BCE INC - Regulatory Filings 2005

6-K 1 bceform6ksr.htm Q2 2005 SHAREHOLDER REPORT HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN" Untitled Document

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 under the Securities Exchange Act of 1934

For the month of: August 2005 Commission File Number: 1-8481

BCE Inc. (Translation of Registrants name into English)

MARKER FORMAT-SHEET="Para Flush"

1000, rue de La Gauchetière Ouest, Bureau 3700, Montréal, Québec H3B 4Y7, (514) 870-8777 (Address of principal executive offices)

Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F Form 40-F X

Indicate by check mark whether the Registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

MARKER FORMAT-SHEET="Left Head Bold"

Yes No X

If "Yes" is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b): 82-_____.

Only the BCE Inc. Management's Discussion and Analysis dated August 2, 2005 and the BCE Inc. 2005 Second Quarter unaudited interim consolidated financial statements for the period ended June 30, 2005, included on pages 6 to 34 and 35 to 43, respectively, of the BCE Inc. 2005 Second Quarter Shareholder Report filed with this Form 6-K are incorporated by reference in the registration statements filed by BCE Inc. with the Securities and Exchange Commission on Form F-3 (Registration No. 333-12130), Form S-8 (Registration No. 333-12780), Form S-8 (Registration No. 333-12802) and Form S-8 (Registration No. 333-12804). Except for the foregoing, no other document or portion of document filed with this Form 6-K is incorporated by reference in BCE Inc.s registration statements. Notwithstanding any reference to BCEs Web site on the World Wide Web in the documents attached hereto, the information contained in BCEs site or any other site on the World Wide Web referred to in BCEs site is not a part of this Form 6-K and, therefore, is not filed with the Securities and Exchange Commission.

CONTENTS
The
Quarter at a Glance	2
MD&A	6
About
Forward-Looking Statements	6
Non-GAAP
Financial Measures	6
About
Our Business	8
Quarterly
Financial Information	11
Financial
Results Analysis	12
Financial
and Capital Management	26
Risks
That Could Affect Our Business	30
Our
Accounting Policies	34
Consolidated
Financial Statements	35
Notes
to Consolidated Financial Statements	38

| | The
Quarter at a Glance |
| --- | --- |
| The
Quarter at a Glance This section reviews the
key measures we use to assess our performance and how our results in Q2 2005
compare to our results in Q2 2004. | In the second quarter,
we achieved strong gains in our wireless, video and high-speed Internet
subscriber bases, which help lay an important foundation for the future
profitable growth of these businesses. In addition, our Business segment
continued to make steady progress on its overall Information and Communications
Technology (ICT), or value-added services (VAS), strategy by leading the
company in the shift towards new growth services. In Q2, growth revenues
accounted for 44% of total revenues at Bell Canada, which is in line
with our target of 45% by the end of 2005. Revenue growth reached 4.2% at BCE and 2.1%
at Bell Canada in Q2. Despite higher revenues and cost savings from
our Galileo Program (Galileo), operating income declined by 0.5% at BCE
and by 3.5% at Bell Canada as a result of the upfront cost of acquiring
more subscribers, as well as higher amortization expense and net benefit
plans cost. EBITDA (1) grew by 2.5% at BCE and by 1.0% at Bell Canada
this quarter, as higher revenues and cost savings from Galileo more than
offset increased subscriber acquisition costs. In our Consumer segment, revenue grew as
a result of continued strength in our growth businesses, but was partly
offset by accelerated declines in legacy service revenues. This improvement
reflected the success of our strategy to significantly enhance subscriber
acquisition and stimulate average revenue per user (ARPU) for wireless
and video. In our Business segment, our Internet Protocol
(IP) based connectivity and VAS strategies within the small and medium-sized
business (SMB) and Enterprise markets continued to gain strength. This
positive trend contributed to solid revenue growth during the quarter,
despite increased competitive pressures and lower demand for our legacy
wireline business services. In
the Aliant segment, strong growth in wireless and Internet services revenue
offset declines in other areas of the business that were affected by the
impacts of competition, technology substitution and regulatory restrictions. Within
the other Bell Canada segment, revenue growth was driven by the acquisition
of the wholesale operations of 360networks, despite ongoing market challenges. Within
the other BCE segment, Bell Globemedia continued to demonstrate very
good financial performance. This was driven by higher advertising revenue,
reflecting strong television ratings as CTV Television held 18 of the
top 20 regularly scheduled programs from September 2004 to July 2005.
Telesat also had a good quarter, reflecting very strong revenue growth
from its network for Interactive Distance Learning services and growth
in Ka-band revenues on its Anik F2 satellite. |

| Customer
Connections | Q2 2005 | | 30-JUN-05 |
| --- | --- | --- | --- |
| CONNECTIONS | NET | | CONNEC- |
| (IN THOUSANDS) | ACTIVATIONS | | TIONS |
| Wireless | 146 | | 5,108 |
| High-Speed Internet | 92 | | 2,028 |
| Video | 63 | | 1,595 |
| NAS | (145 | ) | 12,700 |
| Wireless Our wireless
business regained its momentum this quarter with 146,000 net
activations, increasing our customer base by 11.1% compared with last
year and surpassing the 5 million customer mark. Approximately
80% of our net activations this quarter were on postpaid rate plans.
Churn was unchanged from Q1 2005 at 1.6%, but increased from
1.3% in Q2 2004. High-Speed
Internet Our
high-speed Internet business added 92,000 customers this quarter,
fuelled in part by the growth of our 128 Kbps Basic Lite product introduced
in Ontario during Q1. With these additions, total subscribers grew
by 24.2% over the last twelve months, pushing our customer base to
over 2 million. | | | |

(1) EBITDA, free cash flow and net earnings excluding the impact of restructuring and other items and net gains on investments do not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and are therefore unlikely to be comparable to similar measures presented by other companies. For more details on these measures, including a reconciliation to the most comparable GAAP measure, please refer to the section entitled Non-GAAP Financial Measures contained in BCE Inc.s 2005 Second Quarter MD&A dated August 2, 2005.

2 Bell Canada Enterprises 2005 Quarterly Report

| Video Our video business
had its best Q2 ever with 63,000 net activations, an increase
of 163% compared with Q2 2004. Our video subscriber base grew
by 11.8% over the last twelve months. Churn improved, year-over-year,
to 0.9%. Network
Access Services (NAS)
NAS declined by 145,000 during the quarter, reflecting the seasonal
impact of student and residential moves in Québec and Ontario,
competitive losses and lower demand for second lines. End-of-period
NAS in service declined by 1.8%, since the end of Q2 2004, representing
a higher rate of decline compared with previous quarters. This increase
in year-over-year NAS reductions reflects an increasingly competitive
environment as a major cable operator expanded the footprint of its
low-priced cable telephony offering in certain of our Québec
markets. Operating Revenues Our revenues increased by 4.2% year-over-year
to reach $4,980 million in the quarter. This growth reflected improved
revenue performance across most of our segments. At Bell Canada,
revenues were driven primarily by the Consumer segment due to growth in
wireless, video and Internet access services, as well as from continuing
solid results within the Business segment attributable to focused execution
of our Virtual Chief Information Officer (VCIO), VAS and IP strategies
and the contribution from recent acquisitions, all of which have positively
impacted data revenue growth. This was offset partially by lower Aliant
segment revenues due mainly to lower directory revenues. Overall revenue
performance was further enhanced by double-digit growth at Telesat and
CGI, and high single-digit growth at Bell Globemedia. Operating Income
and EBITDA (1) We
achieved operating income of $1,100 million, down 0.5% or $5 million,
compared with the same period last year. Despite higher revenues and cost
savings from Galileo, the year-over-year decline was the result of an
increase in the cost of acquiring a substantially higher number of subscribers
in wireless and video, some margin pressure from the continuing transformation
of our product mix towards growth services, and by higher net benefit
plans cost and amortization expense. Similarly, Bell Canadas
operating income in the quarter declined by $36 million, or 3.5%,
to $981 million from $1,017 million in Q2 2004. Our
EBITDA for the quarter was $2,001 million, an increase of $48 million
or 2.5% compared with last year, reflecting increases in all segments.
Bell Canadas EBITDA this quarter was $1,839 million, or
1.0% higher than last year. EBITDA
margin in the second quarter was 40.2% at BCE and 43.2% at Bell Canada,
down 0.7 and 0.4 percentage points, respectively, compared with Q2 2004.
The year-over-year declines reflected higher acquisition costs as a result
of significantly better subscriber growth, continued erosion of high-margin
legacy business, and lower local and access and data revenues within our
wholesale operations. This was partly offset by margin improvement at
Aliant, and by strong revenue growth at Bell Globemedia, CGI and
Telesat. | |
| --- | --- |
| (1) | EBITDA, free cash flow
and net earnings excluding the impact of restructuring and other items and
net gains on investments do not have any standardized meaning prescribed
by Canadian generally accepted accounting principles (GAAP) and are therefore
unlikely to be comparable to similar measures presented by other companies.
For more details on these measures, including a reconciliation to the most
comparable GAAP measure, please refer to the section entitled Non-GAAP
Financial Measures contained
in BCE Inc.s 2005 Second Quarter MD&A dated August 2, 2005. |

3 Bell Canada Enterprises 2005 Quarterly Report

The Quarter at a Glance Net Earnings / Earnings Per Share Net earnings applicable to common shares for Q2 2005 were $563 million, or $0.61 per common share, up 1.6% from net earnings of $554 million, or $0.60 per common share, for the same period last year. Included in second-quarter earnings this year were $25 million of net gains on investments and restructuring and other items, composed primarily of a dilution gain relating to our interest in Terre Star, a mobile satellite services company. This compared with net gains of $47 million in Q2 2004. Excluding the impact of these items, net earnings of $538 million, or $0.58 per common share, were up $31 million, or $0.03 per share, representing an increase of 5.5% per share over last year (1) . This improvement can be largely attributed to higher EBITDA and net income tax savings resulting from a loss monetization program based on an agreement entered into by Bell Canada and Bell Canada International Inc. in August 2004, offset partly by a significant increase in net benefit plans cost and higher amortization expense. Capital Expenditures Capital expenditures were $914 million this quarter, or 10.7% higher than the same period last year. As a percentage of revenues, capital expenditures increased this quarter to 18.4% from 17.3% last year, reflecting an acceleration in our spending program. This year-over-year increase related to an expansion of our fiber-to-the-node (FTTN) footprint to deliver higher-speed broadband access, information technology (IT) efficiency projects to deliver cost savings, as well as a return to more normal spending levels at Aliant after its labour disruption in 2004. Cash from operating activities and free cash flow (1) Cash from operating activities in the second quarter was $1,450 million, representing a 29% or $326 million improvement over Q2 2004. This increase was mainly due to: an improvement in cash earnings as a result of higher EBITDA and lower interest costs; and an improvement in accounts receivable collections compared with the second quarter of 2004 that was negatively impacted by the implementation of a new wireless billing platform.

4 Bell Canada Enterprises 2005 Quarterly Report

On a year-to-date basis, cash from operating activities was relatively flat at $2,389 million, compared with $2,384 million for the first six months of 2004. This resulted mainly from an improvement in cash earnings and accounts receivable collections, offset substantially by a number of impacts, which more than offset our growth in EBITDA and lower interest payments. These impacts were: an increase in income taxes paid, primarily related to the final instalment for 2004; higher pension and other benefit plan payments, stemming primarily from a voluntary contribution by Aliant; and restructuring payments related to employee departure programs announced last year at Bell Canada and Aliant. Our free cash flow this quarter was $138 million, up from free cash flow of $64 million in the second quarter of last year. The increase was attributable to higher cash from operating activities, offset partially by a number of anticipated items, including: Telesat insurance proceeds that were received in Q2 2004, which did not recur this year; an increase in capital expenditures related to our investment in next-generation service platforms; and higher dividends paid as a result of a $0.12 annual increase in the dividend per common share. In the first six months of 2005, free cash flow was negative $24 million down from free cash flow of $320 million in the same period last year.

5 Bell Canada Enterprises 2005 Quarterly Report

| | Managements
Discussion and Analysis |
| --- | --- |
| In
this MD&A, we, us, our and BCE mean BCE Inc., its
subsidiaries and joint ventures. All amounts in this MD&A are in millions of Canadian dollars,
except where otherwise noted. Please refer to the unaudited consolidated financial statements for the
second quarter of 2005 when reading this MD&A. We also encourage
you to read BCE Inc.s MD&A for the year ended December 31, 2004
dated March 2, 2005 (BCE 2004 MD&A). You will find more information about BCE, including BCE Inc.s
annual information form for the year ended December 31, 2004
(BCE 2004 AIF), the BCE 2004 MD&A and recent financial reports,
on BCE Inc.s website at www.bce.ca, on SEDAR at www.sedar.com
and on EDGAR at www.sec.gov. About Forward-Looking Statements A statement we make is
forward-looking when it uses what we know and expect today to make a statement
about the future. Forward-looking statements may include words such as anticipate,
believe, could, expect, goal, guidance, intend, may, objective, outlook,
plan, seek, should, strive, target and will . Non-GAAP Financial Measures This section describes
the non-GAAP financial measures we used in the MD&A to explain our
financial results. It also provides reconciliations of the non-GAAP financial
measures to the most comparable Canadian GAAP financial measures. EBITDA We define EBITDA (earnings
before interest, taxes, depreciation and amortization) as operating revenues
less operating expenses, which means it represents operating income before
amortization expense, net benefit plans cost, and restructuring and other
items. | This
managements discussion and analysis of financial condition and results
of operations (MD&A) comments on BCEs operations, performance
and financial condition for the three months (Q2) and six months (YTD)
ended June 30, 2005 and 2004. About
Forward-Looking Statements Securities laws encourage companies
to disclose forward-looking information so that investors can get a better
understanding of the companys future prospects and make informed
investment decisions. Unless
otherwise mentioned in this MD&A, the outlooks provided in the BCE 2004
MD&A dated March 2, 2005 remain unchanged. This
MD&A contains forward-looking statements about BCEs objectives,
strategies, financial condition, results of operations, cash flows and
businesses. These statements are forward-looking because they
are based on our current expectations, estimates and assumptions about
the markets we operate in, the Canadian economic environment and our ability
to attract and retain customers and to manage network assets and operating
costs. It is important to know that: forward-looking
statements in this MD&A describe our expectations at August 2, 2005 our
actual results could be materially different from what we expect if
known or unknown risks affect our business, or if our estimates or
assumptions turn out to be inaccurate. As a result, we cannot guarantee
that any forward-looking statement will materialize and, accordingly,
you are cautioned not to place undue reliance on these forward-looking
statements. forward-looking
statements do not take into account the effect that transactions or
non-recurring or other special items announced or occurring after
the statements are made may have on our business. For example, they
do not include the effect of dispositions, sales of assets, monetizations,
mergers, acquisitions, other business combinations or transactions,
asset write-downs or other charges announced or occurring after forward-looking
statements are made. The financial impact of such transactions and
non-recurring and other special items can be complex and necessarily
depends on the facts particular to each of them. Accordingly, the
expected impact cannot be meaningfully described in the abstract or
presented in the same manner as known risks affecting our business. we
disclaim any intention and assume no obligation to update any forward-looking
statement even if new information becomes available, as a result of
future events or for any other reason. Risks that could cause our actual
results to materially differ from our current expectations are discussed
throughout this MD&A and, in particular, in Risks
That Could Affect Our Business . Non-GAAP
Financial Measures EBITDA The term EBITDA does not have any
standardized meaning prescribed by Canadian generally accepted accounting
principles (GAAP). It is therefore unlikely to be comparable to similar
measures presented by other companies. EBITDA is presented on a consistent
basis from period to period. We
use EBITDA, among other measures, to assess the operating performance
of our ongoing businesses without the effects of amortization expense,
net benefit plans cost, and restructuring and other items. We exclude
amortization expense and net benefit plans cost because they largely depend
on the accounting methods and assumptions a company uses, as well as non-operating
factors, such as the historical cost of capital assets and the fund performance
of a companys pension plans. We exclude restructuring and other
items because they are transitional in nature. EBITDA
allows us to compare our operating performance on a consistent basis.
We believe that certain investors and analysts use EBITDA to measure a
companys ability to service debt and to meet other payment obligations,
or as a common valuation measurement in the telecommunications industry. |

6 Bell Canada Enterprises 2005 Quarterly Report

| The
most comparable Canadian GAAP financial measure is operating income. The
tables below are reconciliations of EBITDA to operating income on a consolidated
basis for BCE and Bell Canada. | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | YTD | | YTD | |
| BCE | Q2 2005 | | Q2 2004 | | 2005 | | 2004 | |
| EBITDA | 2,001 | | 1,953 | | 3,939 | | 3,797 | |
| Amortization
expense | (792 | ) | (769 | ) | (1,565 | ) | (1,536 | ) |
| Net
benefit plans cost | (104 | ) | (65 | ) | (207 | ) | (128 | ) |
| Restructuring and other
items | (5 | ) | (14 | ) | (1 | ) | (17 | ) |
| Operating
income | 1,100 | | 1,105 | | 2,166 | | 2,116 | |

| BELL
CANADA | Q2 2005 | | Q2 2004 | | YTD — 2005 | | YTD — 2004 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| EBITDA | 1,839 | | 1,821 | | 3,654 | | 3,576 | |
| Amortization
expense | (746 | ) | (733 | ) | (1,478 | ) | (1,465 | ) |
| Net
benefit plans cost | (107 | ) | (58 | ) | (213 | ) | (118 | ) |
| Restructuring and other
items | (5 | ) | (13 | ) | | | (16 | ) |
| Operating
income | 981 | | 1,017 | | 1,963 | | 1,977 | |
| Operating
Income Before Restructuring and Other Items The
term operating income before restructuring and other items does not have
any standardized meaning prescribed by Canadian GAAP. It is therefore
unlikely to be comparable to similar measures presented by other companies. We
use operating income before restructuring and other items, among other
measures, to assess the operating performance of our ongoing businesses
without the effects of restructuring and other items. We exclude these
items because they affect the comparability of our financial results and
could potentially distort the analysis of trends in business performance.
The exclusion of these items does not imply they are non-recurring. The
most comparable Canadian GAAP financial measure is operating income. The
table below is a reconciliation of operating income to operating income
before restructuring and other items on a consolidated basis. | | | | | | | | |

	Q2 2005	Q2 2004	YTD — 2005	YTD — 2004
Operating
income	1,100	1,105	2,166	2,116
Restructuring
and other items	5	14	1	17
Operating
income before restructuring and
other items	1,105	1,119	2,167	2,133
Net
Earnings Before Restructuring and Other Items and Net Gains on Investments The term net earnings before restructuring
and other items and net gains on investments does not have any standardized
meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable
to similar measures presented by other companies. We
use net earnings before restructuring and other items and net gains on
investments, among other measures, to assess the operating performance
of our ongoing business without the effects of after-tax restructuring
and other items and net gains on investments. We
exclude these items because they affect the comparability of our financial
results and could potentially distort the analysis of trends in business
performance. The exclusion of these items does not imply they are non-recurring. The
most comparable Canadian GAAP financial measure is net earnings applicable
to common shares. The table below is a reconciliation of net earnings
applicable to common shares to net earnings before restructuring and other
items and net gains on investments on a consolidated basis and per common
share.

	Q2 2005				Q2 2004				YTD 2005				YTD 2004
			PER				PER				PER				PER
	TOTAL		SHARE		TOTAL		SHARE		TOTAL		SHARE		TOTAL		SHARE
Net earnings applicable to common shares	563		0.61		554		0.60		1,037		1.12		1,024		1.11
Restructuring
and other items	3				(16	)	(0.02	)	1				(15	)	(0.02	)
Net
gains on investments	(28	)	(0.03	)	(31	)	(0.03	)	(28	)	(0.03	)	(38	)	(0.04	)
Net
earnings before restructuring and
other items and net gains on
investments	538		0.58		507		0.55		1,010		1.09		971		1.05

7 Bell Canada Enterprises 2005 Quarterly Report

| | Managements
Discussion and Analysis |
| --- | --- |
| Free
Cash Flow We define
free cash flow as cash from operating activities after capital expenditures,
total dividends and other investing activities. | Free
Cash Flow The
term free cash flow does not have any standardized meaning prescribed
by Canadian GAAP. It is therefore unlikely to be comparable to similar
measures presented by other companies. Free cash flow is presented on
a consistent basis from period to period. We
consider free cash flow to be an important indicator of the financial
strength and performance of our business because it shows how much cash
is available to repay debt and to reinvest in our company. We believe
that certain investors and analysts use free cash flow when valuing a
business and its underlying assets. The
most comparable Canadian GAAP financial measure is cash from operating
activities. The table below is a reconciliation of free cash flow to cash
from operating activities on a consolidated basis. |

	Q2 2005		Q2 2004		YTD — 2005		YTD — 2004
Cash from operating
activities	1,450		1,124		2,389		2,384
Capital
expenditures	(914	)	(826	)	(1,651	)	(1,507	)
Total
dividends paid	(387	)	(350	)	(736	)	(692	)
Other investing activities	(11	)	116		(26	)	135
Free
cash flow	138		64		(24	)	320

| About
Our Business |
| --- |
| A detailed description of our products and services and our objectives
and strategy is provided in the BCE 2004 MD&A. Strategic Priorities Our strategy is
to deliver unrivalled integrated communication services to customers and
to take a leadership position in setting the standard in Internet Protocol
(IP). During the quarter, we made significant progress on each of our
three key strategic priorities. 1) Delivering
an enhanced customer experience while significantly lowering costs (our
Galileo program) In our Consumer
segment: We
gained 127,000 subscriptions to the Bell Bundle (a combination
of wireless, Internet and video services in one offer) this quarter.
During the quarter, almost half of bundle activations included the
sale of at least one new service. At the end of the quarter, we had
681,000 subscribers with bundles. The
$5 long distance bundle introduced in June 2004 added 87,000 customers
this quarter, bringing total sales since launch to 406,000. On July 3, 2005,
we stopped offering the $5 long distance bundle option as part of
our refocused consumer market strategy to grow the number of multi-product
households by using more targeted offers. At
the end of the quarter, we had almost one million customers enjoying
the benefits of a single bill for their wireline, Internet, and video
services. We
continued to expand the benefits of bundling to include superior customer
care through our Privileges Program, a service with extended
hours providing technical and administrative support to high value
customers. At the end of the quarter, we had 650,000 members
in the program. We
completed the prototype for our new Bell.ca website, which we expect
to be launched in the fourth quarter. We also fortified our current
website by improving login times and the search engine. |

8 Bell Canada Enterprises 2005 Quarterly Report

We launched a Grab n Go offer in our Bell World stores, enabling customers to pick up everything they need to install their high-speed Internet service in a single box. Previously, the high-speed modem required for the service was shipped separately to customers after the sale. This launch has now made it simpler for customers to get high-speed Internet service and simplified the selling task for our in-store customer representatives. We implemented improvements to our on-line Net Assistant service for Sympatico Internet customers to provide additional functionality, including a Customer Chat capability, for billing related issues. These improvements also give customers greater control over their service with better automation capabilities and quick-fix solutions. In our Business segment: We continued making progress on moving our core traffic to a pervasive national IP multi-protocol label-switching (IP-MPLS) network. At the end of Q2, 73% of the migratable traffic on our core network was IP-based, which is in line with our objective to reach 75% by the end of 2005. As part of our strategy shift to IP, we continued the process of discontinuing legacy data services. In Q2, this list was expanded by 11 services, bringing the year-to-date number to 22. We officially launched Service Promise to provide customers with a consistent level of service in the delivery of connectivity services. Overall, our various Galileo initiatives led to cost reductions this quarter of $122 million, bringing total savings for the first six months of 2005 to approximately $242 million, which keeps us on track to achieve our target run-rate savings of $500-$600 million for 2005. These savings have come primarily from: the employee departures that took place in Q4 2004; reduced procurement costs resulting in COA savings; and improvements in cost of goods sold stemming from optimization of our network and product simplification. 2) Deliver abundant bandwidth to enable next-generation services We continued our fiber-to-the-node (FTTN) rollout by deploying another 593 neighbourhood nodes, raising the total number of nodes served to 1,355. Our objective is to deploy 2,000 nodes by the end of 2005. We made steady progress in the deployment of very-high bit-rate digital subscriber line (VDSL) to large multiple-dwelling units (MDUs). By the end of the quarter, we had signed access agreements with 537 buildings and had provisioned VDSL in 345 buildings. 3) Create next-generation services to drive future growth Our Consumer segment: At the end of Q2, we had 55,000 subscribers on our 10-4 push-to-talk service, which included a significant number of retail consumers. Introduced Solo Mobile, our new wireless youth brand, offering custom-built services and unique features such as a nationwide pay-per-use push-to-talk (PTT) service and the choice of postpaid or prepaid options. We are the first Canadian wireless operator to actively market PTT to the consumer youth segment. Launched True Tones, a monthly service that enables customers to download a recording artists actual song as their ringtone. Launched Seek & Find, a wireless location-based system that enables subscribers to simultaneously locate multiple individuals away from their homes or offices. Commercially introduced a dual tuner high definition personal video recorder (HD PVR), which allows Bell ExpressVu customers to instantly pause live television, as well as record, replay, stop, fast forward and fast rewind HD and standard definition programming on up to two TVs in the home through a single receiver.

