2003 annual report www.bce.ca NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SIGNIFICANT ACCOUNTING POLICIES All amounts are in millions of Canadian dollars, except where noted. See Note 26, Reconciliation of Canadian GAAP to United States GAAP, for a description and reconciliation of the significant differences between Canadian GAAP and United States GAAP that affect our financial statements. Basis of presentation We have prepared the consolidated financial statements according to Canadian generally accepted accounting principles (GAAP).      We consolidate the financial statements of all of the companies we control. We proportionately consolidate our share of the financial statements of our joint venture interests. All transactions and balances between these companies have been eliminated on consolidation. Comparative figures We have reclassified some of the figures for previous years in the consolidated financial statements to make them consistent with the current year’s presentation.      We have restated financial information for previous years to reflect: the change in accounting treatment to discontinued operations for: – Aliant Inc.’s (Aliant) emerging business segment, which consists of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc., effective May 2003 – Aliant’s remote communications segment, which consists of Aliant’s investment in Stratos Global Corporation (Stratos), effective December 2003 – BCE Emergis Inc.’s (BCE Emergis) U.S. Health operations, effective December 2003 – other minor business dispositions the adoption of the fair value-based method of accounting for employee stock options, effective January 1, 2003 the change in the method of accounting for subscriber acquisition costs in our wireless and Direct-home (DTH) satellite television businesses from a deferral and amortization method to a method of expensing as a customer service is activated, effective January 1, 2003. Using estimates When preparing financial statements according to GAAP, management makes estimates and assumptions relating to: reported amounts of revenues and expenses reported amounts of assets and liabilities disclosure of contingent assets and liabilities.      Actual results could be different from these estimates. Recognizing revenue We recognize operating revenues when they are earned, specifically when: services are provided or products are delivered to customers clear proof that an arrangement exists amounts are fixed or can be determined our ability to collect is reasonably assured.      In particular, we recognize: fees for long distance and wireless services, and other fees, such as network access fees, licence fees, hosting fees, maintenance fees and standby fees, when we provide the services or over the term of the contract subscriber revenue when customers receive the service advertising revenue when advertisements are aired, or printed and distributed revenues from the sale of equipment when the equipment is delivered to customers and accepted revenue on long-term contracts based on actual performance as services are provided, as equipment is delivered and accepted, or as contract milestones are met.      When a transaction involves more than one product or service, we allocate revenue to each based on its relative fair value.      We may enter into arrangements with subcontractors who provide services to our customers. When we act as the principal in these arrangements, we recognize revenue based on the amounts billed to the customers. Otherwise, we recognize the net amount that we keep as revenue.      Accruals for sales returns are recorded when revenues are recognized. We base them on past experience.       We record the payments we receive in advance as deferred revenues until we provide the service or deliver the product to customers. Deferred revenues are presented in Accounts payable and accrued liabilities or in Other long-term liabilities on the balance sheet. Cash and cash equivalents We classify all highly liquid investments with a short-term maturity of generally three months or less as Cash and cash equivalents. Securitization of accounts receivable We consider a transfer of accounts receivable to be a sale when we give up control of them in exchange for proceeds from a trust (other than our retained beneficial interest in the accounts receivable).      We determine the fair value of the accounts receivable transferred based on the present value of future expected cash flows. The present value of future cash flows is projected using management’s best estimates of key assumptions, such as discount rates, weighted-average life of accounts receivable and credit loss ratios. We recognize a loss on this kind of transaction as Other income. The loss partly depends on the carrying amount of the accounts receivable transferred. We allocate this amount to accounts receivable sold, or to our retained interest, according to its relative fair value on the day the transfer is made.      Accounts receivable are transferred on a fully serviced basis. As a result, we: recognize a servicing liability on the day accounts receivable are transferred to the trust amortize this liability to earnings over the expected life of the transferred accounts receivable. Capital assets We carry capital assets at cost, less accumulated amortization. Most of our capital assets are amortized using the composite group depreciation method. When we retire assets in the ordinary course of business, we charge their original cost to accumulated amortization. In general, we amortize capital assets on a straight-line basis over the estimated useful lives of the assets. We review the estimate of the useful lives of the assets every year and adjust it, if needed.   Estimated useful life Telecommunications assets 10 to 25 years Machinery and equipment 2 to 20 years Buildings 10 to 40 years Finite-life intangible assets      Software 3 to 7 years    Customer relationships 5 to 40 years      We capitalize construction costs, labour and overhead related to our self-constructed assets.      We capitalize certain costs incurred for developing or obtaining internal-use software. We expense software maintenance and training costs when they are incurred. The expense is included in Operating expenses in the statement of operations.      We assess capital assets for impairment when events or changes in circumstances indicate that we may not be able to recover their carrying value. We calculate impairment by deducting the asset’s net recoverable amount (based on estimates of undiscounted future cash flows or other valuation methods) from its carrying value. This amount is deducted from earnings. Significantly influenced It means that: we have a 20% to 50% equity interest in a company that we do not control or jointly control, and we have a significant influence on its operating, investing and financing activities. Equity method An investment is initially recorded at cost, and adjustments are made to include our share of the investment’s net earnings or losses. These adjustments are included in our net earnings. The amount of our investment is reduced by the amount of dividends received or receivable from the investment. Cost method The investment is recorded at cost. Dividends received or receivable from the investment are included in our net earnings. Goodwill Goodwill is created when we acquire a business. It is calculated by deducting the fair value of the net assets acquired from the amount paid. It represents the value of factors that contribute to a greater earning power, such as a good reputation, customer loyalty or intellectual capital. Translation of foreign currencies The way we account for a foreign operation depends on whether it is self-sustaining or integrated. A self-sustaining foreign operation is largely independent of the parent company. An integrated foreign operation depends on the parent company to finance or run its operations. Accounting for investments We use the following methods to account for investments that are not consolidated or proportionately consolidated in our financial statements: the equity method for companies that we can significantly influence the cost method for our investments in all other companies.      We include investments in Other long-term assets on the balance sheet. Earnings from investments are included in Other income in the statement of operations.      We expense declines in the market values of our investments when management considers them to be longer term. The expense is included in Other income in the statement of operations. Costs of issuing debt and equity The costs of issuing debt are capitalized in Other long-term assets. They are amortized on a straight-line basis over the term of the related debt and are included in Interest expense in the statement of operations. The costs of issuing equity are reflected in the statement of deficit. Indefinite-life intangible assets Our indefinite-life intangible assets consist mainly of the Bell brand name, spectrum licences and television licences.      We assess these assets for impairment in the fourth quarter of every year and when events or changes in circumstances indicate that an asset might be impaired. We calculate the impairment by deducting the asset’s fair value (based on estimates of discounted future cash flows or other valuation methods) from its carrying value. This amount is deducted from earnings. Goodwill We assess goodwill of individual reporting units for impairment in the fourth quarter of every year and when events or changes in circumstances indicate that goodwill might be impaired.      We assess goodwill for impairment in two steps: we identify a potential impairment by comparing the fair value of a reporting unit to its carrying value. Fair value is based on estimates of discounted future cash flows or other valuation methods. When the fair value of the reporting unit is less than its carrying value, we allocate the fair value to all of its assets and liabilities, based on their fair values. The amount that the fair value of the reporting unit exceeds the amounts assigned to its assets and liabilities is the fair value of goodwill. we determine if there is an impairment by comparing the fair value of goodwill to its carrying value. Any excess is deducted from earnings. Translation of foreign currencies Self-sustaining foreign operations For self-sustaining foreign operations, we use: the exchange rates in effect on the date of the balance sheet for assets and liabilities the average exchange rates during the year for revenues and expenses.      Translation exchange gains and losses are reflected as a currency translation adjustment in shareholders’ equity. When we reduce our net investment in a self-sustaining foreign operation, we recognize an appropriate portion of the currency translation adjustment in earnings. Integrated foreign operations For integrated foreign operations, we use: the exchange rates on the date of the balance sheet for monetary assets and liabilities, such as cash, accounts receivable and payable, and long-term debt the historical exchange rates for non-monetary assets and liabilities, such as capital assets the average exchange rates during the year for revenues and expenses.      Translation exchange gains and losses are included in Other income in the statement of operations. Domestic transactions and balances in foreign currencies For domestic transactions made in foreign currencies, we use: the exchange rates on the date of the balance sheet for monetary assets and liabilities the average exchange rates during the year for revenues and expenses.      Translation exchange gains and losses are included in Other income in the statement of operations. Derivative financial instruments We use various derivative financial instruments to hedge against: interest rate risk foreign exchange rate risk changes in the price of BCE Inc. common shares relating to special compensation payments (SCPs).      We expect that the derivatives we use will generate enough cash flows and gains or incur losses to offset these risks. We do not use derivative financial instruments for speculative or trading purposes.      We document all relationships between derivatives and the items they hedge, and our risk management objective and strategy for using various hedges. This process includes linking every derivative to: a specific asset or liability on the balance sheet, or a specific net investment in self-sustaining foreign operations, or a specific firm commitment, or an anticipated transaction.      We assess how effective derivatives are in managing risk when the hedge is put in place and on an ongoing basis. If a hedge is no longer effective, we will stop using hedge accounting.      We follow these policies when accounting for derivatives: deferred gains or losses relating to derivatives that qualify for hedge accounting are recognized in earnings when the hedged item is sold or the anticipated transaction is ended early gains and losses related to hedges of anticipated transactions are recognized in earnings or are recorded as adjustments of carrying values when the transaction takes place derivatives that are economic hedges, but do not qualify for hedge accounting, are recognized at fair value. We record the change in fair value in earnings. any premiums paid for financial instrument contracts are deferred and expensed to earnings over the term of the contract any forward premiums or discounts on forward foreign exchange contracts that are used to hedge long-term debt that is denominated in foreign currencies are amortized as an adjustment to interest expense over the term of the forward contract.      