Bell Canada International Inc.
NEX BOARD : BI.H

Bell Canada International Inc.

March 23, 2006 17:15 ET

BCI Announces 2005 Results

MONTREAL, QUEBEC--(CCNMatthews - March 23, 2006) - As a result of the adoption on July 17, 2002 of BCI's Plan of Arrangement, BCI's annual audited consolidated financial statements for 2005 reflect only the activities of BCI as a holding company. Such audited consolidated financial statements together with management's discussion and analysis (the "MD&A") thereon are attached hereto and readers are encouraged to refer to such documents for full details.

2005 Highlights

BCI's cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2005 were $231.4 million up by $7.4 million from December 31, 2004. This increase was due principally to the receipt of a $7.5 million shareholder distribution from Canbras in December 2005.

Estimated future net assets of BCI at June 30, 2007 are $279.3 million ($6.98 per share), unchanged from the estimate prepared on October 28, 2005 in connection with the Corporation's third quarter 2005 results.

2005 Operating Results

Net loss for 2005 was $65.5 million, or $1.64 per share reflecting primarily the recognition of net income tax expense of $62.0 million in connection with the Corporation's Loss Monetization Plan (as defined below). In addition, the Corporation recorded administrative expenses of $8.6 million, net interest income of $5.1 million, a gain on its Canbras investment of $1.2 million and foreign exchange losses and other expense of $1.2 million. Administrative expenses are comprised of employee and office costs of $5.8 million, legal, tax and auditor fees of $1.2 million and other administrative expenses of $1.5 million. Employee and office costs include the impact of an increase of $3.6 million in the accrual for pension and other post retirement benefits based in part on negotiations with BCE Inc. ("BCE") who is considering the assumption of these liabilities in light of the pending dissolution of BCI; such increased accrual was also based in part on a decrease in the discount rate used to measure the Corporation's pension and other post retirement benefit liabilities. Other administrative expenses include the net cost associated with lawsuits dismissed by the Court during the third quarter of $0.6 million partially offset by an insurance recovery of $0.3 million in connection with a lawsuit by certain former common shareholders that was dismissed by the Supreme Court of Canada in the first quarter of 2005. Foreign exchange losses and other expense include an increase in the Corporation's accrual for contingencies.

As at December 31, 2005, BCI's shareholders' equity was $212.3 million, down by $65.1 million from December 31, 2004. This decrease was the result of the net loss realized during the year.

Accounts payable and accrued liabilities were $19.9 million at the end of 2005, and comprised mainly of employee related costs, such as pension and other post retirement benefits, typical for a company in a wind-down process. Accounts payable and accrued liabilities are up $4.0 million from December 31, 2004, mainly as a result of an increase of $3.6 million in the accrual for pension and other post retirement benefits and an increase in the accrual for contingencies partially offset by a reduction in various other accrued liabilities during the year.

Litigation Update

On September 23, 2005, the Quebec Superior Court rendered its decision in a lawsuit filed by a former employee of the Corporation and awarded the employee an amount of approximately $44 thousand. An estimated amount of the Corporation's exposure to this claim had previously been expensed. On October 21, 2005, the plaintiff in this action filed an appeal with the Quebec Court of Appeal seeking to have the amount awarded to him increased by an amount that the Corporation estimates to be less than $500 thousand, calculated on a present value basis. In a cross appeal which the Corporation filed in November 2005, BCI is seeking to have the original damage assessment of approximately $44 thousand reversed and is also contesting the plaintiff's argument that the amount originally awarded should be further increased. A decision in this matter is expected no sooner than the second quarter of 2007.

Timing of Potential Shareholder Distribution

BCI expects to be in a position to make an initial distribution to shareholders during the second quarter of 2006, but is not currently in a position to estimate the amount of the initial distribution. The assumptions that have been made in connection with the estimated timing for such initial distribution to shareholders are that initial tax clearance certificates will be received from the appropriate authorities in the second quarter of 2006 and that Court approval for an initial distribution is also obtained in the second quarter of 2006. The earliest date for a final distribution to shareholders is estimated to be June 30, 2007. The assumptions that have been made in connection with the estimated timing for such final distribution to shareholders are described in the attached MD&A. In the event that, amongst other factors, the above mentioned assumptions do not occur on the assumed dates, the initial and/or final distributions may be delayed beyond the estimated dates.

Estimated Future Net Assets

Estimated future net assets of BCI at June 30, 2007 are $279.3 million ($6.98 per share). The differences between shareholders' equity on the consolidated balance sheet at December 31, 2005 and the estimated future net assets at June 30, 2007 are: (i) the inclusion in estimated future net assets of an amount of $63.1 million being the realized amount of the benefit expected to be received pursuant to an agreement with BCE to monetize a portion of the Corporation's non-capital tax losses (the "Loss Monetization Plan"); (ii) the inclusion of the expected gain on the Canbras investment of $3.8 million; and (iii) the inclusion of estimated future net income of $0.5 million from January 1, 2006 to June 30, 2007.

Future net income estimated at approximately $0.5 million is comprised of administrative expenses of approximately $10.1 million which is more than offset by interest income of approximately $10.6 million. The expected gain on the Canbras investment of approximately $3.8 million represents the excess over current carrying value that BCI expects to receive on its investment in Canbras.

While the Corporation intends to make a distribution to shareholders in the second quarter of 2006, the precise timing and amount for such distribution has not been determined nor is it factored into estimated future net assets at June 30, 2007 of $279.3 million. To the extent any distribution is made prior to June 30, 2007, it will reduce estimated future interest income and estimated future net assets at June 30, 2007.

Estimated future net income excludes any amounts that may be required to settle contingent liabilities such as lawsuits. To the extent BCI remains in operation beyond June 30, 2007, interest income thereafter may not be sufficient to cover operating expenses estimated at approximately $0.75 million per quarter. The extent of any shortfall would be dependent on a number of factors, including the level of interest rates and BCI's cash balances at the time.

The currently estimated future net assets of BCI at June 30, 2007 of $279.3 million have not changed from the estimate prepared on October 28, 2005 in connection with the Corporation's third quarter 2005 results.

BCI is operating under a court supervised Plan of Arrangement, pursuant to which BCI intends to monetize its assets in an orderly fashion and resolve outstanding claims against it in an expeditious manner with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the company. BCI is listed on the NEX Exchange under the symbol BI.H. Visit our Web site at www.bci.ca.

Certain statements made in this press release describing BCI's intentions, expectations or predictions are forward-looking and are subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. For additional information with respect to risk factors relevant to BCI, see the attached MD&A. BCI disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



Bell Canada International Inc.
Consolidated Balance Sheets

Years ended December 31,
(in thousands of Canadian dollars)

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Notes 2005 2004
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Current assets

Cash and cash equivalents $611 $1,047
Temporary investments 3 228,469 220,561
Interest receivable on cash equivalents
and temporary investments 2,295 2,380
Investment in Canbras 4 - 6,257
Prepaid expenses and other current assets 516 1,082
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231,891 231,327
Future income tax asset 7 - 62,000
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$231,891 $293,327
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Current liabilities
Accounts payable and accrued liabilities 5,11 $19,929 $15,895
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19,929 15,895
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Contingencies and commitments 10

Shareholders' equity
Stated capital 6 10,000 10,000
Contributed surplus 6 1,941,560 1,941,560
Deficit (1,739,598) (1,674,128)
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211,962 277,432
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$231,891 $293,327
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On behalf of the Board of Directors

H. Brian Thompson William D. Anderson



Bell Canada International Inc.
Consolidated Statements of Operations

Years ended December 31,
(in thousands of Canadian dollars, except per share amounts)

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Notes 2005 2004
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Interest on long-term debt $- $(13,780)
Employee and office costs (5,819) (3,204)
Legal, tax and auditor fees (1,247) (2,058)
Other administrative expenses (1,494) (1,274)
Interest income, net 5,101 7,601
Gain on investment 4 1,237 2,644
Foreign exchange losses and other expenses (1,248) (148)
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Net loss before income taxes (3,470) (10,219)
Income tax provision 7 (62,000) 62,000
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Net (loss) earnings $(65,470) $51,781
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Net (loss) earnings applicable to common
shares - basic and diluted $(65,470) $51,781
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Net (loss) earnings per common share
- basic and diluted 6 $(1.64) $1.29
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Consolidated Statements of Deficit