9 Bell Canada Enterprises 2005 Quarterly Report

| Managements
Discussion and Analysis |
| --- |
| Our
small and medium-sized businesses (SMB) unit: Launched
GoTrax, a new low-cost remote wireless tracking system for SMB customers.
GoTrax is a handset-based technology that allows assets to be tracked
in places where traditional Global Positioning System (GPS) signals
do not work. Introduced
a new integrated and Bell-hosted audio and web conferencing solution
for SMB customers based on the bilingual version of Microsoft®
Office Live Meeting 2005 that allows for control of the audio
conference call directly from the desktop. Completed
the acquisition of CSB Systems (CSB), an established enterprise resource
planning systems integrator in Western Canada, which helps expand
our range of value-added services (VAS) in the area of integrated
IT solutions. Our Enterprise unit: Has
sold 185,000 IP-enabled lines on customer premises equipment
(CPE) to date, representing a more than two-fold increase over the
past twelve months. Launched
Global Voice over Internet Protocol solution for Canadian multinationals,
a managed IP service delivered by BT Infonet that can provide
unlimited, international intra-company voice services at a flat rate
by virtue of interconnecting geographically dispersed customer locations
over a virtual private IP network. Continued
to enhance its capabilities through the acquisitions of CDG, Inc.
(CDG), a Canadian provider of anti-virus and anti-spam solutions,
which should provide a strong presence in the West, and PopWare Inc.,
a systems integrator providing inventory and asset management solutions,
which expands our wireless solutions portfolio. Government
of Alberta Agreement In June 2005,
Bell Canada and the Government of Alberta (GOA) entered into a new
agreement whereby completion of the construction of a next-generation
network (SuperNet) and service acceptance by the GOA is scheduled for
September 2005. Under the terms of the agreement, Bell Canada assumes
ownership of the Extended Area Network (EAN) and provides rights of use
to the GOA under indefeasible right-of-use agreements. The SuperNet, which
will provide high-speed Internet and broadband capabilities, is comprised
of a Base Area Network (BAN), covering 27 of Albertas largest communities,
and the EAN, reaching over 400 communities in rural Alberta. In conjunction
with this agreement, Bell Canada also entered into a new revenue
sharing agreement with the GOA and Axia NetMedia Corporation, the access
manager for SuperNet. The new agreements replace the initial contracts
entered into in 2001. Labour agreements On July 18, 2005,
Bell Canada reached a new four-year agreement with approximately
10,000 clerical and associated employees represented by the Canadian
Telecommunications Employees Association (CTEA). On
July 21, 2005, we were informed that Entourage Technology Solutions Inc.s
(Entourage) 1,400 technicians in Ontario represented by the Communications,
Energy and Paperworkers Union of Canada (CEP) voted in favour of
a new four-year collective agreement, ending a labour disruption that
began in March. Entourage technicians in Québec already had accepted
a new four-year collective agreement in April. With
these agreements and the major agreements signed by Bell Canada and
Aliant with their respective technicians in 2004, Bell Canada
now has the labour stability and a more competitive cost structure needed
to deliver quality services and value to customers in the years ahead. |

10 Bell Canada Enterprises 2005 Quarterly Report

| Quarterly
Financial Information The
table below shows selected consolidated financial data for the eight most
recently completed quarters. This information has been prepared on the
same basis as the annual consolidated financial statements, but is unaudited. | | | | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | 2005 | | | | | | 2004 | | | | | | 2003 | |
| | Q2 | | Q1 | | Q4 | | Q3 | | Q2 | | Q1 | | Q4 | | Q3 | |
| Operating
revenues | 4,980 | | 4,859 | | 4,986 | | 4,778 | | 4,779 | | 4,638 | | 4,815 | | 4,624 | |
| EBITDA | 2,001 | | 1,938 | | 1,831 | | 1,936 | | 1,953 | | 1,844 | | 1,847 | | 1,895 | |
| Amortization
expense | (792 | ) | (773 | ) | (803 | ) | (769 | ) | (769 | ) | (767 | ) | (775 | ) | (801 | ) |
| Net
benefit plans cost | (104 | ) | (103 | ) | (67 | ) | (61 | ) | (65 | ) | (63 | ) | (46 | ) | (44 | ) |
| Restructuring
and other items | (5 | ) | 4 | | (126 | ) | (1,081 | ) | (14 | ) | (3 | ) | (13 | ) | (1 | ) |
| Operating
income | 1,100 | | 1,066 | | 835 | | 25 | | 1,105 | | 1,011 | | 1,013 | | 1,049 | |
| Earnings
from continuing operations | 581 | | 492 | | 367 | | 102 | | 544 | | 485 | | 486 | | 453 | |
| Discontinued
operations | | | (1 | ) | (2 | ) | (2 | ) | 27 | | 3 | | (86 | ) | 11 | |
| Extraordinary
gain | | | | | 69 | | | | | | | | | | | |
| Net
earnings | 581 | | 491 | | 434 | | 100 | | 571 | | 488 | | 400 | | 464 | |
| Net
earnings applicable to common shares | 563 | | 474 | | 417 | | 82 | | 554 | | 470 | | 386 | | 446 | |
| Included
in net earnings: | | | | | | | | | | | | | | | | |
| Net
gains on investments | | | | | | | | | | | | | | | | |
| Continuing
operations | 28 | | 1 | | 64 | | 325 | | | | | | 84 | | | |
| Discontinued
operations | | | (1 | ) | (2 | ) | (2 | ) | 31 | | 7 | | (94 | ) | 8 | |
| Restructuring
and other items | (3 | ) | 2 | | (62 | ) | (725 | ) | 16 | | (1 | ) | (9 | ) | 6 | |
| Net
earnings per common share | | | | | | | | | | | | | | | | |
| Continuing
operations basic | 0.61 | | 0.51 | | 0.38 | | 0.09 | | 0.57 | | 0.51 | | 0.50 | | 0.48 | |
| Continuing
operations diluted | 0.61 | | 0.51 | | 0.38 | | 0.09 | | 0.57 | | 0.51 | | 0.50 | | 0.47 | |
| Net
earnings basic | 0.61 | | 0.51 | | 0.45 | | 0.09 | | 0.60 | | 0.51 | | 0.41 | | 0.49 | |
| Net
earnings diluted | 0.61 | | 0.51 | | 0.45 | | 0.09 | | 0.60 | | 0.51 | | 0.41 | | 0.48 | |
| Average number of
common shares outstanding (millions) | 926.6 | | 926.2 | | 925.3 | | 924.6 | | 924.3 | | 924.1 | | 923.4 | | 921.5 | |

11 Bell Canada Enterprises 2005 Quarterly Report

| | Managements
Discussion and Analysis | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Financial
Results Analysis This section provides detailed information and analysis about our performance
in Q2 2005 and YTD 2005 compared with Q2 2004 and YTD 2004.
It focuses on our consolidated operating results and provides financial
information for each of our operating segments. | Financial
Results Analysis Consolidated
Analysis | | | | | | | | | | | | |
| | | Q2 2005 | | Q2 2004 | | %
CHANGE | | YTD 2005 | | YTD 2004 | | %
CHANGE | |
| | Operating
revenues | 4,980 | | 4,779 | | 4.2% | | 9,839 | | 9,417 | | 4.5% | |
| | Operating
expenses | (2,979 | ) | (2,826 | ) | (5.4% | ) | (5,900 | ) | (5,620 | ) | (5.0% | ) |
| | EBITDA | 2,001 | | 1,953 | | 2.5% | | 3,939 | | 3,797 | | 3.7% | |
| | Amortization
expense | (792 | ) | (769 | ) | (3.0% | ) | (1,565 | ) | (1,536 | ) | (1.9% | ) |
| | Net
benefit plans cost | (104 | ) | (65 | ) | (60.0% | ) | (207 | ) | (128 | ) | (61.7% | ) |
| | Restructuring
and other items | (5 | ) | (14 | ) | 64.3% | | (1 | ) | (17 | ) | 94.1% | |
| | Operating
income | 1,100 | | 1,105 | | (0.5% | ) | 2,166 | | 2,116 | | 2.4% | |
| | Other
income | 24 | | 24 | | 0.0% | | 31 | | 60 | | (48.3% | ) |
| | Interest
expense | (247 | ) | (253 | ) | 2.4% | | (494 | ) | (505 | ) | 2.2% | |
| | Pre-tax
earnings from continuing operations | 877 | | 876 | | 0.1% | | 1,703 | | 1,671 | | 1.9% | |
| | Income
taxes | (223 | ) | (293 | ) | 23.9% | | (494 | ) | (555 | ) | 11.0% | |
| | Non-controlling
interest | (73 | ) | (39 | ) | (87.2% | ) | (136 | ) | (87 | ) | (56.3% | ) |
| | Earnings
from continuing operations | 581 | | 544 | | 6.8% | | 1,073 | | 1,029 | | 4.3% | |
| | Discontinued
operations | | | 27 | | (100.0% | ) | (1 | ) | 30 | | (103.3% | ) |
| | Net
earnings | 581 | | 571 | | 1.8% | | 1,072 | | 1,059 | | 1.2% | |
| | Dividends
on preferred shares | (18 | ) | (17 | ) | (5.9% | ) | (35 | ) | (35 | ) | 0.0% | |
| | Net
earnings applicable to common shares | 563 | | 554 | | 1.6% | | 1,037 | | 1,024 | | 1.3% | |
| | EPS | 0.61 | | 0.60 | | 1.7% | | 1.12 | | 1.11 | | 0.9% | |

Operating revenues Our revenues increased by 4.2% in the second quarter to $4,980 million and by 4.5% to $9,839 million on a year-to-date basis. The growth delivered this quarter reflected improved revenue performance across all of our segments except Aliant. At Bell Canada this was driven primarily by higher Consumer revenues attributable to stronger growth in wireless, video and Internet access services, as well as from continuing solid results within the Business segment, due to focused execution of our Virtual Chief Information Officer (VCIO), VAS and IP strategies and recent acquisitions, which has increased data revenues. Although our second quarter revenue growth was tempered slightly by Aliants performance, due to lower directory revenues, on a year-to-date basis Aliant contributed positively to our overall revenue growth. The Other BCE segment also contributed significantly to higher revenues, with double-digit growth at Telesat Canada (Telesat) and CGI Group Inc. (CGI) and high single-digit growth at Bell Globemedia Inc. (Bell Globemedia). Operating income

12 Bell Canada Enterprises 2005 Quarterly Report

We achieved operating income of $1,100 million, down 0.5% or $5 million compared with the same period last year. Despite higher revenues and cost savings from our Galileo program and prudent expense management at Aliant, the year-over-year decline was driven mainly by increased acquisition costs brought about by substantially stronger subscriber growth in wireless, video and high-speed Internet services, as well as by higher net benefit plans cost and amortization expense. For the first half of 2005, however, operating income increased 2.4% to $2,166 million, compared with the same six months last year. Stronger revenue growth, particularly at Bell Globemedia, Telesat and CGI, more than offset higher subscriber acquisition costs, higher wireless bad debt expense in Q1 stemming from billing delays associated with our billing system conversion last year, and increases in net benefit plans cost and amortization expense. At Bell Canada, due mainly to the upfront costs associated with acquiring subscribers, operating income declined 3.5% to $981 million in the second quarter and 0.7% to $1,963 year-to-date, despite solid revenue growth and further Galileo-related cost savings. The various cost-reduction and process improvement initiatives generated $122 million in savings this quarter, bringing total Galileo-related cost savings for the first six months of 2005 to $242 million. These savings resulted mainly from: the employee departures that took place in Q4 2004; reduced procurement costs resulting in COA savings; and improvements in cost of goods sold from optimization of our network and product simplification. EBITDA Our EBITDA for the second quarter and first half of 2005 was $2,001 million and $3,939 million, respectively, corresponding to increases of 2.5% and 3.7%, compared with the same periods last year, reflecting increases in all segments. Similarly, Bell Canada EBITDA increased by 1.0% versus Q2 2004 to reach $1,839 million in the quarter, while on a year-to-date basis EBITDA was up 2.2% to $3,654 million, reflecting revenue improvements in wireless and video, offset by lower local and access and data revenues within our wholesale operations. Wireless EBITDA increased year-over-year by 5.0%, due to double-digit revenue growth, despite the higher cost of acquisition associated with 41% more gross subscriber additions during the second quarter of this year. As a result of this incremental cost impact, EBITDA margin for the quarter was 2.5 percentage points below the same period last year. On a year-to-date basis, wireless EBITDA increased by 9.3%, which reflected wireless revenue growth of 10%. This was offset by the costs of acquiring a larger number of customers this quarter and higher bad debt expense in Q1, which resulted in a slight 0.4 percentage-point decline in EBITDA margin. Video EBITDA was positive and increased both on a quarterly and year-to-date basis, despite a strong increase in activations, reflecting continued focus on cost containment and solid revenue growth driven by the combination of a higher average number of subscribers and higher ARPU. Wireless cost of acquisition (COA) improved by 2.9% to $401 per gross activation in the second quarter of 2005 and by 10.4% to $389 in the first half of 2005 from $413 and $434 per gross activation for the same respective periods in 2004. Despite an increase in hardware subsidies incurred to acquire higher quality customers, the year-over-year improvements in COA were driven primarily by a greater number of gross activations, reduced promotions and advertising costs, and a slightly higher proportion of prepaid activations. The COA for video services in the second quarter and first six months of 2005 decreased by 18.9% and 24%, respectively, to $462 and $466 per gross activation from $570 and $610 per gross activation in the same periods last year. The significant improvements can be attributed primarily to lower set-top box (STB) pricing, reflecting the negotiation of a favourable supply contract, our STB rental program and the increased purchasing power of a stronger Canadian dollar, partially offset by a higher number of customers taking additional STBs.

13 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis Amortization expense Amortization expense of $792 million in Q2 2005 and $1,565 million on a year-to-date basis in 2005 represent increases of 3.0% and 1.9%, respectively, compared to the same periods last year. This was a result of an increase in our capital asset base from capital spending that continues to be higher than asset retirements. Net benefit plans cost The net benefit plans cost of $104 million in Q2 2005 and $207 million on a year-to-date basis in 2005 represent increases of 60% and 62%, respectively, compared to the same periods last year. The increases resulted mainly from: a reduction in the discount rate from 6.5% to 6.2%, which resulted in an increase in the accrued benefit obligation of our pension plans a reduction in plan assets due to the amortization of investment losses experienced in 2001 and 2002 fully amortizing in 2004 the savings relating to the transitional asset that arose upon the adoption of new accounting rules in 1987 an increase in the pension obligation from the early retirement program in 2004. Restructuring and other items We recorded restructuring and other items of $5 million in Q2 2005 and $1 million on a year-to-date basis in 2005, which consisted of charges of $5 million in Q2 2005 and $26 million on a year-to-date basis in 2005. These charges were mainly for relocating employees and closing real estate facilities that are no longer needed because of the reduction in the workforce from the 2004 employee departure program. This was partly offset by a $25 million credit in Q1 2005 for the reversal of restructuring provisions that were no longer necessary, since the actual payments made to employees were lower than estimated. We recorded restructuring and other items of $14 million in Q2 2004 and $17 million on a year-to-date basis in 2004, which consisted mainly of: a $110 million provision recorded in Q2 2004 for cost overruns on a contract with the Government of Alberta (GOA) partly offset by: income of $75 million recorded in Q2 2004 relating to an agreement reached between BCE Inc. and Manitoba Telecom Services Inc. (MTS) to settle lawsuits a $23 million credit in Q2 2004 for the reversal of restructuring provisions that were no longer necessary, since the actual payments made to employees were lower than estimated. Net earnings / Earnings per Share (EPS) Net earnings applicable to common shares for Q2 2005 were $563 million, or $0.61 per common share, 1.6% higher than net earnings of $554 million, or $0.60 per common share, for the same period last year. Included in the second quarter earnings this year were $25 million of net gains on investments and restructuring and other items, composed primarily of a dilution gain relating to our interest in TerreStar Networks Inc., a mobile satellite services company, compared with $47 million in Q2 2004. Excluding the impact of these items, net earnings of $538 million, or $0.58 per common share, were up $31 million, or $0.03 per share, representing an increase of 5.5% over last year. On a year-to-date basis, net earnings applicable to common shares were $1,037 million, or $1.12 per common share, 1.3% higher than net earnings of $1,024 million, or $1.11 per common share, for the same period last year. Included in year-to-date earnings this year were $27 million of net gains on investments and restructuring and other items, compared with $53 million for the same period last year. Excluding the impact of these items, net earnings of $1,010 million, or $1.09 per common share, were up $39 million, or $0.04 per share, representing an increase of 3.8% over last year. Both the quarterly and year-to-date improvements can be attributed directly to higher EBITDA, lower interest expense, as well as the net income tax savings from the loss monetization program between Bell Canada and Bell Canada International Inc. (BCI), which were partly offset by higher net benefit plans cost and amortization expense.

14 Bell Canada Enterprises 2005 Quarterly Report

| Segmented
Analysis | Q2 2005 | | Q2 2004 | | %
CHANGE | | YTD 2005 | | YTD 2004 | | %
CHANGE | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Operating
revenues | | | | | | | | | | | | |
| Consumer | 1,890 | | 1,858 | | 1.7% | | 3,746 | | 3,683 | | 1.7% | |
| Business | 1,499 | | 1,441 | | 4.0% | | 2,977 | | 2,876 | | 3.5% | |
| Aliant | 518 | | 526 | | (1.5% | ) | 1,042 | | 1,030 | | 1.2% | |
| Other
Bell Canada | 485 | | 468 | | 3.6% | | 964 | | 942 | | 2.3% | |
| Inter-segment
eliminations | (134 | ) | (121 | ) | (10.7% | ) | (262 | ) | (253 | ) | (3.6% | ) |
| Total
Bell Canada | 4,258 | | 4,172 | | 2.1% | | 8,467 | | 8,278 | | 2.3% | |
| Other
BCE | 835 | | 722 | | 15.7% | | 1,583 | | 1,373 | | 15.3% | |
| Inter-segment
eliminations | (113 | ) | (115 | ) | 1.7% | | (211 | ) | (234 | ) | 9.8% | |
| Total
operating revenues | 4,980 | | 4,779 | | 4.2% | | 9,839 | | 9,417 | | 4.5% | |
| Operating
income | | | | | | | | | | | | |
| Consumer | 552 | | 560 | | (1.4% | ) | 1,078 | | 1,086 | | (0.7% | ) |
| Business | 221 | | 227 | | (2.6% | ) | 461 | | 468 | | (1.5% | ) |
| Aliant | 99 | | 92 | | 7.6% | | 186 | | 174 | | 6.9% | |
| Other
Bell Canada | 109 | | 138 | | (21.0% | ) | 238 | | 249 | | (4.4 | %) |
| Total
Bell Canada | 981 | | 1,017 | | (3.5% | ) | 1,963 | | 1,977 | | (0.7% | ) |
| Other
BCE | 119 | | 88 | | 35.2% | | 203 | | 139 | | 46.0% | |
| Total
operating income | 1,100 | | 1,105 | | (0.5% | ) | 2,166 | | 2,116 | | 2.4% | |
| Consumer
revenues Consumer
revenues grew by 1.7% both this quarter and year-to-date to $1,890 million
and $3,746 million, respectively, reflecting continued strength in
our growth businesses driven by substantial increases in our wireless,
video and high-speed Internet subscriber bases. Growth in these product
lines more than offset declines in long distance and local and access
revenues. Wireless Consumer wireless
revenues increased year-over-year both this quarter and year-to-date,
mainly as a result of a higher average number of customers compared with
last year. Consumer wireless revenue growth regained momentum this quarter
fuelled by subscriber growth and new rate plans. In addition, the billing
and retention credits issued in Q1 to compensate customers for billing
errors and delays that occurred following implementation of the new billing
platform have now returned to normal levels. (For
further information about our wireless subscriber base, please see Wireless
within our Product Line Analysis.) | | | | | | | | | | | | |

15 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis Video Our video revenues grew by 11.8% this quarter to $236 million from $211 million last year, as a result of a higher average number of subscribers and slightly higher average revenue per user (ARPU). Similarly, on a year-to-date basis, our video revenues grew by 9.3% to $457 million. We had our strongest Q2 ever with the addition of 63,000 net new video customers, a 163% increase compared with the 24,000 net activations achieved in Q2 of 2004. These additions contributed to an 11.8% year-over-year increase in our video customer base to 1,595,000. The strong improvement in net activations this quarter and year-to-date was driven by the positive impact of our STB rental program and VDSL growth. In order to combat DTH signal piracy, a major issue facing the Canadian broadcasting industry, we began the deployment of a new conditional access system in 2004. All new customers since August 2004 have been supplied with the new system and, over the past year, we have been replacing old smart cards for all remaining customers. This process was completed in July. Our ARPU this quarter increased to $50 per month from $49 per month in Q2 2004 as a result of a price increase implemented in March 2005, offset partly by lower pay-per-view revenues due to the NHL lockout and bundle discounts. On a year-to-date basis, ARPU remained flat at $49 per month as the March price increase and a shift in the product mix towards higher priced programming packages was offset by lower pay-per-view revenues and bundle discounts. Our video churn rate improved by 0.1 percentage point to 0.9% this quarter and 0.8% year-to-date compared with last year, reflecting the continued success of our bundled services market strategy and the requirement that, as of August 1, 2004, all new video customers have contracts. Data Consumer data revenues grew this quarter and year-to-date driven by growth of 24% in our High-Speed Internet subscriber base and an increase in revenues from our Sympatico.MSN.ca web portal and Bell Sympatico value-added services (VAS). Consumer high-speed Internet net additions were stronger this quarter and year-to-date compared with last year. This was driven by the introduction of our Basic Lite service in the Ontario market, as well as by footprint expansion, focused selling efforts, and improved retention strategies. The introduction of lower priced high-speed services, such as Basic Lite, that are geared towards the very price sensitive segments of the market has expanded the overall high-speed market, stimulating high-speed service growth and accelerating the rate of erosion of dial-up Internet service. Our Sympatico.MSN.ca portal revenues have increased by 131% over the second quarter of 2004. The portal currently averages 15.8 million unique visitors per month, or 84% of online Canadians. VAS such as MSN Premium, Desktop Anti-Virus and Desktop Firewall added 99,000 subscriptions this quarter and 241,000 subscriptions year-to-date to reach a total of 865,000 subscriptions, approximately double the number of a year ago.

16 Bell Canada Enterprises 2005 Quarterly Report

Wireline Local and access revenues declined this quarter and year-to-date compared with the same periods last year due mainly to NAS declines (leading to both lower NAS revenues and related SmartTouch feature revenues), partly offset by higher revenues from wireline maintenance plans. NAS decreased both this quarter and year-to-date as a result of losses to competitive local exchange carriers (CLECs), cable telephony offerings, VoIP providers, continued pressure from growth in high-speed Internet access which reduces the need for second telephone lines, and customers substituting wireline with wireless telephone service. The rate of year-over-year NAS losses increased this quarter as a competitor expanded the footprint of its low-priced cable telephony offering in certain of our Québec markets. Long distance revenues were lower both this quarter and year-to-date compared with the same periods last year mainly reflecting lower average revenue per minute (ARPM). ARPM declines reflect competition from non-traditional long distance providers, the impact of our $5 Long Distance Bundle, and fewer higher priced overseas minutes. Overall minute volumes this quarter were slightly higher than last year as usage gains stemming from our bundle were largely offset by losses to non-traditional long distance providers. Year-to-date, minute volumes declined as bundle-related minute growth was more than offset by losses to non-traditional voice providers. On July 3, 2005, we stopped offering the $5 Long Distance Bundle. Consumer operating income The Consumer segment achieved operating income of $552 million this quarter and $1,078 million year-to-date, representing decreases of 1.4% and 0.7%, respectively, compared with the same periods last year. Solid revenue growth and savings from cost-reduction initiatives, which contributed significantly to EBITDA performance in 2005, were more than offset by higher acquisition costs from wireless and video subscriber growth and year-over-year increases in net benefit plans cost and amortization expense. Wireless bad debt expense, which negatively impacted results in Q1, returned to normal levels in Q2. Business revenues Business segment revenues for the three and six months ended June 30, 2005 were $1,499 million and $2,977 million, respectively, representing increases of 4.0% and 3.5% compared with the same periods one year earlier. Increases in data and wireless revenues were partially offset by declines in local and access, long distance and terminal sales and other revenues. Enterprise Revenues from enterprise customers increased this quarter and on a year-to-date basis, as increases in data and wireless more than offset declines in local and access, long distance and terminal sales and other revenues. Data delivered strong year-over-year improvement, even when excluding the impact of acquisitions, due to continued growth in our IP-based connectivity and VAS revenues. VAS revenues grew by 47% in the second quarter, compared with the same quarter last year, mostly as a result of acquisitions and customer outsourcing.

17 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis The trend towards IP continued throughout the quarter with 17 new customers implementing IP Virtual Private Networks (IPVPN), including the Jean Coutu Group, the City of Toronto, PepsiCo Canada, and Gowling Lafleur Henderson LLP. This brought the total number of customers implementing IPVPN networks as of the end of Q2 2005 to 111. During the quarter, we continued to broaden our VAS solutions portfolio through acquisitions of CDG, a Canadian provider of anti-virus and anti-spam solutions, which should provide a strong presence in the West, and PopWare, a provider of inventory and assessment management solutions, which helps to expand our wireless solutions portfolio. SMB Revenues from SMB customers increased this quarter and on a year-to-date basis as increases in data, wireless and terminal sales and other revenues more than compensated for the decreases in long distance and local and access revenues. Data revenue growth was fuelled by acceleration in DSL high-speed Internet access service connections and continued strong VAS sales stemming from the successful execution of our VCIO strategy, despite a highly competitive market environment. Subscriptions to VAS increased by an additional 12,000 subscribers, bringing the total number at the end of the quarter to 106,000. The recent business acquisitions of Nexxlink Technologies Inc. (Nexxlink) and CSB, combined with improved rates of growth from Accutel Conferencing Systems Inc. (Accutel) and Charon Systems Inc. (Charon) acquired in 2004, contributed significantly to this quarters growth in data, terminal sales and other revenue. Long distance revenues decreased, due mainly to a combination of volume and competitive pricing pressures, and our weakening pay-phone business resulting from wireless and Internet substitution. Similarly, local and access revenues were also lower due to pressure from our declining payphone business and lower wireline access installation fees due to the Entourage labour dispute, which was settled in July. Bell West Bell West continued to grow its Enterprise and SMB customer bases, resulting in a larger volume of customer premise equipment (CPE) sales, which translated directly into higher terminal sales and other revenue for both the second quarter and first half of 2005. Local and access and long distance revenues also increased this quarter and year-to-date due to expansion of the customer base. However, data revenues decreased, reflecting lower construction revenue in 2005 compared with last year from a contract to build a next-generation network for the GOA. Group Telecom In November 2004, we acquired the Canadian operations of 360networks Corporation, including GT Group Telecom Inc., (collectively 360networks) as well as certain U.S. network assets. This acquisition increased our customer base and gave us an extensive fibre network across major cities in Western Canada. The Business segment now reflects the retail portion of this acquisition, operating in Western Canada as the Group Telecom unit within Bell Canada. Business operating income Business segment operating income for the second quarter and first half of 2005 decreased by 2.6% and 1.5%, respectively, to $221 million and $461 million, as a result of higher net benefits plans cost and amortization expense, which more than offset EBITDA improvements stemming from solid revenue growth and the impact of cost savings initiatives.

