |     | 
|           |  |        |      |            |  |                |      |  |  |  |      | 
|Total      |  |        | 70.5 |            |  |                | 81.5 |  |  |  | 55.9 | 
|           |  |        |      |            |  |                |      |  |  |  |      | 

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

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

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

In 1998, a predecessor to the Company received a right to use fibre
from Metromedia Fibre Networks (MFN). In August 2000, some of the fibre
provided by MFN was transferred to a third party. MFN, which filed for
Chapter 11 in May 2001, has asserted that it wishes to reject the
Companys right to such fibre under the protection of bankruptcy
legislation. Should MFN prevail in its position, the Company will work
to provide the third party another fibre solution or it may be required
to indemnify it.

Occasionally, in the normal course of business the Company provides
guarantees of third party performance in respect of customer lease
arrangements. The current total of these obligations is approximately
$1.1.

12. CONTINGENCIES

Litigation

On March 1, 2002, the Company was notified of an appeal to the Superior
Court of Ontario decision with respect to an application brought by
Montreal Trust Company of Canada (now Computershare Investor Services
Inc.) on April 27, 2000 concerning the payment of $30.0 held in trust
under a change in





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 44 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

control agreement with certain senior management dated September 9,
1999. The Superior Court of Ontario ruled that no change of control had
occurred. The Company intends to vigorously defend its interests at the
appeal. The funds held in trust by Computershare Investor Services Inc.
were released during the year.

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

13. ACQUISITION

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

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

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

14. RELATED PARTY TRANSACTIONS

In the normal course of business, for each of the periods in the three
years ended December 31, the Company has engaged in significant sales
and purchases of telecommunication services with Sprint, which maintains
an approximate 10% equity interest in the Company. These transactions
were made at market prices under normal trade terms and conditions. In
addition, a royalty payment based on revenues is paid to Sprint [note
11]. At December 31, 2002, the net balance due to Sprint and its
affiliates is $16.1 (2001  $2.3). Revenue, carrier charges and royalty
costs transactions with Sprint and its affiliates for each of the
periods in the three years ended December 31 are as follows:

|                |  |               |      |               |  |                      |      |      |  |  |      |  |  |  |      | 
|--------------- |  | ------------- | ---- | ------------- |  | -------------------- | ---- | ---- |  |  | ---- |  |  |  | ---- | 
|                |  |               |      |               |  | Pre-recapitalization
|                |  |               |      |               |  |                     
|                |  | Nine Months   |      | Three Months  |  |                      |      |      |  |  |      | 
|                |  | Ended Dec. 31 |      | Ended Mar. 31 |  |                      |      |      |  |  |      | 
|                |  | 2002          |      | 2002          |  | 2001                 |      | 2000
|                |  |               |      |               |  |                      |      |     
|Revenue         |  |               | 14.9 |               |  |                      | 5.5  |      |  |  | 23.3 |  |  |  | 62.7 | 
|Carrier charges |  |               | 33.7 |               |  |                      | 11.4 |      |  |  | 37.9 |  |  |  | 75.4 | 
|Royalty costs   |  |               | 19.5 |               |  |                      |     |      |  |  |     |  |  |  |     | 
|                |  |               |      |               |  |                      |      |      |  |  |      |  |  |  |      | 

In the normal course of business, for each of the periods in the three
years ended December 31, the Company has engaged in sales of
telecommunication services with Cybersurf Corp., in which the Company
maintains an approximate 5% equity interest and has a right to appoint
two positions on its board. These transactions were made at market
prices under normal trade terms and conditions. At December 31, 2002,
the net balance prepaid by Cybersurf Corp. is $0.3 (2001  net balance
due from Cybersurf Corp. was $0.2). Included in revenue are transactions
with Cybersurf Corp. for each of the periods in the three years ended
December 31 as follows:





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 45 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

|        |  |               |     |               |  |                      |     |      |  |  |     |  |  |  |     | 
|------- |  | ------------- | --- | ------------- |  | -------------------- | --- | ---- |  |  | --- |  |  |  | --- | 
|        |  |               |     |               |  | Pre-recapitalization
|        |  |               |     |               |  |                     
|        |  | Nine Months   |     | Three Months  |  |                      |     |      |  |  |     | 
|        |  | Ended Dec. 31 |     | Ended Mar. 31 |  |                      |     |      |  |  |     | 
|        |  | 2002          |     | 2002          |  | 2001                 |     | 2000
|        |  |               |     |               |  |                      |     |     
|Revenue |  |               | 1.8 |               |  |                      | 0.6 |      |  |  | 2.9 |  |  |  | 3.9 | 

15. UNUSUAL ITEMS

|                                                         |  |               |       |               |  |                      |   |      |  |  |          |   |  |  |        |  
|-------------------------------------------------------- |  | ------------- | ----- | ------------- |  | -------------------- | - | ---- |  |  | -------- | - |  |  | ------ | -
|                                                         |  |               |       |               |  | Pre-recapitalization
|                                                         |  |               |       |               |  |                     
|                                                         |  | Nine Months   |       | Three Months  |  |                      |   |      |  |  |          |  
|                                                         |  | Ended Dec. 31 |       | Ended Mar. 31 |  |                      |   |      |  |  |          |  
|                                                         |  | 2002          |       | 2002          |  | 2001                 |   | 2000
|                                                         |  |               |       |               |  |                      |   |     
|Gain on repurchase of long-term debt [note 8(a)]         |  |               | 93.1  |               |  |                      |  |      |  |  |         |   |  |  |       |  
|Special charge (a)                                       |  |               | (30.5 | )             |  |                      |  |      |  |  | (17.4    | ) |  |  | (84.9  | )
|Net gain (loss) on sale of capital assets and rights (b) |  |               | 9.4   |               |  |                      |  |      |  |  | 6.1      |   |  |  | (62.3  | )
|Writedown of goodwill (c)                                |  |               |      |               |  |                      |  |      |  |  | (1,071.1 | ) |  |  |       |  
|Loss on closure of subsidiary (d)                        |  |               |      |               |  |                      |  |      |  |  | (21.2    | ) |  |  |       |  
|Gain on sale of various subsidiaries (e)                 |  |               |      |               |  |                      |  |      |  |  |         |   |  |  | 19.9   |  
|                                                         |  |               |       |               |  |                      |   |      |  |  |          |   |  |  |        |  
|Total unusual items                                      |  |               | 72.0  |               |  |                      |  |      |  |  | (1,103.6 | ) |  |  | (127.3 | )
|                                                         |  |               |       |               |  |                      |   |      |  |  |          |   |  |  |        |  