Years ended December 31,
(in thousands of Canadian dollars)

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2005 2004
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Deficit, beginning of year $(1,674,128) $(1,725,909)
Net (loss) earnings (65,470) 51,781
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Deficit, end of year $(1,739,598) $(1,674,128)
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Bell Canada International Inc.
Consolidated Statements of Operations

Years ended December 31,
(in thousands of Canadian dollars, except per share amounts)

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Notes 2005 2004
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Operations
Net (loss) earnings $(65,470) $51,781
Items not affecting cash
Income tax provision 7 62,000 (62,000)
Gain on investment 4 (1,237) (2,644)
Depreciation and amortization - 25
Foreign exchange losses 17 82
Amortization of deferred financing
costs - 665
Amortization of premium on temporary
investments - 35
Changes in non-cash working capital
items 8 4,640 (2,236)
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Cash used in operations (50) (14,292)
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Investing activities
(Increase) decrease in temporary
investments (7,908) 162,547
Proceeds from Axtel disposition - 2,644
Distribution from Canbras 4 7,494 8,743
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Cash provided by investing activities (414) 173,934
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Financing Activities
Repayment of long-term debt - (160,000)
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Cash used in financing activities - (160,000)
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Foreign exchange loss (gain) on cash
held in foreign currencies 28 (3)
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Net decrease in cash and cash equivalents (436) (361)
Cash and cash equivalents, beginning of
year 1,047 1,408
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Cash and cash equivalents, end of year $611 $1,047
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See Note 8 for supplementary cash flow information



Bell Canada International Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2005 and 2004
(all tabular amounts are in thousands of Canadian dollars, unless
otherwise noted and except per share amounts)


1. Description of business and basis of presentation

Bell Canada International Inc. ("BCI" or the "Corporation") is operating under a Plan of Arrangement (the "Plan of Arrangement") approved by the Ontario Superior Court of Justice (the "Court") pursuant to which, BCI intends to monetize its assets in an orderly fashion and resolve outstanding claims against it in an expeditious manner with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the Corporation. The consolidated balance sheet at December 31, 2005 reflects BCI's 75.6% interest in Canbras Communications Corp. ("Canbras") as an investment recorded at the lower of carrying value and net realizable value. BCI's 49.9% interest in Genesis Telecom S.A. ("Genesis"), which was previously written off, was disposed of on July 7, 2005 for a nominal amount. Since July 1, 2002, the consolidated statements of operations and cash flows have reflected only the activities of BCI as a holding company.

PLAN OF ARRANGEMENT

On July 12, 2002, the shareholders and noteholders of BCI approved a Plan of Arrangement under the Canada Business Corporations Act. Court approval for the Plan of Arrangement was received on July 17, 2002.

The principal elements of the Plan of Arrangement are as follows:

- Performance by BCI of all its obligations pursuant to the share purchase agreement to effect the disposition of its then held investment in Telecom Americas Ltd;

- A share consolidation that took place on July 12, 2002 pursuant to which the number of BCI common shares outstanding was reduced to 40 million;

- With the assistance of a court-appointed monitor, Ernst & Young Inc., (the "Monitor") and under the supervision of the Court, BCI's continued management of its remaining assets for purposes of disposing of such assets in an orderly manner;

- BCI's development, with the assistance of the Monitor, of recommendations to the Court with respect to the identification of claims against BCI and a process for adjudicating and determining such claims;

- Following the disposition of all the assets of BCI and the determination and adjudication of all claims against BCI, the liquidation of BCI and the final distribution to BCI's shareholders with the assistance of the Monitor and the approval of the Court; and

- Following the liquidation of BCI and the final distribution to BCI's shareholders, the dissolution of BCI.

BCI has discharged all of its obligations and monetized the entire consideration in connection with the Telecom Americas disposition as well completed the share consolidation.

INITIAL CLAIMS PROCESS

On December 2, 2002, the Court approved a claims identification process for BCI (the "Initial Claims Process"). The Initial Claims Process established a procedure by which all claims against BCI would be identified within a specified period. This period began on May 31, 2003 and concluded on August 31, 2003 (September 30, 2003 for taxation authorities) (the "Initial Claims Bar Date"). A creditor that did not submit a proof of claim by the Initial Claims Bar Date is not entitled to receive any payment in respect of that claim and is barred from making that claim in the future against BCI (see Note 10).

The following parties (the "Initial Exempt Creditors") were not required to submit proofs of claim, and their claims are not barred:

- Members of the class action lawsuit (the "6.75% Debenture Class Action") seeking damages of $250 million against BCI, BCI's directors and BCE Inc. ("BCE"), BCI's parent company, on behalf of all persons that owned 6.75% Debentures on December 3, 2001, which action was certified as a class proceeding under the Class Proceedings Act by order of the Court dated December 2, 2002;

- The holders of BCI's $160 million 11% senior unsecured notes due September 29, 2004;

- Parties with claims relating to the supply of goods or services to BCI in the ordinary course, whether before or after May 31, 2003;

- The holders of the Vesper Guarantees; and

- Current or former employees of BCI in respect of employment-related claims for services provided to BCI, whether before or after May 31, 2003, other than employment-related claims in respect of which the current or former employee has initiated litigation against BCI.
As a result of the Initial Claims Process, the claims shown in the following table were filed by non-exempt creditors:



Claims Filed Amounts Claimed
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Shareholder Class Action (Shaw) $1 Billion
Shareholder Class Action (Gillespie) $1 Billion
Caisse de depot et placement ("CDP") $110 Million
Other $19 Million


On September 2, 2005, the Court dismissed the 6.75% Debenture Class Action and the CDP Action and as all related appeal periods have expired these actions are effectively dismissed. The related cost of the dismissals to BCI of $3.2 million was charged to income in 2005, net of insurance proceeds of $2.6 million.

On September 29, 2004, BCI repaid its $160 million 11% senior unsecured notes.

On December 2, 2003, BCI paid US$12,000,000 as consideration for the absolute release of its obligation under the Vesper Guarantees. At the same time, BCI disposed of its remaining 1.5% equity interest in the Vespers for a nominal consideration, and BCI and Qualcomm (Vespers' then majority shareholder) provided each other with full releases with respect to all matters related to the Vespers.

On July 23, 2004, the Ontario Court of Appeal ("OCA") dismissed the two proposed class action lawsuits brought by Mr. Wilfred Shaw and Mr. Cameron Gillespie on behalf of BCI common shareholders and seeking $1 billion in damages against BCI and BCE (the "Shareholder Class Actions"). The OCA upheld the decision of the lower court dismissing the lawsuits as failing to disclose a reasonable cause of action. On September 29, 2004, the plaintiffs filed an application with the Supreme Court of Canada ("SCC") seeking leave to appeal the decision of the OCA and BCI filed materials with the SCC opposing the plaintiff's application. On March 3, 2005, the SCC refused leave to appeal the Shareholder Class Actions. No further appeal of these actions is available to the plaintiffs and the actions are effectively dismissed.

Of the $19 million in claims listed above under the heading "Other", approximately $4.5 million were filed by former holders of BCI's convertible debentures who either filed a claim but neglected to opt out of the 6.75% Debenture Class Action, in which case they still form part of the Class Action and cannot advance a separate claim, or who opted out but subsequently changed their mind. All of these claimants were bound by the dismissal of the 6.75% Debenture Class Action. In addition, approximately $9 million of the claims relate to litigation that has been dismissed or settled for the payment of a nominal amount. For the balance of the claims under the heading "Other", BCI believes that it has established adequate provisions.