18 Bell Canada Enterprises 2005 Quarterly Report

In the Enterprise unit, operating income increased this quarter and year-to-date, reflecting revenue growth and cost-saving initiatives, which were partially offset by the higher amortization expense and net benefit plans cost. Our SMB unit had lower operating income in both the second quarter and first half of the year, compared with the same period in 2004, as it incurred higher amortization expense and net benefit plans cost. Bell West also recorded lower operating income in the second quarter and on a year-to-date basis, due primarily to lower data revenues and higher amortization expense. Aliant revenues Aliant segment revenues of $518 million for the second quarter decreased by 1.5% compared with the same period last year. Continued strong growth in wireless and Internet services partially offset declines in other areas due to regulatory restrictions, the impacts of competition, and lower directory advertising revenues. However, on a year-to-date basis, revenues were $1,042 million, or 1.2% higher than the same period last year, due to stronger product sales in Q1. Aliants wireless revenue grew in the second quarter and year-to-date, compared with the same periods last year. The growth was driven by a year-over-year increase of 9.7% in Aliants wireless customer base. This included a 24% increase in digital customers, reflecting a strong market position that is supported by a comprehensive dealer network and innovative solutions, attractive pricing offers and extensive service area coverage. In addition, ARPU was up in the quarter, reflecting the impacts of a higher percentage of customers subscribing to digital service, higher usage and increased customer adoption of features. Data revenues for the second quarter and first half of 2005 declined as higher Internet revenues were more than offset by other data revenue declines from the continued rationalization of circuit networks by customers and competitive pricing pressures. The Canadian Radio-television and Telecommunications Commissions (CRTC) decision with respect to Competitor Digital Network Services (CDN decision) also had a negative impact on data revenues. The growth in Internet revenues was attributable to year-over-year subscriber growth of 7.0%, reflecting a 31% growth in Aliants high-speed Internet customer base. The higher subscriber base reflects the expansion of high-speed Internet service into new areas, attractive introductory offers and an emphasis on bundling with other products and services. The impact of Aliants aggressive introductory offers that began late last year and ended in the first quarter and its value-package options reduced ARPU. Intense competition in the long distance market, substitution of long distance calling with Internet and wireless options by customers, and the use of contact centre management tools to reduce minute usage resulted in long distance revenue declines in the second quarter and in the first six months of 2005, compared with the same periods last year. Local and access revenues in the second quarter and year-to-date decreased over the same periods last year. This reflected a 1.6% decline in the NAS customer base, resulting from competitive losses and technology substitution. Enhanced service feature revenue also declined as more customers received bundling discounts. The CRTCs regulatory restrictions continue to place pressure on Aliants local and access revenue with respect to bundling and packaging of local services with other non-regulated services, and limitations imposed with respect to customer win-back promotions. In addition, the negative impact from the CDN decision totalled $2.3 million in the second quarter and $4.7 million on a year-to-date basis. Terminal sales and other revenues decreased for the second quarter due to lower directory advertising revenue. On a year-to-date basis there was an increase as declines in directory advertising revenue were more than offset by higher product sales.

19 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis Aliant operating income Aliants operating income was $99 million in the second quarter and $186 million year-to-date, reflecting an increase of $7 million, or 7.6%, and $12 million, or 6.9%, respectively, compared with the same periods last year. The full impact of growth and recovery from the 2004 labour disruption was partially offset by the impact of the CDN decision and an increase in pension and other post-employment benefits costs. Operating expense increases required to drive revenue growth are being contained by sound expense management, including the cost savings from Aliants 2004 voluntary early retirement incentive program. Other Bell Canada revenues Other Bell Canada segment revenues of $485 million for Q2 2005 and $964 million for the first two quarters of this year, reflected increases of $17 million, or 3.6%, and $22 million, or 2.3%, respectively, compared with the same periods last year. These improvements were due mainly to higher revenues at our wholesale unit, resulting from the acquisition of the wholesale portion of 360networks in the fourth quarter of last year and a favourable ruling by the CRTC with respect to subsidies for serving high cost areas at Télébec Limited Partnership (Télébec) in Q1. This was partly offset by lower revenues of $15.9 million in Q2 and $25.8 million year-to-date that resulted from the CDN decision, and continued pressure on data revenues due to competitive pricing and customers migrating services to their own network facilities. The increase in the second quarter also reflected the favourable impact on revenues from the early termination of a cross-border facilities contract. Other Bell Canada operating income Operating income for the Other Bell Canada segment was $109 million this quarter, down 21% from Q2 2004, while on a year-to-date basis operating income was down 4.4% to $238 million when compared with the same period last year. The declines resulted mainly from incremental salaries and higher cost of goods sold associated with the wholesale operations of 360networks that was acquired in Q4 2004, the impact of the CDN decision, and a slight increase in operating expenses at Télébec and NorthernTel Limited Partnership (NorthernTel). These impacts were partially offset by various cost saving initiatives and improvement in bad debt expense. In addition, the year-to-date decrease was positively impacted in Q1 2005 by a $25 million credit for the reversal of restructuring provisions that were no longer necessary since the actual payments were lower than expected, which offset a $24 million charge for relocating employees and closing real estate facilities following our employee departure program. Other BCE Revenues The Other BCE segment revenues grew by 15.7% this quarter to $835 million and by 15.3% to 1,583 million on a year-to-date basis, compared with the same periods in 2004. In each case, the increase reflected higher revenues at Bell Globemedia, Telesat and CGI.

| | Q2 2005 | Q2 2004 | %
CHANGE | YTD 2005 | YTD 2004 | %
CHANGE |
| --- | --- | --- | --- | --- | --- | --- |
| Bell Globemedia | 399 | 371 | 7.5% | 755 | 713 | 5.9% |
| Telesat | 137 | 85 | 61.2% | 245 | 169 | 45.0% |
| CGI | 275 | 248 | 10.9% | 548 | 462 | 18.6% |
| Other | 24 | 18 | 33.3% | 35 | 29 | 20.7% |
| Other
BCE revenues | 835 | 722 | 15.7% | 1,583 | 1,373 | 15.3% |

20 Bell Canada Enterprises 2005 Quarterly Report

Bell Globemedias revenues for the quarter were $399 million, up 7.5% from Q2 of last year. On a year-to-date basis, Bell Globemedias revenues grew 5.9% to $755 million. Television advertising revenues grew by 10.4% this quarter and by 8.2% on a year-to-date basis, reflecting the strength of CTVs schedule, which included 18 of the top 20 regularly scheduled programs from September 2004 to early July 2005. CTV s telecast of the Live8 concert was one of the biggest television events in CTV history, reaching 10.5 million viewers, or approximately one in three Canadians. Strong growth in advertising revenues in conventional and specialty television helped to offset the loss of advertising from hockey broadcasts on our sports specialty channels TSN and RDS. Bell Globemedias subscriber revenues grew by 5.4% this quarter and by 4.7% on a year-to-date basis, reflecting specialty channel growth and online subscription growth at The Globe and Mail. Telesats revenues increased by 61% to $137 million this quarter and by 45% to $245 million on a year-to-date basis primarily as a result of higher revenues from its network for Interactive Distance Learning services, its acquisition of The SpaceConnection Inc. (SpaceConnection), and Ka-band revenues from Anik F2. SpaceConnection was acquired in January 2005 and is a provider of programming-related satellite transmission services to major U.S. television networks and cable programmers. Anik F2 began commercial service in October 2004 and was the worlds first satellite to commercialize the Ka frequency band, enabling two-way high-speed Internet access services to consumers and businesses in Canada and the U.S. On May 25, 2005, Telesat announced the launch of its new two-way high-speed Internet access service using the Ka band of Anik F2. This new service is available to consumers through multiple distributors across Canada, including Barrett Xplore Inc. (Barrett), a wireless broadband service provider, Télébec, NorthernTel and Infosat Communications Inc. Our share of CGI revenues increased this quarter by 10.9% to $275 million and by 18.6% on a year-to-date basis to $548 million, reflecting CGIs acquisition of American Management Systems Inc. (AMS) in May 2004. Other BCE operating income Operating income for the Other BCE segment grew by 35% this quarter to $119 million and by 46% to $203 million on a year-to-date basis, reflecting growth in operating income at Bell Globemedia and Telesat. This was partly offset by operating income declines at CGI. Bell Globemedias operating income grew by 28% this quarter and by 40% on a year-to-date basis, reflecting revenue gains and cost savings. Telesats operating income grew by 27% this quarter and by 23% on a year-to-date basis, reflecting strong revenue growth partly offset by SpaceConnections operating expenses, network equipment costs for Interactive Distance Learning services and higher amortization expense related to Anik F2 and Space-Connection. CGIs operating income declined by 20% this quarter, reflecting higher operating costs and amortization expense associated with the acquisition. On a year-to-date basis, however, CGIs operating income remained unchanged.

21 Bell Canada Enterprises 2005 Quarterly Report

| Managements
Discussion and Analysis Product Line
Analysis | Q2 2005 | Q2 2004 | %
CHANGE | | YTD 2005 | YTD 2004 | %
CHANGE | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Local
and access | 1,368 | 1,401 | (2.4% | ) | 2,736 | 2,780 | (1.6% | ) |
| Long
distance | 518 | 572 | (9.4% | ) | 1,056 | 1,178 | (10.4% | ) |
| Wireless | 771 | 698 | 10.5% | | 1,484 | 1,349 | 10.0% | |
| Data | 966 | 870 | 11.0% | | 1,917 | 1,762 | 8.8% | |
| Video | 236 | 211 | 11.8% | | 457 | 418 | 9.3% | |
| Terminal
sales and other | 399 | 420 | (5.0% | ) | 817 | 791 | 3.3% | |
| Total
Bell Canada | 4,258 | 4,172 | 2.1% | | 8,467 | 8,278 | 2.3% | |
| Local
and access Local
and access revenues of $1,368 million for the quarter and $2,736 million
year-to-date, decreased by 2.4% and 1.6%, respectively, compared with
the same periods in 2004 mainly as a result of lower network access
services (NAS) and lower SmartTouch feature revenues, partly offset by
gains from wireline insurance and maintenance plans. NAS
in service declined by 238,000, or 1.8% since the second quarter of 2004,
as a result of losses to CLECs, cable operators offering local telephone
service, and VoIP providers, as well as continued pressure from growth
in high-speed Internet access that reduces the need for second telephone
lines and wireline to wireless substitution. This year-over-year decrease
reflected a higher level of NAS losses than previously experienced, as
a major cable operator expanded the footprint of its low-priced cable
telephony offering in certain of our Québec markets. Long distance Long distance revenues
were $518 million for the quarter and $1,056 million for the
first six months of 2005, reflecting year-over-year decreases of
9.4% and 10.4%, respectively, compared with the same periods in 2004.
Lower long distance revenues affected all our Bell Canada related
segments, particularly our Consumer and Business segments. Overall
minute volumes increased slightly both this quarter and year-to-date to
4,667 million and 9,255 million conversation minutes, or by
3.8% and 2.0%, respectively, compared with the same periods in 2004.
However, ARPM decreased by $0.017 to $0.101 in the second quarter of 2005
and by $0.015 to $0.104 in the first half of the year, reflecting competitive
pressures and the continued steady take-up rate of our $5 Long Distance
Bundle, which was terminated subsequent to the end of the second quarter
on July 3, 2005. | | | | | | | | |

22 Bell Canada Enterprises 2005 Quarterly Report

Wireless Wireless service revenues grew 10.5% this quarter and 10.0% year-to-date to $771 million and $1,484 million, respectively, compared with the same periods last year. In each case, the year-over-year improvement was driven by subscriber growth of 11.1%. Blended ARPU remained stable on both a quarterly and year-to-date basis at $50 and $48 per month, respectively. Our total cellular and PCS subscriber base surpassed the 5 million customer milestone this quarter, reaching 5,108,000 customers as at June 30, 2005. We had 146,000 net additions this quarter, representing a 54% increase in net additions over the same period last year. This was comprised of a 50% improvement in postpaid net additions to 117,000 and 71% higher prepaid net additions of 29,000. The significantly higher number of postpaid net additions was driven by the success of our new rate plans and our new 10-4 service, as well as our increased presence in western Canada. The improvement in prepaid activations resulted from the contribution of subscribers from Virgin Mobile

| | Q2 2005 | Q2 2004 | %
CHANGE | | YTD 2005 | YTD 2004 | %
CHANGE | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ARPU
($/month) | 50 | 50 | | | 48 | 48 | | |
| Postpaid | 61 | 62 | (1.6% | ) | 59 | 60 | (1.7% | ) |
| Prepaid | 16 | 11 | 45.5% | | 13 | 11 | 18.2% | |
| Cellular
& PCS Gross | | | | | | | | |
| Activations
(k) | 380 | 269 | 41.2% | | 657 | 530 | 24.0% | |
| Postpaid | 280 | 205 | 36.6% | | 473 | 409 | 15.6% | |
| Prepaid | 100 | 63 | 58.7% | | 184 | 121 | 52.1% | |
| Churn (average per
month) | 1.6% | 1.3% | (0.3 | ) pts | 1.6% | 1.3% | (0.3 | )
pts |
| Postpaid | 1.4% | 1.1% | (0.3 | ) pts | 1.5% | 1.1% | (0.4 | )
pts |
| Prepaid | 2.1% | 1.9% | (0.2 | ) pts | 2.0% | 1.8% | (0.2 | )
pts |
| Cellular
& PCS Net | | | | | | | | |
| Activations
(k) (1) | 146 | 95 | 53.7% | | 183 | 187 | (2.1% | ) |
| Postpaid (1) | 117 | 78 | 50.0% | | 112 | 147 | (23.8% | ) |
| Prepaid (1) | 29 | 17 | 70.6% | | 71 | 40 | 77.5% | |
| Cellular
& PCS | | | | | | | | |
| Subscribers
(k) | 5,108 | 4,599 | 11.1% | | 5,108 | 4,599 | 11.1% | |
| Postpaid | 3,836 | 3,500 | 9.6% | | 3,836 | 3,500 | 9.6% | |
| Prepaid | 1,272 | 1,099 | 15.7% | | 1,272 | 1,099 | 15.7% | |

(1) We added 82,000 new customers in Q1 2005 (40,000 postpaid customers and 42,000 prepaid customers) and cancelled 45,000 non-paying postpaid customer accounts.

23 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis and the effects of a new tiered prepaid pricing structure introduced last February designed to stimulate usage by charging customers $0.30 per minute for the first two minutes with the remainder of the call at $0.05 per minute. During the quarter, 80% of net additions were on postpaid rate plans. On a year-to-date basis, our 183,000 net additions were 2.1% lower than the same period last year as the strong growth experienced in Q2 was more than offset by the cancellation of 45,000 non-paying customer accounts in Q1 related to our billing system migration and our limited number of postpaid promotions in the early part of the year. On a year-to-date basis, 61% of net additions were on postpaid rate plans. Our postpaid churn rate this quarter improved to 1.4% from 1.6% in the previous quarter, but increased 0.3 percentage points when compared with Q2 2004. The year-over-year increase in postpaid churn reflected a stricter policy with respect to the application of customer credits and discounts and to the granting of hardware upgrades, as well as some residual impacts of our billing system migration. Prepaid churn for the quarter increased slightly to 2.1% compared with 1.9% for the same period last year, due primarily to customer reaction regarding a change in practice relating to unused prepaid minutes carried foward for existing customers. Overall, our blended churn rate increased to 1.6% this year from 1.3% last year for both the quarter and on a year-to-date basis. Our blended ARPU remained stable both this quarter, at $50 per month, and on a year-to-date basis, at $48 per month, compared with the same periods last year. In each case, slightly lower postpaid ARPU was offset by higher prepaid ARPU. Postpaid ARPU, which increased on a sequential basis by $4, declined by $1 to $61 per month in the second quarter and to $59 per month in the first half of 2005, compared with the same periods last year. The year-over-year decreases were primarily the result of a customer shift to lower-priced plans, which more than offset growth in wireless data and other feature revenues. The year-to-date impact also reflects the application of customer billing and retention credits in Q1 that returned to normal levels in Q2. On July 1, 2005, we implemented price increases for several services, including 911, 411 and outbound text messaging, that should improve postpaid ARPU going forward. Prepaid ARPU increased to $16 per month this quarter and to $13 per month on a year-to-date basis, reflecting higher usage and the recognition of a portion of deferred revenues related to unused prepaid minutes that will expire. Data Our data revenues increased by 11.0% this quarter and by 8.8% on a year-to-date basis to $966 million and $1,917 million, respectively, compared with the same periods last year. In each case, the improvement was a result of growth in high-speed Internet, VAS, and IP-based services, which more than offset declines from lower construction revenues from the GOA contract, legacy data revenues, price competition and lower revenues stemming from the CDN decision totalling $16.3 million in Q2 and $27.7 million year-to-date. Our growth in VAS was due partly to the business acquisitions completed over the last twelve months. This quarters results also reflected the one-time benefit of the early termination of a cross-border facilities contract. The number of high-speed Internet subscribers increased by 92,000 this quarter and by 220,000 on a year-to-date basis, surpassing the two-million customer mark at the end of the second quarter with a total subscriber count of 2,028,000. Stronger high-speed Internet

24 Bell Canada Enterprises 2005 Quarterly Report

net additions both this quarter and year-to-date were driven by the introduction of our Basic Lite service in the Ontario market, as well as by footprint expansion, focused selling efforts, and improved retention strategies. The introduction of lower-priced, high-speed services that are geared towards the price sensitive segments of the market (such as our Basic Lite service) has expanded the overall high-speed market, stimulating high-speed service growth and accelerating the rate of erosion of dial-up Internet services. Our high-speed Internet access footprint in Ontario and Québec reached 84% of homes and business lines passed at the end of the second quarter, compared with 81% at the same time last year. Total dial-up customers decreased to 666,000 at the end of the quarter from 807,000 at the end of Q2 2004, as dial-up customers migrated to higher-speed Internet services. Video See discussion under Consumer Segment. Terminal sales and other Terminal sales and other revenues decreased by 5.0% this quarter to $399 million, reflecting lower equipment sales to Enterprise customers and the impact of consumer promotions on wireless handset revenues. On a year-to-date basis, terminal sales and other revenues were $817 million, or 3.3% higher than the same period last year. This increase reflected growth in Aliant equipment sales, offset partially by lower equipment sales to Enterprise customers and lower consumer wireless handset revenues this quarter. Other Items Other income Other income amounted to $24 million in both Q2 2005 and Q2 2004. In Q2 2005, the increase in net gains on investments and lower foreign exchange losses were offset by a $20 million charge relating to the tax loss monetization program between Bell Canada and BCI (see Related Party Transactions ) and lower income from cost and equity investments. Other income of $31 million in the first six months of 2005 was $29 million lower than the same period in 2004. The $20 million charge relating to the loss monetization program between Bell Canada and BCI and lower income from cost and equity investments were partly offset by the increase in net gains on investments. The increases in net gains on investments in 2005 related mainly to a dilution gain on our interest in a mobile satellite services company. The lower income from cost and equity investments stemmed mainly from the sale of our 15.96% interest in MTS in 2004. Interest expense Interest expense of $247 million in Q2 2005 and $494 million on a year-to-date basis in 2005 represents declines of 2.4% and 2.2%, respectively, compared to the same periods last year. This was a result of lower average debt levels, mainly from the net debt repayments made in the last twelve months, and from lower average interest rates from the refinancing of debt at lower rates. Income taxes Income taxes of $223 million in Q2 2005 and $494 million on a year-to-date basis in 2005 declined 24% and 11.0%, respectively, compared to the same periods last year. The declines were primarily from $60 million of savings resulting from the loss monetization program between Bell Canada and BCI (see Related Party Transactions ). Non-controlling interest Non-controlling interest of $73 million in Q2 2005 and $136 million on a year-to-date basis in 2005 represent increases of 87% and 56%, respectively, compared to the same periods last year. The increases were a result of: purchasing MTS 40% interest in Bell West in August 2004. Before August 2004, Bell Wests net losses, which included the $110 million provision on the contract with the Government of Alberta recorded in Q2 2004, resulted in a reduction of non-controlling interest. higher net earnings at Aliant and Bell Globemedia.

25 Bell Canada Enterprises 2005 Quarterly Report

| | Managements
Discussion and Analysis | | | | |
| --- | --- | --- | --- | --- | --- |
| Financial
and Capital Management This section tells you how
we manage our cash and capital resources to carry out our strategy and deliver
financial results. It provides an analysis of our financial condition, cash
flows and liquidity on a consolidated basis. | Discontinued
operations Discontinued
operations of $27 million in Q2 2004 and $30 million on
a year-to-date basis in 2004 consist mainly of a $26 million
net gain on the sale of our 64% interest in Emergis Inc. (Emergis). Financial
and Capital Management Capital Structure | | | | |
| | | Q2 2005 | | Q4 2004 | |
| | Debt
due within one year | 1,497 | | 1,276 | |
| | Long-term
debt | 12,480 | | 11,809 | |
| | Less:
Cash and cash equivalents | (380 | ) | (380 | ) |
| | Total
net debt | 13,597 | | 12,705 | |
| | Non-controlling
interest | 2,905 | | 2,908 | |
| | Total
shareholders equity | 14,478 | | 14,024 | |
| | Total
capitalization | 30,980 | | 29,637 | |
| | Net
debt to capitalization | 43.9 % | | 42.9% | |
| | Outstanding
share data (in millions) | | | | |
| | Common
shares | 926.7 | | 925.9 | |
| | Stock
options | 27.8 | | 28.5 | |
| | Our net debt to capitalization ratio was 43.9% at the end of Q2 2005,
compared to 42.9% at the end of 2004. This resulted from higher net
debt, partly offset by an increase in total shareholders equity. Net
debt increased by $892 million to $13,597 million in the first
six months of 2005. The increase is attributed to $450 million
of obligations under capital leases relating to the renewal of a number
of lease financing arrangements and $259 million in cash invested
in business acquisitions and other investments. Total
shareholders equity increased $454 million to $14,478 million
in the first six months of 2005. This represents the net earnings
remaining after the dividends we declared on common and preferred shares
in the first six months of 2005. | | | | |

| Cash
Flows The
table below is a summary of the flow of cash into and out of BCE. | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | YTD | | YTD | |
| | Q2 2005 | | Q2 2004 | | 2005 | | 2004 | |
| Cash from operating activities | 1,450 | | 1,124 | | 2,389 | | 2,384 | |
| Capital
expenditures | (914 | ) | (826 | ) | (1,651 | ) | (1,507 | ) |
| Other
investing activities | (11 | ) | 116 | | (26 | ) | 135 | |
| Cash
dividends paid on
common shares | (305 | ) | (277 | ) | (583 | ) | (554 | ) |
| Cash
dividends paid on
preferred shares | (22 | ) | (21 | ) | (43 | ) | (43 | ) |
| Cash
dividends paid by
subsidiaries to non-controlling interest | (60 | ) | (52 | ) | (110 | ) | (95 | ) |
| Free
cash flow | 138 | | 64 | | (24 | ) | 320 | |
| Business
acquisitions | (35 | ) | (247 | ) | (118 | ) | (306 | ) |
| Business
dispositions | | | | | | | 16 | |
| Increase
in cost and equity
investments | (13 | ) | (8 | ) | (141 | ) | (8 | ) |
| Decrease
in cost and equity
investments | 5 | | | | 7 | | 6 | |
| Net
issuance of equity instruments | 4 | | 4 | | 13 | | 8 | |
| Net
issuance (repayment)
of debt instruments | (200 | ) | (713 | ) | 346 | | (302 | ) |
| Financing
activities of
subsidiaries with third parties | (21 | ) | (12 | ) | (38 | ) | (47 | ) |
| Other
financing activities | (25 | ) | 32 | | (55 | ) | (16 | ) |
| Cash
provided by
(used in) discontinued operations | 1 | | (54 | ) | 10 | | 184 | |
| Net
decrease in
cash and cash
equivalents | (146 | ) | (934 | ) | | | (145 | ) |

26 Bell Canada Enterprises 2005 Quarterly Report

Free cash flow Our free cash flow this quarter was $138 million, up from free cash flow of $64 million in the second quarter of last year mainly due to: an improvement in cash earnings coming from higher EBITDA and lower interest costs an improvement in accounts receivable collections, partly due to Q2 2004 being impacted negatively by the implementation of a new wireless billing platform. These were partly offset by a number of anticipated items, which included: Telesat insurance proceeds that were received in Q2 2004 an increase in capital expenditures an increase in dividends paid. Free cash flow was negative $24 million in the first six months of 2005, down from free cash flow of $320 million in the same period in 2004. Year-to-date free cash flow was impacted further by: an increase in income taxes paid, primarily related to the final installment for 2004; higher pension and other benefit plan payments, stemming primarily from a voluntary contribution by Aliant; restructuring payments related to employee departure programs announced last year at Bell Canada and Aliant. Cash from operating activities Cash from operating activities increased 29% or $326 million to $1,450 million in Q2 2005, compared to Q2 2004. This was mainly a result of: an improvement in cash earnings stemming from higher EBITDA and lower interest costs an improvement in accounts receivable collections, partly due to Q2 2004 being impacted negatively by the implementation of a new wireless billing platform. On a year-to-date basis, cash from operating activities was flat at $2,389 million in the first six months of 2005 compared to $2,384 million for the same period last year. This was mainly a result of improvements in cash earnings and accounts receivable collections as explained above, which were substantially offset by: approximately $200 million in income taxes paid in Q1 2005 related to the final installments for the 2004 fiscal year an increase of $71 million in pension and other benefit plan payments, due to Aliants voluntary contribution of $60 million in Q1 2005 an increase of $102 million in payments relating to the employee departure programs at Bell Canada and Aliant. Capital expenditures Capital expenditures were $914 million in Q2 2005, or 18.4% of revenues. This was 10.7% higher than the capital expenditures of $826 million, or 17.3% of revenues, in Q2 2004. On a year-to-date basis, capital expenditures were $1,651 million in the first six months of 2005, or 16.8% of revenues. This was 9.6% higher than the capital expenditures of $1,507 million, or 16.0% of revenues, in the same period last year. The increases reflect the strategic investments in the Consumer segment, which include the FTTN rollout, VDSL deployment, IPTV platform, the acquisition of spectrum licences, and a return to more normal spending levels at Aliant after its labour disruption in 2004. Other investing activities Cash from other investing activities decreased by $127 million in Q2 2005, compared to Q2 2004, and by $161 million in the first six months of 2005, compared to the same period last year. In 2004, cash from other investing activities included insurance proceeds that Telesat received for a malfunction on the Anik F1 satellite, amounting to $136 million in Q2 2004 and $179 million in the first six months of 2004.