|(a) |  | In 2002, the Company recorded a special charge of $19.8 for
severance, facility, lease and contract termination costs incurred as
part of its plan to further streamline and focus on its operations. As
well, during this period the Company recorded a special charge of $10.7
for a provision on redundant assets. As at December 31, 2002, $11.1 of the provision was included in
accounts payable and accrued liabilities. Approximately $2.7 will be
paid by March 31, 2003 and the remainder will be paid over the terms
of the related leases up to a maximum period of eight years.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During 2001, the Company recorded a special charge of $8.0 for
severance, facility and lease termination costs incurred as part of
its plan to focus on profitability. As well, during this period, the
Company recorded a special charge of $9.4 for an additional provision
on redundant assets. As at December 31, 2002, $1.1 of the provision
was included in accounts payable and accrued liabilities and will be
resolved during 2003.                                                                                                                                                
|   
|    |  | During 2000, the Company realigned resources and investments to
focus on core business activities and gain operational efficiencies.
As a result, a provision of $84.9 was taken against assets. Included
within this provision is a charge of $73.4 made against redundant
assets and assets available for sale. In addition, a $11.5 writedown
was taken against the investment in Cybersurf Corp. due to a decline
in value determined to be other than a temporary impairment.                                                                                                          
|   
|(b) |  | During the three months ended December 31, 2002, the Company reached
an agreement to settle several unresolved matters relating to fibre
swaps. As a result of this settlement, the Company received cash
proceeds of $4.4 and has recorded a gain of $4.9.                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | During the three months ended September 30, 2002, the Company
disposed of certain intangible rights under a licensing agreement for
cash proceeds of $2.3. The Company has recorded a receivable of $2.2
and a gain of $4.5.                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | In 2001, the Company disposed of certain non-revenue generating
switch equipment having a book value of $4.3 for proceeds of $0.9. A
loss of $3.3 was recorded as an unusual item. In addition, the
Company realized gains of $9.4 on sales of certain assets and
settlement of certain fibre swaps and recorded as an unusual item
[note 5].                                                                                                                                                                                                                                               
|   
|    |  | In 2000, the Company disposed of non-revenue producing fibre
optic cable assets having a book value of $275.0 for proceeds of
$216.6. A loss of $62.3 ($26.4 net of taxes) was recorded as an
unusual item.                                                                                                                                                                                                                                                                                                                                                                                 





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 46 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]



|(c) |  | In 2001, the Company performed an assessment for impairment of the
carrying values of its long-lived assets. The assessment was performed
due to: (i) deterioration of the economic environment; (ii) the
substantial decline of market value of companies in the
telecommunications services sector; and (iii) the decrease in the
Companys revenue base. The assessment indicated that the decline within
the industry was significant and other than a temporary impairment.                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | A comparison of projected undiscounted cash flows to the
carrying value of the long-lived assets, including goodwill,
indicated that an impairment charge was required. The amount of the
impairment charge was determined by comparing the excess of the
carrying value of the long-lived assets over their estimated fair
value based on a number of scenarios and considering the probability
of their expected outcome.                                                                                     
|   
|    |  | Fair value was estimated by projecting a range of future
discounted cash flows excluding interest expense. The cash flow
period used was four years and the terminal values were estimated
based on an analysis of a range of industry-wide comparable EBITDA
multiples. The Company evaluated a range of discount rates used as
the Companys average cost of capital. The assumptions supporting the
estimated future cash flows, discount rate and terminal values were
based on managements best estimates.
|   
|    |  | Based on this assessment, the Company recorded a $1,071.1
writedown of goodwill. The charge is included in the caption unusual
items on the Consolidated Statements of Operations and Deficit.                                                                                                                                                                                                                                                                                                                
|   
|(d) |  | In 2001, the Company recorded a charge of $21.2 relating to the
closure of its wholly-owned subsidiary, ascenda Inc., as part of its
plan to focus on the profitable deployment of capital resources in core
operations. The charge included $18.6 for writedown of capital assets
and $2.6 for severance and contract termination costs.                                                                                                                                                                       
|   
|(e) |  | On December 29, 2000, the shares of a wholly-owned subsidiary were
sold along with its holdings in various other non-operating subsidiaries
for a gain of $19.9 and net cash proceeds of $11.1.                                                                                                                                                                                                                                                                                                                 

16. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share have been calculated on the basis of income
(loss) divided by the weighted average number of Common Shares and Class
B Non-Voting Shares outstanding during the period after recapitalization
(2002  23,839,638). Earnings (loss) per share for the prior years and
three months ended March 31, 2002 have been calculated on the basis of
income (loss) divided by the weighted average number of
Pre-recapitalization Common Shares, Pre-recapitalization Class B
NonVoting Shares and Pre-recapitalization Class C Non-Voting Shares
outstanding during the year. The Pre-recapitalization weighted average
number of shares outstanding has been restated to give effect to the
1:20 stock consolidation which occurred April 15, 2002 (March 31, 2002
 4,529,550; December 31, 2001  4,522,439; December 31, 2000 
4,522,383). Due to a loss for the nine months ended December 31, 2002,
three months ended March 31, 2002 and both 2001 and 2000, no incremental
shares from the potential exercise of stock options are included because
the effect would be anti-dilutive.

17. CONSOLIDATED STATEMENTS OF CASH FLOWS

Net Change in Non-Cash Working Capital Balances

|                                                                      |  |               |      |               |  |                      |       |      |  |            |        |            |  |  |       |  
|--------------------------------------------------------------------- |  | ------------- | ---- | ------------- |  | -------------------- | ----- | ---- |  | ---------- | ------ | ---------- |  |  | ----- | -
|                                                                      |  |               |      |               |  | Pre-recapitalization
|                                                                      |  |               |      |               |  |                     
|                                                                      |  | Nine Months   |      | Three Months  |  |                      |       |      |  |            |        |           
|                                                                      |  | Ended Dec. 31 |      | Ended Mar. 31 |  |                      |       |      |  |            |        |           
|                                                                      |  | 2002          |      | 2002          |  | 2001                 |       | 2000
|                                                                      |  |               |      |               |  |                      |       |     
|                                                                      |  |               |      |               |  |                      |       |      |  | (Restated) |        | (Restated)
|Accounts receivable                                                   |  |               | 24.0 |               |  |                      | 23.1  |      |  |            | 44.5   |            |  |  | 46.5  |  
|Other current assets                                                  |  |               | 40.7 |               |  |                      | 1.0   |      |  |            | 21.8   |            |  |  | (33.6 | )
|Accounts payable and accrued liabilities                              |  |               | (4.4 | )             |  |                      | (32.4 | )    |  |            | (129.4 | )          |  |  | (46.0 | )
|                                                                      |  |               |      |               |  |                      |       |      |  |            |        |            |  |  |       |  
|Net change in non-cash working capital balances
related to operations |  |               | 60.3 |               |  |                      | (8.3  | )    |  |            | (63.1  | )          |  |  | (33.1 | )
|                                                                      |  |               |      |               |  |                      |       |      |  |            |        |            |  |  |       |  





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 47 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

Non-Cash Transactions

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

|                |  |               |     |               |  |                      |      |      |  |  |      |   |  |  |   | 
|--------------- |  | ------------- | --- | ------------- |  | -------------------- | ---- | ---- |  |  | ---- | - |  |  | - | 
|                |  |               |     |               |  | Pre-recapitalization
|                |  |               |     |               |  |                     
|                |  | Nine Months   |     | Three Months  |  |                      |      |      |  |  |      |  
|                |  | Ended Dec. 31 |     | Ended Mar. 31 |  |                      |      |      |  |  |      |  
|                |  | 2002          |     | 2002          |  | 2001                 |      | 2000
|                |  |               |     |               |  |                      |      |     
|Accrued amounts |  |               | 8.2 |               |  |                      | (3.8 | )    |  |  | (2.0 | ) |  |  |  | 
|                |  |               |     |               |  |                      |      |      |  |  |      |   |  |  |   | 

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

During 2001, the Company disposed of capital assets of $15.0 in
exchange for consideration of capital assets of $15.0 (2000  $33.2).
Accordingly, these transactions are not reflected in the consolidated
statements of cash flows.

