Rogers Telecom 40-F 2004 FY Annual report (Canada)

Exhibit 99.2

CONSOLIDATED FINANCIAL STATEMENTS

CALL-NET ENTERPRISES INC.

DECEMBER 31, 2004

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, 2004 and the consolidated statements of operations and deficit and cash flows for the year ended December 31, 2004. 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 audit.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and the results of its operations and its cash flows for the year ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements as at December 31, 2003 and for each of the periods in the two years ended December 31, 2003, prior to adjustment for the changes in the Company’s accounting policies for Stock-based Compensation and Asset Retirement Obligations as described in note 2 to the financial statements, were audited by other auditors who expressed an opinion without reservation on those statements in their report dated February 13, 2004 (except for note 21 which was dated February 20, 2004). We have audited the adjustments to these financial statements and, in our opinion, such adjustments, in all material respects, are appropriate and have been properly applied.

/s/ KPMG, LLP

Chartered Accountants

Toronto, Canada

February 21, 2005

Call-Net Enterprises Inc.

CONSOLIDATED BALANCE SHEETS

As at December 31

[millions of Canadian dollars]

		2004			2003
					Restated
					[notes 2, 7]
ASSETS
Cash and cash equivalents			38.9			56.5
Short-term investments			34.8			93.6
Cash, cash equivalents and short-term investments			73.7			150.1
Accounts receivable[note 3]			22.8			42.7
Other current assets[note 4]			30.2			48.9
Total current assets			126.7			241.7
Capital assets[note 5]			458.3			516.7
Intangible assets[note 6a]			52.2			68.1
Other assets[note 6b]			11.7			12.6
Total assets			648.9			839.1
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities[note 7]			149.7			149.4
Long-term debt[note 8a]			268.5			387.1
Other long-term liabilities [note 8b]			53.3			49.1
Commitments, guarantees and contingencies[notes 8, 11 and 12]
Shareholders' equity
Capital stock[note 9]
	Common shares, unlimited authorized		49.7			49.8
	Class B non-voting shares,unlimited authorized		298.5			297.6
	Preferred shares, unlimited authorized		-			-
	Contributed surplus [notes 2 and 9]		4.4			2.9
Deficit			(175.2	)		(96.8	)
Total shareholders' equity			177.4			253.5
Total liabilities and shareholders' equity			648.9			839.1

See accompanying notes

On behalf of the board of directors:

Lawrence G. Tapp	David A. Rattee
Chair	Director

Call-Net Enterprises Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

Years ended December 31

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

										Pre-
										recapitalization
							Nine			Three
							Months			Months
							Ended			Ended
							Dec 31,			Mar 31,
	2004			2003			2002			2002
				Restated			Restated
				[note 2]			[note 2]
Revenue		818.6			805.3			598.9			201.8
Carrier charges		400.6			409.9			335.7			116.8
Gross profit		418.0			395.4			263.2			85.0
Operating costs		313.1			299.3			228.5			73.1
Realignment, restructuring and other charges[note 15]		1.2			7.0			30.5			-
Depreciation and amortization[notes 5 and 6]		146.6			157.3			120.7			41.8
Operating loss		(42.9	)		(68.2	)		(116.5	)		(29.9	)
Net gain (loss) on sale of capital assets and rights[note 5]		(0.9	)		-			9.4			-
Gain (loss) on repurchase of long-term debt[note 8(a)]		(4.0	)		-			93.1			-
Reversal of change in control provision [note 12]		4.7			-			-			-
Interest on long-term debt		(32.7	)		(43.2	)		(43.9	)		(60.3	)
Interest and other expense		(13.4	)		(5.7	)		(2.9	)		(0.8	)
Foreign exchange gain (loss)		17.1			85.9			4.1			(1.8	)
Loss before taxes		(72.1	)		(31.2	)		(56.7	)		(92.8	)
Income tax benefit (expense)[note 10]		(6.3	)		(6.3	)		(2.6	)		1.0
Net loss for the period		(78.4	)		(37.5	)		(59.3	)		(91.8	)
Deficit, beginning of period, as previously reported		(93.0	)		(57.7	)		-			(2,759.4	)
Adjustment for stock-based compensation[note 2]		(2.9	)		(1.2	)		-			-
Adjustment for asset retirement obligations[note 2]		(0.9	)		(0.4	)		-			-
Deficit, beginning of period, as restated		(96.8	)		(59.3	)		-			(2,759.4	)
Deficit, end of period		(175.2	)		(96.8	)		(59.3	)		(2,851.2	)
Basic and diluted loss per share[note 16]		(2.20	)		(1.36	)		(2.49	)		(20.26	)

See accompanying notes

Call-Net Enterprises Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31

[millions of Canadian dollars]

											Pre-
											recapitalization
								Nine			Three
								Months			Months
								Ended			Ended
								Dec 31,			Mar 31,
		2004			2003			2002			2002
					Restated			Restated
					[notes 2 and 17]			[note 2]
OPERATING ACTIVITIES
Net loss for the period			(78.4	)		(37.5	)		(59.3	)		(91.8	)
Add (deduct) operating items not requiring cash:
	Depreciation and amortization		146.6			157.3			120.7			41.8
	Unrealized foreign exchange (gain) loss on long-term debt		(17.8	)		(85.9	)		(4.8	)		1.8
	Reversal of change in control provision[note 12]		(4.7	)		-			-			-
	Loss (gain) on repurchase of long-term debt[note 8(a)]		4.0			-			(93.1	)		-
	Income taxes[note 10]		3.9			4.3			-			(2.4	)
	Other non-cash operating expenses		2.7			3.0			4.4			(0.2	)
	Net losses on disposals and writedowns of capital assets[note 5]		0.9			-			1.3			-
	Realignment, restructuring and other charges[note 15]		1.2			-			-			-
	Interest accretion on long-term debt		-			-			-			35.7
Cash provided by (used in) operations before changes in non-cash working capital			58.4			41.2			(30.8	)		(15.1	)
Net change in non-cash working capital balances related to operations[note 17]			28.4			2.5			60.3			(8.3	)
Cash provided by (used in) operating activities			86.8			43.7			29.5			(23.4	)
INVESTING ACTIVITIES
(Increase) decrease in short-term investments			58.8			(2.7	)		12.3			217.2
Acquisition of capital assets[note 17]			(55.4	)		(44.1	)		(62.4	)		(16.0	)
Increase in long-term investment[note 6]			(0.2	)		-			-			-
Net proceeds on disposal of capital assets and rights[note 5]			0.4			7.8			6.7			-
Acquisitions[note 13]			(0.5	)		(19.7	)		(1.0	)		-
Increase in deferred costs			(0.3	)		(1.0	)		-			(2.6	)
Cash provided by (used in) investing activities			2.8			(59.7	)		(44.4	)		198.6
FINANCING ACTIVITIES
Decrease in right-of-way liability			(2.4	)		(2.2	)		(0.1	)		(0.1	)
Issuance of common shares			-			40.6			-			-
Repurchase of long-term debt[note 8(a)]			(104.8	)		-			(29.7	)		-
Cash provided by (used in) financing activities			(107.2	)		38.4			(29.8	)		(0.1	)
Net increase (decrease) in cash and cash equivalents during the period			(17.6	)		22.4			(44.7	)		175.1
Cash and cash equivalents, beginning of period[note 1]			56.5			34.1			78.8			15.5
Cash and cash equivalents, end of period			38.9			56.5			34.1			190.6

See accompanying notes

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

1. BASIS OF PRESENTATION

Call-Net Enterprises Inc. [the ‘Company’], through its various subsidiaries, including Sprint Canada Inc., Call-Net Technology Services, Inc., Call-Net Communications Inc., Call-Net Carrier Services Inc. and AlternaCall Inc., is an alternative provider of long distance, data, local and wireless telecommunications 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.

