RESULTS BY OPERATING GROUP

Highlights

As a result of the dilution of BCE's ownership interest in Nortel Networks from approximately 51% to 41% following Nortel Networks' acquisition of Bay Networks, Inc. (Bay Networks), effective September 1, 1998, on a prospective basis, BCE has changed its accounting for Nortel Networks from full consolidation to equity accounting. Accordingly, BCE's consolidated statement of operations includes Nortel Networks' statement of operations on a line-by-line basis up to and including August 31, 1998 and reflects, as of September 1, 1998, in other income, BCE's share of the net earnings to common of Nortel Networks. Furthermore, BCE's consolidated balance sheet as at December 31, 1998 does not include Nortel Networks' assets and liabilities on a line-by-line basis.

BCE's 1998 net earnings before extraordinary item increased by $3,184 million compared with 1997. Included in BCE's 1998 net earnings are special net gains of $2,913 million resulting primarily from the $3,613 million non-cash gain on the reduction of ownership in Nortel Networks partially offset by BCE's share of Nortel Networks' amortization of intangibles related to the Bay Networks acquisition and the amortization of purchased in-process research and development related to other acquisitions. This compares with total special net charges of $2,883 million in 1997, which included an extraordinary item of $2,950 million.

Excluding the impact of special items, BCE's baseline earnings increased by $319 million (25%) compared with 1997. The improved results primarily reflected:

• increased earnings contribution at Bell Canada of $301 million;

• increased earnings contribution at Nortel Networks of $103 million;

• increased earnings contribution at Other International Telecom of $71 million;

partially offset by:

• decreased earnings contribution at BCE Mobile of $46 million; and,

• the introduction of intercompany profit eliminations of $99 million.

Revenues decreased by $7,063 million (20%) in 1998 compared with 1997 primarily as a result of Nortel Networks being equity accounted for effective September 1, 1998. Excluding Nortel Networks, revenues increased $775 million (6%) in 1998 compared with 1997 mainly due to increased revenues at Other Canadian Telecom and BCI.

During 1999, BCE will continue to pursue new sources of revenues and explore ways of fostering greater integration of strategies across the BCE group. One example is the agreement between Nortel Networks and BCI under which Nortel Networks purchased $150 million of convertible unsecured subordinated debentures (Debentures) due 2002 of BCI in February 1999. In addition, the two companies signed a co-operation agreement whereby the proceeds from the Debentures will be invested by BCI in projects where Nortel Networks will act as a preferred equipment supplier. Another example is the announcement, on January 7, 1999, by Bell Canada and Bell Mobility Cellular Inc. of the formation of a new company, Bell Distribution Inc., that will merge their retail operations and stores across Ontario and Québec.

Extraordinary item and change in accounting policies

As at December 31, 1997, BCE determined that most of its telecommunications subsidiary and associated companies no longer met the criteria necessary for the continued application of regulatory accounting provisions. As a result, BCE recorded an extraordinary non-cash charge of $2,950 million, net of an income tax benefit of $1,892 million and a non-controlling interest of $38 million. Also included in the extraordinary item was an after-tax charge of $97 million representing BCE's share of the related extraordinary item of its associated companies.

The operations of most of BCE's telecommunications subsidiary and associated companies no longer met the criteria for application of regulatory accounting provisions due to significant changes in regulation including the implementation of the price cap regime which replaced rate-of-return regulation effective January 1, 1998, and the concurrent introduction of competition in the local exchange market. Accordingly, BCE adjusted the net carrying values of assets and liabilities as at December 31, 1997 to reflect values appropriate under generally accepted accounting principles (GAAP) for enterprises no longer subject to rate-of-return regulation.

In conjunction with the discontinued application of regulatory accounting provisions, intercompany earnings on the sales from Nortel Networks to BCE's regulated telecommunications subsidiary and associated companies were eliminated on consolidation beginning January 1, 1998.

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