Other Information

|                                       |  |               |      |               |  |                      |      |      |  |  |      |  |  |  |      | 
|-------------------------------------- |  | ------------- | ---- | ------------- |  | -------------------- | ---- | ---- |  |  | ---- |  |  |  | ---- | 
|                                       |  |               |      |               |  | Pre-recapitalization
|                                       |  |               |      |               |  |                     
|                                       |  | Nine Months   |      | Three Months  |  |                      |      |      |  |  |      | 
|                                       |  | Ended Dec. 31 |      | Ended Mar. 31 |  |                      |      |      |  |  |      | 
|                                       |  | 2002          |      | 2002          |  | 2001                 |      | 2000
|                                       |  |               |      |               |  |                      |      |     
|Cash received for interest             |  |               | 3.4  |               |  |                      | 6.2  |      |  |  | 18.1 |  |  |  | 18.6 | 
|Cash paid for interest                 |  |               | 52.3 |               |  |                      | 18.3 |      |  |  | 99.7 |  |  |  | 96.3 | 
|Cash paid for capital and income taxes |  |               | 9.9  |               |  |                      | 0.5  |      |  |  | 2.2  |  |  |  | 2.2  | 
|                                       |  |               |      |               |  |                      |      |      |  |  |      |  |  |  |      | 

18. ADDITIONAL FINANCIAL INFORMATION

[a] Fair Values

The carrying amounts and estimated fair values of the Companys
financial instruments as at December 31, 2002 and 2001 are as follows:

|                                         |  |          |       |            |  |          |       |            |  |                      |         |  |  |  |       | 
|---------------------------------------- |  | -------- | ----- | ---------- |  | -------- | ----- | ---------- |  | -------------------- | ------- |  |  |  | ----- | 
|                                         |  |          |       |            |  |          |       |            |  | Pre-recapitalization
|                                         |  |          |       |            |  |          |       |            |  |                     
|                                         |  | 2002     |       | 2001      
|                                         |  |          |       | [Restated] |  |          |       |           
|                                         |  |          |       |           
|                                         |  | Carrying |       | Estimated  |  | Carrying |       | Estimated 
|                                         |  | Amount   |       | Fair Value |  | Amount   |       | Fair Value
|                                         |  |          |       |            |  |          |       |           
|Financial assets                         |  |          |       |            |  |          |       |            |  |                      |         |  |  |  |       | 
|Cash and cash equivalents                |  |          | 34.1  |            |  |          | 34.1  |            |  |                      | 15.5    |  |  |  | 15.5  | 
|Short-term investments                   |  |          | 90.9  |            |  |          | 90.9  |            |  |                      | 320.4   |  |  |  | 320.4 | 
|Accounts receivable                      |  |          | 89.3  |            |  |          | 89.3  |            |  |                      | 133.7   |  |  |  | 133.7 | 
|Other current assets                     |  |          | 4.4   |            |  |          | 4.4   |            |  |                      | 59.4    |  |  |  | 59.4  | 
|Investment in Cybersurf Corp.            |  |          | 0.4   |            |  |          | 0.2   |            |  |                      | 0.5     |  |  |  | 0.3   | 
|Financial liabilities                    |  |          |       |            |  |          |       |            |  |                      |         |  |  |  |       | 
|Accounts payable and accrued liabilities |  |          | 159.4 |            |  |          | 159.4 |            |  |                      | 212.4   |  |  |  | 212.4 | 
|Long-term liabilities                    |  |          | 511.8 |            |  |          | 293.4 |            |  |                      | 2,626.2 |  |  |  | 795.8 | 
|                                         |  |          |       |            |  |          |       |            |  |                      |         |  |  |  |       | 

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 48 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

Cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable and accrued
liabilities

The carrying values of the Companys cash and cash equivalents,
short-term investments, accounts receivable, other current assets, and
accounts payable and accrued liabilities approximate fair values due to
their current nature.

Investment in Cybersurf Corp.

The fair value of the Companys investment in Cybersurf Corp. is based
on the closing price on the TSX Venture Exchange.

Long-term liabilities

The Companys debt trades over-the-counter and is not listed on an
exchange. The fair value of the Companys long-term debt is estimated
based on current trading values using best estimates. The fair value of
the Companys right-of-way liability is based on discounted future cash
flows and approximates carrying value.

[b] Other Disclosures

Credit Risk

Short-term investments are placed exclusively with entities having
ratings of at least A-1, A-2, P-1 or P-2 by recognized debt rating
agencies.

The Companys accounts receivable are not subject to any
concentration of credit risk. The portfolio is diversified as to both
geographic and industry concentrations.

Currency Agreements

The Company has not entered into any cross-currency swap agreements to
mitigate its exposure to fluctuations in the relationship between the
Canadian and U.S. dollars created by the Companys U.S. dollar
denominated debt obligation. As a result, the Company is exposed to risk
of currency fluctuation for the U.S.$490.3 that will be paid in
principal and interest over the remaining term of this instrument.

19. SEGMENTED INFORMATION

The Company is a facilities-based carrier of long distance, data and
local telecommunications services. It offers different products or
services to two market segments: (i) residential customers and (ii)
business, including small, medium and large business and government
customers. Substantially all of the Companys assets are located in
Canada, and revenues are derived from long distance, data and local
telecommunications services provided in Canada. Assets, including the
fibre optic cable network, are not segmented by business unit as assets
are shared by all segments.

Customer Segments

|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|-------------------------------------------------------------------------------- |  | ----------- | ----- | -------- |  | --------- | ----- | ----- |  | --------- | ----- | - |  |  | ------ | -
|                                                                                 |  |             |       |          |  |           |       |       |  | Corporate |       |   |  | 
|                                                                                 |  | Residential |       | Business |  | and other |       | Total
|                                                                                 |  |             |       |          |  |           |       |      
|Nine months ended December 31, 2002                                              |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Long distance                                                                    |  |             | 104.0 |          |  |           | 268.9 |       |  |           |      |   |  |  | 372.9  |  
|Data                                                                             |  |             | 14.3  |          |  |           | 152.1 |       |  |           |      |   |  |  | 166.4  |  
|Local                                                                            |  |             | 40.2  |          |  |           | 19.4  |       |  |           |      |   |  |  | 59.6   |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Total revenues                                                                   |  |             | 158.5 |          |  |           | 440.4 |       |  |           |      |   |  |  | 598.9  |  
|Operating costs                                                                  |  |             | (57.7 | )        |  |           | (71.0 | )     |  |           | (98.6 | ) |  |  | (227.3 | )
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|                                                                                 |  |             | 100.8 |          |  |           | 369.4 |       |  |           | (98.6 | ) |  |  | 371.6  |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Carrier costs                                                                    |  |             |       |          |  |           |       |       |  |           |       |   |  |  | (335.7 | )
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Earnings before interest, taxes, depreciation and
amortization and unusual items |  |             |       |          |  |           |       |       |  |           |       |   |  |  | 35.9   |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 49 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|-------------------------------------------------------------------------------- |  | ----------- | ----- | -------- |  | --------- | ----- | ----- |  | --------- | ----- | - |  |  | ------ | -
|                                                                                 |  |             |       |          |  |           |       |       |  | Corporate |       |   |  | 
|                                                                                 |  | Residential |       | Business |  | and other |       | Total
|                                                                                 |  |             |       |          |  |           |       |      
|Three months ended March 31, 2002 [Pre-recapitalization]                         |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Long distance                                                                    |  |             | 34.8  |          |  |           | 95.9  |       |  |           |      |   |  |  | 130.7  |  
|Data                                                                             |  |             | 5.4   |          |  |           | 53.5  |       |  |           |      |   |  |  | 58.9   |  
|Local                                                                            |  |             | 8.5   |          |  |           | 3.7   |       |  |           |      |   |  |  | 12.2   |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Total revenues                                                                   |  |             | 48.7  |          |  |           | 153.1 |       |  |           |      |   |  |  | 201.8  |  
|Operating costs                                                                  |  |             | (17.9 | )        |  |           | (24.3 | )     |  |           | (30.9 | ) |  |  | (73.1  | )
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|                                                                                 |  |             | 30.8  |          |  |           | 128.8 |       |  |           | (30.9 | ) |  |  | 128.7  |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Carrier costs                                                                    |  |             |       |          |  |           |       |       |  |           |       |   |  |  | (116.8 | )
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  
|Earnings before interest, taxes, depreciation and
amortization and unusual items |  |             |       |          |  |           |       |       |  |           |       |   |  |  | 11.9   |  
|                                                                                 |  |             |       |          |  |           |       |       |  |           |       |   |  |  |        |  

