FINANCIAL RESULTS ANALYSIS

This section provides detailed information and analysis about our performance in 2010 compared with 2009 and 2009 compared with 2008. It focuses on our consolidated operating results and provides financial information for each of our operating segments.

 CONSOLIDATED ANALYSIS

							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Operating revenues	18,069		17,735		17,661		1.9	%	0.4	%
Cost of revenue, exclusive of depreciation and amortization	(4,949	)	(4,525	)	(4,389	)	(9.4	%)	(3.1	%)
Selling, general and administrative expenses	(5,932	)	(6,121	)	(6,268	)	3.1	%	2.3	%
EBITDA	7,188		7,089		7,004		1.4	%	1.2	%
Depreciation	(2,542	)	(2,595	)	(2,537	)	2.0	%	(2.3	%)
Amortization of intangible assets	(750	)	(776	)	(727	)	3.4	%	(6.7	%)
Restructuring and other	(224	)	(527	)	(871	)	57.5	%	39.5	%
Operating income	3,672		3,191		2,869		15.1	%	11.2	%
Other income (expense)	124		(18	)	(253	)	n.m.		92.9	%
Interest expense	(670	)	(723	)	(791	)	7.3	%	8.6	%
Pre-tax earnings from continuing operations	3,126		2,450		1,825		27.6	%	34.2	%
Income taxes	(550	)	(368	)	(469	)	(49.5	%)	21.5	%
Non-controlling interest	(299	)	(333	)	(323	)	10.2	%	(3.1	%)
Earnings from continuing operations	2,277		1,749		1,033		30.2	%	69.3	%
Discontinued operations	–		(11	)	(90	)	n.m.		87.8	%
Net earnings	2,277		1,738		943		31.0	%	84.3	%
Dividends on preferred shares	(112	)	(107	)	(124	)	(4.7	%)	13.7	%
Net earnings applicable to common shares	2,165		1,631		819		32.7	%	99.1	%
Earnings per share (EPS)	2.85		2.11		1.02		35.1	%	n.m.

n.m.: not meaningful

OPERATING REVENUES

2010 COMPARED TO 2009

Total operating revenues for BCE were $18,069 million in 2010, up 1.9% from $17,735 million in 2009. Higher revenues at Bell, offset partly by lower revenues at Bell Aliant, resulted in the year-over-year increase in BCE’s total operating revenues in 2010.

Bell’s operating revenues increased 2.7% in 2010 to $15,425 million from $15,020 million in 2009, due to higher revenues at both our Bell Wireless and Bell Wireline segments. Operating revenues for Bell in 2010 were comprised of service revenues of $13,819 million and product revenues of $1,606 million, representing improvements of 1.5% and 13.9%, respectively, over 2009.

Bell Wireline’s revenues increased modestly in 2010. The 0.3% year-over-year improvement was due primarily to a full year of product revenues from The Source reflected in our 2010 results versus only six months in 2009. Growth in revenues from our video and Internet services, as well as increased IP broadband connectivity, ICT and equipment sales to business customers also contributed to the year-over-year improvement in 2010. Overall, Bell Wireline revenue growth in 2010 was moderated by the ongoing decline in local access and long distance revenues reflecting a reduction in our residential NAS customer base, decreased connectivity revenues stemming from business customer losses, technology substitution to wireless and IP-based services, as well as competitive pricing pressures particularly in our business and wholesale markets. In addition, we experienced continued soft demand in 2010 for new access line installations from our business customers due to competitive factors and the slow speed of economic recovery.

Bell Wireless segment revenues grew 8.2% in 2010, due to increased service revenues from a larger subscriber base, increased data usage that generated higher ARPU year over year, and the incremental revenue contribution from the acquisition of Virgin.

Revenues at Bell Aliant were 3.2% lower in 2010 compared to 2009, due to the continued decline in its local voice and long distance revenues attributable to competitive losses and substitution for other services. The year-over-year decrease was offset partly by revenue growth in Internet and IP-based broadband connectivity services, and increased wireless revenues. Higher IT product sales also moderated the decline in operating revenues in 2010.

See Segmented Analysis for a discussion of operating revenues on a segmented basis.

2009 COMPARED TO 2008

Total operating revenues at BCE were $17,735 million in 2009, up from $17,661 million in 2008.

Bell revenues increased 1.0% in 2009 to $15,020 million from $14,871 million in 2008, due to higher revenues generated by both our Bell Wireline and Bell Wireless segments. Total Bell revenues in 2009 were comprised of service revenues totalling $13,611 million, representing a 0.6% decline when compared to 2008, and product revenues of $1,409 million representing a 19.8% increase year over year.

Bell Wireline’s revenues in 2009 were essentially unchanged, increasing by 0.2% year over year. Higher product revenues resulting from the acquisition of The Source in the third quarter of 2009, as well as growth in revenues from our video, Internet and IP broadband connectivity services, were largely offset by lower residential local voice and long distance revenues reflecting a decline in the NAS customer base, higher business NAS access line losses and reduced equipment sales to business customers given the weak economy in 2009.

Bell Wireless segment revenue growth of 1.8% in 2009 was driven primarily by a larger subscriber base, increased data usage, and the revenue contribution from the acquisition of Virgin. Although Bell Wireless contributed positively to Bell’s overall revenue growth in 2009, wireless service revenue increased only modestly as a result of weaker voice ARPU in 2009 compared to 2008. The year-over-year decline in voice ARPU was due to a softer economy, which reduced overall wireless usage and discretionary customer spending, as well as to competitive pricing pressures stemming from increased industry penetration of flanker brands.

Revenues at Bell Aliant were 3.7% lower in 2009 compared to 2008 due to the continued erosion of its local wireline and long distance businesses, and lower telecom product sales. The wind-down of the operations of Atlantic Mobility Products (AMP) in the third quarter of 2008 following Bell Canada’s notification that it would terminate its contract with AMP as its exclusive distributor in Atlantic Canada also adversely impacted Bell Aliant’s revenues in 2009.

See Segmented Analysis for a discussion of operating revenues on a segmented basis.

OPERATING EXPENSES

2010 COMPARED TO 2009

Operating expenses for BCE were $10,881 million in 2010 compared to $10,646 million in 2009. The year-over-year increase was the result of higher cost of revenue, offset partly by lower selling, general and administrative expenses.

Cost of revenue was $4,949 million in 2010, up from $4,525 million in 2009, representing a year-over-year increase of 9.4%. Higher cost of revenue in 2010 was the result of:

• greater year-over-year wireless subscriber acquisition and handset upgrade volumes

• significant growth in wireless data usage, related content and services offered due to accelerated customer adoption of smartphones and other similar mobile devices

• increased wireless network expenses related to the new HSPA+ network facilities and to growth in roaming

• higher cost of service at Bell TV driven by a larger subscriber base and increased programming costs

• the inclusion of operating expenses from the acquisitions of The Source and Virgin.

Additionally, costs incurred by Bell in the first quarter of 2010 due to our role as the sole telecommunications provider of the Vancouver Winter Olympics had an unfavourable impact on cost of revenue in 2010.

These factors were offset partly by the positive impact of decreased payments to other carriers due to reduced rates for wireline traffic settled on those carriers’ networks as well as other efficiency-related productivity improvements. Lower U.S. dollar hedge rates in 2010 on our U.S. dollar-denominated purchases of wireless devices, video STBs and cross-border exchange traffic also moderated the increase in cost of revenue in 2010.