Financial Reorganization

On April 10, 2002, the Company completed a Plan of Arrangement pursuant to Section 192 of theCanada Business Corporations Act to surrender all of its $2.6 billion in principal amount of senior notes and senior discount notes in exchange for U.S.$377.0 of new 10.625 per cent senior secured notes due 2008, U.S.$81.9 in cash, and 80 per cent 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’], Shareholders’ Rights Plan [‘Rights Plan’] and Restricted Stock Unit Plan [‘RSUP’]; and
(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 values and the deficit was eliminated by a reduction of capital stock. The book values

1

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

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 were 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:

	Apr 1, 2002						Writedowns			Apr 1, 2002
	Balance			Re-			and			Balance
	prior to re-			capitalization			fresh start			after
	capitalization			adjustments			adjustments			adjustments
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 per cent 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 five per cent 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.

2

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

(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 write-off of the unamortized balance of deferred financing costs, trademarks, as well as technology and product rights associated with the prior agreement with Sprint.
(6)	Under the Plan of Arrangement, the accrued interest on all pre-recapitalization notes was eliminated and interest on the senior secured notes due 2008 was accrued for the period from January 1, 2002 to March 31, 2002.
(7)	The Company used unrecorded tax loss carryforward balances of approximately $1,533 against the gain on retirement of the long-term debt.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Changes

Stock-Based Compensation and Other Stock-Based Payments

Effective January 1, 2004, the Company adopted the changes made to CICA Section 3870, ‘Stock-Based Compensation and Other Stock-Based Payments’ requiring that all stock-based compensation awarded to both employees and non-employees be measured and recognized using the fair value method. Previously, the Company had elected to use the settlement method to account for stock option grants to employees. The main impact for the Company was to measure and recognize compensation expense using the fair value method relating to the award of stock options to employees that the Company had previously chosen to disclose on a pro forma basis within the notes to the financial statements.The Company adopted this change on a retroactive basis with restatement of prior periods to reflect the expensing of the fair value of stock options granted subsequent to January 1, 2002. The result of this change is reflected in operating expenses in the consolidated statements of operations and deficit and contributed surplus and capital stock on the consolidated balance sheets. The effect of the prior-period restatements was an increase to net loss for the year ended December 31, 2003 and nine months ended December 31, 2002 of $1.7 and $1.2 respectively, with corresponding increases to deficit of $2.9 as at December 31, 2003. The impact of the restatement increased both basic and diluted loss per share by $0.06 and $0.05, respectively, for the same periods.

Asset Retirement Obligations

Effective January 1, 2004, the Company retroactively adopted, with restatement of prior periods, the new CICA Handbook Section 3110, ‘Asset Retirement Obligations’ [‘ARO’], which establishes standards for the

3

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated retirement costs. This section applies to legal obligations associated with the retirement of tangible long-lived assets that results from their acquisition, lease, construction, development or normal operation. The offset to the initial ARO is an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its future value, and the asset is depreciated over the useful life of the related asset. The accretion expense related to the ARO is recorded in depreciation and amortization expense within the consolidated statements of operations and deficit. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. This standard was effective on a retroactive basis with restatement of prior periods.

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

Impairment of Long-Lived Assets

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

Revenue Recognition

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

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

4

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Recently Issued Accounting Pronouncements

Vendor Rebates

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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.

Allowance for Doubtful Accounts

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

Sale of Receivables

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

5

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

at their allocated carrying amount. Any subsequent impairment in the value of the retained interest, other than a temporary decline, is recorded as a reduction to income.

Capital Assets

Capital assets are recorded at cost. Direct labour and overhead costs incurred to develop or construct new assets or upgrade existing assets are capitalized. Indirect overhead costs, general and administrative costs and interest costs are not capitalized. 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

Capital assets associated with the Company’s network assets are subject to technological risks and market changes due to new products and changing customer needs. These changes may result in changes to the estimated useful lives of the related assets.

Fibre optic cable acquired under an indefeasible right of use [‘IRU‘] agreement is included in capital assets provided the criteria for capital treatment has been met.

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. 

Intangible and Other Assets

Customer relationships and other assets are recorded at cost. Amortization of intangible and other assets is provided on a straight-line basis as follows:

Customer relationships	30 months to 8 years
Deferred costs	as related revenue is earned

6

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Impairment of long-lived assets

The carrying values of long-lived assets to be held and used, including capital assets and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. Intangible assets with a definite useful life are also assessed for impairment at least annually. An impairment loss is recognized when the carrying value exceeds the projected undiscounted future cash flows expected from its use and disposal, and is measured as the amount by which the carrying value of the asset exceeds its fair value.

Revenue Recognition

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

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

Revenues from telecommunication 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.

Where services to certain customers are provisioned through the use of subcontractor agents, revenue is recognized based on the fees charged to the customer provided that the Company is acting as the principal in the arrangement.

Expense Recognition

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

Sales, marketing and other operating expenses are recognized as incurred. The Company expenses equipment subsidies related to the acquisition of new wireless service customers upon activation.

7

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Stock-based Compensation

The Company has three stock-based compensation plans[note 9]. The Company accounts for stock-based compensation using the fair value method.The fair value of stock options is estimated at the grant date using the Black-Scholes options pricing model. This model requires the input of a number of assumptions including dividend yields, expected stock price volatility, expected life of the option and risk-free interest rates. Although the assumptions used reflect management’s best estimates, they involve uncertainties based on market conditions generally outside of the control of the Company.The estimated fair value of the options is amortized to expense on a straight-line basis over the vesting period of the option. Stock-based compensation expense is recorded in operating costs in the Company’s statement of operations and deficit, and credited to contributed surplus on the balance sheet, until the award is exercised, at which time it is transferred to capital stock.

Stock-based awards that are settled or may be settled in cash or shares purchased on the open market at the option of employees or directors, are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the intrinsic value of the award, determined based on the market price of the underlying shares as applicable at each balance sheet date. Compensation cost determined is recognized over the vesting period of the award. Under the Restricted Stock Unit Plan [‘RSUP’], the Company recognizes compensation expense based on the current market value of the underlying shares. Under the Deferred Share Unit Plan [‘DSUP‘], compensation expense is recognized in the amount of the participants’ remuneration as their services are provided. Changes in the payment obligation subsequent to vesting of the award and prior to the settlement date are recorded into operating costs in the consolidated statements of operations and deficit each period.

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 non-monetary 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.

Income Taxes

Income taxes are accounted for using the asset and liability method of tax allocation accounting. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax liabilities or assets. Future income tax liabilities or assets are calculated using substantively enacted tax rates anticipated to apply in the periods that the temporary differences are expected to reverse. The effect of a change in income tax rates on future income tax liabilities or assets is recognized as income in the period that the change occurs. When necessary, a valuation allowance is recorded to reduce future income tax assets to an amount that is, in the opinion of management, more likely than not to be realized.

8

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing the net income (loss) by the weighted-average number of common shares and class B non-voting shares outstanding during the period after recapitalization. Diluted earnings (loss) per common share is calculated by dividing the applicable net income (loss) by the sum of the weighted-average number of common shares and class B non-voting shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. The treasury stock method is used to compute the dilutive effect of stock options and similar instruments.

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. Significant estimates include allowances for doubtful accounts, provisions for accrued liabilities, and carrier cost accrual and dispute provisions.

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 in note 1.

Certain prior years figures have been reclassified to conform to the current year presentation.