The following describes our policies for specific kinds of derivatives. Interest rate swap agreements We use interest rate swap agreements to help manage the fixed and floating interest rate mix of our total debt portfolio. These agreements often involve exchanging interest payments without exchanging the notional principal amount that the payments are based on. We record the exchange of payments as an adjustment of interest expense on the hedged debt. We include the related amount payable or receivable from counterparties as an adjustment to Other long-term assets or liabilities. Foreign currency swap agreements We use foreign currency swap agreements to manage the exchange rate exposure of some of our debt that is denominated in foreign currencies. We designate these agreements as hedges of firm commitments to pay interest and principal on the foreign currency risk. We recognize gains and losses on these contracts the same way we recognize the gains and losses on the hedged item. Unrealized gains or losses are included in Other long-term assets or liabilities. Forward contracts We use forward contracts to manage: the exchange rate exposure of some of our debt that is denominated in foreign currencies. We designate these agreements as hedges of firm commitments to pay the principal on the foreign currency risk. the exposure to anticipated forecasted transactions denominated in foreign currencies. We designate these agreements as hedges of the future cash flows. changes in price of BCE Inc. common shares relating to SCPs.      We recognize gains and losses on these contracts the same way we recognize the gains and losses on the hedged item. Unrealized gains or losses are included in Other long-term assets or liabilities. Curtailment A curtailment is a significant reduction in plan benefits that can result when a defined benefit pension plan is amended or restructured. Types of curtailments include: a reduction in the expected number of years of future service of active employees the elimination of the right to earn defined benefits for some or all of the future service of employees. Settlement A company makes a settlement when it substantially settles all or part of an accrued benefit obligation. An example is a lump-sum cash payment to employees in exchange for their rights to receive future benefits. Employee benefit plans We maintain defined benefit plans that provide pension benefits for almost all of our employees. Benefits are based on the employee’s length of service and average rate of pay during their last five years of service. Most employees are not required to contribute to the plans. The plans provide increasing pension benefits to help protect a portion of the income of retired employees against inflation. We are responsible for adequately funding our pension plans. We make contributions to them based on various actuarial cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service benefits.      We also provide other future benefits to employees, including: health-care and life insurance benefits during retirement other post-employment benefits, including various disability plans, workers’ compensation and medical benefits to former or inactive employees, their beneficiaries and dependants, from the time their employment ends until their retirement starts, under certain circumstances.      We do not fund the other employee future benefit plans.      We accrue our obligations under employee benefit plans and related costs, net of the fair value of plan assets. Actuaries determine pension and other retirement benefit costs using: the projected benefit method, prorated on years of service, which takes into account future salary levels a discount rate based on market interest rates on high-quality bonds with maturities that match the timing and benefits expected to be paid by the plans management’s best estimate of the plans’ expected investment performance, salary increases, retirement ages of employees and expected health-care costs.      We value pension plan assets at fair value, which is determined using current market values. We use a market-related value to calculate the expected return on plan assets. This value is based on a four-year weighted-average of the fair value of the pension plan assets.      We amortize past service costs from plan amendments on a straight-line basis over the average remaining service period of employees who were active on the day of the amendment but not yet fully eligible to receive benefits. This represents the period that we expect to realize economic benefits from the amendments.      We use the corridor approach to recognize actuarial gains and losses into earnings. First we deduct 10% of the benefit obligation or the market-related value of plan assets, whichever is greater, from the unamortized net actuarial gains or losses. Then we amortize the excess over the average remaining service period of active employees. This ranged from approximately 10 to 17 years, with a weighted average of 14 years at the end of 2003.      When the restructuring of a benefit plan results in both a curtailment and a settlement of obligations, we account for the curtailment before we account for the settlement.      December 31 is the measurement date for most of our employee benefit plans. Our actuaries perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The last actuarial valuation of most of our pension plans was performed on January 1, 2003. Tax laws A tax law is substantively enacted when it has been tabled in the legislature but may not have been passed into law.   Income taxes Current income tax expense reflects the estimated income taxes payable for the current year before any refunds or the use of losses incurred in previous years. We use the asset and liability method to account for future income taxes. Future income taxes reflect: the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes, on an after-tax basis the benefit of losses that will more likely than not be realized and carried forward to future years to reduce income taxes.      We calculate future income taxes using the rates enacted by tax law and those substantively enacted. The effect of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is substantively enacted. Black-Scholes option pricing model The Black-Scholes option pricing model is a financial model we use to calculate the weighted-average fair value of a stock option granted using four key assumptions: stock dividend yield, expected stock volatility, risk-free interest rate and expected life of the stock option.   Stock-based compensation plans BCE Inc.’s stock-based compensation plans mainly include employee savings plans (ESPs) and long-term incentive programs. Before 2000, the long-term incentive programs often included SCPs.      We credit to share capital any amount employees pay when they exercise their stock options or buy shares. We recognize the contributions BCE Inc. makes under ESPs as a compensation expense. We also recognize a compensation expense or recovery relating to SCPs.      We use the fair-value based method for employee stock options and account for employee stock options by measuring the compensation cost of options using the Black-Scholes option pricing model. This method was used for options granted on or after January 1, 2002. Recent changes to accounting standards and policies Transitional goodwill impairment charge Under the goodwill transitional provisions of CICA Handbook section 3062, Goodwill and other intangible assets, we charged an impairment of $8,180 million to opening retained earnings at January 1, 2002 without restating the comparative figures for 2001. This related to the impaired goodwill of reporting units in Teleglobe Inc. (Teleglobe) ($7,516 million), Bell Globemedia Inc. (Bell Globemedia) ($545 million) and BCE Emergis ($119 million). Stock-based compensation and other stock-based payments Effective January 1, 2002, we adopted the recommendations in section 3870 of the CICA Handbook, Stock-based compensation and other stock-based payments, on a prospective basis. The section sets standards for recognizing, measuring and disclosing stock-based compensation and other stock-based payments made in exchange for goods and services. The standards require us to use a fair value-based method for: all stock-based awards to non-employees direct awards of stock and stock appreciation rights to employees awards to employees that can be settled in cash or other assets.      The standards also encourage companies to use a fair value-based method for all other awards granted to employees. Awards that are settled in stock are recorded as equity. Awards that are required to be, or are usually, settled in cash are recorded as liabilities.      Before January 1, 2003, we recognized an expense when the option was exercised. We measured the cost of employee stock options as the amount that the quoted market price of BCE Inc.’s common shares on the day of the grant exceeded the exercise price an employee had to pay to buy the common shares multiplied by the number of options exercised.      Effective January 1, 2003, we changed our accounting to the fair value-based method. We now recognize and measure the compensation cost of options granted on or after January 1, 2002 using the Black-Scholes option pricing model.      As a result of applying this change, we restated the comparative figures for 2002. We recorded a compensation expense of $27 million in 2002. At December 31, 2002, this resulted in: an increase of $27 million in the deficit a decrease of $3 million in non-controlling interest an increase of $30 million in contributed surplus. Subscriber acquisition costs Before 2003, we accounted for the costs of acquiring subscribers by: deferring and amortizing the costs of acquiring DTH satellite television service subscribers against earnings over three years deferring and amortizing the costs of acquiring wireless subscribers against earnings over the terms of the contracts, which are normally up to 24 months expensing all other subscriber acquisition costs when services were activated.      The costs we deferred and amortized consisted mainly of hardware subsidies, net of revenues from the sale of wireless handsets.      Effective January 1, 2003, we changed our accounting method and started expensing all subscriber acquisition costs when services are activated. We also started presenting the revenues generated from the sale of wireless handsets instead of netting them against operating expenses.      As a result of applying this change, we restated the comparative figures for 2002 and 2001: operating revenues increased by $195 million in 2002 and $183 million in 2001 operating expenses increased by $275 million in 2002 and $332 million in 2001 income taxes decreased by $32 million in 2002 and $60 million in 2001 non-controlling interest decreased by $7 million in 2002 and $11 million in 2001 net earnings decreased by $41 million in 2002 and $78 million in 2001.      At December 31, 2002, this resulted in: a decrease of $133 million in other current assets a decrease of $339 million in other long-term assets an increase of $15 million in goodwill a decrease of $189 million in future income tax liabilities a decrease of $9 million in non-controlling interest an increase of $259 million in the deficit. Disclosure of guarantees Effective January 1, 2003, we adopted Accounting Guideline 14, Disclosure of guarantees. The guideline describes how to identify guarantees and requires guarantors to disclose the significant details about guarantees they make, whether or not they will have to make payments under the guarantees.       See Note 24, Guarantees, for more information. Disposal of long-lived assets and discontinued operations Effective May 1, 2003, we adopted the recommendations in section 3475 of the CICA Handbook, Disposal of long-lived assets and discontinued operations. The new section describes: how to recognize, measure, present and disclose long-lived assets that will be sold criteria for classifying assets as held for sale. This section requires an asset held for sale to be measured at its carrying value or fair value less disposal costs, whichever is lower criteria for classifying a disposal of a business as a discontinued operation and how to present and disclose discontinued operations and other disposals of long-lived assets.      We are following the recommendations in this section for all business dispositions after May 1, 2003. Consolidation of variable interest entities Effective July 1, 2003, we adopted Accounting Guideline 15, Consolidation of variable interest entities, on a retroactive basis without restatement of previous periods. The guideline clarifies when variable interest entities should be consolidated, when equity investors are not considered to have a controlling financial interest, or they have not invested enough equity to allow the entity to finance its activities without additional subordinated financial support from other parties.      We performed a review and concluded that the entity with which Bell Canada entered into a 10-year shared services agreement on June 22, 2001 met the criteria for consolidation under this guideline. This entity, which is a corporation owned by a third party, provides Bell Canada with accounting systems and administrative services. Before the consolidation, we reported the fees that the entity charged Bell Canada for its services as operating expenses.      The consolidation of this entity resulted in the following changes to our consolidated balance sheet at July 1, 2003: an increase of $102 million in total assets, of which $88 million is capital assets an increase of $127 million in total liabilities, of which $122 million is long-term debt an increase of $25 million in the deficit.      Changes to our consolidated statement of operations for the year ended December 31, 2003 were: a decrease of $4 million in operating revenues a decrease of $11 million in operating expenses an increase of $22 million in amortization expense an increase of $4 million in interest expense a decrease of $19 million in net earnings.      Changes to our consolidated statement of cash flows for the year ended December 31, 2003 were: an increase of $2 million in cash flows from operating activities an increase of $7 million in cash flows from investing activities a decrease of $7 million in cash flows from financing activities. Future changes to accounting standards and policies Impairment of long-lived assets Effective January 1, 2004, we adopted section 3063 of the CICA Handbook, Impairment of long-lived assets. Adopting this section will affect how we recognize, measure and disclose the impairment of long-lived assets. The section is effective for years beginning on or after April 1, 2003.      An impairment loss is recognized on a long-lived asset to be held and used when its carrying value exceeds the total undiscounted cash flows expected from its use and disposition.      Before January 1, 2004, the amount of the loss was determined by deducting the asset’s net recoverable amount (based on undiscounted cash flows expected from its use and disposition) from its carrying value.      