Selling, general and administrative expenses include salaries, wages and benefits, net benefit plans cost, bad debt expense, taxes other than income, marketing, advertising and sales commission costs, customer billing, call centre and IT costs, professional service fees and rent. Selling, general and administrative expenses decreased 3.1% to $5,932 million in 2010 from $6,121 million in 2009. The year-over-year decrease can be attributed to:

• lower labour costs due to a reduced workforce and decreased use of outsourced labour resulting from productivity and efficiency improvements in both our field service operations and residential call centres

• cost savings realized through renegotiated service contracts with certain IT vendors and outsource suppliers

• decreased capital taxes and real estate costs

• lower net benefit plans cost, which included the positive impact of a pension valuation allowance reversal.

These factors were partly offset by a number of cost increases in 2010, including higher wireless subscriber acquisition costs and retention spending, increased customer service costs to support a growing base of wireless subscribers using more sophisticated devices and mobile services, and increased selling and advertising expenses. Higher costs in the first half of 2010 from the inclusion of operating expenses as a result of the acquisitions of The Source and Virgin in the third quarter of 2009 and from our sponsorship of the Vancouver Winter Olympics in the first quarter of 2010 also moderated the year-over-year improvement in selling, general and administrative expenses in 2010.

2009 COMPARED TO 2008

Operating expenses for BCE were virtually unchanged in 2009, decreasing 0.1% to $10,646 million from $10,657 million in 2008. The year-over-year improvement was due to lower selling, general and administrative expenses, offset partly by higher cost of revenue.

Cost of revenue was $4,525 million in 2009, up 3.1% when compared to $4,389 million in 2008. The increase in cost of revenue can be attributed mainly to higher product costs, consistent with growth in total product revenues, due to the acquisitions of The Source and Virgin. Higher costs associated with increased wireless data usage and more mobile data content, higher cost of service at Bell TV from a larger subscriber base and increased programming costs, as well as higher U.S. dollar hedge rates in 2009 on our U.S. dollar-denominated purchases of wireless devices, video STBs and cross-border exchange traffic, also contributed to higher cost of revenue in 2009.

Selling, general and administrative expenses decreased 2.3% to $6,121 million in 2009 from $6,268 million in 2008. The year-over-year improvement was mainly the result of:

• lower labour costs due to a reduced workforce (excluding the impact of The Source and Virgin acquisitions), decreased use of consultants and contractors, and a cutback in outsourced labour resulting mainly from reduced call centre volumes and IT project-related activity

• lower wireless subscriber acquisition costs and retention spending

• decreased wireless sales promotion and advertising expenses

• reduced discretionary spending in areas such as travel and entertainment.

These factors were partly offset by higher operating expenses from the consolidation of The Source and Virgin in our results beginning in Q3 2009 and higher net benefit plans cost.

OPERATING INCOME

2010 COMPARED TO 2009

BCE’s operating income was $3,672 million in 2010, up 15.1% from $3,191 million in 2009, due to higher operating income at Bell.

Bell’s operating income increased 22.2% in 2010 to $2,972 million from $2,432 million in 2009, mainly as a result of lower restructuring and other charges in 2010. In 2009, restructuring and other charges reflected charges for voluntary and involuntary workforce reduction initiatives (including a retirement incentive for unionized employees), the consolidation of employees to campus environments, as well as a Supreme Court of Canada ruling relating to the disposition of Bell Canada’s deferral account balance with the CRTC. Higher operating revenues and lower net benefit plans cost also contributed to the year-over-year improvement in operating income at Bell in 2010, which were partly offset by the factors described above that contributed to higher operating expenses year over year.

Bell Aliant’s operating income was $700 million in 2010 compared to $759 million in 2009. The year-over-year decrease can be attributed to an impairment charge related to certain customer relationships created on the privatization of the Bell Nordiq Income Fund (Bell Nordiq) in 2008 as well as lower operating revenues, offset partly by decreased operating expenses driven largely by the positive impact of cost containment initiatives such as workforce reductions and tight control over general and administration expenses.

See Segmented Analysis for a discussion of operating income on a segmented basis.

2009 COMPARED TO 2008

BCE’s operating income was $3,191 million in 2009, compared to $2,869 million in 2008. The year-over-year increase was due primarily to higher restructuring and other charges in 2008 totalling $871 million, which included amounts recorded for involuntary workforce reduction initiatives, the relocation of employees and closing of real estate facilities that are no longer needed as a result of a reduced workforce, the CRTC’s decision in the first quarter of 2008 to approve the use of a portion of the deferral account funds for the uneconomic expansion of broadband service, and costs associated with the proposed privatization of BCE Inc. This compared to restructuring and other items of $527 million in 2009, reflecting amounts for voluntary and involuntary workforce reduction initiatives, including a retirement incentive for unionized employees, the consolidation of employees to campus environments, and a charge recorded as a result of a Supreme Court of Canada ruling relating to the use of Bell’s remaining deferral account balance with the CRTC.

Operating income before restructuring and other for BCE in 2009 was $3,718 million, down 0.6% as compared to $3,740 million in 2008. The year-over-year decrease was attributable mainly to lower operating income before restructuring and other items at Bell.

At Bell, operating income in 2009 totalled $2,432 million, up from $2,143 million in 2008, due to lower restructuring and other costs year over year.

Bell’s operating income before restructuring and other was $2,915 million in 2009, down 1.3% from $2,953 million in 2008. The year-over-year decrease was the result of higher net benefit plans cost and increased depreciation and amortization expense, offset partly by lower operating expenses and higher operating revenues as previously described.

Higher operating income at Bell Aliant also positively contributed to overall operating income at BCE in 2009. Bell Aliant’s operating income amounted to $759 million, up 4.5% from $726 million in 2008. The year-over-year increase was due mainly to lower operating expenses driven largely by the positive impact of cost containment initiatives such as workforce reductions and tight control over discretionary expenses, offset partly by lower operating revenues.

See Segmented Analysis for a discussion of operating income on a segmented basis.

 EBITDA

2010 COMPARED TO 2009

EBITDA at BCE increased 1.4% in 2010 to $7,188 million from $7,089 million in 2009, due to higher EBITDA at Bell offset partly by lower EBITDA at Bell Aliant. BCE’s EBITDA margin remained essentially unchanged in 2010 at 39.8% compared to 40.0% in the previous year, reflecting continuing rigorous management of operating expenses.

Bell’s EBITDA was $5,857 million in 2010, up 2.4% from $5,719 million in 2009. This corresponded to an EBITDA margin of 38.0% versus 38.1% in 2009. The increase in Bell’s EBITDA was driven by improved performance at our Bell Wireline segment, offset partly by lower EBITDA at Bell Wireless.

Bell’s EBITDA performance in 2010 was moderated by expenses incurred in the first quarter of 2010 for our role as exclusive telecommunications provider and sponsor of the Vancouver Winter Olympics, which was offset partly by a reversal of a pension valuation allowance that contributed to lower pension expense in 2010 compared to the previous year.

EBITDA at our Bell Wireline segment increased 5.9% in 2010, mainly as a result of cost savings achieved from vendor contract renegotiations with key IT and other outsource suppliers, decreased payments to other carriers due to lower rates for traffic terminated on their networks, a decline in net benefit plans cost reflecting the positive impact of a pension valuation allowance reversal and lower capital taxes, as well as other operational efficiency gains resulting from productivity and service improvements in both our field operations and call centres. The continuing decline in our higher-margin legacy voice and data revenues and higher year-over-year Olympics-related expenses moderated the improvement in Bell Wireline’s EBITDA in 2010.