3. ACCOUNTS RECEIVABLE

	2004			2003
Trade receivables		27.5			46.5
Other		0.6			2.4
Allowance for doubtful accounts		(5.3	)		(6.2	)
		22.8			42.7

Accounts Receivable Securitization Program

In 2003, the Company entered into a five-year accounts receivable securitization program permitting it to sell on an on-going basis, an undivided co-ownership interest in certain of its trade receivables to a securitization trust (the ‘Trust’) to a maximum of $55.0, which was fully utilized as at December 31, 2004 (2003 - $10.0). The total amount transferred to the Trust as at December 31, 2004 was $82.3 (2003 - $56.0). The Company remains exposed to certain risks of default on the amount of the receivables under securitization. The Company retains ongoing servicing responsibilities, and has a retained interest in the securitized receivables and rights to future excess cash flows generated by the Trust. The sales are on a fully-serviced basis and the Company does not receive any fees for its on-going servicing responsibilities. The servicing liability as at December 31, 2004 was $0.3 (2003 - $0.3). The Trust and its investors have

9

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

no recourse on the Company’s other assets for failure of debtors to pay when due, other than the retained interest of the Trust.

During the year ended December, 2004, the Company recognized a loss of $9.8 (2003 - $3.6) on the securitization of receivables, and a loss on servicing of $nil (2003 - $0.3). The Company measures the loss on securitization by applying the same methodology used to estimate the allowance for doubtful accounts. The result is a provision for anticipated credit losses of approximately one per cent. The sensitivity of the current fair value of the retained interest to a 10 to 20 per cent adverse change in this assumption is not material.

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

	2004		2003
Proceeds from new securitizations during the year		45.0		10.0
Proceeds from collections reinvested during the year		478.8		85.8
Proceeds from collections pertaining to the retained interest during the year		215.9		162.2

4. OTHER CURRENT ASSETS

	2004		2003
Retained interest in securitized receivables		24.8		41.2
Other		5.4		7.7
		30.2		48.9

5. CAPITAL ASSETS

	2004						2003
					Net						Net
			Accumulated		Book				Accumulated		Book
	Cost		Depreciation		Value		Cost		Depreciation		Value
Multiplex and telephone switch equipment		491.4		197.6		293.8		467.4		128.8		338.6
Fibre optic cable		109.8		19.9		89.9		107.2		12.9		94.3
Computer equipment and software		175.1		121.7		53.4		144.8		87.1		57.7
Buildings		14.1		1.1		13.0		14.1		0.7		13.4
Leasehold improvements		12.2		9.5		2.7		12.0		6.3		5.7
Furniture and fixtures		10.4		5.4		5.0		10.4		3.9		6.5
Land		0.5		-		0.5		0.5		-		0.5
		813.5		355.2		458.3		756.4		239.7		516.7

10

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Details of depreciation expense are as follows:

							Pre-recapitalization
					Nine Months Ended		Three Months Ended
	2004		2003		Dec 31, 2002		Mar 31, 2002
Depreciation on capital assets		116.4		129.7		102.2		33.2
Accretion expense on ARO liability		0.2		0.2		0.2		-
		116.6		129.9		102.4		33.2

Included in capital assets are assets under construction and not yet being depreciated of $19.6 (2003 - $18.0).

Included in fibre optic cable assets are right-to-use fibres under IRU agreements with original terms extending to 20 years and net book value totalling $3.2 (2003 - $3.3).

In 2004, the Company disposed of network access servers having a net book value of $1.3 for proceeds of $0.4, for a loss on sale of $0.9.

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

In 2003, the Company also disposed of a customer call centre and capital assets having a book value of $0.6 and related expenses of $0.3 for proceeds of $0.9, and equipment having a net book value of $0.3 for proceeds of $0.3, resulting in no net gain or loss.

In 2002, the Company reached an agreement to settle several contingencies relating to asset transfers made in previous years. As a result of this settlement, the Company received cash proceeds of $4.4 and has recorded a gain of $4.9. The Company also disposed of certain intangible rights under a licensing agreement for cash proceeds of $2.3, and a receivable of $2.2, resulting in a gain of $4.5.

11

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

6.	INTANGIBLE AND OTHER ASSETS
(a)	Intangible Assets

	2004						2003
			Accumulated		Net Book				Accumulated		Net Book
	Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships		126.7		74.5		52.2		113.8		45.7		68.1

Details of amortization expense are as follows:

							Pre-
							recapitalization
					Nine Months		Three Months
					Ended		Ended
					Dec 31,		Mar 31,
	2004		2003		2002		2002
Amortization of customer relationships		30.0		27.4		18.3		8.6

Amortization expense for the next five years is expected to be as follows:

2005	32.3
2006	17.2
2007	2.7
2008	-
2009	-
	52.2

In 2004, the Company acquired significant portions of 360networks Corporation’s customer base from Bell Canada[note 13] for $17.6 which was recorded as customer relationships intangible assets. 

Also in 2004, the Company recorded a reduction of its customer relationships amounting to $3.9 relating to the utilization of previously unrecognized tax benefits that arose prior to the application of fresh start accounting[note 10].

In 2004, the Company recorded an impairment loss on its customer relationships amounting to $0.5 (cost of $1.2 and accumulated depreciation of $0.7) due to the loss of a customer group related to the Mosaic Performance Solutions Canada [‘MPS Canada’] Acquisition[note 13]. This impairment loss was recorded in amortization expense.

Also in 2004, the Company recorded other adjustments increasing the cost base of its customer relationships by $0.4.

12

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

During 2003, the Company acquired customer relationships valued at $13.7. In addition, the Company recorded a reduction of $4.3 to the customer relationships amount recorded at the time of fresh start accounting relating to the utilization of previously unrecognized tax benefits that arose prior to that date.

(b) Other Assets

	2004		2003
Prepaid right-of-way		5.9		6.9
Deferred costs and other assets		5.2		5.3
Investment, at cost		0.6		0.4
		11.7		12.6

Details of amortization expense are as follows:

							Pre-
							recapitalization
					Nine		Three
					Months		Months
					Ended		Ended
					Dec 31,		Mar 31,
	2004		2003		2002		2002
Amortization of deferred costs recorded as carrier charges		1.3		2.3		3.3		-

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	2004		2003
Accrued liabilities and trade payables		74.1		62.6
Carrier payables		37.7		49.5
Commodity, capital and income tax liabilities		18.8		19.6
Payroll related liabilities		13.4		14.8
Other		5.7		2.9
		149.7		149.4

Effective January 1, 2004, the Company reclassified the long-term portion of its deferred fibre maintenance charge and lease exit costs to long-term liabilities from accounts payable and accrued liabilities[note 8b]. The comparative figures have been restated to conform to this presentation.

13

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

8.	LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
(a)	Senior Secured Notes due 2008

	Interest Rate			2004		2003
Senior secured notes due 2008		10.625	%		268.5		387.1

During the three months ended March 31, 2004, the Company purchased for cancellation a total of U.S.$76.4 (CDN$100.8) of the outstanding senior secured notes due 2008 at market prices. The total cost of this purchase to the Company was $104.8 resulting in a loss of $4.0.

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

The Company’s remaining outstanding U.S.$223.1 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 cent 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 rankpari passu in 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 a trust indenture which contains 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 per cent, January 1, 2007 at 102.657 per cent and January 1, 2008 and thereafter at 100 per cent 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 per cent of their principal amount plus accrued and unpaid interest to the date of purchase.

14

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

(b) Other Long-Term Liabilities

	Interest Rate			2004		2003
Right-of-way liability (i)		10.0	%		38.3		37.0
Customer list liability[note 13]		N/A			10.0		-
Lease exit costs[note 15]		N/A			2.8		3.7
Asset retirement obligations (ii)		10.0	%		2.2		2.4
Deferred fibre maintenance charge[note 15]		N/A			-		6.0
					53.3		49.1

Effective January 1, 2004, the Company reclassified the long-term portion of its deferred fibre maintenance charge and lease exit costs to long-term liabilities from accounts payable and accrued liabilities[note 7]. The comparative figures have been restated to conform to this presentation.