After January 1, 2004, the amount of the loss is determined by deducting the asset’s fair value (based on discounted cash flows expected from its use and disposition) from its carrying value. Asset retirement obligations Effective January 1, 2004, we adopted section 3110 of the CICA Handbook, Asset retirement obligations. The section is effective for years beginning on or after January 1, 2004. It describes how to recognize and measure liabilities related to the legal obligations of retiring property, plant and equipment.      These obligations are initially measured at fair value and are adjusted for any changes resulting from the passage of time and any changes to the timing or the amount of the original estimate of undiscounted cash flows. The asset retirement cost is capitalized as part of the related asset and is amortized into earnings over time.      Adopting this section will not have a material effect on our future consolidated financial statements because we do not have any significant asset retirement obligations. Hedging relationships Effective January 1, 2004, we adopted Accounting Guideline 13, Hedging relationships. The guideline is effective for years beginning on or after July 1, 2003. The guideline provides additional documentation and designation requirements for hedge accounting and requires regular, periodic assessments of effectiveness. The guideline does not change the method of accounting for derivative instruments in hedging relationships.      Adopting this guideline will not affect our future consolidated financial statements. All outstanding hedges that previously qualified for hedge accounting continue to qualify for hedge accounting under this guideline. Financial instruments The CICA recently issued revisions to section 3860 of the CICA Handbook, Financial instruments – Disclosure and presentation. The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equities.      These revisions come into effect on January 1, 2005. Because we do not have any instruments with these characteristics, adopting this section on January 1, 2005 will not affect our future consolidated financial statements. NOTE 2 SEGMENTED INFORMATION We operate under four segments: Bell Canada, Bell Globemedia, BCE Emergis and BCE Ventures. Our segments are organized by products and services, and reflect how we manage our operations for planning and for measuring performance. Bell Canada segment – Canada’s leading provider of wireline and wireless communications services, Internet access, data services and DTH satellite television services to residential and business customers. Bell Globemedia – provides information and entertainment services to Canadian customers and access to distinctive Canadian content. It includes CTV Inc. (CTV), Canada’s leading private broadcaster, and The Globe and Mail, Canada’s leading national newspaper. BCE Emergis – provides eBusiness solutions to the financial services industry in North America and the health industry in Canada. It automates transactions between companies and allows them to interact and transact electronically. BCE Ventures – consists mainly of our interests in Telesat Canada (Telesat) and CGI Group Inc. (CGI).     The accounting policies of the segments are the same as those we describe in Note 1, Significant accounting policies. Segments negotiate sales between each other as if they were unrelated parties.      We measure the profitability of each segment based on its contribution to consolidated net earnings.      Our operations, including most of our revenues, capital assets and goodwill, are located in Canada. Effective January 1, 2003, the results of Bell Canada Holdings Inc. (BCH), Bell Canada’s holding company, are classified under Corporate and other. They were previously classified under Bell Canada.      The tables on this page and the following page are a summary of financial information by segment. The results in the Corporate and other segment include inter-segment eliminations.   Bell Canada   Bell Globemedia   BCE Emergis   BCE Ventures   Corporate and other   BCE Consolidated   For the year ended December 31, 2003                       Operating revenues                          External customers 16,543   1,327   225   954   7   19,056      Inter-segment 155   36   91   264   (546 ) –   Total operating revenues 16,698   1,363   316   1,218   (539 ) 19,056   Operating expenses (9,697 ) (1,130 ) (301 ) (871 )  369   (11,630 ) Amortization expense (2,970 ) (60 ) (46 ) (126 )  55   (3,147 ) Net benefit plans (cost) credit (181 ) (6 ) –   –   12   (175 ) Restructuring and other charges (14 ) – (38 ) – – (52 ) Operating income (loss) 3,836   167   (69 ) 221   (103 ) 4,052   Other income (expense) 194   (38 ) 54   41   (38 ) 213   Interest expense (945 ) (36 ) (4 ) (36 )  (72 ) (1,093 ) Income taxes (1,127 ) (7 ) (17 ) (89 )  104   (1,136 ) Non-controlling interest (185 ) (35 ) 10   (2 )  21   (191 ) Discontinued operations 59   –   (128 ) –   39   (30 ) Dividends on preferred shares –   –   –   –   (64 ) (64 ) Premium on redemption of preferred shares –   –   –   –   (7 ) (7 ) Net earnings (loss) applicable to common shares                       1,832   51   (154 ) 135   (120 ) 1,744   Segment assets 33,523   3,270   719   2,403   (584 ) 39,331   Investments at equity 391   105   –   –   –   496   Capital expenditures 2,892   49   11   226   1   3,179   For the year ended December 31, 2002                         Operating revenues                            External customers 16,930   1,246   205   796   9   19,186      Inter-segment 172   44   141   268   (625 ) –   Total operating revenues 17,102   1,290   346   1,064   (616 ) 19,186   Operating expenses (10,023 ) (1,110 ) (375 ) (777 ) 454   (11,831 ) Amortization expense (2,894 ) (67 ) (58 ) (121 ) 58   (3,082 )  Net benefit plans (cost) credit 38   (3 ) –   –   (2 ) 33   Restructuring and other charges (675 ) –   (119 ) –   (93 ) (887 )  Operating income (loss) 3,548   110   (206 ) 166   (199 ) 3,419   Other income (expense) 2,434   (11 ) 25   65   (80 ) 2,433   Impairment charge (50 ) (715 ) –   –   –   (765 ) Interest expense (1,108 ) (39 ) (4 ) (35 ) 62   (1,124 )  Income taxes (1,609 ) (34 ) 31   (65 ) 94   (1,583 ) Non-controlling interest (881 ) 197   61   (2 ) 23   (602 ) Discontinued operations 14   –   38   –   577   629   Dividends on preferred shares –   –   –   –   (59 ) (59 ) Premium on redemption of preferred shares –   –   –   –   (6 ) (6 ) Net earnings (loss) applicable to common shares                         2,348   (492 ) (55 ) 129   412   2,342   Segment assets 33,359   3,238   926   2,554   (971 ) 39,106   Investments at equity 371   117   –   –   –   488   Capital expenditures 3,390   47   22   232   40   3,731   For the year ended December 31, 2001                         Operating revenues                            External customers 16,703   1,175   242   670   6   18,796      Inter-segment 164   28   205   374   (771 ) –   Total operating revenues 16,867   1,203   447   1,044   (765 ) 18,796   Operating expenses (10,236 ) (1,095 ) (378 ) (754 ) 606   (11,857 ) Amortization expense (2,873 ) (265 ) (204 ) (152 ) (23 )  (3,517 )  Net benefit plans (cost) credit 128   (1 ) –   –   (6 ) 121   Restructuring and other charges (972 ) (5 ) –   –   –   (977 ) Operating income (loss) 2,914   (163 ) (135 ) 138   (188 ) 2,566   Other income (expense) 48   –   3   236   3,779   4,066   Interest expense (1,063 ) (35 ) (33 ) (64 ) 194   (1,001 )  Income taxes (802 ) (15 ) (22 ) (27 ) (830 )  (1,696 )  Non-controlling interest (456 ) 63   71   –   33   (289 ) Discontinued operations (28 ) –   (125 ) –   (3,057 ) (3,210 ) Dividends on preferred shares –   –   –   –   (64 ) (64 ) Net earnings (loss) applicable to common shares                         613   (150 ) (241 ) 283   (133 ) 372   NOTE 3 BUSINESS ACQUISITIONS AND DISPOSITIONS The consolidated statements of operations include the results of acquired businesses from the day they were acquired. Cognicase provides services, such as implementing e-business solutions, application services provider (ASP) services, re-engineering existing applications for e-business, technology configuration management, as well as project management and business process improvement consulting services.   CGI’s acquisition of Cognicase Inc. (Cognicase) CGI acquired 100% of the outstanding common shares of Cognicase in the first quarter of 2003. It issued Class A subordinate shares to pay for part of the purchase price, which reduced BCE’s equity interest in CGI to 29.9% from 31.5%. BCE recognized a dilution gain of $5 million.      The table below shows the final purchase price allocation.   CGI   BCE’s proportionate share   Non-cash working capital items (108 ) (32 ) Capital assets 31   9   Contract costs and other long-term assets 133   39   Future income taxes (10 ) (3 ) Goodwill (1) 321   96   Long-term debt (61 ) (18 )   306   91   Cash position at acquisition 23   7   Net assets acquired 329   98   Consideration            Cash 180          Acquisition costs 9          Issuance of 19,850,245 CGI Class A subordinate shares (2) 140         329       (1)  The goodwill is not deductible for tax purposes. (2)  The value of the CGI shares issued as payment was determined using the weighted-average closing share price on the Toronto Stock Exchange for the 10 trading days before the day that the terms of the acquisition were agreed on and announced. Sale of Certen Inc. (Certen) On July 2, 2003, Bell Canada sold its 89.9% ownership interest in Certen to a subsidiary of Amdocs Limited for $89 million in cash.      The carrying value of Certen’s net assets was $159 million at the time of the sale. Certen had total assets of $450 million, including $34 million in cash and cash equivalents, and total liabilities of $291 million.      At the time of the sale, Bell Canada extended the remaining term of its contract with Certen and Amdocs Limited for billing operations outsourcing, customer care and billing solutions development from four years to seven years.      Bell Canada received a perpetual right to use and modify the intellectual property relating to the billing system. It recorded the perpetual right as an intangible asset of $494 million that will be amortized against earnings over the remaining life of the contract.      Bell Canada recorded a liability of $392 million. This represented its future payments to Certen over the remaining life of the contract for the development of Bell Canada’s billing system. The development of the billing system was largely completed at the time of the sale. This liability will be reduced as Bell Canada makes payments to Certen.      The future income tax liability relating to the intangible asset and long-term liability was $32 million.      The transaction did not result in any gain or loss for Bell Canada. Before the sale, Certen’s results of operations were presented in the Bell Canada segment. Repurchase of SBC Communications Inc.’s (SBC) 20% interest in BCH On June 28, 2002, BCE Inc., BCH and entities controlled by SBC entered into agreements that ultimately led to BCE Inc.’s repurchase of SBC’s 20% interest in BCH for $6,316 million. The initial purchase price allocation resulted in $5,430 million of goodwill. The goodwill is not deductible for tax purposes.      We completed the purchase price allocation in the third quarter of 2003. This resulted in reallocating $1,758 million from goodwill to other net assets of BCH, based on their fair values on the day of the repurchase.      This resulted in the following on our consolidated balance sheet: an increase of $18 million in investments, which are classified as other long-term assets a decrease of $456 million in accrued benefit asset, which is classified as other long-term assets an increase of $1,986 million in indefinite-life intangibles an increase of $603 million in customer relationships, which are classified as capital assets an increase of $165 million in long-term debt an increase of $228 million in future income tax liability, which is classified as other long-term liabilities. See Note 5, Other income, for more information about the sale of the directories business.     MTS is publicly traded. Bell Canada owns 22% of MTS. MTS is a significantly influenced investment, which we account for under the equity method.   Sale of the directories business On November 29, 2002, we sold our print and electronic directories business for approximately $3 billion ($2.8 billion net of selling costs and after the acquisition of an approximate 10% interest in the acquisition vehicle) in cash. The net carrying value of the net assets of the directories business was $518 million at the time of the sale. The directories business had total assets of $390 million, including $52 million in cash and cash equivalents, and total liabilities of $90 million. We recorded a pre-tax gain of $2.3 billion on the sale. We allocated $218 million of goodwill to the sale.      On the day of the transaction, the buyers owned an approximate 90% equity interest in an acquisition vehicle that holds the directories business. Bell Canada indirectly acquired an approximate 10% interest in the acquisition vehicle for approximately $91 million. It is accounted for under the cost method. Creation of Bell West Inc. (Bell West) In April 2002, Bell Canada and Manitoba Telecom Services Inc. (MTS) created Bell West by combining Bell Canada’s interests in the wireline assets of BCE Nexxia Inc. in Alberta and British Columbia with Bell Canada’s and MTS’s interests in Bell Intrigna Inc. Bell West provides telecommunications services in those two provinces and operates under the Bell brand.      The transaction was accounted for at the combined carrying values of the assets and liabilities. As a result of the transaction, Bell Canada owns 60% of Bell West and MTS owns 40%. The terms of the agreement between Bell Canada and MTS also included put and call options relating to MTS’s 40% interest in Bell West.      