27 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis Cash dividends paid on common shares We paid a dividend of $0.33 per common share in Q2 2005, which is $0.03 more than the dividend we paid in Q2 2004. On a year-to-date basis, we paid $0.63 per common share in the first six months of 2005, compared to $0.60 per common share in the same period in 2004. In December 2004, the board of directors of BCE Inc. approved an increase of 10% or $0.12 per common share in the annual dividend on BCE Inc.s common shares. As a result, starting with the quarterly dividend paid on April 15, 2005, we expect to pay quarterly dividends on BCE Inc.s common shares of approximately $306 million, based on the revised dividend policy. This assumes that there are no significant changes in the number of outstanding common shares. These quarterly dividends equal $0.33 per common share, based on approximately 927 million common shares outstanding at June 30, 2005. Business acquisitions We invested $35 million in business acquisitions in Q2 2005 and $118 million in the first six months of 2005. This consisted mainly of Bell Canadas acquisition of Nexxlink for $74 million and a number of other businesses. We invested $247 million in business acquisitions in Q2 2004 and $306 million in the first six months of 2004. This consisted of: our 28.9% proportionate share of the cash paid for CGIs acquisition of American Management Systems Incorporated (AMS) for $168 million Bell Canadas purchase of: a 100% interest in Infostream Technologies Inc. 100% of the assets required to carry on the business of Charon Systems Inc. a 100% interest in Accutel Conferencing Systems Inc. (Canada) and certain branches of Accutel Conferencing Systems (U.S.) Bell Canadas purchase of a 75.8% interest in Elix Inc. Increase in cost and equity investments In Q1 2005, Bell Canada invested US$100 million for an approximate 12% interest in Clearwire Corporation, a privately-held company that offers advanced IP-based wireless broadband communications services. Bell Canada is now Clearwires exclusive strategic partner in the U.S. and preferred provider beyond North America of VoIP and other value-added IP services and applications. Debt instruments We repaid $200 million of debt, net of issues, in Q2 2005. The repayments included $600 million in debentures at Bell Canada and a $35 million reduction in Bell Globemedias borrowings under its credit facilities. The issuances consisted mainly of $150 million in medium-term notes at Aliant and increased borrowings in notes payable and bank advances of $341 million, mainly at Bell Canada. On a year-to-date basis in 2005, net issues of $346 million included Bell Canadas issuance of $700 million in debentures and a net increase of $186 million in notes payable and bank advances. We repaid $713 million of debt, net of issues, in Q2 2004. The repayments included $500 million in debentures and $114 million in bank debt at Bell Canada. We also decreased our borrowings in notes payable and bank advances by $69 million, mainly at Bell Canada. On a year-to-date basis in 2004, we repaid $302 million of debt, net of issues. Additional issuances were mainly at Bell Canada, which issued $450 million in debentures, and Bell Globemedia, which issued $300 million of senior notes and drew $490 million under its credit facilities. Additional repayments were at BCE Inc., which repaid $351 million in retractable preferred shares, Bell Globemedia, which repaid $380 million under its credit facilities, and Bell Canada, which repaid $126 million in debentures.

28 Bell Canada Enterprises 2005 Quarterly Report

| Cash
relating to discontinued operations Cash provided by
discontinued operations was $184 million in the first six months
of 2004. This consisted mainly of net cash proceeds of $315 million
from the sale of Emergis Inc. (Emergis) and $285 million from
the sale of Emergis U.S. health operations and $96 million
of cash generated from Emergis operations. This was partly offset
by the deconsolidation of Emergis cash on hand of $512 million
at December 31, 2003. Credit Ratings The table below
lists our key credit ratings at August 2, 2005. On May 4, 2005,
S&P (1) and DBRS (2) confirmed
their ratings for BCE Inc. and Bell Canada, but revised their
respective outlooks from stable to negative. On May 16, 2005,
Moodys (3) confirmed
its ratings for BCE Inc. and Bell Canada, but revised its outlook
from stable to negative. | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | BCE
INC. | | | BELL
CANADA | |
| | S&P | DBRS | MOODYS | S&P | DBRS | MOODYS |
| Commercial
paper | A-1
(mid) | R-1
(low) / stable | P-2
/ stable | A-1
(mid) | R-1
(mid) / negative | P-2
/ stable |
| Extendable
commercial notes | A-1
(mid) | R-1
(low) / stable | | A-1
(mid) | R-1
(mid) / negative | |
| Long-term
debt | A-
/ negative | A
/ negative | Baa1
/ negative | A
/ negative | A
(high) / negative | A3
/ negative |
| Preferred
shares | P-2
(high) | Pfd-2
/ negative | | P-2
(high) | Pfd-2
(high) / negative | |
| (1)
Standard & Poors, a division of The McGraw Hill Companies, Inc. (2) Dominion Bond Rating Services Limited (3) Moody s
Investors Service Inc. Related Party
Transaction BCI loss utilization
transaction On April 15, 2005,
3787915 Canada Inc., a wholly-owned subsidiary of Bell Canada,
acquired $17 billion in preferred shares from 3787923 Canada Inc.,
a wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds
to advance $17 billion to BCI through a subordinated interest-free
loan. BCI then advanced $17 billion to 3787915 Canada Inc. by
way of a subordinated interest-bearing demand loan, the funds being used
to repay a daylight loan granted to 3787915 Canada Inc. to make the
initial preferred share investment. The
dividend rate on the preferred shares is equal to 5.1%, which is essentially
the same as the interest rate on the loan. This transaction, which is
expected to be unwound in August 2005, is part of a tax loss consolidation
strategy that follows the transaction steps laid out in an advance tax
ruling granted by the Canada Revenue Agency to Bell Canada and BCI.
The transaction also received the approval of the Ontario Superior Court
of Justice, which is supervising BCIs voluntary Plan of Arrangement
pursuant to which BCI is monetizing its assets and resolving outstanding
claims against it, with the ultimate objective of distributing the net
proceeds to its shareholders and dissolving the company. 3787915
Canada Inc. has the legal right to offset the demand loan payable
to BCI and the investment in preferred shares of 3787923 Canada Inc.
Since 3787915 Canada Inc. intends to do this, we present these items
and the related interest expense and dividend income on a net basis. The
tax savings resulting from the interest expense are presented as a reduction
of income tax expense. BCI
will be compensated for the use of its losses by Bell Canada through
a capital contribution that will be made by BCE Inc. for 88% of the
tax savings. BCE Inc.s ownership interest in BCI will remain
at 62%. As a result: BCE Inc.s
carrying value of its investment in BCI is increased to reflect the
increase in BCE Inc.s share of the expected proceeds upon
BCIs eventual liquidation a
charge to other income is recorded to reflect the non-controlling
interests portion of the capital contribution to be made by
BCE Inc. | | | | | | |

29 Bell Canada Enterprises 2005 Quarterly Report

| | Managements
Discussion and Analysis |
| --- | --- |
| Recent
Developments in Legal Proceedings This section provides
a description of recent developments in certain of the legal proceedings
involving BCE described in the BCE 2004 AIF, filed by BCE Inc.
with the Canadian securities commissions (available on BCE Inc.s
website at www.bce.ca and on SEDAR at www.sedar.com) and with the U.S.
Securities and Exchange Commission (SEC) under Form 40-F (available on
EDGAR at www.sec.gov), as subsequently updated in BCE Inc.s 2005
First Quarter MD&A dated May 3, 2005 (BCE 2005 First
Quarter MD&A) also filed by BCE Inc. with the Canadian securities
commissions (available on BCE Inc.s website and on SEDAR) and
with the SEC under Form 6-K (available on EDGAR). | Liquidity Our sources of liquidity
and cash requirements remain substantially unchanged from those described
in the BCE 2004 MD&A. Commitment
under the deferral account The deferral account
resulted from the CRTCs second price cap decision of May 2002,
which requires us to fund initiatives such as service improvements, reduced
customer rates and/or customer rebates. We estimate our commitment under
the deferral account to be approximately $163 million at June 30, 2005
and anticipate that it will be reduced to approximately $130 million
by December 31, 2005, primarily due to the impact of the CDN
decision. We expect to clear most of this amount in 2006 by implementing
the initiatives that are approved by the CRTC for this purpose. Recent Developments
in Legal Proceedings Lawsuits related
to Teleglobe Inc. (Teleglobe) Teleglobe Lending
Syndicate Lawsuit As indicated in
the BCE 2004 AIF and in the BCE 2005 First Quarter MD&A,
a lawsuit was filed in the Ontario Superior Court of Justice on July 12,
2002 against BCE Inc. by certain of the members of the Teleglobe
and Teleglobe Holdings (U.S.) Corporation lending syndicate. As anticipated,
BNP Paribas (Canada), which had advanced approximately US$50 million
to Teleglobe, filed a notice of discontinuance with the Court on May 3, 2005
and is therefore no longer a plaintiff in this action. Following such
discontinuance, the damages sought by the remaining plaintiffs amount
to approximately US$1.04 billion (down from approximately US$1.09 billion),
plus interest and costs, representing approximately 83% (down from approximately
87%) of the US$1.25 billion that the members of the lending syndicate
advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation. Risks
That Could Affect Our Business A risk is the possibility
that an event might happen in the future that could have a negative effect
on the financial condition, results of operations or business of one or
more BCE group companies. Part of managing our business is to understand
what these potential risks could be and to minimize them where we can. Because
no one can predict whether an event will happen or what its consequences
may be, the actual effect of any event on our business could be materially
different from what we currently anticipate. In addition, the risks described
below and elsewhere in this MD&A do not include all possible risks,
and there may be other risks of which we are currently not aware. In
the BCE 2004 AIF, we provided a detailed review of the risks that
could affect our financial condition, results of operations or business
and that could cause actual results to differ materially from those expressed
in our forward-looking statements. This detailed description of risks,
as updated in the BCE 2005 First Quarter MD&A, is further updated
in this MD&A. These risks include risks associated with: our ability to implement our strategies and plans in order to produce
the expected benefits and growth prospects, including meeting targets
for revenue, earnings per share, free cash flow and capital intensity; our ability to implement the significant changes in our processes,
in how we approach our markets, and in how we develop and deliver
products and services, required by our strategic direction; general economic and market conditions and the level of consumer confidence
and spending, and the demand for, and prices of, our products and
services; the intensity of competitive activity from both traditional and new
competitors, Canadian or foreign, including cross-platform competition,
which is increasing following the introduction of new technologies
such as Voice over Internet Protocol (VoIP) which have reduced barriers
to entry that existed in the industry, and its impact on our ability
to retain existing, and attract new, customers, and on pricing strategies
and financial results; |

30 Bell Canada Enterprises 2005 Quarterly Report

Risks That Could Affect Our Business This section describes general risks that could affect all BCE group companies and specific risks that could affect BCE Inc. and certain of the other BCE group companies. For a more complete description of the risks that could affect our business, please see the section entitled Risks That Could Affect Our Business set out on pages 32 to 41 of the BCE 2004 AIF, as updated in the section entitled Risks That Could Affect Our Business set out on pages 23 to 26 of the BCE 2005 First Quarter MD&A, as further updated in this MD&A. Please also refer to the BCE 2004 AIF for a detailed description of: the principal legal proceedings involving BCE; certain regulatory initiatives and proceedings concerning the Bell Canada companies. Please see Recent Developments in Legal Proceedings , at pages 22 and 23 of the BCE 2005 First Quarter MD&A, and in this MD&A, for a description of recent developments, since the BCE 2004 AIF, in the principal legal proceedings involving us. In addition, please see Risks That Could Affect Certain BCE Group Companies Bell Canada companies Changes to Wireline Regulation in the section entitled Risks That Could Affect Our Business at pages 25 and 26 of the BCE 2005 First Quarter MD&A, and in this MD&A, for a description of recent developments, since the BCE 2004 AIF, in the principal regulatory initiatives and proceedings concerning the Bell Canada companies. our ability to improve productivity and contain capital intensity while maintaining quality of services; our ability to anticipate, and respond to, changes in technology, industry standards and client needs and migrate to and deploy new technologies, including VoIP, and offer new products and services rapidly and achieve market acceptance thereof; the availability and cost of capital required to implement our business plan and fund capital and other expenditures; our ability to find suitable companies to acquire or to partner with; the impact of pending or future litigation and of adverse changes in laws or regulations, including tax laws, or in how they are interpreted, or of adverse regulatory initiatives or proceedings, including decisions by the CRTC affecting our ability to compete effectively; the risk of litigation should BCE Inc. or Bell Canada stop funding a subsidiary or change the nature of its investment, or dispose of all or part of its interest, in a subsidiary; the risk of increased pension plan contributions; our ability to effectively manage labour relations, negotiate satisfactory labour agreements, including new agreements replacing expired labour agreements, while avoiding work stoppages, and maintain service to customers and minimize disruptions during strikes and other work stoppages; events affecting the functionality of our networks or of the networks of other telecommunications carriers on which we rely to provide our services; our ability to improve and upgrade, on a timely basis, our various IT systems and software on which many aspects of our businesses, including customer billing, depend; stock market volatility; the risk that licences on which we rely to provide services might be revoked or not renewed when they expire; our ability to retain major customers; the risk that the amount of the expected annual savings relating to Bell Canada s 2004 employee voluntary departure program will be lower than anticipated due to various factors including the incurrence of outsourcing, replacement and other costs; health concerns about radio frequency emissions; and launch and in-orbit risks and the ability to obtain appropriate insurance coverage at favourable rates, concerning Telesats satellites, certain of which are used by Bell ExpressVu to provide services. Updates to the Description of Risks The following are updates to the description of risks contained in the section entitled Risks That Could Affect Our Business set out on pages 32 to 41 of the BCE 2004 AIF as updated at pages 23 to 26 in the BCE 2005 First Quarter MD&A. For ease of reference, the updates to the description of risks below have been presented under the same headings and in the same order contained in the section entitled Risks That Could Affect Our Business set out in the BCE 2004 AIF. Risks that could affect all BCE group companies Pension fund contributions We have not had to make regular contributions to our pension funds in the past few years as most of our pension plans had pension fund surpluses. However, the decline in the capital markets in 2001 and 2002, combined with historically low interest rates and early retirement programs offered to employees, have significantly reduced the pension fund surpluses. This has negatively affected our net earnings and liquidity. In conformity with our most recent actuarial valuations, we expect to contribute approximately $200 million to our defined benefit pension plans in 2005. The funding status of pension fund surpluses resulting from future valuations of our pension plans depends on a number of factors, including: a new standard adopted by the Canadian Institute of Actuaries in February 2005 for the determination of pension obligations; actual returns on pension plan assets; and long-term interest rates. These factors could require us to increase future contributions to our defined benefit pension plans and therefore could have a material and negative effect on our liquidity and results of operations after 2005.

31 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis Renegotiating labour agreements The collective agreement between the Canadian Telecommunications Employees Association (CTEA) and Bell Canada, representing approximately 10,000 clerical and associated employees, expired on May 31, 2005. A memorandum of agreement between Bell Canada and the CTEA was signed on June 8, 2005, was submitted to a vote and was ratified by 64.5% of CTEA members who voted. A new four-year collective agreement was signed on July 18, 2005. The collective agreement between Entourage and the 1,400 Ontario technicians unionized with the Communications Energy and Paperworkers Union (CEP) expired on September 30, 2004 and the Ontario technicians went on strike on March 24, 2005. On July 5, 2005, negotiations resumed between Entourage and the CEP and a memorandum of agreement was signed on July 10, 2005, was submitted to a vote and was ratified by 70% of the Ontario technicians who voted. A new four-year collective agreement will be signed by August 8, 2005. Software and system upgrades As indicated in the BCE 2004 AIF and in the BCE 2005 First Quarter MD&A, many aspects of the BCE group companies businesses including, but not limited to, customer billing, depend to a large extent on various IT systems and software, which must be improved and upgraded on a regular basis and replaced from time to time. For example, last year, Bell Mobility migrated its wireless customers to a new billing platform which provided additional features and functionality and which also enabled the consolidation of wireless into a single bill. As we addressed accounts receivable concerns related to this billing system migration in the first quarter of 2005, we cancelled a number of postpaid subscriber accounts which were in default of our credit policy, but to whom we had granted payment extensions or term payment options as a result of billing delays, and we increased our allowance for doubtful accounts. Although we believe that the adjustments made to our postpaid subscriber base in the first quarter of 2005 reflect non-paying subscriber accounts relating to our billing conversion, there is a risk that there could be additional cancellations of postpaid subscriber accounts, leading to a possible increase in churn and wireless bad debt expense. Risks that could affect certain BCE group companies Bell Canada companies Changes to Wireline Regulation Second Price Cap decision On May 13, 2005, the CRTC issued a Public Notice calling for comments on a proposal to extend the current price cap regime, which is to expire in May 2006, for another two years. Final reply comments were submitted by incumbent telephone companies to the CRTC on June 27, 2005. Competitor Digital Network Service As indicated in the BCE 2004 AIF, the CRTC released Decision 2005-6 on February 3, 2005, concerning CDN services. This decision determined the rates, terms and conditions for the provision of digital network services by Bell Canada and the other incumbent telephone companies to their competitors. This decision affected both Bell Canada and Aliant as providers of CDN services in their respective operating territories and as purchasers of those services elsewhere in Canada. On March 29, 2005, Bell Canada filed its estimated draw down from the deferral account as a result of this decision. On May 10, 2005, the CRTC directed competitors to identify their CDN-eligible demand to the incumbent telephone companies by June 27, 2005 and for the incumbent telephone companies to file updates to their deferral account by July 25, 2005 to take into account the impact of Decision 2005-6. On July 25, 2005, Bell Canada provided an update to the March 29, 2005 drawdown estimates but advised the CRTC that, due to the amount of time needed to complete the assessment of the CDN-eligible demand information provided by competitors, Bell Canada would not be in a position to provide a final estimate of the deferral account drawdown amounts before September 23, 2005.

32 Bell Canada Enterprises 2005 Quarterly Report

Retail Quality of Service Indicators As indicated in the BCE 2004 AIF and in the BCE 2005 First Quarter MD&A, on March 24, 2005, the CRTC released Decision 2005-17 which, among other things, established the rate adjustment plan to be applied when incumbent telephone companies do not meet mandated standards of quality of service provided to their retail customers. As a result of this decision, incumbent telephone companies are subject to a penalty mechanism when they do not meet one or more service standards for their retail services. Regarding the current penalty period of January 1 to December 31, 2005, the CRTC standard for several indicators may not be met, on an annual average basis, as a direct result of the strike by Entourages Ontario technicians unionized with the CEP. Bell Canada believes that this situation meets the criteria stipulated by the CRTC for force majeure type exclusions to the penalty plan and, as such, will ask the CRTC to approve an impending application to be made by Bell Canada for the purpose of excluding below-standard strike-related results. There is no assurance that the CRTC will issue a favourable decision in response to this application. Application Seeking Consistent Regulation and Regulatory Framework for VoIP On May 12, 2005, the CRTC released Decision 2005-28 which determined the way the CRTC will regulate VoIP services. This decision confirms the CRTCs preliminary view that VoIP services (other than peer-to-peer services, defined in the decision as Internet Protocol communications services between two computers) provided by Bell Canada and other incumbent telephone companies should be regulated the same way traditional telephony services are regulated. As a result of this decision, VoIP services consisting of Internet Protocol communications services using traditional telephone devices will, for incumbent telephone companies, be treated as regulated local exchange services. Accordingly, tariffs will have to be filed by an incumbent telephone company, but not by its competitors, when it provides customers with a telephone number associated with that incumbent telephone companys territory. In addition, the winback rules will also apply, which means that incumbent telephone companies cannot attempt to win back a residential customer for a period of 12 months from the time the customer takes a traditional local telephone service or VoIP service from a competitor. Moreover, incumbent telephone companies and competitive local exchange carriers will have to fulfill, in relation to VoIP services, other requirements that apply to traditional telephone services, such as local number portability, allowing customers to use any long distance provider of their choice, listing telephone numbers in the directory associated with the local telephone number chosen by the customer, offering services for the hearing impaired, and privacy safeguards.These regulatory requirements could reduce Bell Canadas and Aliants flexibility to compete with both traditional and new competitors, and thus could adversely affect our business and results of operations. Bell Canada currently offers a VoIP service called Bell Digital Voice (BDV) in Québec City, Sherbrooke and Trois-Rivières pursuant to a tariff which has received interim approval from the CRTC. On July 7, 2005, the CRTC issued a public notice inviting comments on any aspects of this tariff. The CRTC noted that Bell Canada had filed a tariff notice for the CRTCs approval, on a confidential basis, of minimum and maximum rates associated with each proposed BDV service plan and that Bell Canada had requested that the confidential status of the minimum and maximum rates be maintained after the final tariff approval. Once the minimum and maximum rates would be approved, for all future price changes within that range, Bell Canada proposed to issue new tariff pages on their effective date and to provide, in confidence, copies to the CRTC 48 hours in advance. No additional CRTC approvals would be required for price changes within the ranges. A final decision from the CRTC stemming from this public notice is expected by February 2006. On July 5, 2005, the Province of Saskatchewan filed a Petition with the Governor in Council requesting that it address the inequities of Decision 2005-28 by directing the CRTC to ensure that all companies offering VoIP services in Saskatchewan are competing on a level playing field. Bell Canada together with Aliant Telecom Inc., Telus Communications Inc., Télébec, société en commandite and Sasktel Telecommunications have jointly filed a Petition with the Governor in Council on July 28, 2005 to vary the Decision so as to eliminate economic regulation of

33 Bell Canada Enterprises 2005 Quarterly Report

Managements Discussion and Analysis VoIP services and thereby remove inequities in the regulatory framework for VoIP services applicable to the incumbent telephone companies, including the requirement to file and obtain approval of tariffs, and the application of the bundling rules, promotions restrictions and winback rules. Futhermore, on June 13, 2005, Bell Canada sought leave from the Federal Court to appeal the winback rules included in Decision 2005-28 on the grounds that such winback rules constitute a violation of Bell Canadas freedom of expression, which is a freedom protected under the Canadian Charter of Rights and Freedoms. Telesat During the second quarter of 2005, Telesat renewed the insurance of Nimiq 1. Nimiq 1 is now insured until September 1, 2005 for approximately its book value. Our Accounting Policies We have prepared our consolidated financial statements according to Canadian GAAP. See Note 1 to the consolidated financial statements for more information about the accounting principles we used to prepare our financial statements. The key estimates and assumptions that management has made under these principles and their impact on the amounts reported in the financial statements and notes remain substantially unchanged from those described in the BCE 2004 MD&A. We have not had any significant changes in the accounting standards or our accounting policies other than those described in the BCE 2004 MD&A.