Bell Wireless’ EBITDA decreased 5.0% in 2010, primarily as a result of the cost of acquiring a larger number of new subscribers year over year, increased cost of product sales driven mainly by higher volumes, and greater spending on customer retention and handset upgrades. Significantly higher wireless revenue growth as compared with the previous year moderated the decline in Bell Wireless’ EBITDA in 2010.

Bell Aliant’s EBITDA decreased 2.8% in 2010, reflecting lower year-over-year operating revenues, offset partly by the favourable impact of labour-related cost reductions and other cost containment initiatives.

Lower net benefit plans cost had a positive impact on Bell’s EBITDA in 2010. Net benefit plans cost at Bell totalled $129 million in 2010, down from $263 million in 2009. The year-over-year improvement was attributable to higher returns on plan assets in 2009 and a $500 million voluntary pension contribution made to Bell’s defined benefit plan in December 2009, offset partly by the impact of a lower discount rate on obligations under the plans. Bell’s net benefit plans cost in 2010 also reflected the positive impact of a reversal of a valuation allowance in the first quarter of the year. Net benefit plans cost at Bell Aliant was essentially unchanged, year over year, at $97 million in 2010 compared to $92 million in the previous year. Accordingly, net benefit plans cost for BCE was $226 million in 2010, compared to $355 million in 2009.

2009 COMPARED TO 2008

EBITDA at BCE increased 1.2% in 2009 to $7,089 million from $7,004 million in 2008, corresponding to an EBITDA margin of 40.0% in 2009 compared to 39.7% in 2008.

Bell’s EBITDA was $5,719 million in 2009, up 1.4% from $5,638 million in 2008. This represented an EBITDA margin of 38.1%, or a 0.2 percentage point improvement over 2008. The year-over-year increase was driven by higher EBITDA at both our Bell Wireline and Bell Wireless segments, despite higher net benefit plans cost and the acquisition of a greater number of new wireless and TV subscribers compared to 2008.

Bell Wireless’ EBITDA increased 2.4% in 2009, mainly as a result of reduced network expenses, decreased roaming costs, lower subscriber acquisition costs, and reduced marketing and advertising expenses.

EBITDA at our Bell Wireline segment increased 1.0% in 2009, due primarily to a decline in overall labour costs attributable to a reduced workforce and strict management of selling, general and administrative costs. The ongoing decrease in higher-margin legacy voice and data revenues, increased net benefit plans cost, foreign exchange losses on our U.S. dollar-denominated purchases stemming from higher U.S. dollar hedge rates in 2009, and expenses related to our sponsorship of the Vancouver Winter Olympics partly offset the year-over-year EBITDA improvement in 2009.

Bell Aliant’s EBITDA in 2009 was consistent with 2008, increasing by 0.3%. Reduced operating expenses were offset largely by lower operating revenues.

Higher net benefit plans cost had an adverse impact on Bell’s EBITDA in 2009. Net benefit plans cost at Bell totalled $263 million in 2009, representing an increase of 58%, compared to $166 million in 2008. The year-over-year increase was due to a lower expected return on plan assets, prior period gains that were fully amortized in 2008 and higher amortization of actuarial losses, offset partly by a higher discount rate. Net benefit plans cost at Bell Aliant increased year over year to $92 million in 2009 from $84 million in 2008. Accordingly, net benefit plans cost for BCE increased to $355 million in 2009 from $250 million in the previous year.

DEPRECIATION AND AMORTIZATION OF INTANGIBLE ASSETS

The amount of our depreciation and amortization of intangible assets in any year is affected by:

• how much we invested in new capital assets in previous years

• how many assets we retired during the year

• changes in accounting rules and estimates.

DEPRECIATION

Depreciation of $2,542 million in 2010 represented a decrease of $53 million, or 2.0%, compared to $2,595 million in 2009. The decrease was due to minor changes to depreciation rates used under the group method and asset write-downs and depreciation adjustments in 2009, partly offset by investment in new assets that have shorter useful lives than our legacy network assets.

Depreciation of $2,595 million in 2009 represented an increase of $58 million, or 2.3%, compared to $2,537 million in 2008. The increase was due to a higher asset base and asset write-downs and depreciation adjustments, partly offset by charges in 2008 of $12 million as a result of an impairment of certain fixed assets and $7 million at Bell Aliant on the finalization of the purchase price allocation related to its privatization of Bell Nordiq.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets in 2010 of $750 million decreased $26 million, or 3.4%, compared to $776 million in 2009. The decrease was the result of an intangible asset becoming fully amortized at the end of 2009, partly offset by an increase in our asset base and the early retirement of a billing system in the fourth quarter of 2010.

Amortization of intangible assets in 2009 of $776 million increased $49 million, or 6.7%, compared to $727 million in 2008. The increase was the result of our continued investment in finite-life intangible assets.

RESTRUCTURING AND OTHER

This category includes various income and expenses that are not directly related to the operating revenues generated during the year.

2010

We recorded restructuring and other charges of $224 million in 2010. These included:

• charges related to voluntary and involuntary employee termination charges of $15 million at Bell and $29 million at Bell Aliant

• charges of $21 million mainly at Bell for relocating employees and closing real estate facilities that are no longer needed because of workforce reduction initiatives

• other charges of $159 million that include charges of $120 million as a result of the CRTC’s decision to include interest and other amounts in our deferral account balance and $30 million for the impairment of certain customer relationships created on the privatization of Bell Nordiq in 2008.

2009

We recorded restructuring and other charges of $527 million in 2009. These included:

• charges related to voluntary and involuntary employee termination charges of $219 million at Bell and $41 million at Bell Aliant

• charges of $80 million at Bell for relocating employees and closing real estate facilities that are no longer needed because of workforce reduction initiatives

• other charges of $187 million of which $152 million related to the Supreme Court of Canada decision rendered in September 2009 to uphold the CRTC’s decision that the funds remaining in our deferral account could be used for broadband expansion or returned to our customers.

2008

We recorded restructuring and other charges of $871 million in 2008. These included:

• charges related to involuntary employee termination charges of $274 million at Bell and $54 million at Bell Aliant

• charges of $88 million mainly at Bell for real estate costs of which $32 million related to relocating employees and closing real estate facilities that are no longer needed because of workforce reduction initiatives and $49 million related to the relocation to campus environments

• charges of $455 million related to a charge of $236 million for the CRTC’s decision to approve the use of the deferral account funds for the uneconomic expansion of our broadband network, $187 million for employee retention costs, and other financial advisory, professional and consulting costs associated with the proposed privatization transaction and costs related to Bell’s rebranding.

OTHER INCOME (EXPENSE)

Other income (expense) includes income and expense that we receive and incur from activities that are not part of our main business operations, such as:

• net gains or losses on investments, including gains or losses when we dispose of, write down or reduce our ownership in investments

• foreign currency gains and losses

• interest income on cash and cash equivalents

• other miscellaneous income or expense.

2010

Other income of $124 million in 2010 included a gain on the sale of our investment in SkyTerra Communications Inc., partly offset by an $11 million premium paid for the partial redemption of $345 million of Bell Aliant’s $750 million 4.72% medium-term notes.