On February 2, 2004, MTS exercised its option to sell its 40% interest in Bell West to Bell Canada for approximately $645 million in cash. The cash is payable at closing, which is expected to occur on or before August 3, 2004. Creation of the Bell Nordiq Income Fund In April 2002, Bell Canada announced the initial public offering of units of the Bell Nordiq Income Fund. The fund acquired a 37% interest in each of Télébec Limited Partnership (Télébec) and Northern Telephone Limited Partnership (Northern Telephone) from Bell Canada. Bell Canada retains management control over both partnerships and holds a 63% interest in each of them. Bell Canada received gross proceeds of $324 million and recorded a pre-tax gain of $222 million on this transaction. NOTE 4 RESTRUCTURING AND OTHER CHARGES 2003 Streamlining and other charges at BCE Emergis BCE Emergis recorded a pre-tax charge of $38 million ($21 million after taxes and non-controlling interest) in the fourth quarter of 2003. This included restructuring charges of $22 million and other charges of $16 million.      The restructuring charges will be incurred as BCE Emergis streamlines its organizational structure. These costs include employee severance and other employee costs. At December 31, 2003, the unpaid balance of this restructuring provision was $21 million. The restructuring is expected to be complete in 2004.      Other charges consisted of asset write-downs in BCE Emergis’ remaining businesses. Restructuring of Xwave Solutions Inc. Aliant recorded a pre-tax restructuring charge of $15 million ($4 million after taxes and non-controlling interest) in 2003. This was a result of a restructuring at its subsidiary, Xwave Solutions Inc. Costs associated with the restructuring include severance and related benefits, technology lease cancellation penalties and real estate rationalization costs. At December 31, 2003, the unpaid balance of this restructuring provision was $6 million. The restructuring is expected to be complete in 2004. Bell Canada charges In 2003, Bell Canada recorded other charges of $65 million relating to various asset write-downs and other provisions. These charges were offset by a credit of $66 million relating to the reversal of the restructuring charges recorded in 2002, which were no longer necessary because fewer employees were terminated than expected. This was due to an increased redeployment of employees within Bell Canada. 2002 Streamlining and other charges at Bell Canada Bell Canada recorded a pre-tax charge of $302 million in the fourth quarter of 2002 ($190 million after taxes). This included restructuring charges of $232 million and other charges of $70 million.      The restructuring charges were mainly from streamlining Bell Canada’s management, line and other support functions. They included severance for approximately 1,700 employees, enhanced pension benefits and other employee costs. The restructuring was largely complete in 2003.      Other charges consisted mainly of various accounts receivable write-downs relating to billing adjustments and unreconciled balances from previous years that were identified in 2002. Write-off of deferred costs BCE Inc. recorded a pre-tax charge of $93 million ($61 million after taxes) in the fourth quarter of 2002. This represented a write-off of deferred costs relating to various convergence initiatives after an analysis indicated that it was unlikely that these costs would be recovered. Pay equity settlement On September 25, 2002, the members of the Canadian Telecommunications Employees’ Association (CTEA) ratified a settlement reached between the CTEA and Bell Canada relating to the 1994 pay equity complaints that the CTEA had filed on behalf of its members before the Canadian Human Rights Commission. The settlement included a cash payout of $128 million and related pension benefits of approximately $50 million.      As a result of the settlement, Bell Canada recorded a charge of $79 million in the third quarter of 2002 ($37 million after taxes and non-controlling interest). The charge is equal to the $128 million cash payout, less a previously recorded provision. We are deferring and amortizing the related pension benefits into earnings over the estimated average remaining service life of active employees and the estimated average remaining life of retired employees. Write-down of Bell Canada’s accounts receivable At the same time it was developing its new billing system, Bell Canada adopted a new and more precise method for analysing receivables by customer and by service line. This method allows it to more accurately determine the validity of amounts that customers owe to Bell Canada.      The analysis indicated that a write-down of accounts receivable of $272 million ($142 million after taxes and non-controlling interest) was appropriate at June 30, 2002.      Because these amounts came from legacy billing systems and processes, Bell Canada carried out a detailed review of billings and adjustments for the period from 1997 to 2002. It determined that these amounts were the cumulative result of a series of individually immaterial events and transactions relating to its legacy accounts receivable systems dating back to the early 1990s. Streamlining and other charges at BCE Emergis BCE Emergis recorded a pre-tax charge of $119 million in the second quarter of 2002 ($63 million after taxes and non-controlling interest). This included restructuring charges of $95 million and other charges of $24 million.      All of these charges were mainly from streamlining BCE Emergis’ services and reducing its operating costs. They consisted of the write-off of certain assets, severance and other employee costs, contract settlements and costs of leased properties no longer in use. The charges were reduced by the proceeds of disposition of certain exited activities. The restructuring was complete in 2003. 2001 Streamlining and other charges at Bell Canada Bell Canada recorded a total of $975 million in pre-tax charges in the first and fourth quarters of 2001 ($461 million after taxes and non-controlling interest). This included restructuring charges of $555 million and other charges of $420 million.      The restructuring charges were from Bell Canada’s streamlining initiatives and included employee severance for approximately 4,700 employees, enhanced pension benefits and other employee costs. The restructuring was complete in 2002.      Other charges consisted of the write-down of Bell Mobility Inc.’s wireless capital assets, in particular, its analogue networks, paging networks and personal communications service (PCS) base stations. NOTE 5  OTHER INCOME   2003   2002   2001   Net gains on investments 76   2,414   4,063   Interest income 70   65   113   Foreign currency gains (losses) 31   12   (83 ) Other 36   (58 ) (27 ) Other income 213   2,433   4,066        Net gains on investments of $76 million in 2003 were mainly from: a $120 million gain from the sale of a 3.66% interest in the directories business for net proceeds of $135 million in cash. Bell Canada’s retained interest in the directories business is 3.24%. a $44 million loss from the write-down of a number of our cost-accounted investments.      Net gains on investments of $2,414 million in 2002 were mainly from: selling the directories business ($2.3 billion) selling a 37% interest in each of Télébec and Northern Telephone when the Bell Nordiq Income Fund was created ($222 million) writing down our cost-accounted investment in Nortel Networks Corporation (Nortel) ($98 million).      Included in Other is a $30 million write-down of deferred debt issuance costs relating to the early retirement of credit facilities.      Net gains on investments of $4,063 million in 2001 were mainly from: settling short-term forward contracts on approximately 48 million Nortel common shares and selling the same number of Nortel common shares ($3.7 billion) dilution gains resulting from share issues by CGI, Aliant and BCE Emergis to third parties relating to business acquisitions and public offerings ($265 million). NOTE 6 IMPAIRMENT CHARGE In the fourth quarter of 2002, we completed our annual impairment test for goodwill for all of its reporting units. As a result, we recognized a charge of $765 million to pre-tax earnings ($527 million after non-controlling interest) relating to impaired goodwill of reporting units in Bell Globemedia ($715 million) and Aliant ($50 million). In each case, the goodwill was written down to its estimated fair value, which was determined based on estimates of discounted future cash flows and confirmed by market-related values.      The main factor contributing to the impairment at Bell Globemedia was a revised estimate of future cash flows, which reflected management’s decision to scale back its trials in convergence products and other non-core businesses. Market conditions for the media business also contributed to the impairment.      The write-down at Aliant was a result of poor market conditions in the information technology business, which led to lower than expected performance. NOTE 7 INTEREST EXPENSE   2003   2002   2001   Interest expense on long-term debt 1,039   1,004   899   Interest expense on other debt 54   120   102   Total interest expense 1,093   1,124   1,001   NOTE 8  INCOME TAXES The table below is a reconciliation of income tax expense at Canadian statutory rates of 35.4% in 2003, 37.4% in 2002 and 40.1% in 2001, and the amount of reported income tax expense in the statements of operations.   2003   2002   2001   Income taxes computed at statutory rates 1,123   1,482   2,258   Gains on reduction of ownership in subsidiaries and joint ventures (7 ) (5 ) (144 ) Losses not tax affected 8   3   5   Equity in net (losses) earnings of significantly influenced companies (9 ) (22 ) 4   Net gains on disposal of investments (21 ) (294 ) (766 ) Difference between Canadian statutory rates and those applicable to subsidiaries 10   21   –   Large corporations tax 46   28   31   Goodwill amortization –   –   201   Goodwill impairment –   289   –   Other (14 ) 81   107   Total income tax expense 1,136   1,583   1,696        The table below shows the significant components of income tax expense relating to earnings from continuing operations.   2003   2002   2001   Current income taxes 703   1,065   1,623   Future income taxes                Recognition and utilization of loss carryforwards 425   (274 ) 333      Change in Canadian statutory rate 14   (9 ) 59      Change in temporary differences and other (6 ) 801   (319 ) Total income tax expense 1,136   1,583   1,696        The table below shows future income taxes resulting from temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes, as well as tax loss carryforwards.   2003   2002   Non-capital loss carryforwards 469   832   Capital loss carryforwards 22   25   Capital assets (114 ) (44 ) Indefinite-life intangible assets (340 ) –   Employee benefit plans (148 ) (257 ) Investment tax credits (12 ) (41 ) Investments 46   42   Other (756 ) (446 ) Total future income taxes (833 ) 111   Future income taxes are comprised of:            Future income tax asset – current portion 197   119      Future income tax asset – long-term portion 781   617      Future income tax liability – current portion (13 ) –      Future income tax liability – long-term portion (1,798 ) (625 ) Total future income taxes (833 ) 111        At December 31, 2003, BCE had $1,542 million in non-capital loss carryforwards. We: recognized a future tax asset of $469 million for financial reporting purposes on approximately $1,435 million of the non-capital loss carryforwards. $1,347 million expires in varying annual amounts until the end of 2010. $88 million expires in varying annual amounts from 2011 to 2023. did not recognize a future tax asset for financial reporting purposes on approximately $107 million of the non-capital loss carryforwards. $41 million expires in varying annual amounts until the end of 2010. $66 million expires in varying annual amounts from 2011 to 2023.      At December 31, 2003, BCE had $4,093 million in capital loss carryforwards, all of which can be carried forward indefinitely. We: recognized a future tax asset of $22 million for financial reporting purposes on approximately $99 million of the capital loss carryforwards did not recognize a future tax asset for financial reporting purposes on the balance. NOTE 9 DISCONTINUED OPERATIONS   2003   2002   2001   Teleglobe 39   893   (2,810 ) Bell Canada International Inc. (BCI) –   (316 ) (247 ) Aliant’s emerging business segment (4 ) (20 ) (9 ) Aliant’s remote communications segment 63   34   (19 ) BCE Emergis’ U.S. Health operations (128 ) 38   (125 ) Net gain (loss) from discontinued operations (30 ) 629   (3,210 )      The table below is a summarized statement of operations for the discontinued operations.   2003   2002   2001   Revenue 727   1,458   4,422   Operating gain (loss) from discontinued operations, before tax 86   (37 ) (3,671 ) Gain (loss) from discontinued operations, before tax (70 ) (407 ) 461   Income tax recovery (expense) on operating loss (gain) (13 ) 54   206   Income tax recovery (expense) on loss (gain) 17   1,068   (45 ) Non-controlling interest (50 ) (49 ) (161 ) Net gain (loss) from discontinued operations (30 ) 629   (3,210 ) Teleglobe provided international voice and data telecommunications services. It also provided retail telecommunications services through its investment in the Excel Communications group until the second quarter of 2002. These services included long distance, paging and Internet services to residential and business customers in North America. Teleglobe Effective April 24, 2002, we started presenting the financial results of Teleglobe as discontinued operations. They were previously presented in the BCE Teleglobe segment.      The net gain of $39 million in the fourth quarter of 2003 relates mainly to the use available loss carry-forwards that were applied against the taxes payable relating to Bell Canada’s sale of a 3.66% interest in the directories business and Aliant’s sale of Stratos. Otherwise, the tax benefit associated with the remaining unused capital losses has not been reflected in the financial statements.      We recorded a loss of $73 million in the second quarter of 2002 for the write-down of our interest in Teleglobe to its net realizable value, which we determined to be zero. This loss was in addition to the transitional goodwill impairment charge of $7,516 million to opening retained earnings as of January 1, 2002, which was required by section 3062 of the CICA Handbook.      