|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|----------------------------------------------------------------------------- |  | ----------- | ----- | -------- |  | --------- | ------ | ----- |  | --------- | ------ | - |  |  | ------ | -
|                                                                              |  |             |       |          |  |           |        |       |  | Corporate |        |   |  | 
|                                                                              |  | Residential |       | Business |  | and other |        | Total
|                                                                              |  |             |       |          |  |           |        |      
|2001 [Pre-recapitalization]                                                   |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|Long distance                                                                 |  |             | 170.3 |          |  |           | 454.2  |       |  |           |       |   |  |  | 624.5  |  
|Data                                                                          |  |             | 28.0  |          |  |           | 249.7  |       |  |           |       |   |  |  | 277.7  |  
|Local                                                                         |  |             | 18.2  |          |  |           | 8.0    |       |  |           |       |   |  |  | 26.2   |  
|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|Total revenues                                                                |  |             | 216.5 |          |  |           | 711.9  |       |  |           |       |   |  |  | 928.4  |  
|Operating costs                                                               |  |             | (67.9 | )        |  |           | (107.7 | )     |  |           | (109.1 | ) |  |  | (284.7 | )
|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|                                                                              |  |             | 148.6 |          |  |           | 604.2  |       |  |           | (109.1 | ) |  |  | 643.7  |  
|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|Carrier costs                                                                 |  |             |       |          |  |           |        |       |  |           |        |   |  |  | (508.9 | )
|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  
|Earnings before interest, taxes, depreciation,
amortization and unusual items |  |             |       |          |  |           |        |       |  |           |        |   |  |  | 134.8  |  
|                                                                              |  |             |       |          |  |           |        |       |  |           |        |   |  |  |        |  

|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|----------------------------------------------------------------------------- |  | ----------- | ------ | -------- |  | --------- | ------ | ----- |  | --------- | ------ | - |  |  | ------- | -
|                                                                              |  |             |        |          |  |           |        |       |  | Corporate |        |   |  | 
|                                                                              |  | Residential |        | Business |  | and other |        | Total
|                                                                              |  |             |        |          |  |           |        |      
|2000 [Pre-recapitalization]                                                   |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|Long distance                                                                 |  |             | 259.3  |          |  |           | 678.0  |       |  |           |       |   |  |  | 937.3   |  
|Data                                                                          |  |             | 40.9   |          |  |           | 252.6  |       |  |           |       |   |  |  | 293.5   |  
|Local                                                                         |  |             | 15.1   |          |  |           | 4.3    |       |  |           |       |   |  |  | 19.4    |  
|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|Total revenues                                                                |  |             | 315.3  |          |  |           | 934.9  |       |  |           |       |   |  |  | 1,250.2 |  
|Operating costs                                                               |  |             | (106.3 | )        |  |           | (124.9 | )     |  |           | (144.3 | ) |  |  | (375.5  | )
|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|                                                                              |  |             | 209.0  |          |  |           | 810.0  |       |  |           | (144.3 | ) |  |  | 874.7   |  
|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|Carrier costs                                                                 |  |             |        |          |  |           |        |       |  |           |        |   |  |  | (844.6  | )
|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  
|Earnings before interest, taxes, depreciation,
amortization and unusual items |  |             |        |          |  |           |        |       |  |           |        |   |  |  | 30.1    |  
|                                                                              |  |             |        |          |  |           |        |       |  |           |        |   |  |  |         |  

20. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 50 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

|                                                           |  |      |       |            |  |  |         |  
|---------------------------------------------------------- |  | ---- | ----- | ---------- |  |  | ------- | -
|                                                           |  | 2002 |       | 2001      
|                                                           |  |      |       |           
|                                                           |  |      |       | [Restated]
|Consolidated Balance Sheets  Assets                       |  |      |       |            |  |  |         |  
|Canadian GAAP  Current Assets                             |  |      | 218.7 |            |  |  | 529.0   |  
|Investment available for sale (a)                          |  |      | 0.2   |            |  |  | 0.3     |  
|                                                           |  |      |       |            |  |  |         |  
|U.S. GAAP  Current Assets                                 |  |      | 218.9 |            |  |  | 529.3   |  
|                                                           |  |      |       |            |  |  |         |  
|Canadian GAAP  Capital Assets                             |  |      | 600.0 |            |  |  | 749.7   |  
|Capitalized interest (c)                                   |  |      | 7.1   |            |  |  | 12.7    |  
|Writedowns and fresh start adjustments (b)                 |  |      | 89.7  |            |  |  |        |  
|Writedown of assets held for sale (b)                      |  |      | (78.6 | )          |  |  |        |  
|Depreciation of writedowns and fresh start adjustments (b) |  |      | (1.6  | )          |  |  |        |  
|                                                           |  |      |       |            |  |  |         |  
|U.S. GAAP  Capital Assets                                 |  |      | 616.6 |            |  |  | 762.4   |  
|                                                           |  |      |       |            |  |  |         |  
|Canadian GAAP  Other Assets                               |  |      | 101.1 |            |  |  | 173.4   |  
|Investment available for sale (a)                          |  |      | (0.4  | )          |  |  | (0.5    | )
|Other                                                      |  |      |      |            |  |  | (19.3   | )
|                                                           |  |      |       |            |  |  |         |  
|U.S. GAAP  Other Assets                                   |  |      | 100.7 |            |  |  | 153.6   |  
|                                                           |  |      |       |            |  |  |         |  
|U.S. GAAP  Total Assets                                   |  |      | 936.2 |            |  |  | 1,445.3 |  
|                                                           |  |      |       |            |  |  |         |  