2009

Other expense of $18 million in 2009 included premiums paid on the early redemption of debt of $45 million, partly offset by gains on investments.

2008

Other expense of $253 million in 2008 included losses on investments of $308 million from the write-down of most of our available-for-sale investments, partly offset by interest income on investments.

INTEREST EXPENSE

2010 COMPARED TO 2009

Interest expense of $670 million in 2010 represented a decrease of $53 million, or 7.3%, compared to $723 million for the same period last year as a result of lower average interest rates on refinanced debt and lower average debt levels.

2009 COMPARED TO 2008

Interest expense of $723 million in 2009 represented a decrease of $68 million, or 8.6%, compared to $791 million for the same period last year as a result of interest capitalized on spectrum licences not yet in use and lower interest rates on debt, partly offset by higher average debt levels.

INCOME TAXES

2010 COMPARED TO 2009

Income taxes of $550 million in 2010 represented an increase of $182 million, compared to $368 million for the same period last year as a result of higher earnings, partly offset by a decrease in statutory tax rates in 2010. The favourable resolution of uncertain tax positions decreased tax expense in both 2010 and 2009 but the decrease was larger in 2009.

As a result, the effective tax rate increased to 17.6% in 2010, compared to 15.0% in 2009.

2009 COMPARED TO 2008

Income taxes of $368 million represented a decrease of $101 million, or 21.5%, compared to $469 million for the same period last year as a result of the favourable resolution of uncertain tax positions, partly offset by higher earnings.

As a result, the effective tax rate decreased to 15.0% in 2009, compared to 25.7% in 2008.

NON-CONTROLLING INTEREST

Non-controlling interest of $299 million in 2010 decreased $34 million, or 10.2%, compared to $333 million for the same period last year from lower earnings due to an impairment charge related to certain customer relationships created on the privatization of Bell Nordiq in 2008 and the premium paid on the partial redemption of Bell Aliant’s 4.72% medium-term notes.

Non-controlling interest of $333 million in 2009 increased $10 million, or 3.1%, compared to $323 million in 2008 due to higher earnings at Bell Aliant in 2009.

DISCONTINUED OPERATIONS

In 2009, we incurred a net loss from discontinued operations of $11 million as compared to $90 million in 2008. The net loss in 2008 was due mainly to losses incurred and asset impairments related to our decisions to cease operations or to sell certain of our businesses, including our investment in Expertech Network Installation (US) Inc. (Expertech US). A loss of $15 million was recorded in 2008 in anticipation of the sale of Expertech US. In 2009, we ceased the operations of Expertech US.

NET EARNINGS AND EPS

2010 COMPARED TO 2009

Net earnings applicable to common shares were $2,165 million, or $2.85 per common share, compared to net earnings of $1,631 million, or $2.11 per common share, for the same period last year. This increase was a result of lower net benefit plans cost, lower depreciation and amortization expense, lower interest expense, a lower tax rate and fewer shares outstanding. The increase also was due to a decrease in restructuring and other as compared to 2009, as well as higher gains on investments in 2010 as compared to the same period last year.

Excluding the impact of restructuring and other and net (gains) losses on investments, Adjusted net earnings increased by $230 million, from $1,929 million to $2,159 million in 2010. As a result, Adjusted EPS increased 13.6% in 2010 to $2.84 per common share from $2.50 per common share in 2009.

2009 COMPARED TO 2008

Net earnings applicable to common shares for 2009 were $1,631 million, or $2.11 per common share, compared to net earnings of $819 million, or $1.02 per common share, for the same period last year. The increase was due to higher EBITDA and lower income tax expense from the resolution of uncertain tax positions partly offset by increased depreciation and amortization expense and higher net benefit plans cost. Net earnings were higher in 2009 also due to a decrease in restructuring and other charges compared to 2008, as well as gains on investments in 2009 compared to losses on investments in 2008.

Excluding the impact of restructuring and other and net (gains) losses on investments, Adjusted net earnings increased by $118 million, from $1,811 million to $1,929 million in 2009. As a result, Adjusted EPS increased 11.1% in 2009 to $2.50 per common share from $2.25 per common share in 2008, which also reflects the impact of fewer average outstanding common shares.

 SEGMENTED ANALYSIS

Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance.

OPERATING REVENUES							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Bell Wireline	10,695		10,666		10,640		0.3	%	0.2	%
Bell Wireless	4,934		4,558		4,479		8.2	%	1.8	%
Inter-segment eliminations	(204	)	(204	)	(248	)	0.0	%	17.7	%
Bell	15,425		15,020		14,871		2.7	%	1.0	%
Bell Aliant	3,071		3,174		3,297		(3.2	%)	(3.7	%)
Inter-segment eliminations	(427	)	(459	)	(507	)	7.0	%	9.5	%
Total operating revenues	18,069		17,735		17,661		1.9	%	0.4	%
OPERATING INCOME
							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Bell Wireline	1,812		1,148		902		57.8	%	27.3	%
Bell Wireless	1,160		1,284		1,241		(9.7	%)	3.5	%
Bell	2,972		2,432		2,143		22.2	%	13.5	%
Bell Aliant	700		759		726		(7.8	%)	4.5	%
Total operating income	3,672		3,191		2,869		15.1	%	11.2	%

BELL WIRELINE SEGMENT

BELL WIRELINE REVENUE

BELL WIRELINE REVENUE							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Local and access	3,012		3,159		3,360		(4.7	%)	(6.0	%)
Long distance	932		1,078		1,165		(13.5	%)	(7.5	%)
Data	3,691		3,696		3,723		(0.1	%)	(0.7	%)
Video	1,749		1,593		1,450		9.8	%	9.9	%
Equipment and other	991		817		574		21.3	%	42.3	%
Total external revenues	10,375		10,343		10,272		0.3	%	0.7	%
Inter-segment revenues	320		323		368		(0.9	%)	(12.2	%)
Total Bell Wireline revenue	10,695		10,666		10,640		0.3	%	0.2	%

2010 Compared to 2009

Bell Wireline’s revenues increased 0.3% in 2010 to $10,695 million from $10,666 million in 2009. Year-over-year revenue increases of $174 million in equipment and other and $156 million in video were partly offset by decreases of $147 million in local and access, $146 million in long distance and $5 million in data.

Local and Access

Local and access revenues were $3,012 million in 2010, down 4.7% from $3,159 million in 2009. This decrease was due mainly to ongoing residential and business NAS erosion and reprice pressures, mainly within our large and mass market business segments as a result of competitive pricing offers in the marketplace. Although local and access revenues were lower in 2010 compared to the previous year, the annual rate of decline improved significantly representing our best performance in over five years, due mainly to fewer NAS net losses year over year.

NAS net losses were 385,317 in 2010, representing a 13.9% improvement over net losses of 447,424 in 2009. This result reflected lower year-over-year residential NAS line losses, which improved 17.0% in 2010. Despite continued aggressive pricing and promotional activity by cable TV competitors and CLECs, as well as the effects of wireless substitution, the year-over-year reduction in NAS line losses can be attributed to the benefits of service bundling, effective marketing of our Home Phone packages, increased customer winbacks, fewer losses to CLECs, and high-quality service delivery during the 2010 residential move season in Québec and back-to-school period.

As a result of continued soft demand for new installations due to a slowly recovering economy, business NAS line losses in 2010 also declined year over year, but improved 4.6% over 2009. This result was driven mainly by fewer business line disconnections as compared with the previous year, reflecting economic stabilization and effective customer retention strategies.