SECOND CLAIMS PROCESS

In connection with preparations for an initial distribution to shareholders, on October 18, 2005 the Court approved a Second Claims Process for BCI. The Second Claims Process established a process by which all claims against BCI would be identified within a specified period. The Second Claims Process covers claims arising between June 1, 2003 and October 18, 2005 as well as contingent or unliquidated claims of any nature outstanding on October 18, 2005. The Second Claims Process had a claims identification period which ended on November 30, 2005, prior to which time any person believing they had a claim against BCI that arose between June 1, 2003 and October 18, 2005 needed to submit the appropriate forms or be forever barred from making such claims in the future against BCI. Following the period for the identification of claims, the Second Claims Process specifies a process for the determination and resolution of identified claims. This process is being administered by the Monitor under BCI's Plan of Arrangement, and, in the event of a disputed claim, may also require the intervention of the Court. In the event the intervention of the Court is required, delays for completion of the Second Claims Process could be longer than currently expected. Complete information relating to the Second Claims Process is provided in the October 18, 2005 Court order, which is available on our website at www.bci.ca.

The following parties were not required to submit proofs of claim, and their claims will not be barred:

(a) Parties with claims relating solely to the supply of goods or services to BCI in the ordinary course of BCI's business within three (3) months before October 18, 2005, including for greater certainty personal services consultants to BCI.

(b) Canadian taxation authorities with respect to claims for income, withholding, capital, goods and services, sales and other taxes; and

(C) Parties who were employees of BCI on October 18, 2005 in respect of claims for unpaid wages, salaries, bonuses, pensions, benefits, vacation pay, severance pay or other contractual or statutory compensation related to serves rendered to BCI during the three months prior to the October 18, 2005.

Pursuant to the Second Claims Process, a total of five claims were submitted for approximately $5.9 million. Three of the claims related to employment matters, one of which, in the amount of $5.5 million is described in Note 10. The other two employment related claims represent non-material amounts. The other two claims, totalling approximately $185,000, were submitted by former holders of convertible debentures and the Monitor has disallowed these two claims. BCI believes that the employment related claims are either ineligible or significantly overstated and will not be realized at their submitted amounts. BCI also believes that its financial statements at December 31, 2005 contained adequate provisions to cover the estimated exposures to the five claims submitted in this Second Claims Identification Process.

2. Summary of significant accounting policies

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates made are for the net realizable value of the Corporation's investment in Canbras, the future income tax asset and provisions for claims.

a) Investments

As a result of the adoption of the Plan of Arrangement, the operations of the Corporation are limited to the execution of the Plan of Arrangement. As of December 31, 2002, BCI's 75.6% interest in Canbras and its 27.7% interest in Axtel, its remaining investments as of that date, were recorded at the lower of carrying value and net realizable value. The Corporation's investments in the Vespers were previously written off. During 2003, BCI's then remaining 1.5% interest in Axtel was written down to a net realizable value of zero and in 2004, BCI sold its investment in Axtel (see Note 4b)).

b) Translation of Foreign Currencies

Unrealized translation gains and losses on assets and liabilities denominated in foreign currencies are included in earnings for the year.

Assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates prevailing during the period.

c) Cash and Cash Equivalents

Cash and cash equivalents represent cash and highly-liquid short-term debt investments with an initial maturity of three months or less at the date of acquisition.

d) Temporary Investments

Temporary investments consist of debt instruments with an initial maturity date greater than three months but less than twelve months at the date of acquisition which the Corporation intends to hold to maturity. Temporary investments are carried at cost with discounts or premiums arising on purchase amortized to maturity.

e) Stock-Based Compensation Plans

Effective January 1, 2004, the Corporation adopted the amended Handbook Section 3870, Stock-Based Compensation and other Stock-Based Payments of the Canadian Institute of Chartered Accountants ("CICA"). The amended standards require the Corporation to use the fair value-based method for all stock-based awards and the recognition of an expense in the financial statements.

The adoption of this amended Section, applied retroactively as required, did not have an impact on these financial statements since no stock-based awards have been made since January 1, 2002.

f) Income Taxes

Future income taxes relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future tax assets are recognized only to the extent that it is more likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment.

g) Postretirement Benefits

BCI maintains non-contributory defined benefit plans that provide for pensions for substantially all its employees based on length of service and rate of pay, as well as other retirement benefits such as certain health care and life insurance benefits on retirement and various disability plans, workers' compensation and medical benefits to former or inactive employees, their beneficiaries and covered dependants after employment but before retirement, under specified circumstances.

BCI is responsible for adequately funding the postretirement benefits plans. BCI accrues its obligations under employee benefit plans and the related costs, net of plan assets. Pension costs and other retirement benefits earned by employees are actuarially determined using the projected benefit method pro rated on service and based on management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. Pension plan assets are valued at fair value, which is determined using current market values. For the purpose of calculating the expected return on plan assets and the amortization of actuarial gains and losses, a market-related value of assets recognizing fluctuations over a four-year period is used. Past service costs arising from plan amendments are amortized on a straight-line basis over the estimated average remaining service period of the employees active at the date of amendment. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the estimated average remaining service period of active employees.

h) Financial Instruments

On January 1, 2005, revisions came into effect with respect to CICA Handbook Section 3860 "Financial Instruments - Disclosure and Presentation". The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equity. Because BCI does not have any instruments with these characteristics, adopting this section on January 1, 2005 did not affect the consolidated financial statements of the Corporation.

3. Temporary investments

As at December 31, 2005, the Corporation held investment grade commercial paper in the amount of $228,469,000. The commercial paper matures at varying dates to May 4, 2006. The effective yields on the commercial paper range from 2.41% to 3.3%. At December 31, 2005 the estimated fair value of the commercial paper amounted to $230,764,000.

4. Investment

The Corporation's 75.6% economic interest in Canbras is recorded at the lower of carrying value and estimated net realizable value of $3.8 million.

a) On October 8, 2003, Canbras announced that it had entered into agreements to sell all its operations which sale was completed on December 24, 2003, (the "Canbras Sale"). Canbras received gross proceeds of $32,600,000, comprised of $22,168,000 in cash and a one-year promissory note (the "Note") bearing interest at 10% in the original principal amount of $10,432,000 (subject to reduction in the event indemnification obligations of Canbras arise under the terms of the sale transaction). On December 21, 2004, Canbras provided details of claims made against it under the Canbras Sale amounting to R$58 million (C$30 million). Canbras' potential exposure to such claims was limited to the amount of the Note together with accrued interest thereon. Canbras believed that less than R$2 million (C$1 million) of the total amount claimed of R$58 million was potentially subject to indemnification under the Canbras Sale. On July 21, 2005, Canbras announced that it had accepted a payment of $9,500,000 in full settlement of the Note and received a release from all present and future indemnification claims in connection with the Canbras Sale.

In connection with Canbras' winding up process which began as a result of the Canbras Sale, the Corporation received a preliminary distribution from Canbras of $8,743,000 in August 2004. As a result, as of that date, BCI reduced its carrying value for its investment in Canbras from $15,000,000 to $6,257,000.

On October 26, 2005, Canbras released its third quarter 2005 financial results and disclosed that it expects to distribute an aggregate amount of $15,400,000 to its shareholders in one or more instalments and to be in a position to make a final distribution no earlier than June 30, 2007. On December 22, 2005, BCI received a second distribution from Canbras in the amount of $7,494,000 and recorded a gain of $1,237,000. While BCI's carrying value for its investment is now nil, BCI expects to receive a further distribution from Canbras of $3,763,000.

b) Investment in Axtel

On March 27, 2003, BCI announced that Axtel was proceeding with a series of transactions pursuant to which Axtel's debt was reduced by US$400 million. These restructuring transactions, which were concluded in the second quarter of 2003, included a capital call on shareholders, in which BCI did not participate, which resulted in a reduction of BCI's equity interest in Axtel to 1.5%.

On July 14, 2004, BCI sold its remaining investment in Axtel for US $2,000,000 (C $2,644,200). This investment had previously been written off.

5. Accounts payable and accrued liabilities



2005 2004
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Third parties (1) $19,768 $15,871

Affiliated companies 161 24
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$19,929 $15,895
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(1) Includes $8,678,000 ($5,956,000 in 2004) relating to post
retirement benefits described in Note 9.