|                                                                  |  |      |          |            |  |  |          |  
|----------------------------------------------------------------- |  | ---- | -------- | ---------- |  |  | -------- | -
|                                                                  |  | 2002 |          | 2001      
|                                                                  |  |      |          |           
|                                                                  |  |      |          | [Restated]
|Consolidated Balance Sheets  Liabilities                         |  |      |          |            |  |  |          |  
|Canadian and U.S. GAAP  Accounts Payable and Accrued Liabilities |  |      | 159.4    |            |  |  | 212.4    |  
|Canadian GAAP  Future Income Tax Liability                       |  |      |         |            |  |  | 36.8     |  
|Future income tax liability (b)                                   |  |      | 28.3     |            |  |  |         |  
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Future Income Tax Liability                           |  |      | 28.3     |            |  |  | 36.8     |  
|                                                                  |  |      |          |            |  |  |          |  
|Canadian GAAP  Long-term Liabilities                             |  |      | 511.8    |            |  |  | 2,626.2  |  
|Future interest payments on long-term debt (b)                    |  |      | 301.5    |            |  |  |         |  
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Long-term Liabilities                                 |  |      | 813.3    |            |  |  | 2,626.2  |  
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Total Liabilities                                     |  |      | 1,001.0  |            |  |  | 2,875.4  |  
|                                                                  |  |      |          |            |  |  |          |  
|Consolidated Balance Sheets  Shareholders Equity (Deficiency)   |  |      |          |            |  |  |          |  
|Canadian GAAP  Capital Stock                                     |  |      | 306.3    |            |  |  | 1,336.1  |  
|Share purchase incentives                                         |  |      | 4.6      |            |  |  | 4.6      |  
|Reduction in stated capital (f)                                   |  |      | 10.7     |            |  |  | 10.7     |  
|Recapitalization adjustments (b)                                  |  |      | (6.5     | )          |  |  |         |  
|Writedowns and fresh start adjustments (b)                        |  |      | 1,036.3  |            |  |  |         |  
|Issue of capital stock (b)                                        |  |      | 187.9    |            |  |  |         |  
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Capital Stock                                         |  |      | 1,539.3  |            |  |  | 1,351.4  |  
|                                                                  |  |      |          |            |  |  |          |  
|Canadian GAAP  Deficit                                           |  |      | (57.7    | )          |  |  | (2,759.4 | )
|Share purchase incentives                                         |  |      | (4.6     | )          |  |  | (4.6     | )
|Reduction in stated capital (f)                                   |  |      | (10.7    | )          |  |  | (10.7    | )
|Writedowns and fresh start adjustments (b)                        |  |      | (1,671.8 | )          |  |  |         |  
|Depreciation not recognized under fresh start accounting (b)      |  |      | (1.6     | )          |  |  |         |  
|Income tax benefit related to future tax liability (b)            |  |      | 6.1      |            |  |  |         |  
|Interest expense on long-term debt (b)                            |  |      | 43.6     |            |  |  |         |  
|Gain on repurchase of long-term debt (b)                          |  |      | 81.9     |            |  |  |         |  
|Foreign exchange gain on long-term debt (b)                       |  |      | 3.9      |            |  |  |         |  
|Capitalized interest (c)                                          |  |      | 7.1      |            |  |  | 12.7     |  
|Other                                                             |  |      |         |            |  |  | (19.3    | )
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Deficit                                               |  |      | (1,603.8 | )          |  |  | (2,781.3 | )
|                                                                  |  |      |          |            |  |  |          |  
|Canadian GAAP  Other Comprehensive Income                        |  |      |         |            |  |  |         |  
|Unrealized losses on investment available for sale                |  |      | (0.3     | )          |  |  | (0.2     | )
|                                                                  |  |      |          |            |  |  |          |  
|U.S. GAAP  Other Comprehensive Income                            |  |      | (0.3     | )          |  |  | (0.2     | )
|                                                                  |  |      |          |            |  |  |          |  
|Total U.S. GAAP Shareholders Equity (Deficiency)                 |  |      | (64.8    | )          |  |  | (1,430.1 | )
|                                                                  |  |      |          |            |  |  |          |  
|Total U.S. GAAP Liabilities and Shareholders Equity (Deficiency) |  |      | 936.2    |            |  |  | 1,445.3  |  
|                                                                  |  |      |          |            |  |  |          |  





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 51 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

Consolidated Statements of Operations

|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---------- |  | ---------- | -------- | - |  |  | ------ | -
|                                                                                                   |  | 2002 |         | 2001       |  | 2000      
|                                                                                                   |  |      |         |            |  |           
|                                                                                                   |  |      |         | [Restated] |  | [Restated]
|Net income (loss) for the 12 months ended December 31
based on Canadian GAAP                       |  |      | (149.5  | )          |  |            | (1,524.7 | ) |  |  | (501.2 | )
|Recapitalization and fresh start adjustments (b)                                                   |  |      | (93.8   | )          |  |            |         |   |  |  |       |  
|Gain on repurchase of long-term debt (b)                                                           |  |      | 81.9    |            |  |            |         |   |  |  |       |  
|Interest expense on long-term debt (b)                                                             |  |      | 43.6    |            |  |            |         |   |  |  |       |  
|Foreign exchange gain on long-term debt (b)                                                        |  |      | 3.9     |            |  |            |         |   |  |  |       |  
|Incremental loss on disposal and writedown regarding
capitalized interest (c)                      |  |      | (4.6    | )          |  |            | (2.4     | ) |  |  | (61.7  | )
|Depreciation not recognized under fresh start accounting (b)                                       |  |      | (1.6    | )          |  |            |         |   |  |  |       |  
|Capitalized interest, net of depreciation (c)                                                      |  |      | (1.0    | )          |  |            | 2.9      |   |  |  | 5.0    |  
|Income tax benefit from future income tax liability (b)                                            |  |      | 6.1     |            |  |            |         |   |  |  |       |  
|Amortization of integration costs capitalized (d)                                                  |  |      |        |            |  |            | (1.0     | ) |  |  | (1.3   | )
|Writedown of integration costs capitalized (d)                                                     |  |      |        |            |  |            | (22.7    | ) |  |  |       |  
|Change in enacted tax rate (e)                                                                     |  |      |        |            |  |            | 9.0      |   |  |  | (9.0   | )
|Other                                                                                              |  |      |        |            |  |            |         |   |  |  | (19.7  | )
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|Net loss before extraordinary items for the 12 months ended
December 31 based on U.S. GAAP         |  |      | (115.0  | )          |  |            | (1,538.9 | ) |  |  | (587.9 | )
|Extraordinary item  gain on debt restructuring (b)                                                |  |      | 1,292.5 |            |  |            |         |   |  |  |       |  
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|Net income (loss) after extraordinary items for the
12 months ended December 31 based on U.S. GAAP |  |      | 1,177.5 |            |  |            | (1,538.9 | ) |  |  | (587.9 | )
|Unrealized losses on other investments available for sale                                          |  |      | (0.1    | )          |  |            | (0.2     | ) |  |  |       |  
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|Comprehensive income (loss) for the 12 months ended
December 31 based on U.S. GAAP                 |  |      | 1,177.4 |            |  |            | (1,539.1 | ) |  |  | (587.9 | )
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|U.S. GAAP Earnings (Loss) Per Share  Basic                                                        |  |      |         |            |  |            |          |   |  |  |        |  
|Net income (loss) before extraordinary items  basic                                               |  |      | (6.03   | )          |  |            | (17.01   | ) |  |  | (6.50  | )
|Extraordinary item  basic                                                                         |  |      | 67.75   |            |  |            |         |   |  |  |       |  
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|Net income (loss)  basic                                                                          |  |      | 61.72   |            |  |            | (17.01   | ) |  |  | (6.50  | )
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|U.S. GAAP Earnings (Loss) Per Share  Diluted                                                      |  |      |         |            |  |            |          |   |  |  |        |  
|Net income (loss) before extraordinary items  diluted                                             |  |      | (6.03   | )          |  |            | (17.01   | ) |  |  | (6.50  | )
|Extraordinary item  diluted                                                                       |  |      | 67.71   |            |  |            |         |   |  |  |       |  
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  
|Net income (loss)  diluted                                                                        |  |      | 61.68   |            |  |            | (17.01   | ) |  |  | (6.50  | )
|                                                                                                   |  |      |         |            |  |            |          |   |  |  |        |  





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 52 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