At December 31, 2010, our combined residential and business NAS customer base totalled 6,475,705 lines (comprised of 3,608,887 residential lines and 2,866,818 business lines), compared with 6,861,022 lines (comprised of 3,886,530 residential lines and 2,974,492 business lines) at the end of 2009. As a result of the improvement in NAS line losses year over year, the rate of erosion on our total NAS customer base decreased to 5.6% in 2010 from 6.1% in 2009. Our annual rate of residential NAS erosion was 7.1% in 2010, down from 7.9% in the previous year, while business NAS erosion was relatively unchanged year over year at 3.6% compared with 3.7% in 2009.

Long Distance

Long distance revenues were $932 million in 2010, compared with $1,078 million in 2009. The year-over-year decrease of 13.5% reflected lower billed minute volumes resulting from residential and business NAS line erosion, toll competition, rate pressures in our business and wholesale markets, as well as technological substitution to wireless and Internet. The continuing shift by residential customers towards unlimited or high-usage packages for a set monthly price instead of per-minute rates and the increased adoption of lower-priced rate plans by small business customers to optimize overall telecom spending also contributed to lower long distance revenues in 2010 compared to the previous year.

Data

Data revenues totalled $3,691 million in 2010, down 0.1% from $3,696 million in 2009. The slight year-over-year decrease was attributable to the ongoing decline in legacy data revenues. This decline resulted from continued business customer migration to IP-based systems, competitive losses, pricing pressures in our business and wholesale market segments, and a lower volume of digital network access circuits in use by our business customers due to continued cautious spending consistent with low levels of employment growth in the economy. This was almost entirely offset by higher residential Internet service revenue driven primarily by subscriber growth and a higher proportion of customers subscribing to Bell Fibe Internet packages, higher IP broadband connectivity revenues generated by our Business Markets unit, as well as increased sales of ICT service solutions and data-related equipment to large business customers.

We experienced a rebound in broadband Internet subscriber growth in 2010 driven by our Fibe high-speed Internet service that contributed to net activations of 40,335 compared with 37,618 in 2009. Our Internet subscriber results in 2010 also reflected fewer residential and business customer deactivations year over year, despite ongoing aggressive acquisition offers from our competitors and wireless substitution. At December 31, 2010, our total number of high-speed Internet connections was 2,097,326, representing a 2.0% increase since the end of 2009.

Video

Video revenues increased 9.8% in 2010 to $1,749 million from $1,593 million in the previous year, as a result of higher ARPU and a larger customer base. Video ARPU in 2010 was up 5.6%, or $3.90, to $73.49 per month from $69.59 per month in 2009. The year-over-year improvement in video ARPU was due mainly to customer upgrades to higher-priced programming packages, driven partly by increased customer adoption of premium STBs.

We added 71,221 net video subscribers in 2010, compared with net activations of 113,315 in 2009. Even with the commercial launch of Bell Fibe TV in September 2010 in select areas of Toronto and Montréal, which had a positive impact on subscriber acquisition during the fourth quarter of 2010, and increased wholesale activations, total video net activations decreased year over year due mainly to higher retail churn as a result of aggressive competitive pricing and promotional activity throughout the year by the cable TV operators. Our video churn rate in 2010 increased to 1.4% from 1.2% in the previous year. At December 31, 2010, our video subscriber base totalled 2,020,098, representing a 3.7% increase since the end of 2009.

Equipment and Other

Equipment and other revenues increased 21.3% in 2010 to $991 million from $817 million in 2009, mainly as a result of the acquisition of The Source in the third quarter of 2009.

2009 Compared to 2008

Bell Wireline’s revenues totalled $10,666 million, up 0.2% from $10,640 million in 2008. Year-over-year revenue increases of $143 million in video and $243 million in equipment and other were partly offset by decreases of $201 million, $87 million and $27 million in local and access, long distance and data, respectively.

Local and Access

Local and access revenues declined 6.0% in 2009 to $3,159 million from $3,360 million in 2008. The decrease was due largely to ongoing residential NAS erosion. Higher year-over-year business line losses and the decline in our payphone business driven by reduced usage also negatively impacted local and access revenues this year.

At December 31, 2009, our combined residential and business NAS customer base totalled 6,861,022 lines (comprised of 3,886,530 residential lines and 2,974,492 business lines), compared to 7,308,446 (comprised of 4,221,071 residential lines and 3,087,375 business lines) at the end of 2008. These figures include retroactive adjustments that we made to our NAS customer base as at the beginning of 2008 after an extensive company-wide review of subscriber metrics completed in 2009 that resulted in a reduction of 3,000 lines and 111,000 lines, respectively, to our residential and business NAS subscriber counts.

NAS net losses in 2009 were 447,424, up from 436,172 in the previous year, representing an annual rate of NAS erosion of 6.1% in 2009 compared to 5.6% in 2008. The year-over-year increase in line losses can be attributed to the weaker economy in 2009 that brought about a higher number of business customer disconnections and fewer new installations in Ontario and Québec. As a result, we experienced a higher rate of business NAS erosion in 2009, which increased to 3.7% from 1.7% in 2008. However, our residential local business exhibited resiliency to the economy as evidenced by the reduction in residential NAS line losses in 2009, which improved 12.6% year over year, despite ongoing aggressive competition from both cable TV operators and CLECs for local telephone service.

Long Distance

Long distance revenues were $1,078 million in 2009, compared to $1,165 million in 2008. The 7.5% decrease was driven by lower billed-minute volumes resulting from residential and business NAS line erosion, toll competition and pricing pressures in our business and wholesale markets, as well as technological substitution to wireless and Internet.

Data

Data revenues decreased 0.7% in 2009 to $3,696 million from $3,723 million in 2008. The modest decline in 2009 was attributable to decreased equipment sales to business customers who deferred buying decisions and spent more cautiously during the economic downturn. Although legacy data revenues decreased year over year, total data service revenues increased 1.1% in 2009, mainly as a result of higher Internet services revenue driven by a greater number of high-speed Internet customer connections, higher residential Internet ARPU, and increased IP broadband connectivity revenue from both our business and wholesale customers. Legacy data revenue erosion continued as a result of business customer migrations to IP-based systems, competitive losses, continued market pricing pressures, and a lower number of digital network access circuits used by existing customers due to a reduced level of overall business activity and cost rationalization given the slowdown in the economy.

We added 37,618 net high-speed Internet subscribers in 2009, compared to 50,814 in 2008. Despite increased residential sales through our direct channels, driven by competitive product offers and improvements in service delivery, total net subscriber activations decreased in 2009 as a result of higher economy-related business deactivations and a maturing Internet market. At December 31, 2009, we had 2,056,991 high-speed Internet subscribers, representing a 0.1% increase over 2008. This figure includes an end-of-year subscriber base adjustment following a company-wide review of subscriber metrics, which resulted in a decrease of 35,160 customers. The subscriber base adjustment did not impact net subscriber activations for 2009.

Video

Video revenues increased 9.9% in 2009 to $1,593 million from $1,450 million in 2008 as a result of higher ARPU and a larger customer base. Video ARPU in 2009 was up 6.5%, or $4.22, to $69.59 per month from $65.37 per month in 2008. The year-over-year improvement in video ARPU was due to customer upgrades to higher-priced programming packages, driven partly by increased customer adoption of premium STBs.