Effective May 15, 2002, we stopped consolidating Teleglobe’s financial results and started accounting for the investment at cost. On December 31, 2002, after obtaining court approval, we sold all of our common and preferred shares in Teleglobe to the court-appointed monitor for a nominal amount. The sale triggered approximately $10 billion of capital losses for tax purposes. We recorded a gain of $1,042 million, relating mainly to the tax benefit from: reinstating non-capital loss carryforwards that were previously used to offset gains incurred on the transactions related to the disposition of Nortel common shares in 2001 applying a portion of the capital losses against the gain on the sale of the directories business in 2002.      Teleglobe’s results of operations include an impairment charge of $2,049 million that was recorded in the first quarter of 2001 after it completed an assessment of the carrying value of its investment in the Excel Communications group. BCI developed and operated communications companies in markets outside Canada, with a focus on Latin America, until July 2002 when it sold its interest in Telecom Américas Ltd. BCI held most of its investments through Telecom Américas Ltd. Aliant’s emerging business segment consisted mainly of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc. iMagicTV Inc. is a software development company that provides broadband TV software and solutions to service providers around the world. Prexar LLC is an Internet services provider. AMI Offshore Inc. provides process and systems control technical services, and contracts manufacturing solutions to offshore oil and gas and other industries. Aliant’s remote communications segment consisted of Aliant’s 53.2% investment in Stratos. Stratos offers Internet Protocol (IP), data and voice access services through a range of newly emerging and established technologies, including satellite and microwave, to customers in remote locations. US Health operates cost containment networks (shared savings and preferred provider organizations) that process medical claims for health care payers, including insurance companies and self-insured entities. BCI Effective January 1, 2002, we started presenting the financial results of BCI as discontinued operations. They were previously presented in the BCE Ventures segment.      Effective June 30, 2002, we stopped consolidating BCI’s financial results and started accounting for our investment in BCI at cost. We recorded a charge of $316 million in 2002, which represented a write-down of the investment to our estimate of its net realizable value.      BCI will be liquidated once all of its assets have been disposed of and all claims against it have been determined. A final distribution will be made to BCI’s creditors and shareholders with the approval of the court. BCI is publicly traded. BCE Inc. owns a 62.2% interest in BCI. Aliant’s emerging business segment Effective May 2003, we started presenting the financial results of Aliant’s emerging business segment as discontinued operations. They were previously presented in the Bell Canada segment.      Almost all of the assets of Aliant’s emerging business segment were sold at December 31, 2003. Aliant’s remote communications segment Effective December 2003, we started presenting the financial results of Aliant’s remote communications segment as discontinued operations. They were previously presented in the Bell Canada segment.      In December 2003, Aliant completed the sale of Stratos, after receiving the required regulatory approvals. Aliant received $340 million ($320 million net of selling costs) in cash for the sale. At the time of sale, the net carrying value of Stratos’ net assets was $215 million. Stratos had total assets of $696 million, including $52 million in cash and cash equivalents, and total liabilities of $372 million. The transaction resulted in a gain on sale of $105 million ($48 million after taxes and non-controlling interest). BCE Emergis’ U.S. Health operations (US Health) Effective December 2003, we started presenting the financial results of US Health as discontinued operations. They were previously presented in the BCE Emergis segment.      In December 2003, BCE Emergis’ board of directors approved the sale of US Health for a total of U.S.$213 million in cash. The total price is subject to adjustments set out in the purchase agreement. BCE Emergis sold US Health in March 2004.       The sale excluded BCE Emergis’ National Health Services Inc. subsidiary (NHS), which runs care management operations in the United States. BCE Emergis sold NHS in a separate transaction in March 2004 for a total of U.S.$10 million in cash.      At December 31, 2003, the carrying value of US Health’s net assets was $247 million. It had total assets of $254 million (including $9 million in cash and cash equivalents) and total liabilities of $7 million. The loss on the transaction was $87 million ($160 million after non-controlling interest and BCE Inc.’s incremental goodwill in US Health), which was recorded in December 2003. NOTE 10 EARNINGS PER SHARE The table below is a reconciliation of the numerator and the denominator used in the calculation of basic and diluted earnings per common share from continuing operations.   2003   2002   2001   Earnings from continuing operations (numerator)             Earnings from continuing operations 1,845   1,778   3,646   Dividends on preferred shares (64 ) (59 ) (64 ) Premium on redemption of preferred shares (7 ) (6 ) –   Earnings from continuing operations – basic 1,774   1,713   3,582   Assumed exercise of put options by CGI shareholders (1) –   12   2   Earnings from continuing operations – diluted 1,774   1,725   3,584   Weighted-average number of common shares outstanding (denominator) (in millions)             Weighted-average number of common shares outstanding – basic 920.3   847.9   807.9   Assumed exercise of stock options (2) 1.6   2.0   4.4   Assumed exercise of put options by CGI shareholders (1) –   13.0   5.6   Weighted-average number of common shares outstanding – diluted 921.9   862.9   817.9   (1)  See Note 23, Commitments and Contingencies, for information about the cancellation of the put options with CGI shareholders. (2)  The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. It excludes all anti-dilutive options. These are options that would not be exercised because their exercise price is higher than the average market value of a BCE Inc. common share for each of the periods shown in the table. If we included them, they would cause our diluted earnings per share to be overstated. The number of excluded options was 22,176,302 in 2003, 20,770,155 in 2002 and 13,185,622 in 2001.   NOTE 11 ACCOUNTS RECEIVABLE   2003   2002   Trade accounts receivable 2,116   2,183   Other accounts receivable 192   164   Allowance for doubtful accounts (231 ) (166 )   2,077   2,181   Securitization of accounts receivable Bell Canada sold an interest in a pool of accounts receivable to a securitization trust for a total of $900 million in cash, under a revolving sales agreement that came into effect on December 12, 2001. The agreement expires on December 12, 2006. Bell Canada had a retained interest of $128 million in that pool of accounts receivable at December 31, 2003. This is equal to the amount of overcollateralization in the receivables transferred.      Aliant sold an interest in a pool of accounts receivable to a securitization trust for a total of $130 million in cash, under a revolving sales agreement that came into effect on December 13, 2001. The agreement expires on December 13, 2006. Aliant had a retained interest of $29 million in that pool of accounts receivable at December 31, 2003.      Bell Canada and Aliant continue to service these accounts receivable. The buyers’ interest in the collection of these accounts receivable ranks ahead of the interests of Bell Canada and Aliant. Bell Canada and Aliant remain exposed to certain risks of default on the amount of receivables that is securitized. They have provided various credit enhancements in the form of overcollateralization and subordination of their retained interests.      The buyers will reinvest the amounts collected by buying additional interests in the Bell Canada and Aliant accounts receivable until the agreements expire. The buyers and their investors have no claim on Bell Canada’s and Aliant’s other assets if customers do not pay amounts owed on time.      In 2003, we recognized a pre-tax loss of $33 million on the revolving sale of accounts receivable for the combined securitizations, compared to $27 million in 2002.      The table below shows balances for the combined securitizations at December 31, 2003 and the assumptions that were used in the model on the date of transfer and at December 31, 2003. A 10% or 20% adverse change in each of these assumptions would have no significant effect on the current fair value of the retained interest.   Range   2003   2002   Securitized interest in accounts receivable     1,030   1,035   Retained interest     157   154   Servicing liability     1.4   1.5   Average accounts receivable managed     1,265   1,150   Assumptions                Cost of funds 2.99%–3.51 % 3.22 % 2.76 %    Average delinquency ratio 6.18%–7.65 % 7.58 % 6.01 %    Average net credit loss ratio 0.90%–1.02 % 0.95 % 0.84 %    Weighted average life (in days) 35–37   35   38      Servicing fee liability 2.00 % 2.00 % 2.00 %      The table below is a summary of certain cash flows received from and paid to the trusts during the year.   2003   2002   Collections reinvested in revolving sales 13,612   12,651   Increase (decrease) in sale proceeds (5 ) 10   NOTE 12  CAPITAL ASSETS           2003           2002     Cost   Accumulated Amortization   Net book value   Cost   Accumulated Amortization   Net book value   Telecommunications assets 36,590   23,476   13,114   34,569   21,847   12,722   Machinery and equipment 5,293   2,870   2,423   5,780   3,114   2,666   Buildings 2,551   1,308   1,243   2,559   1,295   1,264   Plant under construction 1,372   –   1,372   1,743   –   1,743   Land 96   –   96   97   –   97   Other 506   225   281   357   139   218   Total property, plant and equipment 46,408   27,879   18,529   45,105   26,395   18,710   Finite-life intangible assets 3,884   1,224   2,660   2,999   1,329   1,670   Total capital assets 50,292   29,103   21,189   48,104   27,724   20,380        The cost of assets under capital leases was $481 million at December 31, 2003 and $565 million at December 31, 2002. The net book value of these assets was $242 million at December 31, 2003 and $352 million at December 31, 2002.      Amortization of capital assets was $3,133 million in 2003, $3,043 million in 2002 and $2,935 million in 2001. We capitalized total interest cost of $23 million in 2003, $25 million in 2002 and $47 million in 2001. Retirements charged to accumulated amortization were $460 million in 2003, $893 million in 2002 and $822 million in 2001. NOTE 13 OTHER LONG-TERM ASSETS   Notes   2003   2002   Accrued benefit asset 22   1,728   2,070   Future income taxes 8   781   617   Investments at equity     496   488   Investments at cost     263   207   Long-term notes and other receivables     95   151   Deferred debt issuance costs     92   95   Deferred development costs     11   34   Other     84   127         3,550   3,789        The amount of Investments at equity includes goodwill of $199 million at December 31, 2003 and $207 million at December 31, 2002. Amortization of deferred charges was $14 million in 2003, $39 million in 2002 and $49 million in 2001. NOTE 14  INDEFINITE-LIFE INTANGIBLE ASSETS   Note   2003   Intangible assets, December 31, 2002     900   Goodwill reallocated to indefinite-life intangible assets 3   1,986   Capitalized interest     24   Intangible assets, December 31, 2003     2,910   Consisting of:            Brand name     1,986      Spectrum licences     778      Television licences     128      Cable licences     18   Total     2,910   NOTE 15  GOODWILL   Note   Bell Canada   Bell Globemedia   BCE Emergis   BCE Ventures   BCE Consolidated   Balance – December 31, 2002     6,871   1,946   58   596   9,471   Additions     72   –   –   103   175   Goodwill reallocated to other net assets 3   (1,758 ) –   –   –   (1,758 ) Other     –   (7 ) –   (56 ) (63 ) Balance – December 31, 2003     5,185   1,939   58   643   7,825   NOTE 16 DEBT DUE WITHIN ONE YEAR   Notes   Weighted- average interest rate   Weighted- average maturity   2003   2002   Bank advances     4.01 % N/A   24   265   Notes payable     4.22 % 30 days   4   63   BCE Inc. Series P retractable preferred shares 18           351   –   Long-term debt due within one year 17           1,158   1,629   Total debt due within one year             1,537   1,957        We expect to repay debt due within one year with funds generated internally or by refinancing it.       The conditions of some of the credit agreements require us to meet specific financial ratios and to place restrictions on acquiring capital assets and paying dividends. We are in compliance with all conditions and restrictions. NOTE 17  LONG-TERM DEBT   Notes   Weighted- average interest rate   Maturity   2003   2002   BCE Inc.                     Notes (a)     6.86 % 2006-2009   2,000   2,000   Notes payable to SBC             –   314   Total – BCE Inc.             2,000   2,314   Bell Canada                     Debentures and notes (b)     7.36 % 2004–2054   8,789   9,609   Subordinated debentures     8.21 % 2026–2031   275   275   Capital leases (c)     5.92 % 2004–2015   471   427   Other             212   219   Total – Bell Canada             9,747   10,530   Aliant                     Debentures, notes and bonds (d)     7.86 % 2004–2025   985   1,058   Other             5   6   Total – Aliant             990   1,064   Bell Globemedia                     Revolving reducing term credit agreements (e)     4.05 % 2007   60   300   Notes     7.15 % 2009   150   150   Total – Bell Globemedia             210   450   Telesat – Notes and other     7.33 % 2006–2009   347   295   Total – Other             116   93   Total debt             13,410   14,746   Unamortized premium 3           141   –   Less: Amount due within one year 16           (1,158 ) (1,629 ) Long-term debt             12,393   13,117   BCE Inc. (a)  All notes are unsecured. BCE Inc. has the option to redeem $1.7 billion in notes at any time. Bell Canada (b)  All debentures and notes are unsecured. They include U.S.$200 million maturing in 2006 and U.S.