6. Stated capital

AUTHORIZED

An unlimited number of First Preferred Shares, issuable in series; an
unlimited number of Second Preferred Shares issuable in series; and
an unlimited number of Common Shares are authorized for issuance.
All authorized classes of shares are without nominal or par value.

ISSUED AND OUTSTANDING

There has been no issuance of First and Second Preferred Shares.
Common shares for 2005 and 2004 are as follows:

Number of Stated
Shares Capital
--------------------------------------------------------------
Balance, December 31, 2004 40,000,000 $10,000
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Balance, December 31, 2005 40,000,000 $10,000
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Contributed surplus for 2005 and 2004 is as follows:

Stated
Capital
--------------------------------------------------------------
Balance, December 31, 2004 $1,941,560
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Balance, December 31, 2005 $1,941,560
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STOCK-BASED COMPENSATION PLANS

a) Stock options (1997 Plan)

The Corporation implemented a stock option plan ("1997 Plan") in
order to assist in attracting and retaining executives and other key
employees. Options were granted based on the position of the
incumbent and at a price equal to the market value of the
Corporation's shares on the last trading day prior to the effective
date of the grant. The right to exercise an award of options in its
entirety, accrues over a period of four years unless otherwise
determined by the Corporate Governance Committee at the time of
grant, and options must be exercised during a period established by
the Corporation but, in any event, within ten years of the grant
date. 14,813 common shares were reserved for issuance under the stock
option plan.

As at December 31, 2005, 5,003 options are outstanding to acquire
common shares at prices ranging from $2,213 to $5,037 per share,
representing the market value of such shares at the date of grant,
expiring at various dates to July 24, 2010.

The following table summarizes information concerning stock options
granted under the 1997 Plan:

2005 2004
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Weighted- Weighted-
average average
Number exercise Number exercise
of price of price
options per share $ options per share $
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Outstanding
beginning of year 5,904 2,857 6,789 2,743
Forfeited during the
year (901) 2,698 (885) 1,983
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Outstanding end of year 5,003 2,886 5,904 2,857
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Exercisable end of year 5,003 2,886 5,904 2,857
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The following table presents additional information concerning stock
options granted under the 1997 Plan which were outstanding at
December 31, 2005:

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Options outstanding
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Range of Weighted-
exercise Weighted- average
prices per average exercise
share Number remaining price per
$ Outstanding life (years) share $
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2,213 to 2,396 275 2 2,368
2,686 to 2,710 4,292 1 2,700
5,037 436 4 5,037
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5,003 1 2,886
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Options exercisable
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Weighted-
average
exercise
Number price per
exercisable share $
275 2,368
4,292 2,700
436 5,037
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5,003 2,886
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b) BCI - Stock options (2000 Plan)

On January 25, 2000, the Board of Directors of BCI approved an
additional stock option plan ("2000 Plan") for employees of BCI.
Under the 2000 Plan, 25,014 common shares were reserved for issuance.
Options were granted based on the position of the incumbent and at a
price equal to the market value of the Corporation's shares on the
last trading day prior to the effective date of the grant.

The right to exercise an award of options vests at a rate of 33 1/3%
per year, provided BCI's share price (measured as the average price
on the TSX over the last 60 days prior to each anniversary date)
increases by at least 25% per year on a compounded basis. The right
to exercise an award of options may also vest under certain
circumstances at the discretion of the Corporation's Board of
Directors.

As at December 31, 2005, there are no options outstanding.

The following table summarizes information concerning stock options
granted under the 2000 Plan:

2005 2004
-------------------------------------------------------------------
Weighted- Weighted-
average average
Number exercise Number exercise
of price of price
options per share $ options per share $
--------------------------------------------------------------------
Outstanding beginning
of year 167 3,904 167 3,904
Exercised during the year - - - -
Forfeited during the year 167 3,904 - -
--------------------------------------------------------------------
Outstanding end of year - - 167 3,904
--------------------------------------------------------------------
--------------------------------------------------------------------
Exercisable end of year - - 167 3,904
--------------------------------------------------------------------
--------------------------------------------------------------------

c) Performance Share Units ("PSUs")

In prior years, certain executives of the Corporation were granted
PSUs. PSUs are notional shares which fluctuate with the share price
of the underlying security and vest over a period of four years. As
at December 31, 2005, 179 PSUs were outstanding, and were vested.
The compensation expense related to PSUs amounted to NIL in 2005,
($150 in 2004).

d) BCE Employees' Savings Plan ("ESP")

The ESP enables employees of BCI to acquire BCE common shares through
regular payroll deductions plus employer contributions, if
applicable. Under the terms of the ESP, employees can choose each
year to have up to 10% of their annual salary and annual incentive
plan ("AIP") bonus withheld to purchase common shares. BCI matches
employees' contributions up to 2% of these earnings. Compensation
expense related to the ESP amounted to $25,000 in 2005 ($39,000 in
2004).

e) BCE - Stock options

Certain executives and key employees of the Corporation were granted
options by BCE in connection with their employment with BCI. Under
the terms of the plan, the subscription price for each share covered
by an option is established at 100% of the market value of a share on
the last trading day prior to the effective date of the grant. The
options are exercisable during a period not to exceed ten years. The
right to exercise the options generally accrues over a period of four
years of continuous employment. Options are not generally exercisable
during the first twelve months after the date of the grant. As a
result of the distribution of common shares of Nortel Networks Inc.,
("Nortel") to holders of BCE common shares by BCE in May 2000, each
of the then outstanding BCE stock options was replaced by a new stock
option which, in addition to the right to acquire one BCE common
share, gave the holder the right to acquire approximately 1.57 post-
split common shares of Nortel. Prior to 2000, simultaneously with the
grant of an option, certain employees of the Corporation may have
also been granted the right to a Special Compensation Payment
("SCP"). As a result of the distribution of Nortel common shares, the
related SCPs were appropriately adjusted. The amount of any SCP is
equal to the increase in market value of the number of the BCE and
Nortel shares covered by SCPs from the date of grant of SCPs to the
date of exercise of the option to which the SCP is related.
Compensation expense related to SCPs amounted to NIL in 2005 (NIL in
2004).

The following table summarizes information concerning BCE stock
options granted on a post-split basis:

2005 2004
-------------------------------------------------------------------
Weighted- Weighted-
average average
Number exercise Number exercise
of price of price
options per share $ options per share $
--------------------------------------------------------------------
Outstanding beginning
of year 47,444 7.90 120,618 13.27
Exercised during the
year (27,542) 7.82 (73,174) 16.76
--------------------------------------------------------------------
Outstanding end of
year 19,902 8.01 47,444 7.90
--------------------------------------------------------------------
--------------------------------------------------------------------
Exercisable end of
year 19,902 8.01 47,444 7.90
--------------------------------------------------------------------
--------------------------------------------------------------------

The following table presents additional information concerning BCE
stock options granted to certain executives and key employees of the
Corporation at December 31, 2005:

-----------------------------------------------------------------
Options outstanding
-----------------------------------------------------------------
Weighted-
average
remaining exercise
Range of Number contractual life price per
exercise prices outstanding (years) share $
-----------------------------------------------------------------
$6.11 to $8.24 19,902 1 8.01

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per share:

2005 2004
-------------------------------------------------------------------
Numerator:
Net earnings (loss) $(65,470) $51,781
-------------------------------------------------------------------
Net earnings (loss) applicable to common
shares - basic and diluted $(65,470) $51,781
-------------------------------------------------------------------
-------------------------------------------------------------------
Denominator (in thousands):
Weighted-average number of common shares
- basic and diluted 40,000 40,000
-------------------------------------------------------------------
-------------------------------------------------------------------
Basic and diluted earnings (loss) per share $(1.64) $1.29
-------------------------------------------------------------------
-------------------------------------------------------------------

For the years ended December 31, 2005 and 2004, the Corporation
excluded all potential common share equivalents from the earnings
(loss) per share calculation as they were anti-dilutive.