(i) Right-of-way Liability

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

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

2005	5.3
2006	5.2
2007	5.1
2008	5.1
2009	5.7
Thereafter	51.2
Total future minimum payments	77.6
Less imputed interest at 10%	(38.0	)
	39.6
Less current portion included in accounts payable	(1.3	)
	38.3

15

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

(ii) Asset Retirement Obligations

The undiscounted amount of the estimated cash flows required to settle the ARO is $10.3. The present value of the asset retirement obligation was calculated using a credit adjusted discount rate of 10 per cent over a weighted-average period of 50 years.

The following table details the changes in the asset retirement liability:

April 1, 2002	2.0
Accretion charges recorded in depreciation expense	0.2
December 31, 2002	2.2
Accretion charges recorded in depreciation expense	0.2
December 21, 2003	2.4
Accretion charges recorded in depreciation expense	0.2
Revisions made to the original estimated cash flows	(0.4	)
December 31, 2004	2.2

9. CAPITAL STOCK

Common Shares

The Company is authorized to issue an unlimited number of the common shares. The holders of the common shares are entitled to one vote for each share held at any meeting of shareholders of the Company. The common shares are convertible, at the option of the common shareholders at any time into class B non-voting shares on a share-for-share basis. The common shares may be subject to constraints on transfer to ensure the Company’s compliance with the foreign ownership provisions of theTelecommunications Act (Canada). The common shares rankpari passu with the class B non-voting shares on a per share basis with respect to the payment of dividends and the right to participate in a distribution of assets of the Company on winding up, dissolution or otherwise.

Class B Non-Voting Shares

The Company is authorized to issue an unlimited number of the class B non-voting shares. The holders of the class B non-voting shares are not entitled to vote at any meeting of shareholders of the Company except for votes affecting class B non-voting shares. The class B non-voting shares are convertible, at the option of the class B shareholders, at any time into common shares on a share-for-share basis, in certain circumstances. The class B non-voting shares rankpari passu with 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 no preferred shares were issued in connection with the Plan of Arrangement. However, as part of the consideration for entering into a commercial agreement with the Company[note 11], Sprint was issued one preferred share

16

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

(for a value of one dollar) and is the only holder of preferred shares. There were no other preferred shares outstanding at December 31, 2004. 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.

The following tables detail the changes in capital stock for the years ended December 31, 2004 and 2003, and the nine months ended December 31, 2002:

Number of Shares	Common			Class B			Preferred
Balance, April 1, 2002		3,686,833			20,152,805			1
Converted during the nine months ended December 31, 2002		364,394			(364,394	)		-
Balance, December 31, 2002		4,051,227			19,788,411			1
Issued during the year		-			11,500,000			-
Issued pursuant to restricted stock units		239,499			-			-
Issued pursuant to stock options		883			-			-
Converted during the year, net		(80,751	)		80,751			-
Fractional shares eliminated due to conversions during the year		(19	)		(10	)		-
Balance, December 31, 2003		4,210,839			31,369,152			1
Issued pursuant to restricted stock units		173,000			-			-
Issued pursuant to stock options		11,015			-			-
Converted during the year, net		(92,873	)		92,873			-
Fractional shares eliminated due to conversions during the year		30			-			-
Balance, December 31, 2004		4,302,011			31,462,025			1

Dollars	Common			Class B			Preferred
Balance, April 1, 2002		45.8			260.5			-
Converted during the nine months ended December 31, 2002		4.5			(4.5	)		-
Balance, December 31, 2002		50.3			256.0			-
Issued during the year		-			40.6			-
Issued pursuant to restricted stock units		0.5			-			-
Converted during the year, net		(1.0	)		1.0			-
Balance, December 31, 2003		49.8			297.6			-
Issued pursuant to restricted stock units		0.7			-			-
Stock options exercised		0.1			-			-
Converted during the year, net		(0.9	)		0.9			-
Balance, December 31, 2004		49.7			298.5			-

During 2003, the Company issued 11,500,000 class B non-voting shares at a price of $3.75 per share. Net proceeds to the Company after deducting fees and expenses were $40.6.

Contributed Surplus

The following table details the changes in contributed surplus for the years ended December 31, 2004 and 2003, and the nine months ended December 31, 2002:

17

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Contributed Surplus	Dollars
Balance, April 1, 2002	-
Stock-based compensation expense for the nine months ended December 31, 2002	1.2
Balance, December 31, 2002		1.2
Stock-based compensation expense for the year		1.7
Balance, December 31, 2003		2.9
Stock-based compensation expense for the year		1.5
Balance, December 31, 2004		4.4

Stock Options

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

The following is a continuity of stock options outstanding for which common shares have been reserved:

Common Shares
				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
Granted during the year		517,500			2.42
Exercised during the year		(883	)		0.65
Cancelled during the year		(86,800	)		6.99
Balance, December 31, 2003		1,356,067			6.11
Granted during the year		488,800			4.50
Exercised during the year		(11,015	)		1.71
Cancelled during the year		(173,868	)		6.16
Balance, December 31, 2004		1,659,984			5.66
Exercisable, December 31, 2004		161,347			2.21

18

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

The following table summarizes information about the common shares stock options outstanding atDecember 31, 2004:

Common Shares

	Options Outstanding						Options Exercisable
			Weighted -
			Average		Weighted -				Weighted -
	Number		Remaining		Average		Number		Average
	Outstanding		Contractual		Exercise		Exercisable		Exercise
Range of	at Dec 31,		Life in		Price		at Dec 31,		Price		Expiry
Exercise Prices	2004		Years		Per Share		2004		Per Share		Dates
$0.65 to $0.80		28,184		4.6	$	0.66		18,195	$	0.66		2009
$1.80		331,100		5.2	$	1.80		109,554	$	1.80		2010
$2.34		12,000		6.8	$	2.34		-		-		2011
$2.64		5,600		6.8	$	2.64		-		-		2011
$3.90		11,200		6.6	$	3.90		-		-		2011
$4.02		5,000		6.3	$	4.02		-		-		2011
$4.35		94,000		5.6	$	4.35		31,332	$	4.35		2010
$4.60		432,000		6.2	$	4.60		-		-		2011
$5.15		6,800		5.8	$	5.15		2,266	$	5.15		2010
$8.50		734,100		4.3	$	8.50		-		-		2009

During the year ended December 31, 2004, there were no stock options granted for which class B non-voting shares have been reserved. As at December 31, 2004, there were no class B non-voting shares stock options outstanding.

The weighted-average fair value for options granted during the year ended December 31, 2004 is $2.87 [2003 - $1.61, nine month period ended December 31, 2002 - $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:

	2004			2003			2002
Risk free interest rate		2.23	%		3.35	%		5.41	%
Expected dividend yield		0	%		0	%		0	%
Expected volatility, common shares		102.9	%		107.9	%		65.6	%
Expected time until exercise, in years		3.0			3.0			6.9

The total compensation cost recognized for the year related to stock options is $1.5 [2003 - - $1.7, 2002 - $1.2]. The amounts transferred from contributed surplus to share capital are negligible in 2004 and 2003.

Shareholders’ Rights Plan

The Rights Plan was adopted to ensure that if a person or group is seeking to acquire beneficial ownership of 20 per cent or more of the common shares, or 20 per cent 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 2007 annual shareholders meeting. Under the Rights Plan, one right was issued in respect of each share outstanding immediately following the

19

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

implementation of the Plan of Arrangement. In addition, one right will be issued in respect of each new share issued thereafter. When exercisable, each right will permit the holder to purchase shares with a market value of 200 dollars on payment of 100 dollars.