We added 113,315 net video subscribers in 2009, compared to 29,741 in 2008. The year-over-year improvement can be attributed to higher activations through our direct channels and increased customer subscriptions from MDUs. Our video churn rate in 2009 remained unchanged year over year at 1.2%. At December 31, 2009, our video subscriber base totalled 1,948,877, representing a 5.2% increase over 2008. This figure includes an end-of-year subscriber base adjustment following a company-wide review of subscriber metrics, which resulted in a decrease of 16,209 customers. The subscriber base adjustment did not impact net subscriber activations for 2009.

Equipment and Other

Equipment and other revenues increased 42.3% to $817 million in 2009 from $574 million in 2008, mainly as a result of the acquisition of The Source in the third quarter of 2009.

BELL WIRELINE OPERATING INCOME

2010 Compared to 2009

Operating income for our Bell Wireline segment was $1,812 million in 2010, up 57.8% from $1,148 million in 2009. The year-over-year increase was due primarily to:

• higher video, Internet and IP broadband connectivity services revenue

• a decline in labour costs due to a reduced workforce and decreased use of outsourced labour resulting from productivity and efficiency improvements in both our field operations and residential services call centres

• decreased payments to other carriers due to reduced rates for traffic settled on their networks

• cost savings realized through renegotiated service contracts with certain IT vendors and other outsource suppliers

• lower U.S. dollar hedge rates in 2010 on our U.S. dollar-denominated purchases

• decreased capital taxes and real estate costs

• decreased net benefit plans cost, which included the positive impact of a pension valuation allowance reversal

• lower restructuring and other expense.

The favourable impact on operating income in 2010 from these factors was partly offset by:

• a reduction in higher-margin legacy voice and data revenues due to the erosion of our residential NAS customer base, business customer losses and competitive pricing pressures

• higher cost of service at Bell TV driven by a larger subscriber base and increased programming costs due to the addition of new content and higher rates paid.

In addition, higher operating expenses and marketing costs incurred in the first quarter of 2010 as a result of our sponsorship of the Vancouver Winter Olympics moderated the improvement in Bell Wireline’s operating income in 2010.

2009 Compared to 2008

Operating income for our Bell Wireline segment was $1,148 million in 2009, up from $902 million in 2008. The year-over-year increase was due primarily to lower restructuring and other charges in 2009, reflecting amounts for voluntary and involuntary workforce reduction initiatives, including a retirement incentive for unionized employees, the relocation of employees to campus environments, and a charge recorded as a result of a Supreme Court of Canada ruling upholding the CRTC’s decision as to the disposition of Bell’s remaining deferral account balance.

Bell Wireline’s operating income before restructuring and other decreased 3.1% to $1,623 million in 2009 from $1,675 million in 2008, mainly as a result of the following:

• ongoing loss of higher-margin legacy voice and data revenues

• higher customer acquisition and TV programming and costs consistent with video subscriber growth and the addition of new channels

• higher U.S. dollar hedge rates in 2009 on our U.S. dollar-denominated purchases

• increased wireline marketing and sales expenses

• costs related to Bell’s sponsorship of the Vancouver Winter Olympics

• higher net benefit plans cost.

These factors, which had an unfavourable impact on operating income in 2009, were partly offset by higher video, Internet and IP broadband connectivity revenues, a decline in overall labour costs due mainly to a reduced workforce, and decreased use of consultants and contractors, as well as lower overall general and administrative expenses.

BELL WIRELESS SEGMENT

BELL WIRELESS REVENUE

BELL WIRELESS REVENUE							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Service	4,481		4,102		4,059		9.2	%	1.1	%
Product	407		405		375		0.5	%	8.0	%
Total external revenues	4,888		4,507		4,434		8.5	%	1.6	%
Inter-segment revenues	46		51		45		(9.8	%)	13.3	%
Total Bell Wireless revenue	4,934		4,558		4,479		8.2	%	1.8	%

2010 Compared to 2009

Bell Wireless operating revenues, comprised of network service and product revenues, increased 8.2% to $4,934 million in 2010 from $4,558 million in 2009.

Wireless service revenue grew 9.2% in 2010 to $4,481 million from $4,102 million in 2009. The year-over-year increase was the result of subscriber base growth and higher ARPU.

Product revenues increased 0.5% in 2010 to $407 million from $405 million in 2009, reflecting higher smartphone sales and a higher number of gross subscriber activations and upgrades year over year. The unfavourable impact of lower average handset pricing and discounted acquisition offers in response to the high level of competitive intensity moderated overall product revenue growth in 2010.

Beginning in the third quarter of 2009, wireless ARPU, churn and COA reflect 100% of Virgin’s results. These metrics, prior to this time, reflected our previous 50% ownership. Wireless gross activations, net activations and end-of-period subscribers in prior periods have always included 100% of Virgin’s subscribers.

Blended ARPU increased 0.6% in 2010 to $52.03 per month from $51.70 per month in 2009. The year-over-year improvement reflected both higher postpaid and prepaid ARPU.

Postpaid ARPU increased 1.0% in 2010 to $63.49 per month from $62.87 per month in 2009. The increase was due to data ARPU growth, reflecting increased use of text messaging, e-mail, wireless Internet access and other mobile applications driven by increased penetration of smartphones and other data-capable devices, as well as increased adoption of data plans. Higher long distance revenue, attributable to increased prices on long distance wireless plans and increased usage, also contributed to higher postpaid ARPU in 2010. Lower voice ARPU, resulting mainly from increased customer adoption of richer rate plans with more services and voice minutes included at lower monthly prices (including the elimination of system access fees on new rate plans launched in November 2009 that are only partly compensated for by a $5 monthly increase), and competitive pricing pressures due to increased market penetration by discount/flanker brands and the emergence of new wireless service providers in the marketplace, moderated the year-over-year improvement in postpaid ARPU in 2010.

Prepaid ARPU increased to $17.76 per month in 2010 from $17.15 per month in 2009, mainly as a result of higher average usage per customer.

For the same reasons as above, on a pro forma basis, assuming the acquisition of Virgin occurred on January 1, 2009, postpaid ARPU increased 1.1% to $63.49 per month in 2010 from $62.81 per month in 2009. Prepaid ARPU improved 1.3% to $17.76 per month from $17.53 per month in the same respective years.

Driven by significantly higher postpaid gross activations year over year, total gross wireless activations increased 11.4% in 2010 to 1,999,482 as compared to 1,794,237 in 2009.

Postpaid gross activations totalled 1,332,086 in 2010, up 26.1% from 1,056,126 in the previous year. Postpaid gross activations represented approximately 67% of total gross activations in 2010, compared to 59% in 2009. The year-over-year increase in postpaid gross activations reflected our extensive portfolio of the latest smartphones and other sought-after mobile handsets, the positive consumer response to our promotional offers, expanded distribution and the launch of the new HSPA+ network in November 2009.

Prepaid gross activations decreased 9.6% in 2010 to 667,396 from 738,111 in 2009, primarily due to our emphasis on postpaid acquisition at Bell Mobility and Virgin as well as aggressive acquisition offers from new wireless entrants for lower value subscribers.

Our blended churn rate increased to 1.9% in 2010 from 1.7% in 2009 as a result of higher postpaid and prepaid churn. Postpaid churn increased to 1.4% in 2010 from 1.3% in the previous year, while prepaid churn increased to 3.5% from 3.2% for the same respective periods. Higher postpaid and prepaid churn in 2010 mainly reflected heightened competitive intensity particularly at the low end of the consumer market.