$200 million maturing in 2010, which have been swapped into Canadian dollars. $375 million of long-term debt includes call options that allow for early repayment of the principal amounts when certain premiums are paid. On March 1, 2004, Bell Canada redeemed its $125 million Series DU debentures at 101% of the principal amount. The original maturity date of these debentures was March 1, 2011. They had an interest rate of 9.45%. (c)  Includes capital leases of $75 million in 2003 and $71 million in 2002, net of loans receivable of $300 million in 2003 and $319 million in 2002. These obligations were from agreements that Bell Canada entered into in 1999 and 2001 to sell and lease back telecommunications equipment for a total of $399 million. Some of the proceeds were invested in interest-bearing loans receivable. The capital lease obligations, net of loans receivable, were originally issued for U.S.$39 million and have been swapped into Canadian dollar obligations. Aliant (d)  All debentures and notes are unsecured. The bonds ($185 million in 2003 and $193 million in 2002) are secured by deeds of trust and mortgage, and by supplemental deeds. These deeds consist of a first fixed and specific mortgage, a pledge and charge on all of Aliant Telecom Inc.’s real and immovable property and equipment, and a floating charge on all other present and future property of Aliant Telecom Inc. Bell Globemedia (e)  Assets of CTV and one of its subsidiaries, CTV Specialty Television Inc. (CTV Specialty), are collateral for these agreements. $450 million of short-term advances were repaid to Bell Canada in January 2004 ($270 million in January and February 2003). These were replaced with long-term debt under CTV’s and CTV Specialty’s existing long-term facilities. CTV Specialty has fixed interest rates through swap agreements on $95 million of bank debt. Restrictions Certain debt agreements: require us to meet specific financial ratios impose covenants, maintenance tests and new issue tests restrict the payment of dividends restrict how we can dispose of Bell Canada voting shares.      We are in compliance with all conditions and restrictions. NOTE 18  OTHER LONG-TERM LIABILITIES   Notes   2003   2002   Future income taxes 8   1,798   625   Accrued benefit liability 22   1,383   1,377   Deferred revenue and gains on assets     358   438   Deferred contract payments 23   301   –   CRTC benefits packages     130   187   BCE Inc. Series P retractable preferred shares (a)     –   355   Other     729   668   Total other long-term liabilities     4,699   3,650   (a)   At December 31, 2003, 14.1 million shares were outstanding (14.2 million shares at December 31, 2002). The annual dividend rate was $1.60 per share. The dividend payments are classified as interest expense in the statements of operations. On December 8, 2003, BCE Inc. announced that it would redeem all of its outstanding Series P retractable preferred shares for approximately $351 million, which it did on January 15, 2004. As a result, the amount outstanding at December 31, 2003 is presented as debt due within one year. NOTE 19 FINANCIAL INSTRUMENTS See Note 11, Accounts receivable, for a description of the receivables securitization agreements that are outstanding. Using derivatives We periodically use derivative instruments to manage our exposure to interest rate risk, foreign currency risk and changes in the price of BCE Inc. common shares. We do not use derivative instruments for speculative purposes. Because we do not trade actively in derivative instruments, we are not exposed to any significant liquidity risks relating to them.      The following derivative instruments were outstanding at December 31, 2003: cross-currency swaps, interest rate swaps and forward contracts that hedge foreign currency risk on a portion of our long-term debt forward contracts on BCE Inc. common shares that hedge the fair value exposure related to SCPs. Credit risk We are exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations. We expect that they will be able to meet their obligations because we deal only with highly rated institutions that have strong credit ratings and we regularly monitor our credit risk and credit exposure.      There was no credit risk relating to derivative instruments at December 31, 2003.      We are also exposed to credit risk from our customers, but the concentration of this risk is minimized because we have a large and diverse customer base. Currency exposures We use cross-currency swaps and forward contracts to hedge debt that is denominated in foreign currencies. Derivatives that qualify for hedge accounting are marked to current rates, as is the underlying hedged item.       The principal amount to be received under currency contracts was U.S.$589 million at December 31, 2003. The principal amount to be paid under these contracts was $869 million at December 31, 2003. Interest rate exposures We use interest rate swaps to manage the mix of fixed and floating interest rates on our debt. We have entered into interest rate swaps with a notional amount of $195 million, maturing in 2006 and 2011. On $100 million of swaps we pay interest at a rate equal to a three-month bankers’ acceptance floating interest rate plus 2.1%. We receive interest on these swaps at a rate of 6.8%. On $75 million of swaps we pay interest at a rate of 3.2%. We receive interest on these swaps at a rate equal to the three-month bankers’ acceptance floating rate. On $20 million of swaps we pay interest at a rate of 4.7%. We receive interest on these swaps at a rate equal to the three-month bankers’ acceptance floating rate.      We also have issued swaptions for the right to enter into interest rate swap transactions for a notional amount of $90 million. If exercised, these swaptions will involve the payment of fixed interest rates of 10.5% and 11% in exchange for the receipt of the three-month bankers’ acceptance floating rate from 2006 until maturity in 2013.      We have also entered into a forward contract that fixes the interest rate on a notional amount of $150 million of future debt. Fair value Fair value is the amount at which a financial instrument could be exchanged between willing parties, based on the current market for instruments with the same risk, principal and remaining maturity. We base fair values on estimates using present value and other valuation methods.      These estimates are significantly affected by our assumptions for the amount and timing of estimated future cash flows and discount rates, all of which reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were actually settled.      The carrying value of all financial instruments approximates fair value, except for those noted in the table below.       2003       2002     Carrying value   Fair value   Carrying value   Fair value   Investment in Nortel (a) 57   77   36   34   Long-term debt due within one year 1,158   1,171   1,629   1,680   Long-term debt 12,393   14,262   13,117   14,493   Derivative financial instruments, net assets (liability) position:                    Forward contracts – BCE Inc. shares (37 ) (41 ) (52 ) (58 )    Currency contracts (b) (92 ) (97 ) 38   44      Interest rate swaps (9 ) (25 ) –   96   (a)  We have designated 4 four million of our approximately 14 million Nortel common shares to manage our exposure to outstanding rights to SCPs. See Note 21, Stock-based compensation plans, for more information. (b)  Currency contracts include cross-currency interest rate swaps and foreign currency forward contracts. Some of the cross-currency interest rate swaps are economic hedges that do not qualify for hedge accounting. We carry these at fair value.      We included net losses of $26 million in 2003 and net gains of $8 million in 2002 in the currency translation adjustment account. This related to foreign currency contracts that hedged a self-sustaining operation. They were settled in 2003. NOTE 20 SHARE CAPITAL BCE Inc.’s articles of incorporation provide for an unlimited number of First Preferred Shares and Second Preferred Shares. The terms set out in the articles authorize BCE Inc.’s directors to issue the shares in one or more series and to set the number of shares and conditions of each series. (i) Preferred shares The table below is a summary of the principal terms of BCE Inc.’s First Preferred Shares. There were no Second Preferred Shares issued and outstanding at December 31, 2003. BCE Inc.’s articles of incorporation describe the terms and conditions of these shares in detail.           Number of shares   Stated capital                     At December 31                     Series Annual  dividend rate Convertible into Conversion date Redemption date Redemption price   Authorized   Issued and outstanding   2003   2002   Q floating Series R December 1, 2010 At any time  $ 25.50   8,000,000   –   –   –   R $ 1.5435 Series Q December 1, 2005 December 1, 2005  $ 25.00   8,000,000   8,000,000   200   200   S floating Series T November 1, 2006 At any time $ 25.50   8,000,000   8,000,000   200   200   T fixed Series S November 1, 2011 November 1, 2011 $ 25.00   8,000,000   –   –   –   U – – – – –   –   –   –   350   Y floating Series Z December 1, 2007 At any time  $ 25.00   10,000,000   1,147,380   29   29   Z $ 1.3298 Series Y December 1, 2007 December 1, 2007 $ 25.00   10,000,000   8,852,620   221   221   AA $ 1.3625 Series AB September 1, 2007 September 1, 2007 $ 25.00   20,000,000   20,000,000   510   510   AB floating Series AA September 1, 2012 At any time $ 25.50   20,000,000   –   –   –   AC $ 1.3850 Series AD March 1, 2008 March 1, 2008 $ 25.00   20,000,000   20,000,000   510   –   AD floating Series AC March 1, 2013 At any time $ 25.50   20,000,000   –   –   –                     1,670   1,510   Transactions in 2003 On February 28, 2003, BCE Inc. issued 20 million Series AC shares for total proceeds of $510 million. Six million of the 20 million Series AC shares were issued by public offering for a subscription price of $153 million. The remaining 14 million Series AC shares were issued to the holders of BCE Inc.’s Series U shares.      BCE Inc. elected to exercise its option to buy all of the Series U shares for $357 million (including a $7 million premium on redemption). The holders of the Series U shares then used the proceeds from the sale of their shares to buy the 14 million Series AC shares for the subscription price of $357 million.      Before February 28, 2003, the Series U shares were convertible at the holder’s option into Series V shares. On February 28, 2003, all Series U and V shares were cancelled. Voting rights All of the issued and outstanding preferred shares at December 31, 2003 were non-voting, except under special circumstances when the holders were entitled to one vote per share. Entitlement to dividends Holders of Series R, Z, AA and AC shares are entitled to fixed cumulative quarterly dividends.      Holders of Series S and Y shares are entitled to floating adjustable cumulative monthly dividends.       If Series Q, AB and AD shares are issued, their holders will be entitled to floating adjustable cumulative monthly dividends.      If Series T shares are issued, their holders will be entitled to fixed cumulative quarterly dividends. The rate will be set at the Government of Canada yield multiplied by a percentage rate, as set out in BCE Inc.’s articles of incorporation. Conversion features All of the issued and outstanding preferred shares at December 31, 2003 are convertible at the holder’s option into another series of preferred shares on a one-for-one basis. Redemption features BCE Inc. may redeem Series R, Z, AA and AC shares on the redemption date and every five years after that date.      If Series T shares are issued, BCE Inc. may redeem them on the redemption date and every five years after that date.      BCE Inc. may redeem Series S and Y shares at any time.      If Series Q, AB and AD shares are issued, BCE Inc. may redeem them at any time. Dividend rate swaps In 2003, we elected to settle the dividend rate swaps that hedged dividend payments on $510 million of BCE Inc. Series AA preferred shares and $510 million of BCE Inc. Series AC preferred shares. These swaps converted the fixed-rate dividends on these preferred shares to floating-rate dividends. They were to mature in 2007.      As a result of the early settlement, we received total cash proceeds of $83 million. We are deferring and amortizing the proceeds against the dividends on these preferred shares over the original term of the swaps. BCE Inc.’s articles of incorporation provide for an unlimited number of voting common shares and non-voting Class B shares. The common shares and the Class B shares rank equally in the payment of dividends and in the distribution of assets if BCE Inc. is liquidated, dissolved or wound up.   (ii) Common shares and Class B shares      BCE Inc. issued 85,000,000 common shares to the public in 2002 for a total of $2.1 billion. BCE Inc. issued 17,862,714 common shares through private placements to SBC in 2002 for $500 million. The net proceeds were used to pay for part of the repurchase of SBC’s 20% interest in BCH.      The table below provides details about the outstanding common shares of BCE Inc. No Class B shares were outstanding at December 31, 2003 and 2002.       2003       2002     Number of shares   Stated capital   Number of shares   Stated capital   Outstanding, beginning of year 915,867,928   16,520   808,514,211   13,827   Shares issued:                 Publicly –   –   85,000,000   2,078   To SBC –   –   17,862,714   500   Under employee savings plans 4,951,199   145   2,656,764   72   Under dividend reinvestment plans 2,807,899   82   1,355,168   36   To employees (under employee stock option plans) 552,681   9   479,873   7   Shares redeemed (190,889 ) (7 ) (802 ) –   Outstanding, end of year 923,988,818   16,749   915,867,928   16,520   NOTE 21  STOCK-BASED COMPENSATION PLANS Employee savings plans ESPs are designed to encourage employees of BCE Inc. and its participating subsidiaries to own shares of BCE Inc. Each year, employees who participate in the plans can choose to have up to a certain percentage of their annual earnings withheld through regular payroll deductions to buy BCE Inc. common shares. In some cases, the employer may also contribute up to a maximum percentage of the employee’s annual earnings to the plan.      Each participating company decides on its maximum percentages. For Bell Canada, employees can contribute 10% to 12% of their annual earnings. Bell Canada contributes up to 2%.      