Restricted Stock Unit Plan

Restricted Stock Units [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 [‘TSX’]. If shares are to be delivered, the Company will have the option to deliver shares issued from treasury or shares purchased on the TSX by an independent administrator. The RSUP provides that the maximum number of shares deliverable to participants under the RSUP shall be 678,000 shares. The maximum term for any RSU is three years. The outstanding RSUs vest in three annual installments of 33.3 per cent each. The resulting compensation expense recorded for the year ended December 31, 2004 is insignificant [2003 - $1.6, nine months ended December 31, 2002 - $0.2, three months ended March 31, 2002 - nil].

The following is a continuity of RSUs outstanding for which common shares have been reserved:

Restricted Stock Units

	Number Outstanding
Balance, April 1, 2002		-
Granted during the nine months ended December 31, 2002		652,000
Cancelled during the nine months ended December 31, 2002		(66,500	)
Balance, December 31, 2002		585,500
Settled during the year		(239,499	)
Balance, December 31, 2003		346,001
Settled during the year		(173,000	)
Cancelled during the year		(8,000	)
Balance, December 31, 2004		165,001

Deferred Share Unit Plan

Participants of the DSUP can elect to receive a portion of their annual compensation in the form of Deferred Share Units [‘DSUs’]. The number of DSUs received is calculated using the amount of compensation directed to the plan, divided by the share price, based on the five trading day average of the closing price of the common shares or class B non-voting shares as applicable on the TSX. DSUs are redeemable upon the departure of the participant from the Company by the delivery of common shares or class B non-voting shares as applicable, equal to the number of DSUs credited to the participant, or at the participant’s option, the delivery of cash equal to the number of DSUs credited to the participant’s account multiplied by the five day trading average of the closing price of the applicable shares on the TSX on the date of termination. If shares are to be delivered, the shares will be purchased on the TSX by an independent administrator. The resulting additional compensation expense recorded during the year ended December 31, 2004 is $0.2 [2003, nine months ended December 31, 2002 and three months ended March 31, 2002 - nil].

20

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

The following is a continuity of the DSUs outstanding for which common shares have been reserved:

Deferred Share Units

	Number Outstanding
Balance, April 1 and December 31, 2002		-
Granted during the year		8,892
Settled during the year		(1,694	)
Balance, December 31, 2003		7,198
Granted during the year		53,970
Balance, December 31, 2004		61,168

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 theTelecommunications 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 rankedpari passu with 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 rankedpari passu with common shares and class B non-voting shares on a per share basis with respect to the payment of dividends and the right to participate in a distribution of assets of the Company on winding up, dissolution or otherwise. The holders of class C non-voting shares were not entitled to vote at any meeting of shareholders of the Company. However, the holders of the class C non-voting shares were entitled to elect up to three directors of the Company as long as they maintained a significant equity interest in the Company.

The class C non-voting shares could be converted into class B non-voting shares (on a share-for-share basis) at any time or common shares and class B non-voting shares (on the basis of one-half common share and one-half class B non-voting share for each class C non-voting share) in certain circumstances.

21

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

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

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

2002 Transactions

All pre-recapitalization common shares, pre-recapitalization class B non-voting shares and pre-recapitalization class C non-voting shares were cancelled pursuant to the Plan of Arrangement[note 1].

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			Three
							Months			Months
							Ended			Ended
							Dec 31,			Mar 31,
	2004			2003			2002			2002
Income tax recovery based on the combined statutory rate of 36% [2003 - 37%; 2002 - 39%]		26.0			11.5			22.1			36.2
Tax effect of items not taxable (deductible) for tax		(6.8	)		8.8			34.6			(3.7	)
Unrecognized tax benefits of losses and temporary differences		(19.2	)		(20.3	)		(56.7	)		(35.8	)
Realization of income tax assets not recognized on implementation of fresh start accounting		(3.9	)		(4.3	)		-			-
Large corporations tax		(2.4	)		(2.0	)		(2.6	)		1.0
Reduction in future income tax liability resulting from substantively enacted tax rate reduction		-			-			-			3.3
Income taxes benefit (expense)		(6.3	)		(6.3	)		(2.6	)		1.0

Upon the implementation of the Plan of Arrangement and the application of fresh start accounting, a full valuation was recorded against the pre-recapitalization future income tax assets of the Company. If any tax benefits from this future income tax asset are subsequently realized, the benefit is recorded first as a

22

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

reduction of the intangible assets recorded upon the application of fresh start accounting and, if these assets are fully drawn down, as a capital transaction within contributed surplus. During the year ended December 31, 2004 and 2003, the Company utilized tax benefits that arose prior to fresh start accounting totaling $3.9 and $4.3, respectively, which has been recorded as a reduction to unamortized customer relationships[note 6].

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

		2004			2003
Benefits:
	Taxable loss carryforwards		(408.1	)		(383.8	)
	Tax values of capital assets in excess of accounting values		(27.5	)		(41.7	)
	Tax values of other assets in excess of accounting values		(8.9	)		(11.5	)
	Accounting values of liabilities in excess of tax values		(4.2	)		(3.7	)
Total future tax benefit			(448.7	)		(440.7	)
Liabilities:
	Accounting values of capital assets in excess of tax values		7.4			21.5
	Tax values of liabilities in excess of accounting values		14.0			23.1
Total future income tax liability			21.4			44.6
Net future income tax benefit			(427.3	)		(396.1	)
Valuation allowance			427.3			396.1
Net future income tax benefit			-			-

At December 31, 2004, the Company had approximately $1,031.8 in losses available for Canadian income tax purposes to reduce future years' taxable income. Of these losses, $878.6 relate to losses which arose prior to the application of fresh start accounting. Income tax losses will expire as follows:

2006	208.4
2007	289.5
2008	222.0
2009	234.6
2010	42.6
2014	34.7
	1,031.8

At December 31, 2004, the Company had approximately $111.0 in losses available for U.S. income tax purposes to reduce future years' taxable income. Income tax losses will expire as follows:

2021	8.6
2022	72.6
2023	10.2
2024	19.6
	111.0

23

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

11. 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 and agreements relating to the operations and maintenance of the network. In addition, the Company enters into agreements with suppliers to provide services and products that include minimum spend commitments.

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

	Office		Network		Other Services
	Space		Facilities		& Products
2005		14.3		21.2		37.2
2006		13.8		17.2		27.9
2007		5.2		9.7		10.5
2008		2.9		8.7		8.9
2009		2.2		5.6		5.9
Thereafter		3.5		0.2		35.4
		41.9		62.6		125.8

On November 20, 2004, the Company entered an agreement with Bell Canada to obtain certain operating and network services[note 13].

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 per cent royalty to Sprint on substantially all revenue for the first five years and 2.0 per cent 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. Historically these payments have not been significant.

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

Occasionally, in the normal course of business the Company provides guarantees of third party performance in respect of customer lease arrangements. As at December 31, 2004, the total of these obligations is $nil [2003 - $0.6].

24

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

12. CONTINGENCIES

Litigation

On March 1, 2002, the Company was notified of an appeal of the Superior Court of Ontario decision with respect to an application brought by Montreal Trust Company of Canada (now Computershare Investor Services Inc.) on April 27, 2000 concerning the payment of $30.0 held in trust under a ‘change in control agreement’ with certain senior management dated September 9, 1999. The Superior Court of Ontario ruled that no change of control had occurred. On February 20, 2004, the Court of Appeal of Ontario agreed with the trial judge and dismissed the appeal of an earlier decision regarding a ‘change in control agreement’. As at April 20, 2004, the 60-day period in which the appellants had to seek leave to appeal to the Supreme Court of Canada expired. The Company reversed a $4.7 provision related to this action during 2004.