Consolidated Statements of Cash Flows

|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---------- |  | ---------- | ------ | - |  |  | ----- | -
|                                                                                                            |  | 2002 |        | 2001       |  | 2000      
|                                                                                                            |  |      |        |            |  |           
|                                                                                                            |  |      |        | [Restated] |  | [Restated]
|Cash provided by (used in) operating activities based
on Canadian GAAP                                      |  |      | 6.1    |            |  |            | (27.2  | ) |  |  | (80.3 | )
|Interest expense on long-term debt (b)                                                                      |  |      | 43.6   |            |  |            |       |   |  |  |      |  
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|Cash provided by (used in) operating activities based
on U.S.GAAP                                           |  |      | 49.7   |            |  |            | (27.2  | ) |  |  | (80.3 | )
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|Cash provided by (used in) investing activities based
on Canadian and U.S. GAAP                             |  |      | 154.2  |            |  |            | (262.9 | ) |  |  | (5.4  | )
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|Cash provided by (used in) financing activities based
on Canadian GAAP                                      |  |      | (29.9  | )          |  |            | 5.7    |   |  |  | 29.6  |  
|Recapitalization adjustments (b)                                                                            |  |      | (111.8 | )          |  |            |       |   |  |  |      |  
|Interest expense on long-term debt (b)                                                                      |  |      | (43.6  | )          |  |            |       |   |  |  |      |  
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|Cash provided by (used in) financing activities based
on U.S. GAAP                                          |  |      | (185.3 | )          |  |            | 5.7    |   |  |  | 29.6  |  
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  
|Net increase (decrease) in cash and cash equivalents for
the 12 months ended December 31 based on U.S. GAAP |  |      | 18.6   |            |  |            | (284.4 | ) |  |  | (56.1 | )
|                                                                                                            |  |      |        |            |  |            |        |   |  |  |       |  



---

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 53 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]



|    |  | Under Canadian GAAP, the future income tax liability was valued
at nil under the application of fresh start accounting. Under U.S.
GAAP, the value of the future income tax liability is not impacted by
the debt restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Additional information regarding the Companys financial
reorganization is presented in note 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(c) |  | Under U.S. GAAP, interest
expense to date of $7.1 (2001  $12.7, 2000  $12.2) would have been
capitalized as part of the cost of constructing fibre optic cable and
buildings and therefore included in the cost of the assets in
determining the losses on disposal. Under Canadian GAAP, these amounts
have been expensed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(d) |  | Under U.S. GAAP, purchase accounting requires certain integration
costs arising from an acquisition to be capitalized as part of the
purchase equation and would increase goodwill. Therefore, for U.S. GAAP, these integration costs were included as part of the cost used
to determine the writedown of goodwill which occurred at September
30, 2001 [note 15]. Under Canadian GAAP, these integration costs were
previously expensed.                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(e) |  | Under Canadian GAAP, future income tax liabilities are valued using
the income tax rates expected to apply when the liability is settled or
the asset is realized based on substantively enacted income tax rates.
Under U.S. GAAP, income tax rates applied are based on those completely
enacted into law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(f) |  | Canadian GAAP allows for the reduction of the
stated capital of outstanding shares with a corresponding offset to
deficit. This reclassification which the Company made in 1992 is not
permitted by U.S. GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(g) |  | Under Canadian GAAP, the Company accounted
for its investment in a joint venture using the proportionate
consolidation method in 2000 prior to the joint venture becoming a
wholly-owned subsidiary in 2001. Under U.S. GAAP, the Company should
account for its investment in the joint venture using the equity method.
However, as permitted by the United States Securities and Exchange
Commission, this difference in accounting has not been reflected in the
U.S. GAAP amount above.                                                                                                                                                                                                                                                                                                                                                                        
|   
|(h) |  | Under Canadian GAAP, stock options are accounted for at the date of
exercise when the purchase is recorded as an increase to capital stock.
For purposes of reconciliation to U.S. GAAP, stock options granted to
employees have been accounted for in accordance with Accounting
Principles Board (APB) Opinion 25, such that the excess of the market
value of the shares over the exercise price is expensed and charged to
income with a corresponding increase to capital stock over the vesting
period. Certain stock options are considered to be part of a variable
stock option plan under U.S. GAAP in accordance with Financial
Accounting Standards Board Interpretation Number 44 and as such
compensation expense is recorded for the excess of the market value of
the shares over the exercise price at each reporting period (2002 and
2001  nil).
|   
|(i) |  | U.S. GAAP SFAS 130 requires the presentation of comprehensive income
and its components. Comprehensive income includes all changes in equity
during a period except shareholder transactions. (j) U.S. GAAP does not
recognize the disclosure of any subtotal of the amount of earnings
before interest, taxes and depreciation and amortization in the
consolidated statements of operations and deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(k) |  | U.S. GAAP does not recognize the disclosure of a subtotal of the
cash flow from operations before net change in non-cash working capital
items in the consolidated statements of cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Additional Information

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

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





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 54 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

|                                               |  |                |     |                |     |                      |   |                |     |  |   |  
|---------------------------------------------- |  | -------------- | --- | -------------- | --- | -------------------- | - | -------------- | --- |  | - | -
|                                               |  |                |     |                |     | Pre-recapitalization
|                                               |  |                |     |                |     |                     
|                                               |  | 2002           |     | 2001           |     | 2000                
|                                               |  |                |     |                |     |                     
|Risk free interest rate                        |  | 3.26% to 5.47% |     | 3.83% to 5.52% |     | 5.32% to 6.39%      
|Expected dividend yield                        |  |                | 0   | %              |     |                      | 0 | %              |     |  | 0 | %
|Expected volatility, Common Shares             |  | 64.8% to 90.7% |     | 71.1% to 77.8% |     | 50.3% to 57.9%      
|Expected volatility, Class B Non-Voting Shares |  |                | N/A |                |     | 75.4% to 90.4%       |   | 53.1% to 70.7%
|Expected time until exercise, in years         |  | 3.0 to 7.0     |     |                | 3.0 |                      |   |                | 3.0 | 

The weighted average fair value of all options granted is estimated at
$5.60 per share in 2002 (2001  $0.63 per share, 2000  $1.98 per
share).

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

|                                                  |  |      |         |      |  |      |          |   |  |  |        |  
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  |  | ------ | -
|                                                  |  | 2002 |         | 2001 |  | 2000
|                                                  |  |      |         |      |  |     
|U.S. GAAP pro forma net income (loss)             |  |      | 1,176.2 |      |  |      | (1,539.6 | ) |  |  | (590.2 | )
|U.S. GAAP pro forma basic income (loss) per share |  |      | 61.66   |      |  |      | (17.02   | ) |  |  | (6.53  | )

Selling, general and administration costs of $250.4 (2001  $252.0; 2000
 $312.2), advertising costs of $18.4 (2001  $17.1; 2000  $32.9),
lease rental costs of $15.0 (2001  $15.5; 2000  $14.8), and bad debt
costs of $16.6 (2001  $0.1; 2000  $15.6) were expensed as incurred
during the year under both Canadian and U.S. GAAP.

Details of depreciation and amortization expense are as follows:

|             |  |      |       |      |  |      |       |  |  |  |       | 
|------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|             |  | 2002 |       | 2001 |  | 2000
|             |  |      |       |      |  |     
|Depreciation |  |      | 136.8 |      |  |      | 135.9 |  |  |  | 136.5 | 
|Amortization |  |      | 26.9  |      |  |      | 77.2  |  |  |  | 94.2  | 
|             |  |      |       |      |  |      |       |  |  |  |       | 
|Total        |  |      | 163.7 |      |  |      | 213.1 |  |  |  | 230.7 | 
|             |  |      |       |      |  |      |       |  |  |  |       | 

New Pronouncements

The Financial Accounting Standards Board [the FASB] has issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS 142), and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 142 changes
the accounting for goodwill from an amortization method to an
impairment-only approach effective January 1, 2002. SFAS 144 establishes
criteria to determine when a long-lived asset should be classified as
assets to be held and used, which are required to be depreciated and
tested for recoverability whenever events or changes in circumstances
indicate that carrying amounts may not be recoverable, effective January
1, 2002. The Company has reviewed its policies and determined there is no
impact as a result of the Company adopting these pronouncements.