On a pro forma basis, our blended churn rate increased to 1.9% in 2010 from 1.8% in 2009 for similar reasons as above. Postpaid and prepaid churn rates were unchanged.

Mainly as a result of higher postpaid gross activations, total wireless net subscriber activations grew 9.7% year over year to 408,746 in 2010 from 372,607 in 2009. Higher value postpaid net activations increased 51.2% to 500,139 in 2010 from 330,815 in the previous year. However, due to lower prepaid gross activations, we reported prepaid net customer losses of 91,393 in 2010, compared to net additions of 41,792 in 2009. At December 31, 2010, we provided service to 7,242,048 wireless subscribers, representing a 6.0% increase since the end of 2009.

2009 Compared to 2008

Bell Wireless operating revenues increased 1.8% to $4,558 million in 2009 from $4,479 million in 2008. Despite subscriber base growth and the July 2009 acquisitions of Virgin and The Source, operating revenues were adversely affected by the economic downturn, which resulted in reduced usage and lower overall spending by both our consumer and business customers.

Wireless service revenue in 2009 grew by 1.1%, or $43 million, to $4,102 million from $4,059 million in 2008. The year-over-year increase was driven by higher wireless data usage, subscriber base growth and the acquisition of Virgin. Lower voice ARPU moderated the growth in wireless service revenue in 2009, reflecting a softer economy and competitive pricing pressures from increased market penetration of flanker brands.

Product revenues increased 8.0% in 2009 to $405 million from $375 million in 2008. The year-over-year increase was due to the acquisitions of Virgin and The Source, and increased smartphone sales.

Beginning in the third quarter of 2009, wireless ARPU, churn and COA reflect 100% of Virgin’s results. These metrics, prior to this time, reflected our previous 50% ownership. Wireless gross activations, net activations and end-of-period subscribers in prior periods always have included 100% of Virgin’s subscribers.

Wireless ARPU decreased in 2009 mainly as a result of lower voice usage attributable to the economic slowdown. The decline in the voice component of ARPU was due largely to decreased usage, reflecting reduced employment levels and increased customer adoption of richer rate plans with more services and voice minutes included at lower monthly prices, and decreased roaming revenues as a result of reduced customer travel. Competitive pricing pressures due to the emergence of flanker brands also put downward pressure on voice ARPU. These factors were partly offset by growth in data revenues, reflecting increased usage and features penetration consistent with the sale of a greater number of smartphones, wireless Internet sticks and other data-capable devices. In addition, due to the inclusion of a higher proportion of Virgin prepaid customers in our ARPU calculation, blended ARPU for 2009 was impacted adversely when compared to 2008, while postpaid ARPU remained virtually unaffected.

Postpaid ARPU was $62.87 per month in 2009, down from $66.09 per month in 2008, while prepaid ARPU was essentially unchanged at $17.15 per month in 2009 compared to $17.14 per month in the previous year. Accordingly, blended ARPU declined to $51.70 per month in 2009 from $54.29 per month in 2008.

On a pro forma basis, assuming the acquisition of Virgin occurred on January 1, 2008, postpaid and prepaid ARPU decreased, year over year, in 2009. Postpaid ARPU was $62.81 per month in 2009, compared to $66.02 per month in 2008. Prepaid ARPU declined to $17.53 per month in 2009 from $17.83 per month in the previous year. Accordingly, blended ARPU declined to $50.88 per month in 2009 from $52.70 per month in 2008.

Notwithstanding the softer economy and intense competition, our gross wireless activations increased 8.6% in 2009 to 1,794,237 compared to 1,651,494 in 2008. The year-over-year improvement was driven by both higher postpaid and prepaid gross activations.

Postpaid gross activations grew 8.9% in 2009 to 1,056,126 from 969,522 last year, reflecting the positive consumer response to the launch of the new HSPA+ network, our expanded handset and smartphone lineup, growth in wireless Internet stick activations and our promotional offers.

Prepaid gross activations increased 8.2% in 2009 to 738,111 from 681,972 in 2008, reflecting growth at Virgin and relatively higher demand for prepaid products as consumers controlled their spending during the economic downturn.

Our blended churn rate increased to 1.7% in 2009 from 1.6% in 2008, reflecting higher postpaid and prepaid churn. Postpaid churn increased to 1.3% in 2009 from 1.2% in the previous year, due to higher economy-driven deactivations and aggressive acquisition offers from our competitors. Prepaid churn increased to 3.2% in 2009 from 3.1% in 2008.

On a pro forma basis, our blended churn rate increased to 1.8% in 2009 from 1.7% in 2008, reflecting higher postpaid and prepaid churn. Postpaid churn increased to 1.3% in 2009 from 1.2% in 2008. Prepaid churn increased to 3.2% in 2009 from 3.1% in 2008.

As a result of higher gross subscriber activations, total wireless net activations increased 6.4% in 2009 to 372,607 compared to 350,044 in 2008. Postpaid net activations, which represented 89% of total net activations in 2009, were essentially stable year over year at 330,815 compared to 331,043 in 2008, while prepaid net activations increased to 41,792 from 19,001 in the same respective periods.

At December 31, 2009, we provided service to 6,833,302 wireless subscribers, representing a 5.2% increase over the end of 2008. This figure reflected an end-of-year subscriber base adjustment following a company-wide review of subscriber metrics, which resulted in a decrease of 36,826 customers (34,752 postpaid and 2,074 prepaid). The subscriber base adjustment did not impact net subscriber activations for 2009.

BELL WIRELESS OPERATING INCOME

2010 Compared to 2009

Our Bell Wireless segment reported operating income of $1,160 million in 2010, down 9.7% from $1,284 million in 2009. The year-over-year decrease was due to a combination of factors, including:

• higher subscriber acquisition costs due mainly to a greater number of gross activations

• increased spending on customer retention and handset upgrades

• higher payments to other carriers as a result of increased data roaming

• increased network expenses to maintain and accommodate growing data usage on the HSPA+ network

• higher labour and administrative costs related to a greater number of distribution points and to provide customer support to a growing base of smartphone customers using more sophisticated data services and applications

• increased advertising.

Higher wireless operating revenues and the favourable impact on product costs from lower U.S. dollar hedge rates in 2010 on our U.S. dollar-denominated purchases of wireless devices partly offset the decrease in Bell Wireless’ operating income in 2010.

Wireless COA per gross activation increased to $397 in 2010 from $350 in the previous year. Despite the favourable impact of a significantly higher number of gross activations, wireless COA was higher year over year, mainly as a result of increased handset subsidies and sales commissions driven by a higher proportion of postpaid and smartphone customer activations in 2010 as compared to the previous year.

Wireless COA per gross activation increased to $397 in 2010 from $336 in 2009 on a pro forma basis for similar reasons as above.

2009 Compared to 2008

Our Bell Wireless segment reported operating income of $1,284 million in 2009, up 3.5% from $1,241 million in 2008. The year-over-year increase was due to higher operating revenues, lower subscriber acquisition costs, and decreased customer retention and handset upgrade spending. These factors were partly offset by:

• higher costs to support a larger number of subscribers and wireless data usage growth

• increased operating expenses consistent with the acquisitions of Virgin and The Source

• increased customer care costs, including increased warranty and repair costs, as a result of supporting more sophisticated devices and services

• higher cost of product sales driven by a significant year-over-year increase in smartphone activations.