34 Bell Canada Enterprises 2005 Quarterly Report

| Consolidated
Statements of Operations | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| FOR
THE PERIOD ENDED JUNE 30 | THREE MONTHS | | | | SIX MONTHS | | | |
| (in
$ millions, except share amounts) (unaudited) | 2005 | | 2004 | | 2005 | | 2004 | |
| Operating
revenues | 4,980 | | 4,779 | | 9,839 | | 9,417 | |
| Operating
expenses | (2,979 | ) | (2,826 | ) | (5,900 | ) | (5,620 | ) |
| Amortization
expense | (792 | ) | (769 | ) | (1,565 | ) | (1,536 | ) |
| Net
benefit plans cost (Note 4) | (104 | ) | (65 | ) | (207 | ) | (128 | ) |
| Restructuring
and other items (Note 5) | (5 | ) | (14 | ) | (1 | ) | (17 | ) |
| Total
operating expenses | (3,880 | ) | (3,674 | ) | (7,673 | ) | (7,301 | ) |
| Operating
income | 1,100 | | 1,105 | | 2,166 | | 2,116 | |
| Other
income | 24 | | 24 | | 31 | | 60 | |
| Interest
expense | (247 | ) | (253 | ) | (494 | ) | (505 | ) |
| Pre-tax
earnings from continuing operations | 877 | | 876 | | 1,703 | | 1,671 | |
| Income
taxes (Note 6) | (223 | ) | (293 | ) | (494 | ) | (555 | ) |
| Non-controlling
interest | (73 | ) | (39 | ) | (136 | ) | (87 | ) |
| Earnings
from continuing operations | 581 | | 544 | | 1,073 | | 1,029 | |
| Discontinued
operations | | | 27 | | (1 | ) | 30 | |
| Net
earnings | 581 | | 571 | | 1,072 | | 1,059 | |
| Dividends
on preferred shares | (18 | ) | (17 | ) | (35 | ) | (35 | ) |
| Net
earnings applicable to common shares | 563 | | 554 | | 1,037 | | 1,024 | |
| Net
earnings per common share basic | | | | | | | | |
| Continuing
operations | 0.61 | | 0.57 | | 1.12 | | 1.08 | |
| Discontinued
operations | | | 0.03 | | | | 0.03 | |
| Net
earnings | 0.61 | | 0.60 | | 1.12 | | 1.11 | |
| Net
earnings per common share diluted | | | | | | | | |
| Continuing
operations | 0.61 | | 0.57 | | 1.12 | | 1.08 | |
| Discontinued
operations | | | 0.03 | | | | 0.03 | |
| Net
earnings | 0.61 | | 0.60 | | 1.12 | | 1.11 | |
| Dividends
per common share | 0.33 | | 0.30 | | 0.66 | | 0.60 | |
| Average
number of common shares outstanding basic (millions) | 926.6 | | 924.3 | | 926.4 | | 924.2 | |

| Consolidated
Statements of Deficit | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| FOR
THE PERIOD ENDED JUNE 30 | THREE MONTHS | | | | SIX MONTHS | | | |
| (in
$ millions) (unaudited) | 2005 | | 2004 | | 2005 | | 2004 | |
| Balance
at beginning of period, as previously reported | (5,264 | ) | (5,645 | ) | (5,424 | ) | (5,837 | ) |
| Accounting
policy change (Note 1) | | | (8 | ) | (8 | ) | (8 | ) |
| Balance
at beginning of period, as restated | (5,264 | ) | (5,653 | ) | (5,432 | ) | (5,845 | ) |
| Net
earnings | 581 | | 571 | | 1,072 | | 1,059 | |
| Dividends
declared on preferred shares | (18 | ) | (17 | ) | (35 | ) | (35 | ) |
| Dividends
declared on common shares | (306 | ) | (278 | ) | (612 | ) | (555 | ) |
| Other | 2 | | 1 | | 2 | | | |
| Balance
at end of period | (5,005 | ) | (5,376 | ) | (5,005 | ) | (5,376 | ) |

35 Bell Canada Enterprises 2005 Quarterly Report

| Consolidated
Balance Sheets | JUNE
30, | | DECEMBER 31, | |
| --- | --- | --- | --- | --- |
| (in
$ millions) (unaudited) | 2005 | | 2004 | |
| Assets | | | | |
| Current
assets | | | | |
| Cash
and cash equivalents | 380 | | 380 | |
| Accounts
receivable | 1,874 | | 2,096 | |
| Other
current assets | 1,228 | | 1,212 | |
| Total
current assets | 3,482 | | 3,688 | |
| Capital
assets | 22,050 | | 21,398 | |
| Other
long-term assets | 2,690 | | 2,656 | |
| Indefinite-life
intangible assets | 2,973 | | 2,916 | |
| Goodwill | 8,528 | | 8,413 | |
| Non-current
assets of discontinued operations | 82 | | 50 | |
| Total
assets | 39,805 | | 39,121 | |
| Liabilities | | | | |
| Current
liabilities | | | | |
| Accounts payable and
accrued liabilities | 3,328 | | 3,692 | |
| Interest
payable | 189 | | 183 | |
| Dividends
payable | 325 | | 297 | |
| Debt
due within one year | 1,497 | | 1,276 | |
| Total
current liabilities | 5,339 | | 5,448 | |
| Long-term
debt | 12,480 | | 11,809 | |
| Other
long-term liabilities | 4,603 | | 4,932 | |
| Total
liabilities | 22,422 | | 22,189 | |
| Non-controlling
interest | 2,905 | | 2,908 | |
| Shareholders
equity | | | | |
| Preferred
shares | 1,670 | | 1,670 | |
| Common
shareholders equity | | | | |
| Common
shares | 16,794 | | 16,781 | |
| Contributed
surplus | 1,071 | | 1,061 | |
| Deficit | (5,005 | ) | (5,432 | ) |
| Currency
translation adjustment | (52 | ) | (56 | ) |
| Total
common shareholders equity | 12,808 | | 12,354 | |
| Total
shareholders equity | 14,478 | | 14,024 | |
| Total
liabilities and shareholders equity | 39,805 | | 39,121 | |

36 Bell Canada Enterprises 2005 Quarterly Report

| Consolidated
Statements of Cash Flows | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| FOR
THE PERIOD ENDED JUNE 30 | THREE MONTHS | | | | SIX MONTHS | | | |
| (in
$ millions) (unaudited) | 2005 | | 2004 | | 2005 | | 2004 | |
| Cash
flows from operating activities | | | | | | | | |
| Earnings
from continuing operations | 581 | | 544 | | 1,073 | | 1,029 | |
| Adjustments
to reconcile earnings from continuing operations to cash
flows from operating activities: | | | | | | | | |
| Amortization
expense | 792 | | 769 | | 1,565 | | 1,536 | |
| Net
benefit plans cost | 104 | | 65 | | 207 | | 128 | |
| Restructuring
and other items | 5 | | 14 | | 1 | | 17 | |
| Net
gains on investments | (32 | ) | (1 | ) | (34 | ) | (6 | ) |
| Future
income taxes | 65 | | 33 | | 174 | | 87 | |
| Non-controlling
interest | 73 | | 39 | | 136 | | 87 | |
| Contributions
to employee pension plans | (34 | ) | (27 | ) | (128 | ) | (56 | ) |
| Other
employee future benefit plan payments | (22 | ) | (22 | ) | (45 | ) | (46 | ) |
| Payments
of restructuring and other items | (28 | ) | (8 | ) | (129 | ) | (27 | ) |
| Operating
assets and liabilities | (54 | ) | (282 | ) | (431 | ) | (365 | ) |
| Cash
flows from operating activities | 1,450 | | 1,124 | | 2,389 | | 2,384 | |
| Cash
flows from investing activities | | | | | | | | |
| Capital
expenditures | (914 | ) | (826 | ) | (1,651 | ) | (1,507 | ) |
| Business
acquisitions | (35 | ) | (247 | ) | (118 | ) | (306 | ) |
| Business
dispositions | | | | | | | 16 | |
| Increase
in cost and equity investments | (13 | ) | (8 | ) | (141 | ) | (8 | ) |
| Decrease
in cost and equity investments | 5 | | | | 7 | | 6 | |
| Other
investing activities | (11 | ) | 116 | | (26 | ) | 135 | |
| Cash
flows used in investing activities | (968 | ) | (965 | ) | (1,929 | ) | (1,664 | ) |
| Cash
flows from financing activities | | | | | | | | |
| Increase
(decrease) in notes payable and bank advances | 341 | | (69 | ) | 186 | | (50 | ) |
| Issue
of long-term debt | 206 | | 74 | | 991 | | 1,400 | |
| Repayment
of long-term debt | (747 | ) | (718 | ) | (831 | ) | (1,652 | ) |
| Issue
of common shares | 4 | | 4 | | 13 | | 8 | |
| Issue
of equity securities by subsidiaries to non-controlling interest | | | | | | | 7 | |
| Redemption
of equity securities by subsidiaries from non-controlling interest | (21 | ) | (12 | ) | (38 | ) | (54 | ) |
| Cash
dividends paid on common shares | (305 | ) | (277 | ) | (583 | ) | (554 | ) |
| Cash
dividends paid on preferred shares | (22 | ) | (21 | ) | (43 | ) | (43 | ) |
| Cash
dividends paid by subsidiaries to non-controlling interest | (60 | ) | (52 | ) | (110 | ) | (95 | ) |
| Other
financing activities | (25 | ) | 32 | | (55 | ) | (16 | ) |
| Cash
flows used in financing activities | (629 | ) | (1,039 | ) | (470 | ) | (1,049 | ) |
| Cash
used in continuing operations | (147 | ) | (880 | ) | (10 | ) | (329 | ) |
| Cash
provided by (used in) discontinued operations | 1 | | (54 | ) | 10 | | 184 | |
| Net
decrease in cash and cash equivalents | (146 | ) | (934 | ) | | | (145 | ) |
| Cash
and cash equivalents at beginning of period | 526 | | 1,511 | | 380 | | 722 | |
| Cash
and cash equivalents at end of period | 380 | | 577 | | 380 | | 577 | |

37 Bell Canada Enterprises 2005 Quarterly Report

| | Notes
to Consolidated Financial Statements |
| --- | --- |
| The
interim consolidated financial statements should be read in conjunction
with BCE Inc.s annual consolidated financial statements for
the year ended December 31, 2004, on pages 82 to 121 of BCE Inc.s 2004
annual report. These notes are unaudited. All amounts are in millions of Canadian dollars, except where noted. We,
us, our and BCE mean BCE Inc., its subsidiaries and
joint ventures. | Note
1: Significant accounting policies We have prepared
the consolidated financial statements in accordance with Canadian generally
accepted accounting principles (GAAP) using the same basis of presentation
and accounting policies as outlined in Note 1 to the annual consolidated
financial statements for the year ended December 31, 2004, except
as noted below. Comparative figures We have reclassified
some of the figures for the comparative periods in the consolidated financial
statements to make them consistent with the presentation for the current
period. We have restated
financial information for previous periods to reflect: the
change in Aliant Inc.s (Aliant) method of recognizing revenues
and expenses from its directory business effective January 2005,
as described below the change in classification to discontinued operations for minor
business dispositions. Change in accounting
policy Effective January 1, 2005,
we defer and amortize revenues and expenses from Aliants directory
business over the period of circulation, which is usually 12 months. Prior
to January 1, 2005, we recognized revenues and expenses from
Aliants directory business on the publication date. The impact on
our consolidated statements of operations for the three months and six
months ended June 30, 2005 and the comparative periods was negligible.
We did not restate the statements of operations for prior periods. At
December 31, 2004, the restatement of the balance sheet resulted
in: a decrease of $23 million in accounts receivable an increase of $1 million in other current assets a decrease of $8 million in accounts payable and accrued liabilities a decrease of $6 million in non-controlling interest an increase of $8 million in the deficit. |

38 Bell Canada Enterprises 2005 Quarterly Report

| Note
2: Segmented information The table below
is a summary of financial information by segment. | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | THREE MONTHS | | | | SIX MONTHS | | | |
| FOR
THE PERIOD ENDED JUNE 30 | | 2005 | | 2004 | | 2005 | | 2004 | |
| Operating
revenues | | | | | | | | | |
| Consumer | External | 1,879 | | 1,846 | | 3,718 | | 3,659 | |
| | Inter-segment | 11 | | 12 | | 28 | | 24 | |
| | | 1,890 | | 1,858 | | 3,746 | | 3,683 | |
| Business | External | 1,456 | | 1,385 | | 2,890 | | 2,739 | |
| | Inter-segment | 43 | | 56 | | 87 | | 137 | |
| | | 1,499 | | 1,441 | | 2,977 | | 2,876 | |
| Aliant | External | 484 | | 490 | | 972 | | 954 | |
| | Inter-segment | 34 | | 36 | | 70 | | 76 | |
| | | 518 | | 526 | | 1,042 | | 1,030 | |
| Other
Bell Canada | External | 424 | | 421 | | 858 | | 859 | |
| | Inter-segment | 61 | | 47 | | 106 | | 83 | |
| | | 485 | | 468 | | 964 | | 942 | |
| Inter-segment
eliminations Bell Canada | | (134 | ) | (121 | ) | (262 | ) | (253 | ) |
| Bell Canada | | 4,258 | | 4,172 | | 8,467 | | 8,278 | |
| Other
BCE | External | 737 | | 637 | | 1,401 | | 1,206 | |
| | Inter-segment | 98 | | 85 | | 182 | | 167 | |
| | | 835 | | 722 | | 1,583 | | 1,373 | |
| Inter-segment
eliminations Other | | (113 | ) | (115 | ) | (211 | ) | (234 | ) |
| Total
operating revenues | | 4,980 | | 4,779 | | 9,839 | | 9,417 | |
| Operating
income | | | | | | | | | |
| Consumer | | 552 | | 560 | | 1,078 | | 1,086 | |
| Business | | 221 | | 227 | | 461 | | 468 | |
| Aliant | | 99 | | 92 | | 186 | | 174 | |
| Other
Bell Canada | | 109 | | 138 | | 238 | | 249 | |
| Bell Canada | | 981 | | 1,017 | | 1,963 | | 1,977 | |
| Other
BCE | | 119 | | 88 | | 203 | | 139 | |
| Total
operating income | | 1,100 | | 1,105 | | 2,166 | | 2,116 | |
| Other
income | | 24 | | 24 | | 31 | | 60 | |
| Interest
expense | | (247 | ) | (253 | ) | (494 | ) | (505 | ) |
| Income
taxes | | (223 | ) | (293 | ) | (494 | ) | (555 | ) |
| Non-controlling
interest | | (73 | ) | (39 | ) | (136 | ) | (87 | ) |
| Earnings
from continuing operations | | 581 | | 544 | | 1,073 | | 1,029 | |

39 Bell Canada Enterprises 2005 Quarterly Report

| | Notes
to Consolidated Financial Statements |
| --- | --- |
| The
consolidated statements of operations include the results of acquired businesses
from the date they were acquired. | Note 3:
Business acquisitions During the first
six months of 2005, we made a number of business acquisitions which
included 100% of the outstanding common shares of Nexxlink Technologies Inc.,
a provider of integrated IT solutions, and certain other providers of
value-added and security services. The
table below provides a summary of all business acquisitions made during
the first six months of 2005. The purchase price allocation for all 2005
acquisitions is based on estimates. The final purchase price allocation
for each business acquisition is expected to be complete within 12 months
of the acquisition date. Of the goodwill acquired: $71 million relates to the Business segment, $18 million
relates to the Other Bell Canada segment, $4 million relates
to the Consumer segment and $4 million relates to the Other BCE
segment no amount is deductible for tax purposes. |

| Consideration
received: — Non-cash
working capital | (15 | ) |
| --- | --- | --- |
| Capital
assets | 95 | |
| Other
long-term assets | 3 | |
| Indefinite-life
intangible assets | 20 | |
| Goodwill | 97 | |
| Long-term
debt | (61 | ) |
| Other
long-term liabilities | (16 | ) |
| | 123 | |
| Cash
and cash equivalents at acquisition | 14 | |
| Net
assets acquired | 137 | |
| Consideration
given: | | |
| Cash | 127 | |
| Acquisition
costs | 5 | |
| Non-cash | 5 | |
| | 137 | |

| Note 4:
Employee benefit plans The table below
shows the components of the net benefit plans cost. | | | | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | THREE
MONTHS | | | | | | | | SIX MONTHS | | | | | |
| | PENSION BENEFITS | | | | OTHER
BENEFITS | | | | PENSION
BENEFITS | | | | OTHER
BENEFITS | | | |
| FOR
THE PERIOD ENDED JUNE 30 | 2005 | | 2004 | | 2005 | | 2004 | | 2005 | | 2004 | | 2005 | | 2004 | |
| Current
service cost | 61 | | 64 | | 8 | | 8 | | 121 | | 124 | | 17 | | 16 | |
| Interest
cost on accrued benefit obligation | 219 | | 202 | | 28 | | 26 | | 438 | | 403 | | 55 | | 52 | |
| Expected
return on plan assets | (237 | ) | (240 | ) | (3 | ) | (3 | ) | (474 | ) | (477 | ) | (5 | ) | (5 | ) |
| Amortization
of past service costs | 3 | | 3 | | 1 | | | | 5 | | 5 | | 1 | | | |
| Amortization
of net actuarial losses | 25 | | 8 | | | | | | 51 | | 16 | | | | | |
| Amortization
of transitional (asset)
obligation | (2 | ) | (11 | ) | 7 | | 8 | | (3 | ) | (22 | ) | 13 | | 15 | |
| Increase
(decrease) in valuation allowance | (6 | ) | | | | | | | (12 | ) | 1 | | | | | |
| Net
benefit plans cost | 63 | | 26 | | 41 | | 39 | | 126 | | 50 | | 81 | | 78 | |
| Comprised
of: | | | | | | | | | | | | | | | | |
| Defined
benefit plans cost | 58 | | 21 | | 41 | | 39 | | 114 | | 42 | | 81 | | 78 | |
| Defined contribution
plans cost | 5 | | 5 | | | | | | 12 | | 8 | | | | | |

40 Bell Canada Enterprises 2005 Quarterly Report

| The
table below shows the amounts we contributed to the defined benefit and
defined contribution plans and the payments made to beneficiaries under
other employee future benefit plans. | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | THREE
MONTHS | | | | SIX MONTHS | | |
| | PENSION
BENEFITS | | OTHER
BENEFITS | | PENSION
BENEFITS | | OTHER
BENEFITS | |
| FOR
THE PERIOD ENDED JUNE 30 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 |
| Aliant | 20 | 19 | 2 | 1 | 101 | 38 | 3 | 2 |
| Bell Canada | 7 | 4 | 20 | 21 | 14 | 9 | 42 | 44 |
| Bell Globemedia | 5 | 2 | | | 9 | 5 | | |
| BCE Inc. | 2 | 2 | | | 4 | 4 | | |
| Total | 34 | 27 | 22 | 22 | 128 | 56 | 45 | 46 |
| Comprised
of: | | | | | | | | |
| Contributions
to defined benefit plans | 30 | 22 | 22 | 22 | 121 | 48 | 45 | 46 |
| Contributions
to defined contribution
plans | 4 | 5 | | | 7 | 8 | | |

| Note 5:
Restructuring and other items Employee departure
programs The table below
provides an update on the liability relating to the employee departure
programs which were implemented in 2004. | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | | | | CONSO- | |
| | BELL
CANADA | | ALIANT | | LIDATED | |
| Balance
in accounts payable and accrued liabilities at December 31, 2004 | 120 | | 67 | | 187 | |
| Less: | | | | | | |
| Cash
payments | (50 | ) | (43 | ) | (93 | ) |
| Reversal
of excess provision | (25 | ) | | | (25 | ) |
| Balance
in accounts payable and accrued liabilities at June 30, 2005 | 45 | | 24 | | 69 | |
| During the three months and six months ended June 30, 2005,
we recorded a pre-tax charge of $5 million and $26 million,
respectively, primarily for relocating employees and closing real estate
facilities that are no longer needed because of the employee departure
programs of 2004. We expect to spend approximately $40 million
in the future for similar costs that will be expensed as incurred. These
charges were offset by a credit of $25 million in the first quarter
of 2005, relating to the reversal of restructuring provisions that
were no longer necessary since the actual payments were lower than estimated. | | | | | | |

41 Bell Canada Enterprises 2005 Quarterly Report

| Notes
to Consolidated Financial Statements |
| --- |
| Note 6:
Income taxes Bell Canada
International Inc. (BCI) loss utilization transaction On April 15, 2005,
3787915 Canada Inc., a wholly-owned subsidiary of Bell Canada,
acquired $17 billion in preferred shares from 3787923 Canada Inc.,
a wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds
to advance $17 billion to BCI through a subordinated interest-free
loan. BCI then advanced $17 billion to 3787915 Canada Inc. by
way of a subordinated interest-bearing demand loan, the funds being used
to repay a daylight loan granted to 3787915 Canada Inc. to make the
initial preferred share investment. The
dividend rate on the preferred shares is equal to 5.1%, which is essentially
the same as the interest rate on the loan. This transaction, which is
expected to be unwound in August 2005, is part of a tax loss consolidation
strategy that follows the transaction steps laid out in an advance tax
ruling granted by the Canada Revenue Agency to Bell Canada and BCI.
The transaction also received the approval of the Ontario Superior Court
of Justice, which is supervising BCIs voluntary Plan of Arrangement
pursuant to which BCI is monetizing its assets and resolving outstanding
claims against it, with the ultimate objective of distributing the net
proceeds to its shareholders and dissolving the company. 3787915
Canada Inc. has the legal right to offset the demand loan payable
to BCI and the investment in preferred shares of 3787923 Canada Inc.
Since 3787915 Canada Inc. intends to do this, we present these items
and the related interest expense and dividend income on a net basis. The
tax savings resulting from the interest expense are presented as a reduction
of income tax expense. BCI
will be compensated for the use of its losses by Bell Canada through
a capital contribution that will be made by BCE Inc. for 88% of the
tax savings. BCE Inc.s ownership interest in BCI will remain
at 62%. As a result: BCE Inc.s carrying value of its investment in BCI is increased
to reflect the increase in BCE Inc.s share of the expected
proceeds upon BCIs eventual liquidation a charge to other income is recorded to reflect the non-controlling
interests portion of the capital contribution to be made by
BCE Inc. |

| Note 7: Stock-based compensation
plans Restricted
share units (RSUs) The table below
is a summary of the status of RSUs. | | |
| --- | --- | --- |
| | NUMBER
OF | |
| | RSUs | |
| Outstanding,
January 1, 2005 | 1,996,522 | |
| Granted | 483,227 | |
| Dividends
credited | 46,397 | |
| Expired/forfeited | (66,871 | ) |
| Outstanding,
June 30, 2005 | 2,459,275 | |
| Vested,
June 30, 2005 | | |
| For
the three months and six months ended June 30, 2005, we recorded
compensation expense for RSUs of $3 million and $12 million, respectively.
For the three months and six months ended June 30, 2004, we recorded
compensation expense for RSUs of $6 million and $10 million, respectively. | | |

42 Bell Canada Enterprises 2005 Quarterly Report

| BCE Inc.
stock options The table below
is a summary of the status of BCE Inc.s stock option programs. | | | |
| --- | --- | --- | --- |
| | | | WEIGHTED |
| | | | AVERAGE |
| | NUMBER | | EXERCISE |
| | OF
SHARES | | PRICE |
| Outstanding,
January 1, 2005 | 28,481,679 | | $32 |
| Granted | 713,224 | | $29 |
| Exercised | (787,046 | ) | $17 |
| Expired/forfeited | (640,792 | ) | $34 |
| Outstanding,
June 30, 2005 | 27,767,065 | | $32 |
| Exercisable,
June 30, 2005 | 17,082,799 | | $34 |

| Assumptions
used in stock option pricing model The table below
shows the assumptions used to determine the stock-based compensation expense
using the Black-Scholes option pricing model. | THREE MONTHS | | SIX MONTHS | |
| --- | --- | --- | --- | --- |
| FOR
THE PERIOD ENDED JUNE 30 | 2005 | 2004 | 2005 | 2004 |
| Compensation
expense ($ millions) | 5 | 6 | 11 | 14 |
| Number
of stock options granted | 235,700 | 55,000 | 713,224 | 5,449,776 |
| Weighted
average fair value per option granted ($) | 4 | 3 | 3 | 6 |
| Weighted
average assumptions | | | | |
| Dividend
yield | 4.5% | 4.3% | 4.5% | 4.0% |
| Expected
volatility | 19% | 26% | 23% | 27% |
| Risk-free
interest rate | 3.6% | 3.3% | 3.4% | 3.1% |
| Expected
life (years) | 3.5 | 3.5 | 3.5 | 3.5 |

Note 8: Commitments and contingencies Teleglobe Lending Syndicate Lawsuit As indicated in Note 24 to BCEs audited Consolidated Financial Statements for the year ended December 31, 2004, a lawsuit was filed in the Ontario Superior Court of Justice on July 12, 2002 against BCE Inc. by certain of the members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate. BNP Paribas (Canada), which had advanced approximately US$50 million to Teleglobe, filed a notice of discontinuance with the Court on May 3, 2005 and is therefore no longer a plaintiff in this action. Following such discontinuance, the damages sought by the remaining plaintiffs amount to approximately US$1.04 billion (down from approximately US$1.09 billion), plus interest and costs, representing approximately 83% (down from approximately 87%) of the US$1.25 billion that the members of the lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation.