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. ACQUISITIONS

Effective November 20, 2004, the Company acquired significant portions of 360networks Corporation’s business customer base in Ontario, Quebec and Atlantic Canada, from Bell Canada. The acquisition price for the business customer relationships is measured based on three times the average revenue of the acquired customer base in the two months pre- and post the closing date of the transaction, and will be paid over a two-year period. Taking acquisition costs into account, the total cost for the customer relationships intangible asset is $17.6. This is a preliminary estimate and is subject to adjustment in the first quarter of fiscal 2005. At December 31, 2004, $7.1 of the customer relationship liability was included within accrued liabilities and $10.0 was included in other long-term liabilities[note 8(b)].

Concurrently, the Company entered into a two-year transitional services agreement under which Bell Canada will provide technical and operational services to the newly acquired customer base and in exchange be paid approximately 70 per cent of the total retail revenue with a minimum monthly payment of approximately $2.0. The Company also has entered into an option agreement under which the Company has four months to determine which assets used to service the acquired customers it may wish to acquire from Bell Canada at the end of the transitional services agreement. As consideration for the option, the Company will pay up to $2.3, or 7.5 per cent of the expected $30.0 maximum price payable, for the assets in the second quarter of fiscal 2005.

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

25

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

On September 27, 2002, the Company acquired 75 per cent of the non-voting shares and 24 per cent 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 had a call right under a contractual arrangement with a member of Time iCR’s management who owns 51 per cent of the outstanding voting rights of Time iCR Inc. As a result, while the Company did not have voting control of Time iCR Inc., the Company determined under generally accepted accounting principles it would consolidate its interest in Time iCR Inc. On February 13, 2004 the Company acquired the remaining 25 per cent non-voting shares and 76 per cent voting shares of Time iCR for $0.4. This acquisition has been accounted for as a business acquisition using the purchase method, and the results of operations were included in these consolidated financial statements from the dates of 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 Corporation, which maintains an approximate 6.6 per cent equity interest in the Company, through its subsidiary, Sprint. These transactions were made at market prices under normal trade terms and conditions. In addition, a royalty payment based on revenues is paid to Sprint[note 11]which is included within the consolidated statements of operations and deficit. At December 31, 2004, the net balance due to Sprint and its affiliates is $12.3 [2003 - $12.9]. 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-
							recapital-
							ization
					Nine		Three
					Months		Months
					Ended		Ended
					Dec 31,		Mar 31,
	2004		2003		2002		2002
Revenue		30.4		27.0		14.9		5.5
Carrier charges		42.4		44.0		33.7		11.4
Royalty costs		19.7		19.5		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 a related entity, in which the Company maintains an approximate 7.5 per cent 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. Revenue derived from this entity were $3.5 [2003 - $3.2; nine months ended December 31, 2002 - $1.8; three months ended March 31, 2002 - $0.6].

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 companies to which various members of the Company’s board of directors are related. These transactions were made at market prices under normal trade terms and conditions and total less than $1.5 in each of the periods presented.

26

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

15. REALIGNMENT, RESTRUCTURING AND OTHER CHARGES

								Pre-
								recapital-
								ization
						Nine		Three
						Months		Months
						Ended		Ended
						Dec 31,		Mar 31,
	2004			2003		2002		2002
Realignment charge (a)		7.8			-		-		-
Non-recoverable fibre maintenance costs (b)		(6.6	)		7.0		-		-
Special charge (c)		-			-		30.5		-
		1.2			7.0		30.5		-

(a) In 2004, the Company recorded a special charge of $7.8 for severance incurred as part of its plan to improve organizational effectiveness by consolidating its corporate, operations, marketing and provisioning functions and eliminating two executive positions. The details of the movement in the severance provision during the year is shown below.

Severance Provision
Balance, December 31, 2003		-
Special charges recorded during the year		7.8
Payments made during the year		(2.6	)
Balance, December 31, 2004	$	5.2

	As at December 31, 2004, $5.2 of this provision was included in accounts payable and accrued liabilities and is expected to be paid by March 31, 2005.
(b)	During 2003, the Company recorded a special charge of $7.0 for fibre maintenance costs that were expected to be incurred by the Company under contracts for up to 15 years in length without any foreseeable future economic benefit and for which the Company had determined there is no reasonable prospect of recovery.  During 2004, the Company reversed $6.6 of this charge since an agreement was reached under which it abandoned both the fibre and the commitment. As at December 31, 2004, none of this charge remained in the Company’s liabilities.
(c)	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.
	All amounts except for the facility lease exit costs were drawn down by the end of 2003. The details of the movement in the lease exit provision during the year is shown below. The remaining balance will be paid over the terms of the related leases up to a maximum period of seven years.

27

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Lease Exit Costs
Balance, April 1, 2002	$	7.2
Payments made during the nine months ended December 31, 2002		(0.4	)
Balance, December 31, 2002	$	6.8
Payments made during the year		(2.1	)
Balance, December 31, 2003	$	4.7
Payments made during the year		(0.9	)
Balance, December 31, 2004	$	3.8

	As at December 31, 2004 and 2003, the current portion of $1.0 and $1.0, respectively, of the lease exit cost liability was included within accrued liabilities and $2.8 and $3.7 was included in other long-term liabilities, respectively[note 8(b)].
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 Bnon-voting shares outstanding during the period after recapitalization [December 31, 2004 - 35,713,781; December 31, 2003 - 27,484,447; December 31, 2002 - 23,839,638]. Earnings (loss) per share for 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 Bnon-voting shares and pre-recapitalization class C non-voting shares outstanding during the year. The pre-recapitalization weighted-average number of shares outstanding has been restated to give effect to the 1:20 stock consolidation which occurred April 15, 2002 [March 31, 2002 - 4,529,550]. Due to a loss for all periods presented, no incremental shares from the potential exercise of stock options are included because the effect would be anti-dilutive. As at December 31, 2004, 2003 and 2002, the Company had 1,659,984, 1,356,067 and 926,250 stock options outstanding, which could be dilutive to future periods. For these same periods, it had 165,001, 346,001 and 585,500 RSUs and 61,168, 7,198 and nil DSUs which could be dilutive to future periods.

17. CONSOLIDATED STATEMENTS OF CASH FLOWS

Net Change in Non-Cash Working Capital Balances

										Pre-
										recapitali-
										zation
							Nine			Three
							Months			Months
							Ended			Ended
							Dec 31,			Mar 31,
	2004			2003			2002			2002
Accounts receivable		19.9			47.8			24.0			23.1
Other current assets		18.9			(43.3	)		40.7			1.0
Accounts payable and accrued liabilities		(10.4	)		(2.0	)		(4.4	)		(32.4	)
Net change in non-cash working capital balances related to operations		28.4			2.5			60.3			(8.3	)

28

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless 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-
									recapital-
									ization
							Nine		Three
							Months		Months
							Ended		Ended
							Dec 31,		Mar 31,
	2004			2003			2002		2002
Accrued amounts		(1.6	)		(2.2	)		8.2		(3.8	)

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

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

Other Information

							Pre-
							recapital-
							ization
					Nine		Three
					Months		Months
					Ended		Ended
					Dec 31,		Mar 31,
	2004		2003		2002		2002
Cash received for interest		3.9		4.2		3.4		6.2
Cash paid for interest		39.0		46.8		52.3		18.3
Cash paid for capital and income taxes		5.7		3.4		9.9		0.5

Commencing in the fourth quarter of 2004, the Company presents proceeds from sales of accounts receivable within cash flows from operations on the statement of cash flows. Previously these had been classified as investing activities. The comparative figures have been restated to conform to the current year presentation.