In April 2002, FASB issued SFAS No. 145, Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections (SFAS 145). SFAS 145 requires any gain or loss on
extinguishment of debt to be classified as income or loss from operating
activities unless the criteria in the APB Opinion 30 for classification
as an extraordinary item are satisfied. Under APB Opinion 30, a gain or
loss is classified as extraordinary if it is unusual and occurs
infrequently. This statement is effective for fiscal periods beginning
after May 15, 2002. The Company has adopted this pronouncement for the
year ended December 31, 2002. As a result, the $175.0 gain on repurchase
of long-term debt [notes 8(a) and 20(b)]has been classified as income
from operating activities.





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##### Table of Contents



|                                           |  |  |    | 
|------------------------------------------ |  |  | -- | 
|Notes to Consolidated Financial Statements |  |  | 55 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or
otherwise indicated]

In June 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity
is recognized when the cost is incurred rather than at the date the entity
commits to the exit plan. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company is currently
reviewing the standard, but has not yet fully determined the impact it
will have on its reported U.S. GAAP financial information.

In November 2002, FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Interpretation 45). Interpretation
45 requires disclosure by a guarantor regarding its obligations under
certain guarantees it has issued, effective December 31, 2002.
Interpretation 45 also requires recognition of a liability for the fair
value of its obligations under guarantees issued after December 31, 2002.
The Company is currently reviewing this standard, but has not yet fully
determined the impact of the recognition of its obligations under
guarantees on its reported U.S. GAAP financial information.

In December 2002, FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS 148). SFAS 148
amends SFAS No. 123 to provide alternative methods of transition to SFAS
No. 123s fair value method of accounting for stock-based compensation.
The Company is currently reviewing this standard, but has not yet fully
determined its impact on its reported U.S. GAAP financial information.

21. SUBSEQUENT EVENT

On January 14, 2003, the Company sold a customer care centre and capital
assets having a net book value of $0.6. Total proceeds were $1.8. As part
of this transaction, the Company entered into an agreement with the
purchaser to buy call centre services over the next three years for $4.9
in 2003 and $3.5 in each of 2004 and 2005.





---



##### Table of Contents



|                                 |  |  |    | 
|-------------------------------- |  |  | -- | 
|Additional Financial Information |  |  | 56 | 

December 31, 2002 [millions of Canadian dollars, except per share amount or otherwise indicated]

2002 Quarterly Review

|                                  |  |                      |         |      |  |    |         |    |  |    |          |    |  |    |          |    |  |  |          |   |  |  |         |   |  |  |       |   |  |  |       |  
|--------------------------------- |  | -------------------- | ------- | ---- |  | -- | ------- | -- |  | -- | -------- | -- |  | -- | -------- | -- |  |  | -------- | - |  |  | ------- | - |  |  | ----- | - |  |  | ----- | -
|                                  |  | Pre-recapitalization
|                                  |  |                     
|                                  |  | 2001                 |         | 2002
|                                  |  |                      |         |     
|(Unaudited)                       |  | Q1                   |         | Q2   |  | Q3 |         | Q4 |  | Q1 |          | Q2 |  | Q3 |          | Q4
|                                  |  |                      |         |      |  |    |         |    |  |    |          |    |  |    |          |   
|Statement of Operations           |  |                      |         |      |  |    |         |    |  |    |          |    |  |    |          |    |  |  |          |   |  |  |         |   |  |  |       |   |  |  |       |  
|Revenue                           |  |                      | 263.1   |      |  |    | 227.2   |    |  |    | 223.0    |    |  |    | 215.1    |    |  |  | 201.8    |   |  |  | 197.9   |   |  |  | 198.6 |   |  |  | 202.4 |  
|Gross margin                      |  |                      | 46.3    | %    |  |    | 48.5    | %  |  |    | 46.1     | %  |  |    | 39.2     | %  |  |  | 42.1     | % |  |  | 40.2    | % |  |  | 42.6  | % |  |  | 48.9  | %
|EBITDA before unusual items       |  |                      | 36.9    |      |  |    | 40.2    |    |  |    | 37.1     |    |  |    | 20.6     |    |  |  | 11.9     |   |  |  | (9.7    | ) |  |  | 15.0  |   |  |  | 30.6  |  
|EBITDA after unusual items        |  |                      | 36.9    |      |  |    | 32.2    |    |  |    | (1,058.5 | )  |  |    | 20.6     |    |  |  | 11.9     |   |  |  | (35.3   | ) |  |  | 112.6 |   |  |  | 30.6  |  
|Net income (loss)                 |  |                      | (185.9  | )    |  |    | 17.8    |    |  |    | (1,258.4 | )  |  |    | (98.2    | )  |  |  | (91.8    | ) |  |  | (62.4   | ) |  |  | 29.1  |   |  |  | (24.4 | )
|Earnings (loss) per share         |  |                      | (41.08  | )    |  |    | 3.93    |    |  |    | (278.10  | )  |  |    | (21.70   | )  |  |  | (20.26   | ) |  |  | (2.62   | ) |  |  | 1.22  |   |  |  | (1.02 | )
|                                 
|Balance Sheet                     |  |                      |         |      |  |    |         |    |  |    |          |    |  |    |          |    |  |  |          |   |  |  |         |   |  |  |       |   |  |  |       |  
|Working capital                   |  |                      | 312.2   |      |  |    | 357.8   |    |  |    | 353.8    |    |  |    | 316.6    |    |  |  | 279.9    |   |  |  | 112.4   |   |  |  | 55.1  |   |  |  | 59.3  |  
|Total assets                      |  |                      | 2,785.7 |      |  |    | 2,610.9 |    |  |    | 1,484.7  |    |  |    | 1,452.1  |    |  |  | 1,365.1  |   |  |  | 1,054.8 |   |  |  | 945.8 |   |  |  | 919.8 |  
|Long-term liabilities             |  |                      | 2,498.9 |      |  |    | 2,440.7 |    |  |    | 2,565.8  |    |  |    | 2,626.2  |    |  |  | 2,662.9  |   |  |  | 611.1   |   |  |  | 513.1 |   |  |  | 511.8 |  
|Shareholders equity/(deficiency) |  |                      | (84.5   | )    |  |    | (66.7   | )  |  |    | (1,325.1 | )  |  |    | (1,423.3 | )  |  |  | (1,515.1 | ) |  |  | 243.9   |   |  |  | 273.0 |   |  |  | 248.6 |  

Stock Information

|                                    |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |         |  |  |      |  |  |  |       |  |  |  |      |  |  |  |       | 
|----------------------------------- |  | -------------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | ------ | ----- | ------- |  | ------ | ----- | ------- |  |  | ---- |  |  |  | ----- |  |  |  | ---- |  |  |  | ----- | 
|                                    |  | Common               |       | Class B        |  | Common        |       | Class B        |  | Common |       | Class B |  | Common |       | Class B
|                                    |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |        
|                                    |  | Pre-recapitalization
|                                    |  |                     
|                                    |  | First Quarter        |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                    |  |                      |       |                |  |               |       |               
|2002 share price
and trading volume |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |         |  |  |      |  |  |  |       |  |  |  |      |  |  |  |       | 
|High                                |  |                      | 14.80 |                |  |               | 11.40 |                |  |        | 9.00  |         |  |        | 8.00  |         |  |  | 0.77 |  |  |  | 0.63  |  |  |  | 1.00 |  |  |  | 1.05  | 
|Low                                 |  |                      | 8.40  |                |  |               | 5.60  |                |  |        | 0.41  |         |  |        | 0.33  |         |  |  | 0.38 |  |  |  | 0.37  |  |  |  | 0.45 |  |  |  | 0.48  | 
|Close                               |  |                      | 9.20  |                |  |               | 9.40  |                |  |        | 0.60  |         |  |        | 0.58  |         |  |  | 0.50 |  |  |  | 0.62  |  |  |  | 1.00 |  |  |  | 1.05  | 
|Volume (000s)                       |  |                      | 110   |                |  |               | 646   |                |  |        | 2,203 |         |  |        | 8,546 |         |  |  | 999  |  |  |  | 1,820 |  |  |  | 764  |  |  |  | 1,584 | 