The trustee of the ESPs buys BCE Inc. common shares for the participants on the open market, by private purchase or from BCE Inc. (shares issued from treasury). BCE Inc. chooses the method the trustee uses to buy the shares.      There were 36,536 employees participating in the plans at December 31, 2003. The total number of common shares bought for employees was 6,352,654 in 2003 and 6,368,907 in 2002. Compensation expense related to ESPs was $38 million in 2003, $43 million in 2002 and $42 million in 2001. 13,513,812 common shares were reserved for issue under the ESPs at December 31, 2003. BCE Inc. stock options Under BCE Inc.’s long-term incentive programs, BCE Inc. may grant options to key employees to buy BCE Inc. common shares. The subscription price is usually equal to the market value of the shares on the last trading day before the grant comes into effect. At December 31, 2003, 29,739,237 common shares were authorized for issue under these programs.      In general, the right to exercise options vests or accrues by 25% a year for four years of continuous employment from the day of grant, unless a special vesting period applies. Options usually become exercisable when they vest and can be exercised for a period of up to 10 years. Special vesting provisions may apply if: there is a change of control of BCE Inc. and the option holder’s employment ends under certain circumstances the option holder is employed by a designated subsidiary of BCE Inc., and BCE Inc.’s ownership interest in that subsidiary falls below the percentage set out in the program.      When the Nortel common shares were distributed in May 2000, each outstanding BCE Inc. stock option was cancelled and was replaced by two new stock options. The first option gives the holder the right to buy one BCE Inc. common share. The second option gives the holder the right to buy approximately 1.57 post-split common shares of Nortel (Nortel option) at exercise prices that maintain the holder’s economic position.      We ensured that exercising the Nortel options would not dilute Nortel shares by: calculating how many BCE Inc. common shares could be issued under options granted under stock option programs immediately before the day of the distribution factoring this number into the calculation that determined how many Nortel common shares were distributed for each BCE Inc. common share held.      BCE Inc. may exercise all Nortel options that expire unexercised or are forfeited. The exercise price paid to Nortel is given back to BCE Inc. We credit an amount to retained earnings that is equal to the market share price of Nortel.      The table below is a summary of the status of BCE Inc.’s stock option programs.       2003       2002       2001     Number of shares   Weighted- average exercise price ($)   Number of shares   Weighted- average exercise price ($)   Number of shares   Weighted- average exercise price ($)   Outstanding, beginning of year 20,470,700   $33   18,527,376   $35   9,114,695   $27   Granted 6,008,051   $28   8,051,159   $32   11,629,250   $41   Exercised (363,972 ) $16   (297,319 ) $12   (335,669 ) $11   Expired/forfeited (1,319,234 ) $34   (5,810,516 ) $39   (1,880,900 ) $37   Outstanding, end of year 24,795,545   $32   20,470,700   $33   18,527,376   $35   Exercisable, end of year 9,767,119   $34   6,468,320   $33   2,300,387   $25        The table below tells you more about BCE Inc.’s stock option programs at December 31, 2003. Options outstanding Options exercisable Range of exercise price   Number   Weighted- average remaining life   Weighted- average exercise  price ($)   Number   Weighted-  average exercise price ($)   Below $20   2,811,635   5 years    $15   1,501,635    $13   $20–$30   7,092,577   9 years    $28   344,440    $27   $30–$40   8,139,419   8 years    $34   3,517,410    $35   Over $40   6,751,914   7 years    $41   4,403,634    $41     24,795,545      $32   9,767,119    $34   Teleglobe stock options When we acquired a controlling interest in Teleglobe in November 2000, holders of Teleglobe stock options were allowed to exercise their options under the original terms, except that when they exercise their options, they receive 0.91 of one BCE Inc. common share for each Teleglobe stock option exercised. All of the outstanding Teleglobe stock options that were not already vested, vested when Teleglobe was sold on December 31, 2002.      The table below is a summary of the status of Teleglobe’s stock option programs.        2003        2002        2001     Number of BCE Inc. shares    Weighted- average exercise price ($)   Number of BCE Inc. shares   Weighted- average exercise  price ($)   Number of BCE Inc. shares   Weighted- average exercise price ($)   Outstanding, beginning of year 4,266,723   $37   10,204,966    $39   18,934,537    $36   Exercised (188,709 )   $19   (182,554 )  $16   (2,911,216 )  $24   Expired/forfeited (3,122,839 )   $35   (5,755,689 )  $40   (5,818,355 )  $44   Outstanding, December 31 955,175    $21   4,266,723    $37   10,204,966    $39   Exercisable, December 31 955,175    $21   4,266,723    $37   6,073,732    $38          The table below tells you more about Teleglobe’s stock option programs at December 31, 2003.    Options outstanding and exercisable Range of exercise price  Number   Weighted- average remaining life   Weighted- average exercise price   Below $20  496,529    2 years    $12   $20–$30  131,830    3 years    $25   $30–$40  316,806    4 years    $34   Over $40  10,010   1 year    $48      955,175        $21   Assumptions used in stock option pricing model The table below shows the assumptions used to determine stock-based compensation expense using the Black-Scholes option pricing model.   2003   2002   Compensation cost (in $ millions) 29   27   Number of stock options granted 6,008,051   8,051,159   Weighted-average fair value per option granted ($) 6   7   Assumptions            Dividend yield 3.6 % 3.3 %    Expected volatility 30 % 30 %    Risk-free interest rate 4.0 % 4.6 %    Expected life (years) 4.5   4.4   Special compensation payments Before 2000, when BCE Inc. granted options to officers, vice-presidents and other key employees, related rights to SCPs were also often granted. SCPs are cash payments representing the amount that the market value of the shares on the date of exercise of the related options exceeds the exercise price of these options.      When the distribution of Nortel common shares was made in 2000, the outstanding options were divided into options to buy BCE Inc. common shares and options to buy Nortel common shares. The related SCPs were adjusted accordingly.      For each right to an SCP held before the distribution, right holders now have rights related to both BCE Inc. and Nortel common shares.      To manage the cost of SCPs, we: entered into forward contracts to hedge our exposure to outstanding rights related to options on BCE Inc. common shares designated approximately four million Nortel common shares to hedge our exposure to outstanding rights related to the options on the Nortel common shares.      The number of SCPs outstanding at December 31, 2003 was: 2,547,652 relating to BCE Inc. common shares 2,656,990 relating to Nortel common shares.      All of the outstanding SCPs covered the same number of shares as the options they related to. It is the employer’s responsibility to make the payments under the SCPs. The income related to SCPs was $29 million in 2003, an expense of $1 million in 2002 and $64 million in 2001. The income of $29 million in 2003 and the expense of $1 million in 2002 include a recovery of SCP expense previously established of $50 million and $59 million, respectively relating to forfeitures of SCPs. Dividend reinvestment plan The dividend reinvestment plan allows eligible common shareholders to use their dividends to buy additional common shares. A trustee buys BCE Inc. common shares for the participants on the open market, by private purchase or from BCE Inc. (shares issued from treasury). BCE Inc. chooses the method the trustee uses to buy the shares.      A total of 2,807,899 common shares were bought under this plan for $82 million in 2003. A total of 2,528,624 common shares were bought for $70 million in 2002. NOTE 22  EMPLOYEE BENEFIT PLANS We maintain defined benefit plans that provide pension, other retirement and post-employment benefits for almost all of our employees. Components of accrued benefit asset (liability) The table below shows the change in benefit obligations, change in fair value of plan assets and the funded status of the plans.     Pension benefits       Other benefits     Notes 2003   2002   2003   2002   Accrued benefit obligation, beginning of year   11,815   11,737   1,628   1,444   Current service cost   222   223   31   35   Interest cost on accrued benefit obligation   757   749   105   94   Actuarial (gains) losses   513   (19 ) (52 ) 173   Benefits payments   (716 ) (654 ) (87 ) (77 ) Employee contributions   6   6   –   –   Business combinations   –   26   –   1   Special termination costs 4 (27 ) 122   –   –   Plan amendment 4 4   50   2   –   Divestitures and other 3 and 9 (64 ) (425 ) (12 ) (42 ) Accrued benefit obligation, end of year   12,510   11,815   1,615   1,628   Fair value of plan assets, beginning of year   11,587   13,532   125   134   Actual return (loss) on plan assets   1,583   (854 ) 8   1   Benefits payments   (716 ) (654 ) (87 )  (77 ) Employer contribution   160   21   87   76   Employee contribution   6   6   –   –   Business combinations   –   25   –   –   Divestitures and other 3 and 9 (46 ) (489 ) –   (9 ) Fair value of plan assets, end of year (1)   12,574   11,587   133   125   Plan surplus (deficit)   64   (228 ) (1,482 ) (1,503 ) Unamortized net actuarial (gains) losses   1,682   2,241   (58 ) (10 ) Unamortized past service costs   71   95   2   1   Unamortized transitional (asset) obligation   (80 ) (143 ) 270   376   Valuation allowance   (124 ) (136 ) –   –   Accrued benefit asset (liability), end of year   1,613   1,829   (1,268 ) (1,136 ) Accrued benefit asset included in other long-term assets   1,728   2,070   –   –   Accrued benefit liability included in other long-term liabilities   (115 ) (241 ) (1,268 ) (1,136 ) (1)   The market-related value of pension plan assets was $13,044 million at December 31, 2003 and $12,542 million at December 31, 2002.      For pension plans with an accrued benefit obligation that was more than plan assets: the accrued benefit obligation was $2,737 million at December 31, 2003 and $2,683 million at December 31, 2002 the fair value of plan assets was $2,010 million at December 31, 2003 and $1,909 million at December 31, 2002.      For pension plans with an accrued benefit obligation that was less than plan assets: the accrued benefit obligation was $9,773 million at December 31, 2003 and $9,132 million at December 31, 2002 the fair value of plan assets was $10,564 million at December 31, 2003 and $9,678 million at December 31, 2002. Components of net benefit plans cost (credit) The table below shows the net benefit plans cost (credit) before and after recognizing its long-term nature. The recognized net benefit plan cost (credit) reflects the amount reported in our statement of operations and is calculated according to our accounting policy.       Pension benefits       Other benefits     2003   2002   2001   2003   2002   2001   Current service cost 222   223   212   31   35   31   Interest cost on accrued benefit obligation 757   749   732   105   94   100   Actual (return) loss on plan assets (1,583 ) 854   (415 ) (8 ) (1 ) (9 ) Past service costs arising during period 4   50   49   2   –   1   Actuarial loss (gain) on accrued benefit obligation 513   (19 ) 799   (52 ) 173   (100 ) Elements of employee future benefit plans cost (credit), before recognizing its long-term nature                                                 (87 ) 1,857   1,377   78   301   23   Excess (deficiency) of actual return over expected return 648   (1,981 ) (783 ) (1 ) (10 ) (3 ) Deferral of amounts arising during period:                         Past service costs (4 ) (50 ) (49 ) (2 ) –   (1 ) Actuarial (loss) gain on accrued benefit obligation (513 ) 19   (799 ) 52   (173 ) 100   Amortization of previously deferred amounts:                         Past service costs 9   6   12   –   –   –   Net actuarial (gains) losses 23   1   (4 ) –   –   (6 ) Transitional (asset) obligation (44 ) (56 ) (60 ) 30   39   40   Adjustments to recognize long-term nature of employee future benefit plans cost (credit)                         119   (2,061 ) (1,683 ) 79   (144 ) 130   Increase (decrease) in valuation allowance (12 ) 14   102   –   –   –   Other (2 ) –   (71 ) –   –   1   Net benefit plans cost (credit), recognized 18   (190 ) (275 ) 157   157   154   Significant assumptions We used the following key assumptions to measure the accrued benefit obligation and the net benefit plans cost (credit). These assumptions are long term, which is consistent with the nature of employee benefit plans.       Pension benefits       Other benefits     2003   2002   2001   2003   2002   2001   At December 31                         Accrued benefit obligation                         Discount rate, end of year 6.5 % 6.5 % 6.5 % 6.5 % 6.5 % 6.5 % Rate of compensation increase, end of year 3.5 % 3.5 % 3.5 % 3.5 % 3.5 % 3.5 % For the year ended December 31                         Net benefit plans cost (credit)                            Discount rate, end of  preceding year 6.5 % 6.5 % 7.0 % 6.5 % 6.5 % 7.0 %    Expected return on plan  assets, end of preceding   year 7.5 % 8.3 % 8.8 % 7.5 % 8.3 % 8.8 %    Rate of compensation     increase, end of preceding year 3.5 % 3.5 % 3.9 % 3.5 % 3.5 % 3.9 %      We assumed the following trend rates in health-care costs: a 4.5% annual rate of increase in the cost per person of covered health-care benefits for 2003 and the foreseeable future a 10.5% annual rate of increase in the cost of medication for 2003 with a gradual decline to 4.5% over six years.      Assumed trend rates in health-care costs have a significant effect on the amounts reported for the health-care plans. The table below, for example, shows the effect of a 1% change in the assumed trend rates in health-care costs.   1% increase   1% decrease   Effect on other benefits – total service and interest cost 16   (14 ) Effect on other benefits – accrued obligation 164   (140 ) Pension plan assets The table below shows the allocation of our pension plan assets at December 31, 2003 and 2002, target allocation for 2003 and expected long-term rate of return by asset class.   