43 Bell Canada Enterprises 2005 Quarterly Report

BCE Inc. 1000, rue de La Gauchetière Ouest Bureau 3700 Montréal (Québec) H3B 4Y7 www.bce.ca Communications e-mail: [email protected] tel: 1 888 932-6666 fax: (514) 870-4385 This document has been filed by BCE Inc. with Canadian securities commissions and the U.S. Securities and Exchange Commission. It can be found on BCE Inc.s Website at www.bce.ca, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov or is available upon request from: Investor Relations e-mail: [email protected] tel: 1 800 339-6353 fax: (514) 786-3970 For further information concerning the Dividend Reinvestment and Stock Purchase Plan (DRP), direct deposit of dividend payments, the elimination of multiple mailings or the receipt of quarterly reports, please contact: Computershare Trust Company of Canada 100 University Avenue, 9th Floor, Toronto, Ontario M5J 2Y1 tel: (514) 982-7555 or 1 800 561-0934 fax: (416) 263-9394 or 1 888 453-0330 e-mail: [email protected] PRINTED IN CANADA 05-07 BCE-2E

| BCE
Investor Relations — Thane Fotopoulos | 514-870-4619 | [email protected] |
| --- | --- | --- |
| Vincent
Surette | 514-870-4613 | [email protected] |

BCE Consolidated (1) Consolidated Operational Data

| ($
millions, except per share amounts) — Operating revenues | 4,980 | | Q2 2004 — 4,779 | | $
change — 201 | | %
change — 4.2% | | YTD June 2005 — 9,839 | | YTD June 2004 — 9,417 | | $
change — 422 | | %
change — 4.5% | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Operating expenses | (2,979 | ) | (2,826 | ) | (153 | ) | (5.4% | ) | (5,900 | ) | (5,620 | ) | (280 | ) | (5.0% | ) |
| EBITDA (2) | 2,001 | | 1,953 | | 48 | | 2.5% | | 3,939 | | 3,797 | | 142 | | 3.7% | |
| EBITDA margin (3) | 40.2% | | 40.9% | | | | (0.7)
pts | | 40.0% | | 40.3% | | | | (0.3)
pts | |
| Amortization expense | (792 | ) | (769 | ) | (23 | ) | (3.0% | ) | (1,565 | ) | (1,536 | ) | (29 | ) | (1.9% | ) |
| Net benefit
plans cost | (104 | ) | (65 | ) | (39 | ) | (60.0% | ) | (207 | ) | (128 | ) | (79 | ) | (61.7% | ) |
| Restructuring and other items | (5 | ) | (14 | ) | 9 | | 64.3% | | (1 | ) | (17 | ) | 16 | | 94.1%. | |
| Operating income | 1,100 | | 1,105 | | (5 | ) | (0.5% | ) | 2,166 | | 2,116 | | 50 | | 2.4% | |
| Other income | 24 | | 24 | | - | | 0.0% | | 31 | | 60 | | (29 | ) | (48.3% | ) |
| Interest expense | (247 | ) | (253 | ) | 6 | | 2.4% | | (494 | ) | (505 | ) | 11 | | 2.2% | |
| Pre-tax earnings from continuing operations | 877 | | 876 | | 1 | | 0.1% | | 1,703 | | 1,671 | | 32 | | 1.9% | |
| Income taxes | (223 | ) | (293 | ) | 70 | | 23.9% | | (494 | ) | (555 | ) | 61 | | 11.0% | |
| Non-controlling interest | (73 | ) | (39 | ) | (34 | ) | (87.2% | ) | (136 | ) | (87 | ) | (49 | ) | (56.3% | ) |
| Earnings from continuing operations | 581 | | 544 | | 37 | | 6.8% | | 1,073 | | 1,029 | | 44 | | 4.3% | |
| Discontinued operations | - | | 27 | | (27 | ) | n.m. | | (1 | ) | 30 | | (31 | ) | n.m. | |
| Net
earnings | 581 | | 571 | | 10 | | 1.8% | | 1,072 | | 1,059 | | 13 | | 1.2% | |
| Dividends on
preferred shares | (18 | ) | (17 | ) | (1 | ) | (5.9% | ) | (35 | ) | (35 | ) | - | | 0.0% | |
| Net
earnings applicable to common shares | 563 | | 554 | | 9 | | 1.6% | | 1,037 | | 1,024 | | 13 | | 1.3% | |
| Net
earnings per common share - basic | | | | | | | | | | | | | | | | |
| Continuing operations | $ 0.61 | $ | 0.57 | $ | 0.04 | | 7.0% | $ | 1.12 | $ | 1.08 | $ | 0.04 | | 3.7% | |
| Discontinued operations | $ - | $ | 0.03 | $ | (0.03 | ) | n.m. | $ | - | $ | 0.03 | $ | (0.03 | ) | n.m. | |
| Net earnings | $ 0.61 | $ | 0.60 | $ | 0.01 | | 1.7% | $ | 1.12 | $ | 1.11 | $ | 0.01 | | 0.9% | |
| Net
earnings per common share - diluted | | | | | | | | | | | | | | | | |
| Continuing operations | $ 0.61 | $ | 0.57 | $ | 0.04 | | 7.0% | $ | 1.12 | $ | 1.08 | $ | 0.04 | | 3.7% | |
| Discontinued operations | $ - | $ | 0.03 | $ | (0.03 | ) | n.m. | $ | - | $ | 0.03 | $ | (0.03 | ) | n.m. | |
| Net earnings | $ 0.61 | $ | 0.60 | $ | 0.01 | | 1.7% | $ | 1.12 | $ | 1.11 | $ | 0.01 | | 0.9% | |
| Dividends per common share | $ 0.33 | $ | 0.30 | $ | 0.03 | | 10.0% | $ | 0.66 | $ | 0.60 | $ | 0.06 | | 10.0% | |
| Average number of common shares outstanding - basic (millions) | 926.6 | | 924.3 | | | | | | 926.4 | | 924.2 | | | | | |

| The
following items are included in net earnings: | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Net gains (losses) on investments | | | | | | | | | | |
| Continuing
operations | 28 | | - | | | 29 | | - | | |
| Discontinuing
operations | - | | 31 | | | (1 | ) | 38 | | |
| Restructuring and other items | (3 | ) | 16 | | | (1 | ) | 15 | | |
| Total | 25 | | 47 | | | 27 | | 53 | | |
| Impact on net earnings per share | $ 0.03 | $ | 0.05 | | | $ 0.03 | $ | 0.06 | | |
| EPS before net gains (losses)
on investments and restructuring and other items (2) | $ 0.58 | $ | 0.55 | $ 0.03 | 5.5% | $ 1.09 | $ | 1.05 | $ 0.04 | 3.8% |

n.m. : not meaningful

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 2

BCE Consolidated (1) Consolidated Operational Data - Historical Trend

| ($ millions,
except per share amounts) — Operating revenues | 9,839 | | Q2 05 — 4,980 | | Q1
05 — 4,859 | | Total 2004 — 19,181 | | Q4
04 — 4,986 | | Q3
04 — 4,778 | | Q2
04 — 4,779 | | Q1
04 — 4,638 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Operating
expenses | (5,900 | ) | (2,979 | ) | (2,921 | ) | (11,617 | ) | (3,155 | ) | (2,842 | ) | (2,826 | ) | (2,794 | ) |
| EBITDA (2) | 3,939 | | 2,001 | | 1,938 | | 7,564 | | 1,831 | | 1,936 | | 1,953 | | 1,844 | |
| EBITDA margin (3) | 40.0% | | 40.2% | | 39.9% | | 39.4% | | 36.7% | | 40.5% | | 40.9% | | 39.8% | |
| Amortization expense | (1,565 | ) | (792 | ) | (773 | ) | (3,108 | ) | (803 | ) | (769 | ) | (769 | ) | (767 | ) |
| Net benefit
plans cost | (207 | ) | (104 | ) | (103 | ) | (256 | ) | (67 | ) | (61 | ) | (65 | ) | (63 | ) |
| Restructuring and other items | (1 | ) | (5 | ) | 4 | | (1,224 | ) | (126 | ) | (1,081 | ) | (14 | ) | (3 | ) |
| Operating income | 2,166 | | 1,100 | | 1,066 | | 2,976 | | 835 | | 25 | | 1,105 | | 1,011 | |
| Other income | 31 | | 24 | | 7 | | 411 | | 18 | | 333 | | 24 | | 36 | |
| Interest
expense | (494 | ) | (247 | ) | (247 | ) | (1,005 | ) | (247 | ) | (253 | ) | (253 | ) | (252 | ) |
| Pre-tax earnings from continuing operations | 1,703 | | 877 | | 826 | | 2,382 | | 606 | | 105 | | 876 | | 795 | |
| Income taxes | (494 | ) | (223 | ) | (271 | ) | (710 | ) | (199 | ) | 44 | | (293 | ) | (262 | ) |
| Non-controlling interest | (136 | ) | (73 | ) | (63 | ) | (174 | ) | (40 | ) | (47 | ) | (39 | ) | (48 | ) |
| Earnings from continuing operations | 1,073 | | 581 | | 492 | | 1,498 | | 367 | | 102 | | 544 | | 485 | |
| Discontinued operations | (1 | ) | - | | (1 | ) | 26 | | (2 | ) | (2 | ) | 27 | | 3 | |
| Net earnings before extraordinary gain | 1,072 | | 581 | | 491 | | 1,524 | | 365 | | 100 | | 571 | | 488 | |
| Extraordinary
gain | - | | - | | - | | 69 | | 69 | | - | | - | | - | |
| Net earnings | 1,072 | | 581 | | 491 | | 1,593 | | 434 | | 100 | | 571 | | 488 | |
| Dividends
on preferred shares | (35 | ) | (18 | ) | (17 | ) | (70 | ) | (17 | ) | (18 | ) | (17 | ) | (18 | ) |
| Net earnings applicable to common shares | 1,037 | | 563 | | 474 | | 1,523 | | 417 | | 82 | | 554 | | 470 | |
| Net earnings per common share - basic | | | | | | | | | | | | | | | | |
| Continuing operations | $ 1.12 | $ | 0.61 | $ | 0.51 | $ | 1.55 | $ | 0.38 | $ | 0.09 | $ | 0.57 | $ | 0.51 | |
| Discontinued operations | $ - | $ | - | $ | - | $ | 0.03 | $ | - | $ | - | $ | 0.03 | $ | - | |
| Extraordinary gain | $ - | $ | - | $ | - | $ | 0.07 | $ | 0.07 | $ | - | $ | - | $ | - | |
| Net earnings | $ 1.12 | $ | 0.61 | $ | 0.51 | $ | 1.65 | $ | 0.45 | $ | 0.09 | $ | 0.60 | $ | 0.51 | |
| Net earnings per common share - diluted | | | | | | | | | | | | | | | | |
| Continuing operations | $ 1.12 | $ | 0.61 | $ | 0.51 | $ | 1.55 | $ | 0.38 | $ | 0.09 | $ | 0.57 | $ | 0.51 | |
| Discontinued operations | $ - | $ | - | $ | - | $ | 0.03 | $ | - | $ | - | $ | 0.03 | $ | - | |
| Extraordinary gain | $ - | $ | - | $ | - | $ | 0.07 | $ | 0.07 | $ | - | $ | - | $ | - | |
| Net earnings | $ 1.12 | $ | 0.61 | $ | 0.51 | $ | 1.65 | $ | 0.45 | $ | 0.09 | $ | 0.60 | $ | 0.51 | |
| Dividends per common share | $ 0.66 | $ | 0.33 | $ | 0.33 | $ | 1.20 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | |
| Average number of common shares outstanding - basic (millions) | 926.4 | | 926.6 | | 926.2 | | 924.6 | | 925.3 | | 924.6 | | 924.3 | | 924.1 | |
| The following
items are included in net earnings: | | | | | | | | | | | | | | | | |
| Net gains (losses) on investments | | | | | | | | | | | | | | | | |
| Continuing
operations | 29 | | 28 | | 1 | | 389 | | 64 | | 325 | | - | | - | |
| Discontinued
operations | (1 | ) | - | | (1 | ) | 34 | | (2) | | (2) | | 31 | | 7 | |
| Restructuring and other items | (1 | ) | (3 | ) | 2 | | (772) | | (62) | | (725) | | 16 | | (1) | |
| Total | 27 | | 25 | | 2 | | (349) | | - | | (402) | | 47 | | 6 | |
| Impact on net
earnings per share | $ 0.03 | $ | 0.03 | $ | - | $ | (0.37) | $ | - | $ | (0.43) | $ | 0.05 | $ | 0.01 | |
| EPS
before net gains (losses) on investments and restructuring and other items (2) | $ 1.09 | $ | 0.58 | $ | 0.51 | $ | 2.02 | $ | 0.45 | $ | 0.52 | $ | 0.55 | $ | 0.50 | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 3

BCE Consolidated (1) Segmented Data

($ millions, except where otherwise indicated)	Q2 2005		Q2 2004		$ change		% change		YTD 2005		YTD 2004		$ change		% change
Revenues
Consumer	1,890		1,858		32		1.7%		3,746		3,683		63		1.7%
Business	1,499		1,441		58		4.0%		2,977		2,876		101		3.5%
Aliant	518		526		(8	)	(1.5%	)	1,042		1,030		12		1.2%
Other Bell Canada	485		468		17		3.6%		964		942		22		2.3%
Inter-segment eliminations	(134	)	(121	)	(13	)	(10.7%	)	(262	)	(253	)	(9	)	(3.6%	)
Total Bell
Canada	4,258		4,172		86		2.1%		8,467		8,278		189		2.3%
Other BCE
Bell Globemedia	399		371		28		7.5%		755		713		42		5.9%
Advertising	300		277		23		8.3%		561		526		35		6.7%
Subscriber	78		74		4		5.4%		155		148		7		4.7%
Production and Sundry	21		20		1		5.0%		39		39		-		0.0%
Telesat	137		85		52		61.2%		245		169		76		45.0%
CGI	275		248		27		10.9%		548		462		86		18.6%
Other	24		18		6		33.3%		35		29		6		20.7%
Total Other
BCE	835		722		113		15.7%		1,583		1,373		210		15.3%
Inter-segment eliminations	(113	)	(115	)	2		1.7%		(211	)	(234	)	23		9.8%
Total revenues	4,980		4,779		201		4.2%		9,839		9,417		422		4.5%
Operating income
Consumer	552		560		(8	)	(1.4%	)	1,078		1,086		(8	)	(0.7%	)
Business	221		227		(6	)	(2.6%	)	461		468		(7	)	(1.5%	)
Aliant	99		92		7		7.6%		186		174		12		6.9%
Other Bell Canada	109		138		(29	)	(21.0%	)	238		249		(11	)	(4.4%	)
Total Bell
Canada	981		1,017		(36	)	(3.5%	)	1,963		1,977		(14	)	(0.7%	)
Other BCE
Bell Globemedia	95		74		21		28.4%		159		114		45		39.5%
Telesat	43		34		9		26.5%		80		65		15		23.1%
CGI	20		25		(5	)	(20.0%	)	45		46		(1	)	(2.2%	)
Other	(39	)	(45	)	6		13.3% .		(81	)	(86	)	5		5.8% .
Total Other BCE	119		88		31		35.2%		203		139		64		46.0%
Total operating income	1,100		1,105		(5	)	(0.5%	)	2,166		2,116		50		2.4%
Capital expenditures (4)
Consumer	394		331		(63	)	(19.0%	)	735		576		(159	)	(27.6%	)
Business	246		281		35		12.5%		442		495		53		10.7%
Aliant	104		45		(59	)	n.m.		186		130		(56	)	(43.1%	)
Other Bell Canada	103		58		(45	)	(77.6%	)	150		104		(46	)	(44.2%	)
Total Bell Canada	847		715		(132	)	(18.5%	)	1,513		1,305		(208	)	(15.9%	)
Other BCE
Telesat	53		88		35		39.8%		107		153		46		30.1%.
Other	14		23		9		39.1%		31		49		18		36.7%
Total capital expenditures	914		826		(88	)	(10.7%	)	1,651		1,507		(144	)	(9.6%	)

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 4

BCE Consolidated (1) Segmented Data Historical Trend

| ($ millions,
except where otherwise indicated) | YTD 2005 | | Q2 05 | | Q1
05 | | Total 2004 | | Q4
04 | | Q3
04 | | Q2
04 | | Q1
04 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | | | | | | | | | | | |
| Consumer | 3,746 | | 1,890 | | 1,856 | | 7,502 | | 1,911 | | 1,908 | | 1,858 | | 1,825 | |
| Business | 2,977 | | 1,499 | | 1,478 | | 5,851 | | 1,535 | | 1,440 | | 1,441 | | 1,435 | |
| Aliant | 1,042 | | 518 | | 524 | | 2,033 | | 506 | | 497 | | 526 | | 504 | |
| Other Bell
Canada | 964 | | 485 | | 479 | | 1,939 | | 511 | | 486 | | 468 | | 474 | |
| Inter-segment eliminations | (262 | ) | (134 | ) | (128 | ) | (538 | ) | (160 | ) | (125 | ) | (121 | ) | (132 | ) |
| Total Bell
Canada | 8,467 | | 4,258 | | 4,209 | | 16,787 | | 4,303 | | 4,206 | | 4,172 | | 4,106 | |
| Other BCE | | | | | | | | | | | | | | | | |
| Bell Globemedia | 755 | | 399 | | 356 | | 1,420 | | 405 | | 302 | | 371 | | 342 | |
| Advertising | 561 | | 300 | | 261 | | 1,041 | | 306 | | 209 | | 277 | | 249 | |
| Subscriber | 155 | | 78 | | 77 | | 298 | | 77 | | 73 | | 74 | | 74 | |
| Production and Sundry | 39 | | 21 | | 18 | | 81 | | 22 | | 20 | | 20 | | 19 | |
| Telesat | 245 | | 137 | | 108 | | 362 | | 102 | | 91 | | 85 | | 84 | |
| CGI | 548 | | 275 | | 273 | | 1,007 | | 271 | | 274 | | 248 | | 214 | |
| Other | 35 | | 24 | | 11 | | 60 | | 19 | | 12 | | 18 | | 11 | |
| Total Other
BCE | 1,583 | | 835 | | 748 | | 2,849 | | 797 | | 679 | | 722 | | 651 | |
| Inter-segment eliminations | (211 | ) | (113 | ) | (98 | ) | (455 | ) | (114 | ) | (107 | ) | (115 | ) | (119 | ) |
| Total revenues | 9,839 | | 4,980 | | 4,859 | | 19,181 | | 4,986 | | 4,778 | | 4,779 | | 4,638 | |
| Operating income | | | | | | | | | | | | | | | | |
| Consumer | 1,078 | | 552 | | 526 | | 2,119 | | 464 | | 569 | | 560 | | 526 | |
| Business | 461 | | 221 | | 240 | | 896 | | 183 | | 245 | | 227 | | 241 | |
| Aliant | 186 | | 99 | | 87 | | 268 | | 23 | | 71 | | 92 | | 82 | |
| Other Bell Canada | 238 | | 109 | | 129 | | (588 | ) | 61 | | (898 | ) | 138 | | 111 | |
| Total Bell
Canada | 1,963 | | 981 | | 982 | | 2,695 | | 731 | | (13 | ) | 1,017 | | 960 | |
| Other BCE | | | | | | | | | | | | | | | | |
| Bell Globemedia | 159 | | 95 | | 64 | | 240 | | 103 | | 23 | | 74 | | 40 | |
| Telesat | 80 | | 43 | | 37 | | 141 | | 37 | | 39 | | 34 | | 31 | |
| CGI | 45 | | 20 | | 25 | | 94 | | 24 | | 24 | | 25 | | 21 | |
| Other | (81 | ) | (39 | ) | (42 | ) | (194 | ) | (60 | ) | (48 | ) | (45 | ) | (41 | ) |
| Total Other
BCE | 203 | | 119 | | 84 | | 281 | | 104 | | 38 | | 88 | | 51 | |
| Total operating income | 2,166 | | 1,100 | | 1,066 | | 2,976 | | 835 | | 25 | | 1,105 | | 1,011 | |
| Capital expenditures (4) | | | | | | | | | | | | | | | | |
| Consumer | 735 | | 394 | | 341 | | 1,371 | | 418 | | 377 | | 331 | | 245 | |
| Business | 442 | | 246 | | 196 | | 1,008 | | 330 | | 183 | | 281 | | 214 | |
| Aliant | 186 | | 104 | | 82 | | 295 | | 114 | | 51 | | 45 | | 85 | |
| Other Bell Canada | 150 | | 103 | | 47 | | 352 | | 123 | | 125 | | 58 | | 46 | |
| Total Bell
Canada | 1,513 | | 847 | | 666 | | 3,026 | | 985 | | 736 | | 715 | | 590 | |
| Other BCE | | | | | | | | | | | | | | | | |
| Telesat | 107 | | 53 | | 54 | | 257 | | 40 | | 64 | | 88 | | 65 | |
| Other | 31 | | 14 | | 17 | | 81 | | 21 | | 11 | | 23 | | 26 | |
| Total capital expenditures | 1,651 | | 914 | | 737 | | 3,364 | | 1,046 | | 811 | | 826 | | 681 | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 5

BCE Consolidated (1) Consolidated Balance Sheet Data

| ($
millions, except where otherwise indicated) | June 30 2005 | | March
31 2005 | | December
31 2004 | |
| --- | --- | --- | --- | --- | --- | --- |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash
and cash equivalents | 380 | | 526 | | 380 | |
| Accounts
receivable | 1,874 | | 2,074 | | 2,096 | |
| Other
current assets | 1,228 | | 1,364 | | 1,212 | |
| Total current
assets | 3,482 | | 3,964 | | 3,688 | |
| Capital assets | 22,050 | | 21,376 | | 21,398 | |
| Other long-term
assets | 2,690 | | 2,747 | | 2,656 | |
| Indefinite-life intangible assets | 2,973 | | 2,951 | | 2,916 | |
| Goodwill | 8,528 | | 8,482 | | 8,413 | |
| Non-current assets
of discontinued operations | 82 | | 50 | | 50 | |
| Total assets | 39,805 | | 39,570 | | 39,121 | |
| LIABILITIES | | | | | | |
| Current liabilities | | | | | | |
| Accounts
payable and accrued liabilities | 3,328 | | 3,313 | | 3,692 | |
| Interest
payable | 189 | | 283 | | 183 | |
| Dividends
payable | 325 | | 325 | | 297 | |
| Debt
due within one year | 1,497 | | 1,428 | | 1,276 | |
| Total current
liabilities | 5,339 | | 5,349 | | 5,448 | |
| Long-term debt | 12,480 | | 12,280 | | 11,809 | |
| Other long-term
liabilities | 4,603 | | 4,819 | | 4,932 | |
| Total liabilities | 22,422 | | 22,448 | | 22,189 | |
| Non-controlling interest | 2,905 | | 2,914 | | 2,908 | |
| SHAREHOLDERS'
EQUITY | | | | | | |
| Preferred shares | 1,670 | | 1,670 | | 1,670 | |
| Common shareholders'
equity | | | | | | |
| Common
shares | 16,794 | | 16,790 | | 16,781 | |
| Contributed
surplus | 1,071 | | 1,065 | | 1,061 | |
| Deficit | (5,005 | ) | (5,264 | ) | (5,432 | ) |
| Currency
translation adjustment | (52 | ) | (53 | ) | (56 | ) |
| Total common
shareholders' equity | 12,808 | | 12,538 | | 12,354 | |
| Total shareholders'
equity | 14,478 | | 14,208 | | 14,024 | |
| Total liabilities
and shareholders' equity | 39,805 | | 39,570 | | 39,121 | |
| Number of common
shares outstanding | 926.7 | | 926.4 | | 925.9 | |
| Total Net Debt | 13,597 | | 13,182 | | 12,705 | |
| Total Capitalization | 30,980 | | 30,304 | | 29,637 | |
| Key ratios | | | | | | |
| Net debt : Total
Capitalization | 43.9% | | 43.5% | | 42.9% | |
| Net debt : Trailing
12 month EBITDA | 1.76 | | 1.72 | | 1.68 | |
| EBITDA : Interest
(trailing 12 month) | 7.75 | | 7.66 | | 7.53 | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 6

BCE Consolidated Consolidated Cash Flow Data

| ($
millions, except where otherwise indicated) | | | Q2 2004 | | $
change | | YTD June 2005 | | YTD June 2004 | | $
change | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cash
flows from operating activities | | | | | | | | | | | | |
| Earnings from continuing operations | 581 | | 544 | | 37 | | 1,073 | | 1,029 | | 44 | |
| Adjustments to reconcile earnings from
continuing operations
to cash flows from operating activities: | | | | | | | | | | | | |
| Amortization
expense | 792 | | 769 | | 23 | | 1,565 | | 1,536 | | 29 | |
| Net benefit
plans cost | 104 | | 65 | | 39 | | 207 | | 128 | | 79 | |
| Restructuring
and other items | 5 | | 14 | | (9 | ) | 1 | | 17 | | (16 | ) |
| Net gains on
investments | (32 | ) | (1 | ) | (31 | ) | (34 | ) | (6 | ) | (28 | ) |
| Future
income taxes | 65 | | 33 | | 32 | | 174 | | 87 | | 87 | |
| Non-controlling
interest | 73 | | 39 | | 34 | | 136 | | 87 | | 49 | |
| Contributions
to employee pension plans | (34 | ) | (27 | ) | (7 | ) | (128 | ) | (56 | ) | (72 | ) |
| Other employee
future benefit plan payments | (22 | ) | (22 | ) | - | | (45 | ) | (46 | ) | 1 | |
| Payments
of restructuring and other items | (28 | ) | (8 | ) | (20 | ) | (129 | ) | (27 | ) | (102 | ) |
| Operating
assets and liabilities | (54 | ) | (282 | ) | 228 | | (431 | ) | (365 | ) | (66 | ) |
| | 1,450 | | 1,124 | | 326 | | 2,389 | | 2,384 | | 5 | |
| Capital expenditures | (914 | ) | (826 | ) | (88 | ) | (1,651 | ) | (1,507 | ) | (144 | ) |
| Other investing activities | (11 | ) | 116 | | (127 | ) | (26 | ) | 135 | | (161 | ) |
| Cash dividends paid on preferred shares | (22 | ) | (21 | ) | (1 | ) | (43 | ) | (43 | ) | - | |
| Cash dividends paid by subsidiaries
to non-controlling interest | (60 | ) | (52 | ) | (8 | ) | (110 | ) | (95 | ) | (15 | ) |
| Free Cash Flow from operations, before common dividends (2) | 443 | | 341 | | 102 | | 559 | | 874 | | (315 | ) |
| Cash dividends paid on common shares | (305 | ) | (277 | ) | (28 | ) | (583 | ) | (554 | ) | (29 | ) |
| Free Cash Flow from operations, after common dividends (2) | 138 | | 64 | | 74 | | (24 | ) | 320 | | (344 | ) |
| Business acquisitions | (35 | ) | (247 | ) | 212 | | (118 | ) | (306 | ) | 188 | |
| Business dispositions | - | | - | | - | | - | | 16 | | (16 | ) |
| Increase in cost and equity investments | (13 | ) | (8 | ) | (5 | ) | (141 | ) | (8 | ) | (133 | ) |
| Decrease in cost and equity investments | 5 | | - | | 5 | | 7 | | 6 | | 1 | |
| Free Cash Flow after investments and divestitures | 95 | | (191 | ) | 286 | | (276 | ) | 28 | | (304 | ) |
| Other
financing activities | | | | | | | | | | | | |
| Increase (decrease) in notes payable
and bank advances | 341 | | (69 | ) | 410 | | 186 | | (50 | ) | 236 | |
| Issue of long-term debt | 206 | | 74 | | 132 | | 991 | | 1,400 | | (409 | ) |
| Repayment of long-term debt | (747 | ) | (718 | ) | (29 | ) | (831 | ) | (1,652 | ) | 821 | |
| Issue of common shares | 4 | | 4 | | - | | 13 | | 8 | | 5 | |
| Issue of equity securities by subsidiaries
to non-controlling interest | - | | - | | - | | - | | 7 | | (7 | ) |
| Redemption of equity securities by
subsidiaries from non-controlling interest | (21 | ) | (12 | ) | (9 | ) | (38 | ) | (54 | ) | 16 | |
| Other financing activities | (25 | ) | 32 | | (57 | ) | (55 | ) | (16 | ) | (39 | ) |
| | (242 | ) | (689 | ) | 447 | | 266 | | (357 | ) | 623 | |
| Cash
used in continuing operations | (147 | ) | (880 | ) | 733 | | (10 | ) | (329 | ) | 319 | |
| Cash
provided by (used in) discontinued operations | 1 | | (54 | ) | 55 | | 10 | | 184 | | (174 | ) |
| Net
increase (decrease) in cash and cash equivalents | (146 | ) | (934 | ) | 788 | | - | | (145 | ) | 145 | |
| Cash
and cash equivalents at beginning of period | 526 | | 1,511 | | (985 | ) | 380 | | 722 | | (342 | ) |
| Cash and cash equivalents at end of period | 380 | | 577 | | (197 | ) | 380 | | 577 | | (197 | ) |
| Other information | | | | | | | | | | | | |
| Capital
expenditures as a percentage of revenues | 18.4% | | 17.3% | | (1.1)
pts | | 16.8% | | 16.0% | | (0.8)
pts | |
| Cash
flow per share (5) | $ 0.58 | $ | 0.32 | $ | 0.26 | $ | 0.80 | $ | 0.95 | $ | (0.15 | ) |
| Annualized cash flow yield (6) | 6.6% | | 5.5% | | 1.1
pts | | 4.2% | | 7.1% | | (2.9)
pts | |
| Common
dividend payout | 54.2% | | 50.0% | | 4.2
pts | | 56.2% | | 54.1% | | 2.1
pts | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 7