|                                    |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |         |  |  |       |  |  |  |       |  |  |  |       |  |  |  |      | 
|----------------------------------- |  | -------------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | ------ | ----- | ------- |  | ------ | ----- | ------- |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ---- | 
|                                    |  | Common               |       | Class B        |  | Common        |       | Class B        |  | Common |       | Class B |  | Common |       | Class B
|                                    |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |        
|                                    |  | Pre-recapitalization
|                                    |  |                     
|                                    |  | First Quarter        |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                    |  |                      |       |                |  |               |       |               
|2001 share price
and trading volume |  |                      |       |                |  |               |       |                |  |        |       |         |  |        |       |         |  |  |       |  |  |  |       |  |  |  |       |  |  |  |      | 
|High                                |  |                      | 36.60 |                |  |               | 31.00 |                |  |        | 32.00 |         |  |        | 25.20 |         |  |  | 27.60 |  |  |  | 20.00 |  |  |  | 13.00 |  |  |  | 8.60 | 
|Low                                 |  |                      | 18.40 |                |  |               | 10.40 |                |  |        | 16.00 |         |  |        | 7.80  |         |  |  | 12.40 |  |  |  | 7.40  |  |  |  | 6.80  |  |  |  | 4.00 | 
|Close                               |  |                      | 20.20 |                |  |               | 11.60 |                |  |        | 22.00 |         |  |        | 15.20 |         |  |  | 13.00 |  |  |  | 7.40  |  |  |  | 9.40  |  |  |  | 5.60 | 
|Volume (000s)                       |  |                      | 140   |                |  |               | 404   |                |  |        | 59    |         |  |        | 261   |         |  |  | 54    |  |  |  | 100   |  |  |  | 117   |  |  |  | 681  | 



---

|* |  | The pre-recapitalization share price and trading volume have been
restated to give effect to the one for 20 stock consolidation which
occurred April 15, 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------





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##### Table of Contents



Corporate Directory

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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Officers                                                                                                                                                                                                                                                                                                      |  | Management Team                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|LAWRENCE G. TAPP
Dean, Richard Ivey School of Business
University of Western OntarioS. DENNIS BELCHER
Corporate DirectorBARRY R. CAMPBELL*
President, Barry R. Campbell Strategies Inc.ROBERT M. FRANKLIN*Δ
Chairman and Corporate Director
Placer Dome Inc.ROBERT T.E. GILLESPIE*
Chairman and Chief Executive Officer
General Electric Canada Inc.ARTHUR B. KRAUSEn
Corporate DirectorWENDY A. LEANEYΔ
President, Wyoming Associates Ltd.WILLIAM W. LINTON
President and Chief Executive Officer
Call-Net Enterprises Inc.LESLIE H. MEREDITHΔn
Vice President, Mergers & Acquisitions
& Risk Management
Sprint Communications Company L.P.DAVID A. RATTEE
Chairman, President and CEO,
CIGL Holdings Ltd.,
President and CEO, MICC Investments LimitedJOSEPH H. WRIGHT*Δ
Corporate Director |  | LAWRENCE G. TAPP
ChairmanJIM LARAMIE
Vice President, FinanceJOHN V. LAURIE
Vice President, Treasurer and
Investor RelationsWILLIAM W. LINTON
President and Chief Executive OfficerGEORGE MALYSHEFF
Senior Vice President,
Chief Legal Counsel and
Corporate SecretaryDUNCAN J. MCEWAN
Chief Operating Officer |  | WILLIAM W. LINTON
President and Chief Executive Officer
Call-Net Enterprises Inc.DUNCAN J. MCEWAN
President and Chief Operating Officer
Sprint Canada Inc.SERGE BABIN
Senior Vice-President and
Chief Technology Officer
Sprint Canada Inc.DAVID BOWDEN
President, Consumer Services and SOHO
Sprint Canada Inc.JEAN BRAZEAU
Senior Vice-President,
Regulatory Affairs and
Strategic Partnerships
Call-Net Enterprises Inc.ERIC DOBSON
President, Carrier Services
Sprint Canada Inc.JIM LARAMIE
Vice President, Finance
Sprint Canada Inc.JOHN V. LAURIE
Vice President, Treasurer and
Investor Relations
Call-Net Enterprises Inc.GEORGE MALYSHEFF
Senior Vice President,
Chief Legal Counsel and
Corporate Secretary
Call-Net Enterprises Inc.GREG L. MCCAMUS
President,
Enterprise Communications Solutions
Sprint Canada Inc.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                               |  | VICTORIA WALKER
Vice President, Human Resources
Call-Net Enterprises Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



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| |  | Denotes Chairman of the Board.                                                                
|- |  | ----------------------------------------------------------------------------------------------
| 
| |  | Denotes member of the Audit Committee of the Board of Directors.                              
| 
|* |  | Denotes member of the Corporate Governance and Nominating Committee of the Board of Directors.
| 
|Δ |  | Denotes member of the Compensation and Human Resources Committee of the Board of Directors.   
| 
|n |  | Denotes directors elected by Sprint as the holder of a Preferred Share.                       

Shareholder Information

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|CALL-NET ENTERPRISES INC.
Head Office
2235 Sheppard Avenue East
Atria II, Suite 1800
Toronto, Ontario
M2J 5G1
www.callnet.caTRANSFER AGENT AND REGISTRAR
Call-Net Enterprises Inc.s transfer agent and registrar
is CIBC Mellon Trust Company, Toronto, Montreal and
Vancouver. Changes of address or inquiries about shares
and dividends should be directed to the transfer agent.
STOCK EXCHANGE LISTINGS
The Common Shares and Class B Non-Voting Shares of
Call-Net Enterprises Inc. trade on the Toronto Stock
Exchange under the symbols TSX: FON, FON.B, respectively |  | SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the
Vice President, Treasurer and Investor Relations
416-718-6245.OWNERSHIP AND VOTING RIGHTS OF CALL-NET
ENTERPRISES INC.
Call-Net Enterprises Inc. is a Canadian company widely
held by public shareholders. Through its wholly-owned subsidiaries Sprint Canada Inc., Call-Net Communications Inc.,
AlternaCall Inc., CNCS and Call-Net Technology Services
Inc., the Company offers local and long distance voice
services, data, networking and online services to consumers
and businesses.
The Companys shareholders equity consists of issued and
outstanding Common Shares and Class B Non-Voting Shares |  | To ensure that the Company or its affiliates remain qualified
to operate as a telecommunications common carrier pur-
suant to the Telecommunications Act (Canada), and the
regulations made thereunder (Telecommunications
Legislation), the Articles of the Company impose certain
restrictions on the issue and transfer of Common Shares to
non-Canadians, as defined in the Telecommunications
Legislation. The Board of Directors may establish, amend
or repeal any procedure required to administer such
restrictions on the issuance and transfer of the Common
Shares of the Company.
® Sprint, the Sprint logo, Foncard, and The Most are
trademarks of Sprint Communications Company L.P. used under
license by Sprint Canada Inc.
Call-Net is a trademark of Call-Net Enterprises Inc.
Buck-a-Call is a product of AlternaCall Inc.
References to Sprint mean Sprint Communications
Company L.P.