7. Income taxes

On August 4, 2004, the Corporation announced that it had entered into
an agreement to monetize a portion of its non-capital tax losses (the
"Loss Monetization Plan"). As further announced on March 21, 2005,
the Loss Monetization Plan is expected to result in a compensatory
cash payment to BCI of approximately $62,000,000, and this amount was
recorded as a future income tax asset in the Corporation's financial
statements for 2004. The Loss Monetization Plan, which is the
subject of an advance income tax ruling received from the Canada
Revenue Agency ("CRA") was approved by the Court pursuant to BCI's
Plan of Arrangement on September 8, 2004. BCI expects to receive the
proceeds of the Loss Monetization Plan in the first quarter of 2007,
although at BCI's request, and subject to the consent of BCE, the
proceeds may be received in 2006 at a reduced amount based on a
discount rate to be mutually agreed at that time. When the proceeds
of the Loss Monetization are received, they will be recorded as a
contributed surplus.

In connection with the Loss Monetization Plan, BCI had requested that
the CRA audit BCI's income tax returns for years up to December 31,
2004 for the purpose of making a final determination of BCI's losses.
While the Corporation's income tax returns were filed using tax
positions that were believed at the time to be appropriate, following
the completion of the CRA audit, the Loss Monetization Plan was
implemented on April 15, 2005 based on the monetization of
$297,500,000 of losses and a compensatory payment of $62,475,000.
Accordingly, in the second quarter of 2005, an additional amount of
income tax recovery of $475,000 was recorded. In the fourth quarter
of 2005, an additional amount of income tax recovery of $582,000 was
recorded to more precisely reflect the terms of the Loss Monetization
Plan.

To effect the implementation, the Corporation entered into agreements
with BCE and Bell Canada pursuant to which a wholly-owned subsidiary
of BCI ("BCI Subco") issued preferred shares (the "BCI Subco
Preferred Shares") to a wholly-owned subsidiary of Bell Canada ("Bell
Subco") in exchange for cash of $17 billion. BCI Subco then lent
$17 billion to BCI on the basis of an interest free subordinated
demand loan from BCI (the "BCI Note") and BCI lent $17 billion to
Bell Subco on the basis of an interest bearing demand loan to Bell
Subco (the "Bell Subco Note"). All of the foregoing transactions
occurred on April 15, 2005. The BCI Subco Preferred Shares were non-
participating, non-voting, cumulative, redeemable and retractable at
any time and paid dividends at a per annum rate of 5.12%. The Bell
Subco Note bore interest at a rate of 5.11% per annum, was unsecured
and was payable on demand and could be repaid at anytime.

The BCI Subco Preferred Shares could be repaid by delivering to Bell
Subco the BCI Note. Furthermore, the Bell Subco Note could be
redeemed by delivering to BCI the BCI Note. On August 17, 2005, the
parties availed themselves of these rights of set off such that the
BCI Subco Preferred Shares, the BCI Note and the Bell Subco Note were
retired on such date. The consolidated statements of operations
reflect preferred dividends on the BCI Subco Preferred Shares of
$298,082,000 and interest income on the Bell Subco Note of
$297,500,000, on a net basis (included in the interest income line).
The Corporation recorded income tax expense of $63,057,000 based on
the amount of interest income earned during the year.

As at December 31, future income taxes are as follows:

2005 2004
-------------------------------------------------------------------
-------------------------------------------------------------------
Future income tax asset $- $62,000
-------------------------------------------------------------------
-------------------------------------------------------------------

The reconciliation of income taxes at Canadian statutory rates to
income tax expense is as follows:

2005 2004
-------------------------------------------------------------------
Income tax provision (recovery) at Canadian
statutory rates $(1,331) $(3,921)
Reduction (increase) of tax recovery resulting
from:
Gain on sale of investments not tax effected (475) -
Non deductible expenses 505 -
Losses not tax effected 1,301 -
Monetization of prior years' losses (1,057) (59,079)
Expected compensatory payment 63,057 -
-------------------------------------------------------------------
Income tax provision (recovery) $62,000 $(62,000)
-------------------------------------------------------------------
-------------------------------------------------------------------

At December 31, 2005, the Corporation has non-capital tax losses
carried forward available amounting to approximately $1,563,000,
expiring in year 2014. In addition, the corporation had Canadian
capital losses amounting to $279,782,000 that can be carried forward
indefinitely. The benefit of these losses has not been recorded in
the financial statements.

8. Supplementary cash flow information

2005 2004
-------------------------------------------------------------------
a) Changes in working capital items $ $

Decrease (increase) in current assets
Accounts receivable including interest
receivable 85 3,429
Prepaid expenses and other current assets 566 942
Increase (decrease) in accounts payable
and accrued liabilities 3,989 (6,607)
--------------------------------------------------------------------
(Increase) in working capital items $4,640 $(2,236)
--------------------------------------------------------------------
--------------------------------------------------------------------

b) Other cash flow information

Interest paid $- $17,600
-------------------------------------------------------------------
-------------------------------------------------------------------


9. Postretirement benefits

BCI maintains non-contributory defined benefit plans that provide for pension, other retirement and post-employment benefits for all its current and most of its former employees based on length of service and rate of pay. Certain former employees participated in a defined contribution pension plan. BCI is responsible to adequately fund its registered pension fund as well as to meet commitments in excess of those provided for by such registered pension fund (the "Top-up Commitments"). BCI's funding policy is to make contributions to its registered pension fund based on actuarial cost methods as permitted by pension regulatory bodies. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Registered pension fund assets are represented primarily by Canadian and foreign equities, government and corporate bonds, debentures and secured mortgages. With respect to the funding of the Top-up Commitments, BCI has established an appropriate accrual on its financial statements which it can fund from its holdings of temporary investments.

The changes in the benefit obligations and in the fair value of assets and the funded status of the defined benefit plan as at December 31, were as follows:




Pension Other Pension Other
Benefits Benefits Benefits Benefits
2005 2005 2004(1) 2004
---------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation,
beginning of year $21,164 $822 $19,712 $1,135
Current service cost 118 - 148 -
Interest cost 1,188 48 1,250 58
Actuarial (gains) losses 5,295 733 1,312 (351)
Benefit payments (3,937) (32) (1,258) (20)
---------------------------------------------------------------------
Benefit obligation, end of
year $23,828 $1,571 $21,164 $822
---------------------------------------------------------------------

Change in fair value of plan
assets:
Fair value of plan assets,
beginning of year $16,545 $- $15,470 $-
Actual return on plan assets 2,039 - 1,979 -
Benefit payments (3,937) - (1,258) -
Employer contributions 394 - 354 -
---------------------------------------------------------------------
Fair value of plan assets,
end of year $15,041 $- $16,545 $-
---------------------------------------------------------------------

Plan surplus (deficit) (8,787) (1,571) (4,619) (822)
Unamortized net actuarial
losses 5,819 - 4,577 -
Unamortized transitional
asset (2,998) - (3,426) -
Valuation allowance (2,712) - (2,488) -
---------------------------------------------------------------------
Accrued (liability) included
in accounts payable and
accrued liabilities $(8,678) $(1,571) $(5,956) $(822)
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Certain comparative figures have been reclassified to conform
with the presentation adopted in 2005.


The significant assumptions adopted in measuring the Corporation's pension and other benefit obligations as at December 31, were as follows:



Pension Other Pension Other
Benefits Benefits Benefits Benefits
2005 2005 2004 2004
---------------------------------------------------------------------
Weighted-average discount rate 5.2%(1) 3.4% 6.0% 6.0%
Expected long-term rate of return
on plan assets 7.5% - 7.5% -
Rate of compensation increase 3.0% 3.0% 3.5% 3.5%
Inflation 2.5% 2.5% 2.5% 2.5%

(1) Top-up Commitments are discounted at 3.4%


For measurement purposes, a 10.5% (prescription medication) and 4.5% (other) annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend rate) was assumed for 2005. This prescription medication rate was assumed to gradually decline to 4.5% over six years and remain at that level thereafter.