BCE Consolidated Consolidated Cash Flow Data Historical Trend

| ($
millions, except where otherwise indicated) — Cash
flows from operating activities | YTD 2005 — 1,073 | | Q2
05 — 581 | | Q1
05 — 492 | | Total 2004 — 1,498 | | Q4
04 — 367 | | Q3
04 — 102 | | Q2
04 — 544 | | Q1
04 — 485 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Earnings
from continuing operations | | | | | | | | | | | | | | | | |
| Adjustments
to reconcile earnings from continuing operations to cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Amortization
expense | 1,565 | | 792 | | 773 | | 3,108 | | 803 | | 769 | | 769 | | 767 | |
| Net benefit
plans cost | 207 | | 104 | | 103 | | 256 | | 67 | | 61 | | 65 | | 63 | |
| Restructuring
and other items | 1 | | 5 | | (4 | ) | 1,224 | | 126 | | 1,081 | | 14 | | 3 | |
| Net (gains)
losses on investments | (34 | ) | (32 | ) | (2 | ) | (319 | ) | 12 | | (325 | ) | (1 | ) | (5 | ) |
| Future
income taxes | 174 | | 65 | | 109 | | (34 | ) | 62 | | (183 | ) | 33 | | 54 | |
| Non-controlling
interest | 136 | | 73 | | 63 | | 174 | | 40 | | 47 | | 39 | | 48 | |
| Contributions
to employee pension plans | (128 | ) | (34 | ) | (94 | ) | (112 | ) | (24 | ) | (32 | ) | (27 | ) | (29 | ) |
| Other employee
future benefit plan payments | (45 | ) | (22 | ) | (23 | ) | (81 | ) | (22 | ) | (13 | ) | (22 | ) | (24 | ) |
| Payments
of restructuring and other items | (129 | ) | (28 | ) | (101 | ) | (253 | ) | (214 | ) | (12 | ) | (8 | ) | (19 | ) |
| Operating
assets and liabilities | (431 | ) | (54 | ) | (377 | ) | 58 | | 90 | | 333 | | (282 | ) | (83 | ) |
| | 2,389 | | 1,450 | | 939 | | 5,519 | | 1,307 | | 1,828 | | 1,124 | | 1,260 | |
| Capital
expenditures | (1,651 | ) | (914 | ) | (737 | ) | (3,364 | ) | (1,046 | ) | (811 | ) | (826 | ) | (681 | ) |
| Other investing
activities | (26 | ) | (11 | ) | (15 | ) | 124 | | (9 | ) | (2 | ) | 116 | | 19 | |
| Cash dividends
paid on preferred shares | (43 | ) | (22 | ) | (21 | ) | (85 | ) | (21 | ) | (21 | ) | (21 | ) | (22 | ) |
| Cash dividends
paid by subsidiaries to non-controlling interest | (110 | ) | (60 | ) | (50 | ) | (188 | ) | (49 | ) | (44 | ) | (52 | ) | (43 | ) |
| Free
Cash Flow from operations, before common dividends (2) | 559 | | 443 | | 116 | | 2,006 | | 182 | | 950 | | 341 | | 533 | |
| Cash dividends
paid on common shares | (583 | ) | (305 | ) | (278 | ) | (1,108 | ) | (277 | ) | (277 | ) | (277 | ) | (277 | ) |
| Free
Cash Flow from operations, after common dividends (2) | (24 | ) | 138 | | (162 | ) | 898 | | (95 | ) | 673 | | 64 | | 256 | |
| Business
acquisitions | (118 | ) | (35 | ) | (83 | ) | (1,299 | ) | (347 | ) | (646 | ) | (247 | ) | (59 | ) |
| Business
dispositions | - | | - | | - | | 20 | | - | | 4 | | - | | 16 | |
| Increase
in cost and equity investments | (141 | ) | (13 | ) | (128 | ) | (58 | ) | (38 | ) | (12 | ) | (8 | ) | - | |
| Decrease
in cost and equity investments | 7 | | 5 | | 2 | | 713 | | - | | 707 | | - | | 6 | |
| Free
Cash Flow after investments and divestitures | (276 | ) | 95 | | (371 | ) | 274 | | (480 | ) | 726 | | (191 | ) | 219 | |
| Other
financing activities | | | | | | | | | | | | | | | | |
| Increase
(decrease) in notes payable and bank advances | 186 | | 341 | | (155 | ) | 130 | | 7 | | 173 | | (69 | ) | 19 | |
| Issue of
long-term debt | 991 | | 206 | | 785 | | 1,521 | | 111 | | 10 | | 74 | | 1,326 | |
| Repayment
of long-term debt | (831 | ) | (747 | ) | (84 | ) | (2,391 | ) | (641 | ) | (98 | ) | (718 | ) | (934 | ) |
| Issue of
common shares | 13 | | 4 | | 9 | | 32 | | 16 | | 8 | | 4 | | 4 | |
| Issue of
equity securities and convertible debentures by subsidiaries to non-controlling interest | - | | - | | - | | 8 | | 1 | | - | | - | | 7 | |
| Redemption
of equity securities by subsidiaries from non-controlling interest | (38 | ) | (21 | ) | (17 | ) | (58 | ) | - | | (4 | ) | (12 | ) | (42 | ) |
| Other
financing activities | (55 | ) | (25 | ) | (30 | ) | (51 | ) | (17 | ) | (18 | ) | 32 | | (48 | ) |
| | 266 | | (242 | ) | 508 | | (809 | ) | (523 | ) | 71 | | (689 | ) | 332 | |
| Cash provided
by (used in) continuing operations | (10 | ) | (147 | ) | 137 | | (535 | ) | (1,003 | ) | 797 | | (880 | ) | 551 | |
| Cash provided
by (used in) discontinued operations | 10 | | 1 | | 9 | | 193 | | (3 | ) | 12 | | (54 | ) | 238 | |
| Net increase
(decrease) in cash and cash equivalents | - | | (146 | ) | 146 | | (342 | ) | (1,006 | ) | 809 | | (934 | ) | 789 | |
| Cash and
cash equivalents at beginning of period | 380 | | 526 | | 380 | | 722 | | 1,386 | | 577 | | 1,511 | | 722 | |
| Cash
and cash equivalents at end of period | 380 | | 380 | | 526 | | 380 | | 380 | | 1,386 | | 577 | | 1,511 | |
| Consists
of: | | | | | | | | | | | | | | | | |
| Cash
and cash equivalents of continuing operations | 380 | | 380 | | 526 | | 380 | | 380 | | 1,386 | | 577 | | 1,135 | |
| Cash
and cash equivalents of discontinued operations | - | | - | | - | | - | | - | | - | | - | | 376 | |
| Total | 380 | | 380 | | 526 | | 380 | | 380 | | 1,386 | | 577 | | 1,511 | |
| Other
Information | | | | | | | | | | | | | | | | |
| Capital
expenditures as a percentage of revenues | 16.8 | % | 18.4 | % | 15.2 | % | 17.5 | % | 21.0 | % | 17.0 | % | 17.3 | % | 14.7 | % |
| Cash flow
per share (5) | $
0.80 | | $
0.58 | | $
0.22 | | $
2.33 | | $
0.28 | | $
1.10 | | $
0.32 | | $ 0.63 | |
| Annualized
cash flow yield (6) | 4.2 | % | 6.6 | % | 1.7 | % | 7.5 | % | 2.7 | % | 15.1 | % | 5.5 | % | 8.4 | % |
| Common
dividend payout | 56.2 | % | 54.2 | % | 58.6 | % | 72.8 | % | 66.4 | % | 337.8 | % | 50.0 | % | 58.9 | % |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 8

Proportionate Net Debt, Preferreds and EBITDA

| BCE
Corporate and Bell Canada Net debt and preferreds — At
June 30, 2005 ($ millions, except where otherwise indicated) | Bell
Canada (excl. Aliant) | | Aliant | | Bell Canada Statutory | | Inter- company eliminations | | Total Bell Canada | | BCE
Inc. Corporate | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cash
and cash equivalents | 150 | | (319 | ) | (169 | ) | | | (169 | ) | 3 | |
| Long-term
debt | 9,131 | | 892 | | 10,023 | | (360 | ) | 9,663 | | 2,000 | |
| Debt
due within one year | 1,344 | | 156 | | 1,500 | | (232 | ) | 1,268 | | - | |
| Long-term
note receivable from BCH | (498 | ) | - | | (498 | ) | 498 | | - | | - | |
| PPA
fair value increment (7) | | | | | | | | | 107 | | - | |
| Net
debt | 10,127 | | 729 | | 10,856 | | (94 | ) | 10,869 | | 2,003 | |
| Preferred
shares - Bell Canada (8) | 1,100 | | | | 1,100 | | | | 1,100 | | - | |
| Preferred
shares - Aliant (8) | | | 172 | | 172 | | | | 172 | | - | |
| Perpetual
Preferred shares - BCE | - | | - | | - | | | | - | | 1,670 | |
| Nortel
common shares at market | - | | - | | - | | | | - | | (47 | ) |
| Net debt
and preferreds | 11,227 | | 901 | | 12,128 | | (94 | ) | 12,141 | | 3,626 | |

| Proportionate
net debt and preferreds, Trailing EBITDA | | | | | | | | | | | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| For
the quarter ended June 30, 2005 ($ millions, except where otherwise indicated) | % owned by BCE | Proportionate net debt and preferreds | | TOTAL
EBITDA | | | | | | | | | | PROPORTIONATE
EBITDA | | | | | | | | | |
| | | | | Q2
05 | | Q1
05 | | Q4
04 | | Q3
04 | | Trailing | | Q2
05 | | Q1
05 | | Q4
04 | | Q3
04 | | Trailing | |
| Bell
Canada (excluding Aliant) | 100% | 11,240 | A | 1,618 | | 1,605 | | 1,469 | | 1,669 | | 6,361 | | 1,618 | | 1,605 | | 1,469 | | 1,669 | | 6,361 | |
| Aliant | 53.0% | 477 | | 221 | | 210 | | 210 | | 187 | | 828 | | 117 | | 112 | | 112 | | 99 | | 440 | |
| Total
Bell Canada Consolidated | | 11,717 | | 1,839 | | 1,815 | | 1,679 | | 1,856 | | 7,189 | | 1,735 | | 1,717 | | 1,581 | | 1,768 | | 6,801 | |
| Other BCE | | | | | | | | | | | | | | | | | | | | | | | |
| Bell
Globemedia | 68.5% | 350 | | 114 | | 83 | | 124 | | 43 | | 364 | | 68 | | 49 | | 73 | | 22 | | 212 | |
| Telesat | 100% | 245 | | 71 | | 63 | | 60 | | 60 | | 254 | | 71 | | 63 | | 60 | | 60 | | 254 | |
| CGI | 29.5% | 29 | B | 37 | | 37 | | 40 | | 38 | | 152 | | 37 | | 37 | | 40 | | 38 | | 152 | |
| Corporate
and other | 100% | 3,619 | | (39 | ) | (37 | ) | (47 | ) | (35 | ) | (158 | ) | (39 | ) | (37 | ) | (47 | ) | (35 | ) | (158 | ) |
| Total
Other BCE | | 4,243 | | 183 | | 146 | | 177 | | 106 | | 612 | | 137 | | 112 | | 126 | | 85 | | 460 | |
| Inter-segment
eliminations | | | | (21 | ) | (23 | ) | (25 | ) | (26 | ) | (95 | ) | (21 | ) | (23 | ) | (25 | ) | (26 | ) | (95 | ) |
| Total | | 15,960 | | 2,001 | | 1,938 | | 1,831 | | 1,936 | | 7,706 | | 1,851 | | 1,806 | | 1,682 | | 1,827 | | 7,166 | |

A Bell Canada (excl. Aliant) net debt and preferred of $11,227 million less $94 million of inter-company eliminations plus $107 million upon consolidation (PPA fair value increment). B CGI is proportionately consolidated

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 9

Bell Canada Consolidated (1) Operational Data

| ($
millions, except where otherwise indicated) | Q2 2005 | | Q2 2004 | | $
change | | %
change | YTD June 2005 | | YTD June 2004 | | | | %
change | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | | | | | | | | | | |
| Local
and access | 1,368 | | 1,401 | | (33 | ) | (2.4%) | 2,736 | | | 2,780 | | (44 | ) | (1.6%) |
| Long
distance | 518 | | 572 | | (54 | ) | (9.4%) | 1,056 | | | 1,178 | | (122 | ) | (10.4%) |
| Wireless | 771 | | 698 | | 73 | | 10.5% | 1,484 | | | 1,349 | | 135 | | 10.0% |
| Data | 966 | | 870 | | 96 | | 11.0% | 1,917 | | | 1,762 | | 155 | | 8.8% |
| Video | 236 | | 211 | | 25 | | 11.8% | 457 | | | 418 | | 39 | | 9.3% |
| Terminal
sales and other | 399 | | 420 | | (21 | ) | (5.0%) | 817 | | | 791 | | 26 | | 3.3% |
| Total
operating revenues | 4,258 | | 4,172 | | 86 | | 2.1% | 8,467 | | | 8,278 | | 189 | | 2.3% |
| Operating
expenses | (2,419 | ) | (2,351 | ) | (68 | ) | (2.9%) | (4,813 | ) | | (4,702 | ) | (111 | ) | (2.4%) |
| EBITDA | 1,839 | | 1,821 | | 18 | | 1.0% | 3,654 | | | 3,576 | | 78 | | 2.2% |
| EBITDA
margin (%) | 43.2% | | 43.6% | | | | ( 0 .4)
pts | 43.2% | | | 43.2% | | | | 0.0 pts |
| Amortization
expense | (746 | ) | (733 | ) | (13 | ) | (1.8%) | (1,478 | ) | | (1,465 | ) | (13 | ) | (0.9%) |
| Net benefit
plans cost | (107 | ) | (58 | ) | (49 | ) | (84.5%) | (213 | ) | | (118 | ) | (95 | ) | (80.5%) |
| Restructuring
and other items | (5 | ) | (13 | ) | 8 | | n.m. | - | | | (16 | ) | 16 | | n.m. |
| Operating
income | 981 | | 1,017 | | (36 | ) | (3.5%) | 1,963 | | | 1,977 | | (14 | ) | (0.7%) |
| Other
income | 13 | | 19 | | (6 | ) | (31.6%) | 24 | | | 49 | | (25 | ) | (51.0%) |
| Interest
expense | (206 | ) | (216 | ) | 10 | | 4.6% | (412 | ) | | (436 | ) | 24 | | 5.5% |
| Pre-tax
earnings | 788 | | 820 | | (32 | ) | (3.9%) | 1,575 | | | 1,590 | | (15 | ) | (0.9%) |
| Income
taxes | (178 | ) | (245 | ) | 67 | | 27.3% | (407 | ) | | (441 | ) | 34 | | 7.7% |
| Non-controlling
interest | (17 | ) | 9 | | (26 | ) | n.m. | (33 | ) | | (1 | ) | (32 | ) | n.m. |
| Net
Earnings | 593 | | 584 | | 9 | | 1.5% | 1,135 | | | 1,148 | | (13 | ) | (1.1%) |
| Dividends
on preferred shares | (13 | ) | (17 | ) | 4 | | 23.5% | (27 | ) | - | (33 | ) | 6 | | 18.2% |
| Net earnings
applicable to common shares | 580 | | 567 | | 13 | | 2.3% | 1,108 | | | 1,115 | | (7 | ) | (0.6%) |
| Other
information | | | | | | | | | | | | | | | |
| Cash
flow information | | | | | | | | | | | | | | | |
| Free
Cash Flow (FCF) | | | | | | | | | | | | | | | |
| Cash
from operating activities | 1,467 | | 1,089 | | 378 | | 34.7% | 2,327 | | | 2,284 | | 43 | | 1.9% |
| Capital
expenditures | (847 | ) | (715 | ) | (132 | ) | (18.5%) | (1,513 | ) | | (1,305 | ) | (208 | ) | (15.9%) |
| Dividends
and distributions | (453 | ) | (437 | ) | (16 | ) | (3.7%) | (875 | ) | | (940 | ) | 65 | | 6.9% |
| Other
investing items | 4 | | (1 | ) | 5 | | n.m. | - | | | (8 | ) | 8 | | n.m. |
| Total | 171 | | (64 | ) | 235 | | n.m. | (61 | ) | | 31 | | (92 | ) | n.m. |
| Capital
expenditures as a percentage of revenues (%) | 19.9 | % | 17.1 | % | | | (2.8)
pts | 17.9 | % | | 15.8 | % | | | (2.1)
pts |
| Balance
Sheet Information | June
30 | | Dec.
31 | | | | | | | | | | | | |
| | 2005 | | 2004 | | | | | | | | | | | | |
| Net
Debt | | | | | | | | | | | | | | | |
| Long-term
debt | 10,023 | | 9,166 | | | | | | | | | | | | |
| Debt
due within one year | 1,500 | | 1,352 | | | | | | | | | | | | |
| Less:
Cash and cash equivalents | (169 | ) | (32 | ) | | | | | | | | | | | |
| Total
Net Debt | 11,354 | | 10,486 | | | | | | | | | | | | |
| Non-controlling
interest | 1,162 | | 1,229 | | | | | | | | | | | | |
| Total
shareholders' equity | 9,957 | | 9,670 | | | | | | | | | | | | |
| Total
Capitalization | 22,473 | | 21,385 | | | | | | | | | | | | |
| Net Debt:
Total Capitalization | 50.5% | | 49.0% | | | | | | | | | | | | |
| Net Debt:
Trailing 12 month EBITDA | 1.58 | | 1.47 | | | | | | | | | | | | |
| EBITDA
: Interest (trailing 12 month) | 8.57 | | 8.24 | | | | | | | | | | | | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 10

Bell Canada Consolidated (1) Operational Data - Historical Trend

| ($ millions,
except where otherwise indicated) | YTD 2005 | | Q2
05 | | | | | | | Q3
04 | | Q2
04 | | Q1
04 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | | | | | | | | | | |
| Local
and access | 2,736 | | 1,368 | | 1,368 | | 5,572 | | 1,397 | | 1,395 | | 1,401 | | 1,379 |
| Long
distance | 1,056 | | 518 | | 538 | | 2,327 | | 560 | | 589 | | 572 | | 606 |
| Wireless | 1,484 | | 771 | | 713 | | 2,818 | | 742 | | 727 | | 698 | | 651 |
| Data | 1,917 | | 966 | | 951 | | 3,640 | | 963 | | 915 | | 870 | | 892 |
| Video | 457 | | 236 | | 221 | | 850 | | 219 | | 213 | | 211 | | 207 |
| Terminal
sales and other | 817 | | 399 | | 418 | | 1,580 | | 422 | | 367 | | 420 | | 371 |
| Total
operating revenues | 8,467 | | 4,258 | | 4,209 | | 16,787 | | 4,303 | | 4,206 | | 4,172 | | 4,106 |
| Operating
expenses | (4,813 | ) | (2,419 | ) | (2,394 | ) | (9,676 | ) | (2,624 | ) | (2,350 | ) | (2,351 | ) | (2,351) |
| EBITDA | 3,654 | | 1,839 | | 1,815 | | 7,111 | | 1,679 | | 1,856 | | 1,821 | | 1,755 |
| EBITDA
margin (%) | 43.2 | % | 43.2 | % | 43.1 | % | 42.4 | % | 39.0 | % | 44.1 | % | 43.6 | % | 42.7% |
| Amortization
expense | (1,478 | ) | (746 | ) | (732 | ) | (2,962 | ) | (763 | ) | (734 | ) | (733 | ) | (732) |
| Net benefit
plans cost | (213 | ) | (107 | ) | (106 | ) | (235 | ) | (62 | ) | (55 | ) | (58 | ) | (60) |
| Restructuring
and other items | - | | (5 | ) | 5 | | (1,219 | ) | (123 | ) | (1,080 | ) | (13 | ) | (3) |
| Operating
income (loss) | 1,963 | | 981 | | 982 | | 2,695 | | 731 | | (13 | ) | 1,017 | | 960 |
| Other
income | 24 | | 13 | | 11 | | 183 | | 20 | | 114 | | 19 | | 30 |
| Interest
expense | (412 | ) | (206 | ) | (206 | ) | (863 | ) | (212 | ) | (215 | ) | (216 | ) | (220) |
| Pre-tax
earnings (loss) | 1,575 | | 788 | | 787 | | 2,015 | | 539 | | (114 | ) | 820 | | 770 |
| Income
taxes | (407 | ) | (178 | ) | (229 | ) | (506 | ) | (140 | ) | 75 | | (245 | ) | (196) |
| Non-controlling
interest | (33 | ) | (17 | ) | (16 | ) | 9 | | 8 | | 2 | | 9 | | (10) |
| Net
earnings (loss) before extraordinary gain | 1,135 | | 593 | | 542 | | 1,518 | | 407 | | (37) | | 584 | | 564 |
| Extraordinary
gain | - | | - | | - | | 69 | | 69 | | - | | - | | - |
| Net
earnings | 1,135 | | 593 | | 542 | | 1,587 | | 476 | | (37 | ) | 584 | | 564 |
| Dividends
on preferred shares | (27 | ) | (13 | ) | (14 | ) | (60 | ) | (11 | ) | (16 | ) | (17 | ) | (16) |
| Net
earnings applicable to common shares | 1,108 | | 580 | | 528 | | 1,527 | | 465 | | (53 | ) | 567 | | 548 |
| Other
information | | | | | | | | | | | | | | | |
| Cash
flow information | | | | | | | | | | | | | | | |
| Free
Cash Flow (FCF) | | | | | | | | | | | | | | | |
| Cash
from operating activities | 2,327 | | 1,467 | | 860 | | 5,333 | | 1,293 | | 1,756 | | 1,089 | | 1,195 |
| Capital
expenditures | (1,513 | ) | (847 | ) | (666 | ) | (3,026 | ) | (985 | ) | (736 | ) | (715 | ) | (590) |
| Dividends
and distributions | (875 | ) | (453 | ) | (422 | ) | (1,736 | ) | (351 | ) | (445 | ) | (437 | ) | (503) |
| Other
investing items | - | | 4 | | (4 | ) | (15 | ) | (8 | ) | 1 | | (1 | ) | (7) |
| Total | (61 | ) | 171 | | (232 | ) | 556 | | (51 | ) | 576 | | (64 | ) | 95 |
| Capital
expenditures as a percentage of revenues (%) | 17.9 | % | 19.9 | % | 15.8 | % | 18.0 | % | 22.9 | % | 17.5 | % | 17.1 | % | 14.4% |
| Balance
Sheet Information | | | June
30 | March
31 | | Dec.
31 | | | | | | | | | |
| | | | 2005 | 2005 | | 2004 | | | | | | | | | |
| Net
Debt | | | | | | | | | | | | | | | |
| Long-term
debt | | | 10,023 | | 9,657 | | 9,166 | | | | | | | | |
| Debt
due within one year | | | 1,500 | | 1,634 | | 1,352 | | | | | | | | |
| Less:
Cash and cash equivalents | | | (169 | ) | (308 | ) | (32 | ) | | | | | | | |
| Total
Net Debt | | | 11,354 | | 10,983 | | 10,486 | | | | | | | | |
| Non-controlling
interest | | | 1,162 | | 1,202 | | 1,229 | | | | | | | | |
| Total
shareholders' equity | | | 9,957 | | 9,796 | | 9,670 | | | | | | | | |
| Total
Capitalization | | | 22,473 | | 21,981 | | 21,385 | | | | | | | | |
| Net Debt:
Total Capitalization | | | 50.5% | | 50.0% | | 49.0% | | | | | | | | |
| Net Debt
: Trailing 12 month EBITDA | | | 1.58 | | 1.53 | | 1.47 | | | | | | | | |
| EBITDA
: Interest (trailing 12 month) | | | 8.57 | | 8.45 | | 8.24 | | | | | | | | |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 11