18.	ADDITIONAL FINANCIAL INFORMATION
[a]	Fair Values

The carrying amounts and estimated fair values of the Company’s financial instruments as at December 31, 2004 and 2003 are substantially the same, except as noted below:

29

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

	2004				2003
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Investment, at cost		0.6		0.6		0.4		0.3
Financial liabilities
Long-term debt		268.5		266.5		387.1		385.7

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

	Cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable and accrued liabilities
	The carrying values of the Company’s cash and cash equivalents, short-term investments, accounts receivable, other current assets, and accounts payable and accrued liabilities approximate fair values due to their current nature.
	Investment
	The fair value of the Company’s investment is based on the closing price on The Canadian Venture Exchange.
	Long-term debt
	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.
	Other long-term liabilities
	The fair value of the Company’s other long-term liabilities is based predominately 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.

30

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Currency Risk

The Company is exposed to risk of currency fluctuation created by the U.S. dollar denominated debt obligation, which amounts to U.S.$317.9 that will be paid in principal and interest over the remaining term of this instrument.  The principal amount of U.S.$223.1 matures on December 31, 2008. 

19. SEGMENT INFORMATION

The Company is a facilities-based carrier of long distance, data, local, enhanced voice and wireless communications services. It offers different products or services to three market segments: (i) Consumer Services including residential and small office and home office customers (ii) Business Services, including small, medium and large business and government customers and (iii) Carrier Services including other providers and carriers of telecommunications services.

During the fourth quarter of 2004, the Company changed the allocation of the Consumer Services system access fees to allocate to all products based on revenues. Previously, the Consumer Services system access fees were included in long distance revenue only. Accordingly, segment information of previous periods has been restated to reflect this change. Substantially all of the Company’s assets are located in Canada, and revenues are derived from long distance, data and local telecommunications services provided in Canada. Assets, including the fibre optic cable network, are not segmented by business division as assets are shared by all segments. The Company did not have an economic dependence on any one customer in 2004 or for all prior periods.

Customer Segments

										Network,
										Operations,
	Consumer			Business			Carrier			Corporate
	Services			Services			Services			and other			Total
Year ended December 31, 2004
Long distance		147.4			150.9			129.5			-			427.8
Data		13.1			142.5			47.2			-			202.8
Local		124.8			45.6			7.3			-			177.7
Wireless		10.3			-			-			-			10.3
Total revenues		295.6			339.0			184.0			-			818.6
Operating costs		(119.3	)		(78.2	)		(9.7	)		(105.9	)		(313.1	)
		176.3			260.8			174.3			(105.9	)		505.5
Carrier costs														(400.6	)
Realignment, restructuring and other charges														(1.2	)
Depreciation and amortization														(146.6	)
Operating loss														(42.9	)

31

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

										Network,
										Operations,
	Consumer			Business			Carrier			Corporate
	Services			Services			Services			and other			Total
Year ended December 31, 2003
Long distance		165.8			153.6			162.8			-			482.2
Data		17.0			134.0			50.1			-			201.1
Local		84.6			31.0			4.8			-			120.4
Wireless		1.6			-			-			-			1.6
Total revenues		269.0			318.6			217.7			-			805.3
Operating costs		(98.3	)		(63.2	)		(6.9	)		(130.9	)		(299.3	)
		170.7			255.4			210.8			(130.9	)		506.0
Carrier costs														(409.9	)
Realignment, restructuring and other charges														(7.0	)
Depreciation and amortization														(157.3	)
Operating loss														(68.2	)

										Network,
										Operations,
	Consumer			Business			Carrier			Corporate
	Services			Services			Services			and other			Total
Nine months ended December 31, 2002
Long distance		133.3			110.6			125.6			-			369.5
Data		16.3			107.3			43.6			-			167.2
Local		45.9			14.2			2.1			-			62.2
Wireless		-			-			-			-			-
Total revenues		195.5			232.1			171.3			-			598.9
Operating costs		(71.3	)		(43.7	)		(13.7	)		(99.8	)		(228.5	)
		124.2			188.4			157.6			(99.8	)		370.4
Carrier costs														(335.7	)
Realignment, restructuring and other charges														(30.5	)
Depreciation and amortization														(120.7	)
Operating loss														(116.5	)

32

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

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

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.

33

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

	2004			2003
				Restated
				[notes 2, 7]
Balance Sheets - Assets
Canadian GAAP - Current Assets		126.7			241.7
Investment available for sale (a)		0.6			0.3
U.S. GAAP - Current Assets		127.3			242.0
Canadian GAAP - Capital Assets		458.3			516.7
Capitalized interest (c)		4.9			5.9
Writedowns and fresh start adjustments (b)		89.7			89.7
Writedown of assets held for sale (b)		(78.6	)		(78.6	)
Depreciation of writedowns and fresh start adjustments (b)		(2.0	)		(3.1	)
Disposal of writedowns and fresh start adjustments (b)		(1.7	)		(1.7	)
Writedown of assets (b)		(17.5	)		-
U.S. GAAP - Capital Assets		453.1			528.9
Canadian GAAP - Other Assets		63.9			80.7
Investment available for sale (a)		(0.6	)		(0.4	)
Writedowns and fresh start adjustments (b)		8.2			4.3
U.S. GAAP - Other Assets		71.5			84.6
U.S. GAAP - Total Assets		651.9			855.5
Balance Sheets - Liabilities
Canadian GAAP - Accounts Payable and Accrued Liabilities		149.7			149.4
Disposal gain not recognized under fresh start accounting (b)		(0.9	)		(0.9	)
U.S. GAAP - Accounts Payable and Accrued Liabilities		148.8			148.5
Canadian GAAP - Future Income Tax Liability		-			-
Future income tax liability (b)		13.8			21.3
U.S. GAAP - Future Income Tax Liability		13.8			21.3
Canadian GAAP - Long-term Debt		268.5			387.1
Future interest payments on long-term debt (b)		114.1			205.6
U.S. GAAP - Long-term Debt		382.6			592.7
Canadian GAAP - Other long-term Liabilities		53.3			49.1
U.S. GAAP - Other long-term Liabilities		53.3			49.1
U.S. GAAP - Total Liabilities		598.5			811.6

34

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

	2004			2003
				Restated
				[note 2]
Balance Sheets - Shareholders’ Equity
Canadian GAAP - Capital Stock		352.6			350.3
Share purchase incentives		4.6			4.6
Reduction in stated capital (e)		10.7			10.7
Recapitalization adjustments (b)		(6.5	)		(6.5	)
Writedowns and fresh start adjustments (b)		1,036.3			1,036.3
Issue of capital stock (b)		187.9			187.9
U.S. GAAP - Capital Stock		1,585.6			1,583.3
Canadian GAAP - Deficit		(175.2	)		(96.8	)
Share purchase incentives		(4.6	)		(4.6	)
Reduction in stated capital (e)		(10.7	)		(10.7	)
Writedowns and fresh start adjustments (b)		(1,671.8	)		(1,671.8	)
Reduction of intangible assets (b)		8.2			4.3
Depreciation not recognized under fresh start accounting (b)		(2.0	)		(3.1	)
Income tax benefit related to future tax liability (b)		22.5			14.7
Interest expense on long-term debt (b)		121.0			88.2
Gain (loss) on repurchase of long-term debt (b)		133.6			81.9
Foreign exchange gain on long-term debt (b)		62.2			55.2
Loss on disposal and write-down of capital assets (b)		(18.3	)		(0.8	)
Capitalized interest (c)		4.9			5.9
Change in enacted tax rate (d)		(1.9	)		(1.6	)
U.S. GAAP - Deficit		(1,532.1	)		(1,539.2	)
Canadian GAAP - Other Comprehensive Income (Loss)		-			-
Unrealized losses on investment available for sale		(0.1	)		(0.2	)
U.S. GAAP - Other Comprehensive Income (Loss)		(0.1	)		(0.2	)
Total U.S. GAAP Shareholders’ Equity (Deficiency)		53.4			43.9
Total U.S. GAAP Liabilities and Shareholders’ Equity (Deficiency)		651.9			855.5