The net benefit expenses for the years ended December 31, included the following components:



Pension Other Pension Other
Benefits Benefits Benefits Benefits
2005 2005 2004 2004
---------------------------------------------------------------------
Current service cost $118 $- $148 $-
Interest cost 1,188 48 1,250 58
Expected return on plan assets (1)(1,103) - (1,173) -
Amortization of net
actuarial loss (gain) (1)(2) 3,117 733 471 (351)
Amortization of transitional
(asset) obligation (428) - (428) -
Increase in valuation allowance 224 - 351 -
---------------------------------------------------------------------
Net benefit expense $3,116 $781 $619 $(293)
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) The market-related value of pension plan assets for purposes
of calculating expected returns on plan assets and the
amortization of net actuarial losses was $16,472,000 for 2005
and $16,089,000 for 2004.

(2) The amount of $3,117,000 includes an increase in the accrual
for pension benefits of $2,873,000, based on the estimated cost
to transfer the pension benefit liability to BCE. The amount of
$733,000 represents an increase in the accrual for other
benefit obligations based on the estimated cost to transfer
the other benefit liability to a related party.


10. Contingencies and Commitments

CONTINGENCIES

The Corporation has accrued amounts that are in management's best estimate sufficient to cover the Corporation's exposures with respect to the following contingencies:

A former employee of a BCI subsidiary has filed a claim against BCI and two of its affiliates totaling $5.5 million alleging failure to honour a promise of employment. BCI believes that this claim is without merit and is vigorously defending its position.

On September 23, 2005, the Quebec Superior Court rendered its decision in a lawsuit filed by a former employee of BCI and awarded the employee an amount of approximately $44,000. An estimated amount of BCI's exposure to this claim had previously been expensed. On October 21, 2005, the plaintiff in this action filed an appeal with the Quebec Court of Appeal seeking to have the amount awarded to him increased by an amount that the Corporation estimates to be less than $500,000, calculated on a present value basis. In a cross appeal which the Corporation filed in early November 2005, BCI is seeking to have the original damage assessment of approximately $44,000 reversed and is also contesting the plaintiff's argument that the amount originally awarded should be further increased. A decision in this matter is expected no sooner than the second quarter of 2007.

During the year, the CRA began an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit may result in all or some portion of the $1.9 million of input tax credits claimed during that period by the Corporation being disallowed and interest and penalties being assessed. It is expected that the GST audit will be completed during the first half of 2006.

COMMITMENTS

At December 31, 2005, the Corporation has no commitments under operating leases or other arrangements. However, the Corporation was in negotiations to extend its current lease for office premises.

Annual lease payments in 2005 amounted to $246,000 (2004 - $296,000).

11. Related party transactions (see also Note 7)

In the normal course of business, the Corporation had transactions which were measured at exchange amounts with BCE, its affiliated companies and associated companies, and not otherwise disclosed elsewhere herein, as follows:



2005 2004
---------------------------------------------------------------------
BCE and affiliated companies: (1)
Administrative expenses $352 $507

(1) Affiliated companies are companies under the control of the
Corporation's ultimate parent company.


12. Financial instruments

a) Currency Risk

The Corporation is exposed to market risks from changes in foreign currency rates. From time to time, the Corporation may enter into foreign currency contracts to mitigate this risk.

The Corporation does not trade derivative financial instruments.

b) Credit Risk

The Corporation's financial assets that are exposed to credit risk consist primarily of temporary investments. Credit risk is minimized substantially by ensuring that these financial assets are invested in treasury bills, bankers' acceptances, commercial paper and corporate bonds with investment grade credit ratings. In addition, dollar limits are established on a per investment basis.

c) Fair Value of Financial Instruments

As at December 31, 2005 the Corporation's financial instruments were comprised of cash and cash equivalents, temporary investments, interest receivable and accounts payable and accrued liabilities.

Fair values approximate amounts at which financial instruments could be exchanged for instruments of similar risk, principal and remaining features. Fair values are based on estimates using present value and other valuation techniques which are significantly affected by assumptions concerning future cash flows and discount rates and should not be interpreted as being realizable in an immediate settlement of the instruments.

Estimated fair value of the Corporation's financial instruments, where the fair value differs from the carrying amounts in the financial statements as at December 31, 2005 and 2004, are as follows:



2005 2004
---------------------------------------------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------------------------------------------------------------------
Temporary investments
(see Note 3) $228,469 $230,764 $220,561 $222,941
---------------------------------------------------------------------
---------------------------------------------------------------------


The carrying amounts of cash and cash equivalents, interest receivable, and accounts payable, in the consolidated balance sheets, approximate their estimated fair values.

13. Comparative figures

Certain comparative figures have been reclassified in order to conform with the presentation adopted in 2005.


M a n a g e m e n t ' s D i s c u s s i o n & A n a l y s i s

This management's discussion and analysis of financial condition and results of operations ("MD&A") for Bell Canada International Inc. ("BCI" or the "Corporation") for 2005 should be read in conjunction with BCI's audited consolidated financial statements for the year ended December 31, 2005 including related notes thereto. The consolidated financial statements, as well as information contained in this MD&A, are prepared in accordance with Canadian generally accepted accounting principles and reported in Canadian dollars. Information contained in this MD&A includes all material developments up to March 23, 2006, the date on which the consolidated financial statements were approved by the Board of Directors.

Certain sections of this MD&A contain forward-looking statements with respect to the Corporation. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors which could cause actual results to differ materially from current expectations are discussed under "Risk Factors".

Overview

BCI is operating under a plan of arrangement (the "Plan of Arrangement") approved by the Ontario Superior Court of Justice (the "Court") on July 17, 2002. Pursuant to the Plan of Arrangement, BCI has now monetized a significant portion of its assets and is in the process of resolving outstanding claims against it in an expeditious manner with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the Corporation, all with the assistance of the court-appointed monitor, Ernst & Young Inc., (the "Monitor"). Although BCI believes that a final distribution to shareholders could be made in the first half of 2007, such distribution may be delayed (see Risk Factors - "Timing of Distributions to Shareholders and Completion of the Plan of Arrangement" and "Future Costs").

In view of the purpose of the Plan of Arrangement, and in order to provide relevant information to shareholders, this MD&A does not provide a detailed analysis of the results of operations for the year ended December 31, 2005 compared to the previous year. Instead, this MD&A focuses on an analysis of BCI's balance sheet at December 31, 2005, and develops it into a statement of estimated future net assets at June 30, 2007, the earliest date that BCI believes it may be in a position to make its final distribution to shareholders. BCI expects to be in a position to make an initial distribution to shareholders during the second quarter of 2006, but is not currently in a position to estimate the amount of the initial distribution. The assumptions that have been made in connection with the estimated timing for such initial distribution to shareholders are as follows: (i) initial tax clearance certificates will be received from the appropriate authorities in the second quarter of 2006; and (ii) Court approval for an initial distribution will be obtained in the second quarter of 2006. The assumptions that have been made in connection with the estimated timing for the final distribution to shareholders are as follows: (i) the compensatory cash payment under the Loss Monetization Plan (see "Loss Monetization Plan") is received no later than the first quarter of 2007 (if such payment is received no later than the second quarter of 2006 (see "Loss Monetization Plan") then the amount thereof would be available to be part of an initial distribution to shareholders as described above); (ii) all remaining contingencies are resolved in the first half of 2007 as part of a final claims bar process, or otherwise; (iii) final tax clearance certificates are received in the second quarter of 2007; (iv) all of BCI's investee companies will be dissolved by June 30, 2007; and (v) court approval for a final distribution is received in the second quarter of 2007. In the event that, amongst other factors, the above mentioned assumptions do not occur on the assumed dates, the initial and/or final distributions may be delayed beyond the estimated dates (See Risk Factors - "Timing of Distributions and Completion of the Plan of Arrangement" and "Future Costs").

Highlights of 2005 Results

BCI's cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2005 were $231.4 million up by $7.4 million from December 31, 2004. This increase was due principally to the receipt of a $7.5 million shareholder distribution from Canbras in December 2005.

Estimated future net assets of BCI at June 30, 2007 are $279.3 million ($6.98 share), unchanged from the estimate provided in connection with the Corporation's 2004 results.