Bell Canada Consolidated (1) Statistical Data

| | Q2 2005 | | | | | %
change |
| --- | --- | --- | --- | --- | --- | --- |
| Wireline | | | | | | |
| Local | | | | | | |
| Network
access services (k) | | | | | | |
| Residential | 8,189 | 8,390 | (2.4%) | 8,189 | 8,390 | (2.4%) |
| Business | 4,511 | 4,548 | (0.8%) | 4,511 | 4,548 | (0.8%) |
| Total | 12,700 | 12,938 | (1.8%) | 12,700 | 12,938 | (1.8%) |
| SmartTouch
feature revenues ($M) | 225 | 235 | (4.3%) | 452 | 472 | (4.2%) |
| Long
Distance (LD) | | | | | | |
| Conversation
minutes (M) | 4,667 | 4,498 | 3.8% | 9,255 | 9,076 | 2.0% |
| Average
revenue per minute ($) | 0.101 | 0.118 | (14.4%) | 0.104 | 0.119 | (12.6%) |
| Data | | | | | | |
| Equivalent
access lines (9) (k) - Ontario and Quebec | | | | | | |
| Digital
equivalent access lines (k) | 4,634 | 4,083 | 13.5% | 4,634 | 4,083 | 13.5% |
| Internet
subscribers (10) (k) | | | | | | |
| High Speed
Internet net activations (k) | 92 | 65 | 41.5% | 220 | 175 | 25.7% |
| High Speed
Internet subscribers (k) | 2,028 | 1,633 | 24.2% | 2,028 | 1,633 | 24.2% |
| Dial-up
Internet subscribers (k) | 666 | 807 | (17.5%) | 666 | 807 | (17.5%) |
| | 2,694 | 2,440 | 10.4% | 2,694 | 2,440 | 10.4% |
| Wireless | | | | | | |
| Cellular
& PCS net activations (k) | | | | | | |
| Pre-paid | 29 | 17 | 70.6% | 71 | 40 | 77.5% |
| Post-paid | 117 | 78 | 50.0% | 112 | 147 | (23.8%) |
| | 146 | 95 | 53.7 % | 183 | 187 | (2.1%) |
| Cellular
& PCS subscribers (k) | | | | | | |
| Pre-paid | 1,272 | 1,099 | 15.7 % | 1,272 | 1,099 | 15.7% |
| Post-paid | 3,836 | 3,500 | 9.6 % | 3,836 | 3,500 | 9.6% |
| | 5,108 | 4,599 | 11.1 % | 5,108 | 4,599 | 11.1% |
| Average
revenue per unit (ARPU) ($/month) | 50 | 50 | 0.0 % | 48 | 48 | 0.0% |
| Pre-paid | 16 | 11 | 45.5 % | 13 | 11 | 18.2% |
| Post-paid | 61 | 62 | (1.6 %) | 59 | 60 | (1.7%) |
| Churn (%)
(average per month) | 1.6 % | 1.3 % | (0.3 )
pts | 1.6 % | 1.3 % | (0.3)
pts |
| Pre-paid | 2.1 % | 1.9 % | (0.2 )
pts | 2.0 % | 1.8 % | (0.2)
pts |
| Post-paid | 1.4 % | 1.1 % | (0.3 )
pts | 1.5 % | 1.1 % | (0.4)
pts |
| Usage per
subscriber (min/month) | 262 | 257 | 1.9 % | 247 | 241 | 2.5% |
| Cost of
acquisition (COA) (11) ($/sub) | 401 | 413 | 2.9 % | 389 | 434 | 10.4% |
| Wireless
EBITDA ($ millions) | 333 | 317 | 5.0 % | 633 | 579 | 9.3% |
| Wireless
EBITDA margin (12) | 42.4 % | 44.9 % | (2.5 )
pts | 41.9 % | 42.3 % | (0.4)
pts |
| Wireless
capital expenditures ($ millions) | 118 | 77 | (53.2 %) | 182 | 142 | (28.2%) |
| Wireless
capital expenditures as a percentage of revenue | 15.3 % | 11.0 % | (4.3 )
pts | 12.2 % | 10.5 % | (1.7)
pts |
| Paging
subscribers (k) | 385 | 469 | (17.9 %) | 385 | 469 | (17.9%) |
| Paging
average revenue per unit ($/month) | 10 | 10 | 0.0 % | 12 | 10 | 20.0% |
| Video
(DTH and VDSL) | | | | | | |
| Total subscribers
(k) | 1,595 | 1,427 | 11.8% | 1,595 | 1,427 | 11.8% |
| Net subscriber
activations (k) | 63 | 24 | 162.5% | 92 | 40 | 130% |
| ARPU ($/month) | 50 | 49 | 2.0% | 49 | 49 | 0.0% |
| COA ($/sub) | 462 | 570 | 18.9% | 466 | 610 | 23.6% |
| Video EBITDA
($ millions) | 6 | - | n.m | 10 | 1 | n.m |
| Churn (%)
(average per month) | 0.9 % | 1.0 % | 0.1
pts | 0.8 % | 1.0 % | 0.2
pts |

BCE Inc Supplementary Financial Information - Second Quarter 2005 Page 12

Bell Canada Consolidated (1) Statistical Data Historical Trend

| | YTD 2005 | Q2
05 | Q1
05 | | Total
2004 | | Q4
04 | | Q3
04 | | Q2
04 | Q1
04 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Wireline | | | | | | | | | | | | |
| Local | | | | | | | | | | | | |
| Network
access services (k) | | | | | | | | | | | | |
| Residential | | 8,189 | 8,332 | | | | 8,392 | | 8,427 | | 8,390 | 8,476 |
| Business | | 4,511 | 4,513 | | | | 4,513 | | 4,535 | | 4,548 | 4,541 |
| Total | | 2,700 | 12,845 | | | | 12,905 | | 12,962 | | 12,938 | 13,017 |
| SmartTouch
feature revenues (SM) | 452 | 225 | 227 | | 939 | | 233 | | 234 | | 235 | 237 |
| Long
Distance (LD) | | | | | | | | | | | | |
| Conversation
minutes (M) | 9,255 | 4,667 | 4,588 | | 18,070 | | 4,559 | | 4,435 | | 4,498 | 4,578 |
| Average
revenue per minute ($) | 0.104 | 0.101 | 0.107 | | 0.117 | | 0.109 | | 0.120 | | 0.118 | 0.120 |
| Data | | | | | | | | | | | | |
| Equivalent
access lines (9) (k) - Ontario and Quebec | | | | | | | | | | | | |
| Digital
equivalent access lines (k) | | 4,634 | 4,469 | | | | 4,335 | | 4,197 | | 4,083 | 3,983 |
| Internet
subscribers (10) (k) | | | | | | | | | | | | |
| High Speed
Internet net activations (k) | 220 | 92 | 128 | | 350 | | 91 | | 84 | | 65 | 110 |
| High Speed
Internet subscribers (k) | | 2,028 | 1,936 | | | | 1,808 | | 1,717 | | 1,633 | 1,568 |
| Dial-up
Internet subscribers (k) | | 666 | 696 | | | | 743 | | 775 | | 807 | 836 |
| | | 2,694 | 2,632 | | | | 2,551 | | 2,492 | | 2,440 | 2,404 |
| Wireless | | | | | | | | | | | | |
| Cellular
& PCS net activations (k) | | | | | | | | | | | | |
| Pre-paid | 71 | 29 | 42 | | 142 | | 88 | | 14 | | 17 | 23 |
| Post-paid | 112 | 117 | (5 | ) | 371 | | 129 | | 95 | | 78 | 69 |
| | 183 | 146 | 37 | | 513 | | 217 | | 109 | | 95 | 92 |
| Cellular
& PCS subscribers (k) | | | | | | | | | | | | |
| Pre-paid | | 1,272 | 1,243 | | | | 1,201 | | 1,113 | | 1,099 | 1,082 |
| Post-paid | | 3,836 | 3,719 | | | | 3,724 | | 3,595 | | 3,500 | 3,422 |
| | | 5,108 | 4,962 | | | | 4,925 | | 4,708 | | 4,599 | 4,504 |
| Average
revenue per unit (ARPU) ($/month) | 48 | 50 | 46 | | 49 | | 50 | | 50 | | 50 | 47 |
| Pre-paid | 13 | 16 | 11 | | 12 | | 13 | | 12 | | 11 | 11 |
| Post-paid | 59 | 61 | 57 | | 61 | | 61 | | 63 | | 62 | 59 |
| Churn (%)
(average per month) | 1.6 % | 1.6 % | 1.6 | % | 1.3 | % | 1.4 | % | 1.2 | % | 1.3 % | 1.3 % |
| Pre-paid | 2.0 % | 2.1 % | 1.8 | % | 1.9 | % | 1.9 | % | 1.9 | % | 1.9 % | 1.7 % |
| Post-paid | 1.5 % | 1.4 % | 1.6 | % | 1.1 | % | 1.2 | % | 1.0 | % | 1.1 % | 1.1 % |
| Usage per
subscriber (min/month) | 247 | 262 | 232 | | 248 | | 252 | | 258 | | 257 | 224 |
| Cost of
acquisition (COA) (11) ($/sub) | 389 | 401 | 373 | | 411 | | 402 | | 381 | | 413 | 455 |
| Wireless
EBITDA ($ millions) | 633 | 333 | 300 | | 1,187 | | 274 | | 334 | | 317 | 262 |
| Wireless
EBITDA margin (12) | 41.9 % | 42.4 % | 41.4 | % | 41.5 | % | 36.2 | % | 45.4 | % | 44.9 % | 39.6 % |
| Wireless
capital expenditures ($ millions) | 182 | 118 | 64 | | 362 | | 125 | | 95 | | 77 | 65 |
| Wireless
capital expenditures as a percentage of revenue | 12.2 % | 15.3 % | 9.0 | % | 12.8 | % | 16.8 | % | 13.1 | % | 11.0 % | 10.0 % |
| Paging
subscribers (k) | | 385 | 404 | | | | 427 | | 449 | | 469 | 493 |
| Paging
average revenue per unit ($/month) | 12 | 10 | 15 | | 10 | | 9 | | 10 | | 10 | 10 |
| Video
(DTH and VDSL) | | | | | | | | | | | | |
| Total subscribers
(k) | | 1,595 | 1,532 | | | | 1,503 | | 1,460 | | 1,427 | 1,403 |
| Net subscriber
activations (k) | 92 | 63 | 29 | | 116 | | 43 | | 33 | | 24 | 16 |
| ARPU ($/month) | 49 | 50 | 48 | | 49 | | 49 | | 48 | | 49 | 48 |
| COA ($/sub) | 466 | 462 | 473 | | 571 | | 537 | | 548 | | 570 | 661 |
| Video EBITDA
($ millions) | 10 | 6 | 4 | | (19 | ) | (4 | ) | (16 | ) | - | 1 |
| Churn (%)
(average per month) | 0.8 % | 0.9 % | 0.8 | % | 1.0 | % | 0.8 | % | 1.1 | % | 1.0 % | 0.9 % |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 13

Accompanying Notes

| (1) | We have
reclassified some of the figures for the comparative period to make them
consistent with the current periods presentation. |
| --- | --- |
| (2) | Non-GAAP
Financial Measures |
| | EBITDA The term,
EBITDA (earnings before interest, taxes, depreciation and amortization),
does not have any standardized meaning prescribed by Canadian generally
accepted accounting principles (GAAP). It is therefore unlikely to be
comparable to similar measures presented by other companies. EBITDA is
presented on a consistent basis from period to period. |
| | We
define EBITDA as operating revenues less operating expenses, which means
it represents operating income before amortization expense, net benefit
plans cost, and restructuring and other items. |
| | We
use EBITDA, among other measures, to assess the operating performance
of our ongoing businesses without the effects of amortization expense,
net benefit plans cost, and restructuring and other items. We exclude
amortization expense and net benefit plans cost because they largely depend
on the accounting methods and assumptions a company uses, as well as non-operating
factors, such as the historical cost of capital assets and the fund performance
of a companys pension plans. We exclude restructuring and other
items because they are transitional in nature. |
| | EBITDA
allows us to compare our operating performance on a consistent basis.
We believe that certain investors and analysts use EBITDA to measure a
companys ability to service debt and to meet other payment obligations,
or as a common valuation measurement in the telecommunications industry. |
| | EBITDA
should not be confused with net cash flows from operating activities.
The most comparable Canadian GAAP financial measure is operating income. |
| | EPS
before net gains (losses) on investments and restructuring and other items The
term, EPS (earnings per share) before net gains (losses) on investments
and restructuring and other items, does not have any standardized meaning
prescribed by GAAP. It is therefore unlikely to be comparable to similar
measures presented by other companies. |
| | We
use EPS before net gains (losses) on investments and restructuring and
other items, among other measures, to assess the operating performance
of our ongoing businesses without the effects of after-tax restructuring
and other items and net gains on investments. We exclude these items because
they affect the comparability of our financial results and could potentially
distort the analysis of trends in business performance. The exclusion
of these items does not imply they are necessarily non-recurring. |
| | The most
comparable Canadian GAAP financial measure is EPS. |
| | FREE
CASH FLOW The term,
free cash flow, does not have any standardized meaning prescribed by Canadian
GAAP. It is therefore unlikely to be comparable to similar measures presented
by other companies. Free cash flow is presented on a consistent basis
from period to period. |
| | We
define free cash flow as cash from operating activities after capital
expenditures, total dividends and other investing activities. |
| | We
consider free cash flow to be an important indicator of the financial
strength and performance of our business because it shows how much cash
is available to repay debt and to reinvest in our company. We believe
that certain investors and analysts use free cash flow when valuing a
business and its underlying assets. |
| | The most comparable
Canadian GAAP financial measure is cash from operating activities. |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 14

Accompanying Notes (continued)

| (3) | EBITDA
margin is calculated as follows: |
| --- | --- |
| | EBITDA |
| | Operating
revenues |
| (4) | Effective
Q2 2005 the total Wireless capital expenditures are segregated between
the Consumer and Business segments. Prior quarters have been restated
accordingly. |
| (5) | Cash flow
per share is calculated as follows: |
| | Cash
flow from operations less capital expenditures |
| | Average
number of common shares outstanding during the period |
| (6) | Annualized
cash flow yield is calculated as follows: |
| | Free
cash flow from operations before common dividends |
| | Number
of common shares outstanding at end of period multiplied by share price
at end of period |
| | Note:
to annualize, multiply the most recent quarter's resultant by 4. |
| (7) | Reflects
an increase in the total Bell Canada debt as a result of the completion
of the purchase price allocation (PPA) relating to the repurchase of SBCs
20% interest in Bell Canada, which resulted in an increase in long-term
debt of $165 million. This increase in long-term debt will be applied
against interest expense ($3 million in Q2 2005) over the remaining terms
of the related long-term debt. |
| (8) | At
the BCE Consolidated level, Third Party Preferred Shares reflected in
the financial statements of subsidiaries are included in non-controlling
interest on the balance sheet. |
| (9) | Digital
equivalent access lines are derived by converting low capacity data lines
(DS-3 and lower) to the equivalent number of voice grade access lines.
Broadband equivalent access lines are derived by converting high capacity
data lines (higher than DS-3) to the equivalent number of voice grade
access lines. |

| Conversion
factors | |
| --- | --- |
| DS-0 | 1 |
| Basic
ISDN | 2 |
| Primary
ISDN | 23 |
| DS-1,
DEA | 24 |
| DS-3 | 672 |
| OC-3 | 2,016 |
| OC-12 | 8,064 |
| OC-48 | 32,256 |
| OC-192 | 129,024 |
| 10
Base T | 155 |
| 100
Base T | 1,554 |
| Gigabit
E | 15,554 |

(10) High Speed Internet subscribers include Consumer, Business and Wholesale. Dial-up Internet subscribers include Consumer and Business.

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 15

Accompanying Notes (continued)

| (11) | Includes
allocation of selling costs from Bell Canada and excludes costs of migrating
from analog to digital. Cost of Acquisition (COA) per subscriber is reflected
on a consolidated basis. |
| --- | --- |
| (12) | Wireless
EBITDA margins are calculated based on total Wireless operating revenues
(i.e. external revenues as shown on pages 10 and 11 plus inter-company
revenues). |

BCE Inc. Supplementary Financial Information - Second Quarter 2005 Page 16

| Appendix
A Reconciliation of Canadian Generally Accepted Accounting Principles |
| --- |
| (GAAP) to United
States GAAP |
| We
have prepared the interim consolidated financial statements according
to Canadian GAAP. The tables below 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. |

RECONCILATION OF NET EARNINGS


For
the period ended June 30
($
million, except share amounts) (unaudited)	2005		2004		2005		2004
Canadian
GAAP - Earnings from continuing operations	581		544		1,073		1,029
Adjustments
Deferred
costs (a)	1		2		3		6
Employee
future benefits (b)	(12	)	(21	)	(24	)	(41	)
United
States GAAP - Earnings from continuing operations	570		525		1,052		994
Discontinued
operations - United States GAAP (h)	-		84		(1	)	88
United
States GAAP - Net earnings	570		609		1,051		1,082
Dividends
on preferred shares (i)	(21	)	(22	)	(42	)	(46	)
United
States GAAP - Net earnings applicable to common shares	549		587		1,009		1,036
Other comprehensive
earnings items
Change
in currency translation adjustment	1		-		4		15
Change
in unrealized gain (loss) on investments (g)	89		195		81		213
Comprehensive
earnings	639		782		1,094		1,264
Net
earnings per common share - basic
Continuing
operations	0.59		0.54		1.09		1.02
Discontinued
operations	0.00		0.10		0.00		0.11
Net
earnings	0.59		0.64		1.09		1.13
Net
earnings per common share - diluted
Continuing
operations	0.59		0.54		1.09		1.02
Discontinued
operations	0.00		0.09		0.00		0.09
Net
earnings	0.59		0.63		1.09		1.11
Dividends
per common share	0.33		0.30		0.66		0.60
Average
number of common shares
outstanding
(millions)	926.6		924.3		926.4		924.2

| Appendix
A Reconciliation of Canadian Generally Accepted Accounting Principles |
| --- |
| (GAAP) to United
States GAAP |

STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

| ($
millions) (unaudited) | June
30 — 2005 | | December 31 — 2004 | |
| --- | --- | --- | --- | --- |
| Currency
translation adjustment | (52 | ) | (56 | ) |
| Unrealized
gain (loss) on investments (g) | 85 | | 4 | |
| Additional
minimum liability for pensions (b) | (193 | ) | (193 | ) |
| Accumulated
Other Comprehensive loss | (160 | ) | (245 | ) |

RECONCILIATION OF TOTAL SHAREHOLDERS EQUITY

| ($
millions) (unaudited) | June
30 — 2005 | | December
31 — 2004 | |
| --- | --- | --- | --- | --- |
| Canadian
GAAP | 14,478 | | 14,024 | |
| Adjustments | | | | |
| Deferred
costs (a) | (62 | ) | (67 | ) |
| Employee
future benefits (b) | (592 | ) | (543 | ) |
| Gain
on disposal of investments and on reduction | | | | |
| of
ownership in subsidiary companies (c) | 163 | | 163 | |
| Other | 103 | | 114 | |
| Tax
effect of the above adjustments (e) | 103 | | 81 | |
| Non-controlling
interest effect of the above adjustments (f) | 100 | | 95 | |
| Unrealized
gain (loss) on investments (g) | 85 | | 4 | |
| United
States GAAP | 14,378 | | 13,871 | |

DESCRIPTION OF UNITED STATES GAAP ADJUSTMENTS

(a) Deferred costs Under Canadian GAAP, certain expenses can be deferred and amortized if they meet certain criteria. Under United States GAAP, these costs are expensed as incurred.

(b) Employee future benefits The accounting for future benefits for employees under Canadian GAAP and United States GAAP is essentially the same, except for the recognition of certain unrealized gains and losses.

Canadian GAAP requires companies to recognize a pension valuation allowance for any excess of the accrued benefit asset over the expected future benefit. Changes in the pension valuation allowance are recognized in the consolidated statement of operations. United States GAAP does not specifically address pension valuation allowances. United States regulators have interpreted this to be a difference between Canadian and United States GAAP.

| Appendix
A Reconciliation of Canadian Generally Accepted Accounting Principles |
| --- |
| (GAAP) to United
States GAAP |

(c) Gains or losses on investments Under Canadian GAAP and United States GAAP, gains or losses on investments are calculated in a similar manner. Differences in Canadian GAAP and United States GAAP, however, may cause the underlying carrying value of the investment to be different. This will cause the resulting gain or loss to be different.

(d) Equity income Under Canadian GAAP, we account for our joint venture investments, which are mainly comprised of CGI Group Inc., using the proportionate consolidation method. Under United States GAAP, we account for our joint venture investments using the equity method. There is no impact on net earnings.

Our proportionate share of our joint ventures operating results was as follows:


For
the period ended June 30
($
millions) (unaudited)	2005		2004		2005		2004
Operating
revenues
External	233		209		472		388
Inter-segment	44		38		79		74
Total
revenues	277		247		551		462
Operating
expenses
External	(236	)	(202	)	(464	)	(380	)
Inter-segment	(11	)	(8	)	(24	)	(14	)
Total	(247	)	(210	)	(488	)	(394	)
Amortization
expense	(17	)	(12	)	(31	)	(22	)
Total
operating expenses	(264	)	(222	)	(519	)	(416	)
Operating
income	13		25		32		46
Other
income (expense)	5		1		5		2
Interest
expense	(2	)	(1	)	(4	)	(2	)
Earnings
from continuing operations before income taxes	16		25		33		46
Income
taxes	(5	)	(9	)	(13	)	(17	)
Earnings
from continuing operations	11		16		20		29
Discontinued
operations	-		3		(1	)	3
Net
earnings	11		19		19		32

(e) Income taxes The income tax adjustment represents the impact the United States GAAP adjustments that we describe above have on income taxes. The accounting for income taxes under Canadian GAAP and United States GAAP is essentially the same, except that:

| | income
tax rates of enacted or substantively enacted tax law are used to calculate
future income tax assets and
liabilities under Canadian GAAP |
| --- | --- |
| | only enacted
income tax rates are used under United States GAAP. |

(f) Non-controlling interest The non-controlling interest adjustment represents the impact the United States GAAP adjustments that we describe above have on non-controlling interest.

(g) Change in unrealized gain (loss) on investments Our portfolio investments are recorded at cost under Canadian GAAP. They would be classified as available-for-sale under United States GAAP and would be carried at fair value, with any unrealized gains or losses included in other comprehensive loss, net of tax.

(h) Discontinued operations Differences between Canadian GAAP and United States GAAP will cause the historical carrying values of the net assets of discontinued operations to be different.

| Appendix
A Reconciliation of Canadian Generally Accepted Accounting Principles |
| --- |
| (GAAP) to United
States GAAP |

(i) Accounting for stock-based compensation In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation Transition and Disclosure . It applies to fiscal years ending after December 15, 2002. It amends the transitional provisions of SFAS No. 123 for companies that choose to recognize stock-based compensation under the fair value-based method of SFAS No. 123, instead of choosing to continue following the intrinsic value method of Accounting Principles Board Opinion (APB) No. 25.

We adopted the fair value-based method of accounting on a prospective basis, effective January 1, 2002.

Under SFAS No. 123, however, we are required to make pro forma disclosures of net earnings, and basic and diluted earnings per share, assuming that the fair value-based method of accounting had been applied from the date that SFAS No. 123 was adopted.

The table below shows the stock-based compensation expense and pro forma net earnings using the Black-Scholes pricing model.

| For
the period ended June 30 (unaudited) | 2005 | | 2004 | | 2005 | | 2004 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Net earnings,
as reported | 570 | | 609 | | 1,051 | | 1,082 | |
| Compensation
cost included in net
earnings | 4 | | 14 | | 19 | | 24 | |
| Total compensation cost | (4 | ) | (17 | ) | (20 | ) | (29 | ) |
| Pro
forma net earnings | 570 | | 606 | | 1,050 | | 1,077 | |
| Pro
forma net earnings per common share - basic | 0.59 | | 0.63 | | 1.09 | | 1.11 | |
| Pro
forma net earnings per common share - diluted | 0.59 | | 0.63 | | 1.09 | | 1.11 | |

(j) Accounting for derivative instruments and hedging activities (SFAS No. 133) On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities , as amended by SFAS No. 138. Under this standard, all derivatives must be recorded on the balance sheet at fair value under United States GAAP. In addition, certain economic hedging strategies, such as using dividend rate swaps to hedge preferred share dividends and hedging SCPs, no longer qualify for hedge accounting under United States GAAP.

The change in the fair value of derivative contracts that no longer qualify for hedge accounting under United States GAAP is reported in net earnings.

We elected to settle the dividend rate swaps used to hedge $510 million of BCE Inc. Series AA preferred shares and $510 million of BCE Inc. Series AC preferred shares in the third quarter of 2003. These dividend rate swaps in effect 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 proceeds of $83 million in cash. After the settlement, all of our derivative contracts qualify for hedge accounting.

Under Canadian GAAP, the proceeds are being deferred and amortized against the dividends on these preferred shares over the remaining original terms of the swaps. Under United States GAAP, these dividend rate swaps did not qualify for hedge accounting and were recorded on the balance sheet at fair value. As a result, the amortization of the deferred gain under Canadian GAAP is reversed for purposes of United States GAAP.

Certification of Interim Filings during Transition Period

I, Michael J. Sabia, President and Chief Executive Officer of BCE Inc., certify that:

| 1. | I
have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim
Filings) of BCE Inc. (the issuer) for the interim period ending June 30,
2005; |
| --- | --- |
| 2. | Based
on my knowledge, the interim filings do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the
circumstances under which it was made, with respect to the period covered
by the interim filings; and |
| 3. | Based
on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in
all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented
in the interim filings. |

| Dated:
August 3, 2005 |
| --- |
| Michael J. Sabia President and Chief Executive Officer BCE Inc. |

Certification of Interim Filings during Transition Period

I, Siim A. Vanaselja, Chief Financial Officer of BCE Inc., certify that:

| 1. | I have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim
Filings) of BCE Inc. (the issuer) for the interim period ending June 30,
2005; |
| --- | --- |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the
circumstances under which it was made, with respect to the period covered
by the interim filings; and |
| 3. | Based on my knowledge, the interim financial statements together with
the other financial information included in the interim filings fairly
present in all material respects the financial condition, results of operations
and cash flows of the issuer, as of the date and for the periods presented
in the interim filings. |

| Dated:
August 3, 2005 |
| --- |
| Siim A. Vanaselja Chief Financial Officer BCE Inc. |

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BCE Inc.
(signed) Siim
A. Vanaselja
Siim A. Vanaselja
Chief Financial
Officer
Date: August
3, 2005

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BCE INC — Regulatory Filings 2005

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