35

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Statements of Operations

	2004			2003			2002
				Restated			Restated
				[note 2]			[note 2]
Net income (loss) for the year ended December 31 based on Canadian GAAP		(78.4	)		(37.5	)		(151.1	)
Recapitalization and fresh start adjustments (b)		-			-			(93.8	)
Reduction of intangible assets (b)		3.9			4.3			-
Gain on repurchase of long-term debt (b)		51.7			-			81.9
Interest expense on long-term debt (b)		32.8			44.6			43.6
Foreign exchange gain on long-term debt (b)		7.0			51.3			3.9
Incremental loss on disposal and writedown regarding capitalized interest (c)		-			(0.2	)		(4.6	)
Depreciation not recognized under fresh start accounting (b)		1.1			(1.5	)		(1.6	)
Capitalized interest, net of depreciation (c)		(1.0	)		(1.0	)		(1.0	)
Loss on disposal of capital assets (b)		(17.5	)		(0.8	)		-
Cumulative effect of accounting change for ARO		-			(0.4	)		0.4
Net income (loss) before taxes and extraordinary items for the year ended December 31 based on U.S. GAAP		(0.4	)		58.8			(122.3	)
Income tax benefit from future income tax liability (b)		7.9			8.6			6.1
Change in enacted tax rate (d)		(0.3	)		(1.6	)		-
Net income (loss) before extraordinary items for the year ended December 31 based on U.S. GAAP		7.2			65.8			(116.2	)
Extraordinary item - gain on debt restructuring (b)		-			-			1,292.5
Net income (loss) after extraordinary items for the year ended December 31 based on U.S. GAAP		7.2			65.8			1,176.3
Unrealized gain (loss) on investment available for sale		0.1			0.1			(0.1	)
Comprehensive income (loss) for the year ended December 31 based on U.S. GAAP (f)		7.3			65.9			1,176.2
U.S. GAAP Earnings (Loss) Per Share - Basic
Net income (loss) before extraordinary items - basic		0.20			2.40			(6.09	)
Extraordinary item - basic		-			-			67.75
Net income (loss) - basic		0.20			2.40			61.66
U.S. GAAP Earnings (Loss) Per Share - Diluted
Net income (loss) before extraordinary items - diluted		0.20			2.38			(6.09	)
Extraordinary item - diluted		-			-			67.71
Net income (loss) - diluted		0.20			2.38			61.62

36

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Statements of Cash Flows

	2004			2003			2002
Cash provided by (used in) operating activities based on Canadian GAAP		86.8			43.7			6.1
Interest expense on long-term debt (b)		32.8			44.6			43.6
Cash provided by (used in) operating activities based on U.S. GAAP		119.6			88.3			49.7
Cash provided by (used in) investing activities based on Canadian and U.S. GAAP		2.8			(59.7	)		154.2
Cash provided by (used in) financing activities based on Canadian GAAP		(107.2	)		38.4			(29.9	)
Recapitalization adjustments (b)		-			-			(111.8	)
Interest expense on long-term debt (b)		(32.8	)		(44.6	)		(43.6	)
Cash provided by (used in) financing activities based on U.S. GAAP		(140.0	)		(6.2	)		(185.3	)
Net increase (decrease) in cash and cash equivalents for the 12 months ended December 31 based on U.S. GAAP		(17.6	)		22.4			18.6

(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.
	The net reduction in the value of other in-use capital assets of $11.1 (fair value increments of $89.7 and decrements of $100.8) made under Canadian GAAP under fresh start accounting did not apply under U.S. GAAP. In 2004, the Company wrote down the Cable and Wireless IRU for U.S. GAAP purposes in the amount of $17.5, which had been previously written down for Canadian GAAP under fresh start accounting. Under U.S. GAAP, an additional ($1.1) of depreciation would have been expensed during 2004 [2003 - $1.5; 2002 - $1.6].
	Under Canadian GAAP, the first quarter of 2002 royalty payment to Sprint of $4.9 was accounted for under the restructuring. Under U.S. GAAP, the payment is included in the statement of operations of the current period.
	Under U.S. GAAP, the gain on debt restructuring is determined in accordance with SFAS 15. The fair value of the assets transferred to the noteholders include cash and an equity interest, net of issuance costs. The remaining direct costs of the Plan of Arrangement of $18.3 are deducted in measuring the gain on restructuring. Also included in the determination of the gain is the carrying amount of the pre-recapitalization notes cancelled, and accrued interest thereon, net of related deferred financing costs,

37

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

	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 statement of operations.
	Under Canadian GAAP, the future income tax liability was valued at nil under the application of fresh start accounting. Under U.S. GAAP, the value of the future income tax liability is not impacted by the debt restructuring.
	Under Canadian GAAP, the benefit of tax items that arose prior to the application of fresh start accounting of $3.9 [2003 - $4.3] are recorded through a reduction of unamortized customer relationships. Under U.S. GAAP, the reduction is not applied.
	Additional information regarding the Company’s financial reorganization is presented in note 1.
(c)	Under U.S. GAAP, interest expense to date of $4.9 [2003 - $5.9, 2002 - $7.1] 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 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.
(e)	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.
(f)	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.
(g)	U.S. GAAP does not recognize the disclosure of any subtotal of the amount of cash, cash equivalents and short-term investments in the consolidated balance sheets.
(h)	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.

38

Call-Net Enterprises Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2004

[millions of Canadian dollars, unless otherwise indicated]

Additional Information

Selling, general and administration costs of $284.1 [2003 - $267.5; 2002 - $250.4], advertising costs of $14.6 [2003 - $14.2; 2002 - $18.4], lease rental costs of $14.5 [2003 - $15.0; 2002 - $15.0], and bad debt costs of ($0.1) [2003 - $0.9; 2002 - $16.6] were expensed as incurred during the year under both Canadian and U.S. GAAP.

Accounting Changes

The Financial Accounting Standards Board [the ’FASB‘] has issued Interpretation No. 46, ’Consolidation of Variable Interest Entities‘ [‘FIN 46‘]. FIN 46 clarifies the application of consolidation to those entities defined as ‘variable interest entities’ [‘VIEs’], which are certain entities in which equity investors do not have the characteristics of a ‘controlling financial interest’ or there is not sufficient equity at risk for the entity to finance its own activities without additional subordinated financial support. VIEs will be consolidated by the Company when it is determined that it will, as the primary beneficiary, absorb the majority of the VIEs expected losses and/or expected residual returns. The Company has reviewed this interpretation and determined there is no impact as a result of adopting FIN 46.

In December 2002, the FASB issued Statement of Financial Accounting Standards [‘SFAS’] No. 148, ‘Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123’ [‘SFAS 148’], which amended the transitional provisions of SFAS No. 123, ‘Accounting for Stock-based Compensation’ [‘SFAS 123’], for companies electing to recognize employee stock-based compensation using the fair value based method. Effective January 1, 2004, the Company elected to expense employee stock-based compensation using the fair value method, with retroactive restatement of prior periods. Previously, the intrinsic value method had been used to account for allowed employee awards under U.S. GAAP. As all of the Company’s stock options were granted subsequent to January 1, 2002, the impact of adoption of the fair value method under U.S. GAAP was consistent with Canadian GAAP.

21. SUBSEQUENT EVENT

On February 3, 2005, the CRTC released a decision to lower the price of competitor digital network access (CDNA) facilities and services provided to competitive local exchange carriers.  Based on the inventory of circuits and contracts in place with carriers as at December 31, 2004, this decision is expected to reduce carrier charges by more than $25.0 per annum.  In addition, the decision was partially retroactive to June 2002. The retroactive portion is estimated to be approximately $1.0 to $2.0 which will reduce carrier charges in the first quarter of 2005.

39