Loss Monetization Plan

As described in Note 7 to the consolidated financial statements, the Corporation has entered into an agreement to monetize a portion of its non-capital taxes losses (the "Loss Monetization Plan") which is expected to give rise to a compensatory cash payment to BCI of approximately $63.057 million in the first quarter of 2007, although at BCI's request, and subject to the consent of BCE Inc., ("BCE") the proceeds maybe received in 2006 at a reduced amount based on a discount rate to be mutually agreed upon at that time. In 2004, an income tax recovery of $62 million was recorded together with a corresponding future income tax asset in the consolidated financial statements. During 2005, the income tax recovery and future income tax asset were increased by $1,057 million. Also during 2005, the Corporation realized for accounting purposes the future income tax asset and accordingly recorded an income tax expense of $63.057 million. When the compensatory cash payment is received, it will be recorded as a contribution to capital. Although it is considered unlikely, the amount of the compensatory cash payment could be increased in certain circumstances. If favourable circumstances were to prevail in all instances, the maximum amount of the compensatory payment would increase to approximately $110 million. It is expected that during the first half of 2006, BCI will have determined if the maximum amount would be reduced to approximately $86 million or maintained at $110 million. Further clarity on the potential maximum amount may be available in 2006 or 2007 but if not, it is unlikely to be available until mid 2012 at the earliest. If prior to the time clarity is provided on such amount, BCI could otherwise be wound up and dissolved, and having received the minimum amount payable under the Loss Monetization Plan of $63.057 million in the first quarter of 2007 (or earlier), there exists a significant potential upside benefit, relating to the results of certain tax filings, to be realized from the Loss Monetization Plan, then a structure to substantially eliminate BCI's ongoing administrative expenses would need to be implemented pending resolution of such taxation matters. The ability to implement such a structure would depend upon a variety of external factors, including the receipt of favorable regulatory and court rulings. It is unlikely that the amount to be realized under the Loss Monetization Plan will exceed $63.057 million.

Statement of Estimated Future Net Assets at June 30, 2007

The following table summarizes the consolidated balance sheet of the Corporation as at December 31, 2005 in the form of a statement of estimated future net assets at June 30, 2007 (being the earliest date by which the Corporation believes it may be in a position to make a final distribution to shareholders). The differences between the consolidated balance sheet and the statement of estimated future net assets at June 30, 2007 are the inclusion in estimated future net assets of: (i) the realized amount for accounting purposes of the future income tax asset of $63.1 million relating to the Loss Monetization Plan; (ii) the expected gain on the Canbras Communications Corp. ("Canbras") investment of approximately $3.8 million (see Risk Factors - "Timing of Distributions to Shareholders and Completion of the Plan of Arrangement", and "Realization of BCI's expected gain on its investment in Canbras"); and (iii) estimated future net income of $0.5 million from January 1, 2006 to June 30, 2007.



STATEMENT OF ESTIMATED NET ASSETS AT JUNE 30, 2007
thousands of Canadian dollars)

Assets at December 31, 2005

Cash and cash equivalents $611
Temporary investments 228,469
Other current assets 2,811
-------------------------------------------------------------------
Total assets 231,891

Liabilities at December 31, 2005

Accounts payable and accrued liabilities 19,929
-------------------------------------------------------------------
Net assets as at December 31, 2005 211,962

Items Affecting the Future Net Assets to June 30, 2007

Amount of future income tax asset realized
for accounting purposes 63,057
Estimated future net income until June 30, 2007 520
Expected gain on Canbras investment 3,763
-------------------------------------------------------------------
Estimated future net assets as at June 30, 2007 1 $279,302
-------------------------------------------------------------------
-------------------------------------------------------------------


As at December 31, 2005, total assets were $231.9 million of which $229.1 million, or 98.8 %, were in the form of cash and temporary investments.

Other current assets of $2.8 million consist of $2.3 million of accrued interest on cash and cash equivalents as well as on temporary investments, prepaid expenses and other current assets.

The future income tax asset was first recorded in the fourth quarter of 2004 and increased in the second and fourth quarters of 2005 to the amount of the expected benefit to be received by BCI in the first quarter of 2007 under the Loss Monetization Plan. At BCI's request, and subject to the consent of BCE, the proceeds may be received in 2006 at a reduced amount based on a discount rate to be mutually agreed upon at that time.

Total liabilities include accounts payable and accrued liabilities of $19.9 million. This amount includes employee related accruals, mainly pension and other post retirement benefit obligation typical for a company in a wind-down process as well as other accounts payable and accruals.

The expected future net income from January 1, 2006 until June 30, 2007, of $0.5 million includes estimated administrative expenses of approximately $10.1 million which is more than offset by estimated interest income on cash and cash equivalents and temporary investments of approximately $10.6 million. In calculating estimated interest income, it has been assumed that short-term investments will provide a 3.25 % per annum return and that no distribution to shareholders will be made before June 30, 2007. While the Corporation intends to make a distribution to shareholders in the second quarter of 2006, the precise timing and amount for such a distribution has not been determined. To the extent any distribution is made prior to June 30, 2007, it will reduce future interest income and estimated future net assets at June 30, 2007.

As at December 31, 2004, the future net assets of BCI at June 30, 2007, were estimated to be approximately $279.3 million the same as the current estimate at June 30, 2007. As the table below shows, net assets at December 31, 2005 were $6.7 million lower than previously estimated. This is principally due to a deferral of a portion of the expected gain on BCI's investment in Canbras as well as higher than expected other costs, mainly pension expense. This shortfall at December 31, 2005 is expected to be recovered by June 30, 2007 based on the expectation of realizing an additional gain on the Corporation's investment in Canbras and on increased net income due to increased interest resulting from higher than expected interest rates.



Estimated Estimated
as at as at
(thousands of Canadian dollars) December 31 December 31
2005 2004 Difference
---------------------------------------------------------------------
Net assets as reported
at December 31, 2004 $277,432 $277,432 $-

Income tax recovery 1,057 - 1,057
Income tax provision (63,057) (62,000) (1,057)
Reported/expected gain
on investment in Canbras 1,237 5,000 (3,763)
All other costs (net) (4,707) (1,774) (2,933)
---------------------------------------------------------------------

Net assets reported/estimated
at December 31, 2005 211,962 218,658 (6,696)

Anticipated proceeds
of Loss Monetization 63,057 62,000 1,057

Expected gain on
investment in Canbras 3,763 - 3,763
Estimated future net income
(loss) until June 30, 2007 520 (1,356) 1,876
---------------------------------------------------------------------
Estimated future net
assets at June 30, 2007 $279,302 $279,302 $-
---------------------------------------------------------------------
---------------------------------------------------------------------


In accordance with Canadian GAAP, contingent liabilities are not included on a balance sheet unless the event giving rise to the liability is likely and the amount of the liability can be reasonably estimated. BCI has three contingent liabilities that are not included on the consolidated balance sheet which are described in Note 10 to the consolidated financial statements. Such contingent liabilities are not considered likely at the present time. However, if circumstances were to change such that these contingencies become likely and their amounts could be reasonably estimated, then they would need to be recorded in the financial statements, which could result in material changes to BCI's balance sheet and the statement of estimated future net assets at June 30, 2007 and consequently in the amounts which may be available for distribution to BCI's shareholders.

The following is a discussion of all contingencies of which the Corporation is currently aware. BCI has accrued amounts that are sufficient to cover the Corporation's estimated exposures with respect to these contingencies in the consolidated financial statements.

Employee Litigation

As described in Note 10 to the consolidated financial statements, a former employee of a subsidiary filed a claim against BCI and two of its affiliates totaling $5.5 million and alleging failure to honour a promise of employment. BCI believes that this claim is without merit and is vigorously defending its position.