Weighted-average target allocation   Percentage of plan assets at December 31   Weighted-average expected long-term rate of return   Asset category 2003   2003   2002   2003   Equity securities 45%–65 % 56 % 58 % 9.0 % Debt securities 35%–55 % 44 % 42 % 5.5 % Total     100 % 100 % 7.5 %      Equity securities included approximately $111 million of BCE Inc. common shares or 0.9% of total plan assets at December 31, 2003, and approximately $123 million of BCE Inc. common shares or 1.1% of total plan assets at December 31, 2002.       Debt securities included approximately $108 million of BCE Inc. and affiliates’ debentures or 0.9% of total plan assets at December 31, 2003, and $109 million or 1.0% of total plan assets at December 31, 2002.      The maturities of debt securities ranged from zero to 39 years, with a weighted-average maturity of 11 years at December 31, 2003. They ranged from zero to 40 years, with a weighted-average maturity of 10 years at December 31, 2002. Projected cash flows We are responsible for adequately funding our pension plans. We make contributions to them based on various actuarial cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service benefits. The table below shows the amounts we contributed to the pension benefit plans in 2003.   Minimum funding requirements   Discretionary funding   Total funding             2003   Aliant 70   55   125   Bell Canada 11   6   17   Bell Globemedia 11   –   11   BCE Inc. 7   –   7   Total employer contributions 99   61   160        We expect to contribute $107 million to the pension plans in 2004. Because we do not fund the other employee future benefit plans, the total $87 million paid in 2003 represents payments made to beneficiaries under these plans. We expect to pay $84 million under these plans in 2004. NOTE 23  COMMITMENTS AND CONTINGENCIES Contractual obligations The table below is a summary of our contractual obligations at December 31, 2003 that are due in each of the next five years and thereafter.   2004   2005   2006   2007   2008   Thereafter   Total   Long-term debt (excluding capital leases) 1,390   1,082   957   1,782   1,093   7,089   13,393   Notes payable and bank advances 28   –   –   –   –   –   28   Capital leases 119   86   80   66   59   99   509   Operating leases 404   275   244   220   205   1,525   2,873   Commitments for capital expenditures 435   100   34   27   –   –   596   Other purchase obligations 489   366   329   280   153   270   1,887   Other long-term liabilities –   97   93   100   63   78   431   Total 2,865   2,006   1,737   2,475   1,573   9,061   19,717        Long-term debt and notes payable and bank advances include $194 million drawn under our committed credit facilities. They exclude $361 million of letters of credit. The total amount available under these committed credit facilities and under our commercial paper programs, including the amount currently drawn, is $2,841 million.      The imputed interest to be paid on capital leases is $135 million.      Rental expense relating to operating leases was $368 million in 2003, $356 million in 2002 and $278 million in 2001.      Our commitments for capital expenditures include investments to expand and update our networks, and to meet customer demand. Other purchase obligations consist mainly of contractual obligations under service contracts.      Other long-term liabilities included in the table relate to: Bell Canada’s future payments over the remaining life of its contract with Certen for the development of Bell Canada’s billing system. The total amount was $301 million at December 31, 2003. Bell Globemedia’s obligations relating to CRTC benefits owing on previous business combinations. These and other long-term liabilities were $130 million at December 31, 2003.      At December 31, 2003, we had other long-term liabilities that were not included in the table. They consisted of an accrued employee benefit liability, future income tax liabilities, deferred revenue and gains on assets and various other long-term liabilities.      We did not include the accrued employee benefit liability and future income tax liabilities because we cannot accurately determine the timing and amount of cash needed for them. This is because: future contributions to the pension plans depend largely on how well they are funded. This varies based on the results of actuarial valuations that are performed periodically and on the investment performance of the pension fund assets. future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carryforwards available to reduce income tax liabilities.      We did not include deferred revenue and gains on assets because they do not represent future cash payments. CRTC Price Cap decision The Price Cap decision made a number of changes to the rules governing local service in Canada’s telecommunications industry. These rules will be in effect for four years. The CRTC has stated that it will initiate a Price Cap review in the final year of the regime and make modifications to the regulatory framework, as necessary. One of the changes resulting from the Price Cap decision was a new mechanism, called the deferral account, which will be used to fund initiatives such as service improvements, reduced rates and/or rebates. We estimated our commitment relating to the deferral account to be approximately $160 million at December 31, 2003, which we expect to clear substantially in 2004 by implementing various initiatives. Agreement with CGI On July 24, 2003, BCE and CGI signed a new agreement relating to BCE’s ownership in CGI. It replaced the shareholders’ agreement entered into on July 1, 1998. As a result: the put rights of CGI’s three majority individual shareholders relating to the CGI shares they hold were cancelled BCE’s call rights relating to the CGI shares held by these majority shareholders were cancelled BCE converted all of its 7,027,606 CGI Class B multiple voting shares into CGI Class A single voting shares on a one-for-one basis.      BCE has shareholder’s rights under the new agreement. These include preemptive rights relating to CGI’s equity shares, right of representation on CGI’s board of directors and certain veto rights. In addition, there are no restrictions on BCE selling its shares of CGI. We continue to proportionately consolidate CGI’s results. Litigation Teleglobe lending syndicate lawsuit On July 12, 2002, some members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate (the plaintiffs) filed a lawsuit against BCE Inc. in the Ontario Superior Court of Justice.      The claim makes several allegations, including that BCE Inc. and its management, in effect, made a legal commitment to repay the advances the plaintiffs made as members of the lending syndicate, and that the court should disregard Teleglobe as a corporate entity and hold BCE Inc. responsible to repay the advances as Teleglobe’s alter ego.      The plaintiffs claim damages of U.S.$1.19 billion, plus interest and costs, which they allege is equal to the amount they advanced. This represents approximately 95.2% of the total U.S.$1.25 billion that the lending syndicate advanced.      While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that it has strong defences, and it intends to vigorously defend its position. Kroll Restructuring lawsuit In February 2003, a lawsuit was filed in the Ontario Superior Court of Justice by Kroll Restructuring Ltd., in its capacity as interim receiver of Teleglobe, against five former directors of Teleglobe. This lawsuit was filed in connection with Teleglobe’s redemption of its third series preferred shares in April 2001 and the retraction of its fifth series preferred shares in March 2001.      The plaintiff is seeking a declaration that such redemption and retraction were prohibited under the Canada Business Corporations Act and that the five former directors should be held jointly and severally liable to restore to Teleglobe all amounts paid or distributed on such redemption and retraction, being an aggregate of approximately $661 million, plus interest.      While BCE Inc. is not a defendant in this lawsuit, Teleglobe was at the relevant time a subsidiary of BCE Inc. Pursuant to standard policies and subject to applicable law, the five former Teleglobe directors are entitled to seek indemnification from BCE Inc. in connection with this lawsuit.      While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that the defendants have strong defences and that the claims of the plaintiffs will be vigorously defended against. Other litigation We become involved in various other claims and litigation as a regular part of our business.      While we cannot predict the final outcome of claims and litigation that were pending at December 31, 2003, management believes that the resolution of these claims and litigation will not have a material and negative effect on our consolidated financial position or results of operations. NOTE 24   GUARANTEES As a regular part of our business, we enter into agreements that provide for indemnification and guarantees to counterparties that may require us to pay for costs and losses incurred in various types of transactions.   Sales of assets and businesses As part of transactions involving business dispositions and sales of assets, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, intellectual property right infringement, loss or damages to property, environmental liabilities, changes in, or in the interpretation of, laws and regulations (including tax legislation), valuation differences, litigation against the counterparties, earn-out guarantees if the disposed business does not meet specific targets, contingent liabilities of a disposed business or reassessments of previous tax filings of the corporation that carries on the business.      We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $2.1 billion in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. A total of $16 million has been accrued in the consolidated balance sheet relating to this type of indemnification or guarantee at December 31, 2003. Historically, we have not made any significant payments under these indemnifications or guarantees. Sales of services As part of transactions involving sales of services, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, changes in, or in the interpretation of, laws and regulations (including tax legislation) or litigation against the counterparties.      We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $261 million in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnification or guarantee at December 31, 2003. Historically, we have not made any significant payments under these indemnifications or guarantees. Purchases and development of assets As part of transactions involving purchases and development of assets, we may be required to pay counter-parties for costs and losses incurred as a result of breaches of representations and warranties, loss or damages to property, changes in, or in the interpretation of, laws and regulations (including tax legislation), or litigation against the counterparties.      We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $1.5 billion in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnification or guarantee at December 31, 2003. Historically, we have not made any significant payments under these indemnifications or guarantees. Other transactions As part of other transactions, such as securitization agreements and operating leases, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, loss or damages to property, changes in, or in the interpretation of, laws and regulations (including tax legislation) or litigation against the counterparties.      We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $26 million in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnification or guarantee at December 31, 2003. Historically, we have not made any significant payments under these indemnifications or guarantees. NOTE 25  SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS   2003   2002   2001                 Interest paid on long-term debt 1,109   1,019   1,381   Income taxes paid (net of refunds) (24 ) 1,284   1,348   Cash restricted to collateralize short-term bank loans –   –   233   NOTE 26  RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP We have prepared these consolidated financial statements according to Canadian GAAP. The tables that follow are a reconciliation of significant differences relating to the statement of operations and total shareholders’ equity reported according to Canadian GAAP and United States GAAP. Reconciliation of net earnings (loss) <   2003   2002   2001   Canadian GAAP – Earnings from continuing operations 1,845   1,778   3,646   Adjustments             Deferred costs (a) (2 ) 18   (2 ) Employee future benefits (b) (132 ) (14 ) 114   Gain on disposal of investments and on reduction of ownership in subsidiary companies (e) –   –   (11 ) Income taxes (h) –   –   (45 ) Goodwill (c) –   –   (24 ) Derivative instruments (m) (12 ) 15   18   Restructuring and other charges (d) –   –   (5 ) Other (8 ) (5 ) (36 ) United States GAAP – Earnings from continuing operations 1,691   1,792   3,655   Discontinued operations – United States GAAP (j) (30 ) 827   (3,064 ) Cumulative effect of change in accounting policy (m) (n) (25 ) (7,268 ) 21   United States GAAP – Net earnings (loss) 1,636   (4,649 ) 612   Dividends on preferred shares (m) (70 ) (59 ) (64 ) Premium on redemption of preferred shares (7 ) (6 ) –   United States GAAP – Net earnings (loss) applicable to common shares 1,559   (4,714 ) 548   Other comprehensive earnings (loss) items             Change in currency translation adjustment (56 ) 30   158   Change in unrealized loss on investments (k) 17   9   (168 ) Additional minimum liability for pension obligation (b) (40 ) (81 ) –   Comprehensive earnings (loss) 1,480   (4,756 ) 538   Net earnings (loss) per common share – basic             Continuing operations 1.75   2.02   4.44   Discontinued operations and change in accounting policy (0.06 ) (8.11 ) (3.76 ) Net earnings (loss) 1.69   (6.09 ) 0.68   Net earnings (loss) per common share – diluted             Continuing operations 1.75   1.99   4.39   Discontinued operations and change in accounting policy (0.06 ) (8.11 ) (3.72 ) Net earnings (loss) 1.69