Wireless COA decreased by 11.4% in 2009 to $350 per gross activation from $395 per gross activation in 2008. On a pro forma basis, wireless COA decreased by 9.9% in 2009 to $336 per gross activation from $373 in 2008. The improvement in wireless COA was primarily the result of lower selling and advertising costs, as well as a higher proportion of wireless Internet stick activations year over year.

BELL ALIANT SEGMENT

BELL ALIANT REVENUE

BELL ALIANT REVENUE
							% CHANGE
							2010 VS. 2009		2009 VS. 2008
	2010		2009		2008
Local and access	1,287		1,348		1,394		(4.5	%)	(3.3	%)
Long distance	371		399		429		(7.0	%)	(7.0	%)
Data	659		632		598		4.3	%	5.7	%
Wireless	81		78		72		3.8	%	8.3	%
Equipment and other	408		428		462		(4.7	%)	(7.4	%)
Total external revenues	2,806		2,885		2,955		(2.7	%)	(2.4	%)
Inter-segment revenues	265		289		342		(8.3	%)	(15.5	%)
Total Bell Aliant revenue	3,071		3,174		3,297		(3.2	%)	(3.7	%)

2010 Compared to 2009

Bell Aliant revenues decreased 3.2% to $3,071 million in 2010 from $3,174 million in 2009. The year-over-year decline resulted from the continued erosion of Bell Aliant’s legacy voice and data businesses. Lower IT product sales also contributed to the decline in operating revenues at Bell Aliant in 2010. Higher revenues from growth in Internet, IP-based broadband connectivity services and wireless partly offset the year-over-year decrease in Bell Aliant’s revenues.

Local and access revenues decreased 4.5% in 2010 to $1,287 million from $1,348 million in the previous year. This was due to a 4.8% decline in the NAS customer base since the end of 2009, reflecting competitive losses driven by aggressive pricing and an expansion in the cable competitive footprint, as well as substitution for other services including wireless and VoIP services. A number of Bell Aliant’s regulated services are governed by a price cap formula and, as a result of negative inflation in 2009, a large reduction in contribution subsidy revenues resulted in 2010. This was mitigated in the fourth quarter of 2010 by the beneficial effects of a retroactive revenue adjustment associated with a regulatory decision regarding contribution subsidies. In order to moderate the impact of reduced contribution subsidies and a declining NAS customer base on its revenues, Bell Aliant has programs in place targeted at retaining the highest value customers and has implemented pricing increases in certain areas of its territory that reflect the higher value provided through its bundled packages. At December 31, 2010, Bell Aliant had 2,775,874 NAS in service, compared with 2,916,156 NAS at the end of 2009.

Long distance revenues were $371 million in 2010, down 7.0% as compared to $399 million in 2009. The decrease was due to lower minutes of use, year over year, resulting from competitive NAS line losses and technology substitution to wireless calling and IP-based services. The continued shift by residential customers from per-minute rate plans to fixed-price packages also contributed to lower long distance revenues at Bell Aliant in 2010.

Data revenues increased 4.3% in 2010 to $659 million from $632 million in 2009. The year-over-year improvement can be attributed largely to higher Internet revenues driven by a 4.3% increase in the number of high-speed subscribers and higher residential ARPU from growth in value-added services and price increases in 2009. At December 31, 2010, Bell Aliant had 842,460 high-speed Internet subscribers compared with 807,640 subscribers at the end of 2009.

Wireless revenues grew 3.8% in 2010 to $81 million from $78 million in 2009, due mainly to subscriber base growth. At December 31, 2010, Bell Aliant had 132,362 wireless customers, representing a 9.4% increase since the end of 2009.

Equipment and other revenues decreased 4.7% in 2010 to $408 million from $428 million in the previous year. The decline was due mainly to lower IT product revenues attributable to customer sales in 2009 that did not recur in 2010.

2009 Compared to 2008

Bell Aliant revenues decreased 3.7% to $3,174 million in 2009 from $3,297 million in 2008. The year-over-year decline resulted from the continued erosion of Bell Aliant’s local wireline and long distance businesses and reduced telecom product sales. These declines were partly offset by higher revenues from growth in Internet and IP-based broadband connectivity services, and an increase in wireless and IT revenue. The wind-down of the operations of AMP in the third quarter of 2008, following Bell’s notification that it would terminate its contract with AMP as its exclusive distributor in Atlantic Canada, also adversely impacted Bell Aliant’s operating revenues in 2009.

Local and access revenues decreased 3.3% in 2009 to $1,348 million from $1,394 million in 2008. This was due to a 5.1% decline in the NAS customer base in 2009, reflecting competitive losses driven by aggressive pricing and increased promotional activity by competitors, as well as expansion in the cable telephony footprint and substitution for other services including wireless and VoIP services. At December 31, 2009, Bell Aliant had 2,916,156 NAS in service, compared to 3,071,675 NAS one year earlier.

Long distance revenues were $399 million in 2009, down 7.0% compared to $429 million in 2008. The decrease was due to a decline in conversation minutes resulting from competitive losses and technology substitution to wireless calling and IP-based services.

Data revenues increased 5.7% in 2009 to $632 million from $598 million in 2008. The year-over-year improvement can be attributed to higher Internet revenues driven by a 7.0% increase in the number of high-speed subscribers and higher residential ARPU. At December 31, 2009, Bell Aliant had 807,640 high-speed Internet subscribers compared to 754,927 subscribers at the end of 2008.

Wireless revenues grew 8.3% in 2009 to $78 million from $72 million in 2008, mainly due to a larger subscriber base and higher ARPU. At December 31, 2009, Bell Aliant had 121,019 wireless customers, representing a 6.2% increase compared to the end of 2008.

Equipment and other revenues decreased 7.4% in 2009 to $428 million from $462 million in 2008. The year-over-year decline was due to lower telecom product sales in 2009 compared to 2008. Equipment and other revenues in 2009 were also adversely impacted by the wind-down of the operations of AMP in the third quarter of 2008.

BELL ALIANT OPERATING INCOME

2010 Compared to 2009

Operating income at Bell Aliant decreased 7.8% to $700 million in 2010 from $759 million in 2009. The year-over-year decline was due mainly to a $30 million impairment charge related to certain customer relationships created on the privatization of Bell Nordiq in 2008 as well as lower operating revenues, offset partly by decreased labour costs from workforce reduction programs, and continued efficiencies achieved as a result of various initiatives that led to decreased use of consultants and IT services contract labour. Various cost containment and other expense reduction measures that resulted in reduced selling, general and administrative expenses, as well as lower year-over-year restructuring and other charges, also moderated the decrease in Bell Aliant’s operating income in 2010.

2009 Compared to 2008

Operating income at Bell Aliant was higher year over year, increasing by 4.5% to $759 million in 2009 from $726 million in 2008. The year-over-year improvement was due mainly to lower labour costs as a result of workforce reduction programs initiated in the fourth quarter of 2008 and the first quarter of 2009, and to decreased use of consultants and IT services contract labour. Other cost containment initiatives that resulted in reduced selling, general and administrative expenses, as well as lower restructuring and other charges also contributed to higher operating income in 2009. These favourable factors were partly offset by lower total operating revenues and higher net benefit plans cost year over year.