On September 23, 2005, the Quebec Superior Court rendered its decision in a lawsuit filed by a former employee of the Corporation and awarded the employee an amount of approximately $44 thousand. An estimated amount of the Corporation's exposure to this claim had previously been expensed. On October 21, 2005, the plaintiff in this action filed an appeal with the Quebec Court of Appeal seeking to have the amount awarded to him increased by an amount that the Corporation estimates to be less than $500 thousand, calculated on a present value basis. In a cross appeal which the Corporation filed in early November 2005, BCI is seeking to have the original damage assessment of approximately $44 thousand reversed and has also contested the plaintiff's argument that the amount originally awarded should be further increased. A decision on this matter is expected no sooner than the second quarter of 2007.

During the year, the Canada Revenue Agency ("CRA") began an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit may result in all or some portion of the $1.9 million of input tax credits claimed during that period by the Corporation being disallowed and interest and penalties being assessed. The GST audit will be completed during the first half of 2006.

Results of Operations for 2005

Net loss for 2005 was $65.5 million, or $1.64 per share reflecting primarily the recognition of net income tax expense of $62.0 million in connection with the Corporation's Loss Monetization Plan (as defined below). In addition, the Corporation recorded administrative expenses of $8.6 million, net interest income of $5.1 million, a gain on its Canbras investment of $1.2 million and foreign exchange losses and other expense of $1.2 million. Administrative expenses are comprised of employee and office costs of $5.8 million, legal, tax and auditor fees of $1.2 million and other administrative expenses of $1.5 million. Employee and office costs include the impact of an increase of $3.6 million in the accrual for pension and other post retirement benefits based in part on negotiations with BCE who is considering the assumption of these liabilities in light of the pending dissolution of BCI; such increased accrual was also based in part on a decrease in the discount rate used to measure the Corporation's pension and other post retirement benefit liabilities. Other administrative expenses include the net cost associated with lawsuits dismissed by the Court during the third quarter of $0.6 million partially offset by an insurance recovery of $0.3 million in connection with a lawsuit by certain former common shareholders that was dismissed by the Supreme Court of Canada in the first quarter of 2005. Foreign exchange losses and other expense includes an increase in the Corporation's accrual for contingencies.

As at December 31, 2005, BCI's shareholders' equity was $212.0 million, down by $65.5 million from December 31, 2004. This decrease was the result of the net loss realized during the year.

BCI's cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2005 were $231.4 million up by $7.4 million from December 31, 2004. This increase was due principally to the receipt of a $7.5 million shareholder distribution from Canbras in December 2005.

Accounts payable and accrued liabilities were $19.9 million at the end of 2005, and comprised mainly of employee related costs, such as pension and other post retirement benefits, typical for a company in a wind-down process. Accounts payable and accrued liabilities are up $4.0 million from December 31, 2004, mainly as a result of an increase of $3.6 million in the accrual for pension and other post retirement benefits, as well as an increase in the accrual for contingencies partially offset by a reduction in other various accrued liabilities during the year.

Results of Operations for the Fourth Quarter of 2005

Net loss for the fourth quarter was $3.4 million, or $0.08 per share. During the quarter, BCI recorded administrative expenses of $4.7 million, interest income of $1.5 million and a gain on Canbras investment of $1.2 million. Administrative expenses reflect the impact of an increase of $3.6 million in the accrual for pension and other post retirement benefits based on negotiations with a related party who is considering the assumption of these liabilities in light of the pending dissolution of BCI. Also recorded during the quarter was an increase in the Corporation's accrual for contingencies.

Financial Instruments

The Corporation does not trade derivative financial instruments.

The Corporation's financial assets that are exposed to credit risk consist primarily of temporary investments. Credit risk is minimized substantially by ensuring that these financial assets are invested in treasury bills, bankers' acceptances, commercial paper and corporate bonds and debentures with investment grade credit ratings. In addition, dollar limits are established on a per entity basis. Interest rate risk is minimized by the Corporation purchasing financial assets with the intention of holding them until maturity.

Temporary Investments

As at December 31, 2005, the Corporation held investment grade commercial paper in the amount of $228.5 million. The commercial paper matures at varying dates from January 4, 2006 to May 4, 2006. The effective yields on the commercial paper range from 2.41% to 3.30%. At December 31, 2005 the estimated fair value (based on market values) of the commercial paper amounted to $230.8 million. During the year ended December 31, 2005, the Corporation recorded interest income of $5.7 million related to temporary investments.

Stated Capital

An unlimited number of First Preferred Shares, issuable in series; an unlimited number of Second Preferred Shares issuable in series; and an unlimited number of Common Shares are authorized. All authorized classes of shares are without nominal or par value.



Number of
Common Shares Stated
Outstanding capital
------------------------------------------------------------
Balance, December 31, 2004 40,000,000 $10,000
------------------------------------------------------------
Balance, December 31, 2005 40,000,000 $10,000
------------------------------------------------------------
------------------------------------------------------------

At December 31, 2005, 5,003 stock options were outstanding and
exercisable. The stock options are exercisable on a one-for-one basis
for common shares of the Corporation. The total stock options
outstanding have exercise prices ranging from $2,213 to $5,037 per
share over the remaining term of the options of between 1 to 4 years.

Transactions with Related Parties

In the normal course of business, the Corporation had transactions
which were measured at exchange amounts with BCE, its affiliated
companies and associated companies as follows:

BCE and affiliated companies(1) 2005 2004
----------------------------------------------------------------
Administrative expenses(2) $352,000 $507,000

(1) Affiliated companies are companies under the control of BCE
(2) Principally information technology services and various corporate
services


As the Loss Monetization Plan is between BCI and related parties, an Independent Committee of the Board of Directors of BCI was appointed to consider the transaction. The Independent Committee recommended that the Board of Directors approve the Loss Monetization Plan based in part on an opinion received from its financial advisors that the transaction is fair, from a financial point of view, to BCI and BCI's shareholders other than BCE. After receiving the recommendation of the Independent Committee, the BCI Board approved the Loss Monetization Plan. In addition, because the Loss Monetization Plan was to be entered into with BCI's majority shareholder, BCE, and Bell Canada (or their affiliates), the transaction would be subject to the approval of a majority of BCI's shareholders other than BCE; however, an exemption from such requirement was granted to BCI by securities regulators on September 7, 2004.

Risk Factors

The following are major risk factors facing the Corporation. Certain of these risk factors are also discussed in this MD&A under "Statement of Estimated Future Net Assets at June 30, 2007".

Timing of Distributions to Shareholders and Completion of the Plan of Arrangement

While BCI believes that an initial distribution to shareholders may be possible in the second quarter of 2006 and that a final distribution to shareholders may be possible in the first half of 2007, this timing is dependent on the list of assumptions, discussed in this MD&A under "Overview", being realized.

Delays are possible in resolving the Corporation's existing contingencies; unforeseen claims may be asserted against the Corporation in future claims bar processes or otherwise that could be time consuming to resolve; delays are also possible in the receipt of tax clearance certificates, in winding up and dissolving all of BCI's investee companies, in obtaining court approval to make distributions as well as in receiving the proceeds under the Loss Monetization Plan. Delays at any stage in the process of winding up and dissolving BCI could be lengthy and create a material delay in the timing of distributions to shareholders.

Employee Litigation

As described in Note 10 to the consolidated financial statements, a former employee of a subsidiary of BCI filed a claim against BCI and two of its affiliates totaling $5.5 million. Also as described in Note 10, another employee is appealing a September 23, 2005 decision from the Quebec Superior Court and seeking an increase in the damage award from $44 thousand to approximately $500 thousand. While BCI believes that both of these claims are without merit, there can be no assurances BCI's ultimate liability to such claims will not have an adverse impact on BCI's financial position.

Realization of BCI's Expected Gain on its Investment in Canbras

BCI's estimated gain on its Canbras investment of $3.8 milllion is shown in the Statement of Net Assets at June 30, 2007. BCI's estimates are based on disclosures made by Canbras in connection with the release of Canbras' third quarter 2005 unaudited interim financial results. However, if significant additional claims are successfully asserted against Canbras, or its estimated future costs have been significantly underestimated, then, the Corporation might not receive any future distributions from Canbras and not record a gain on this investment.

Cash and Cash Equivalents and Temporary Investments

As at December 31, 2005, BCI had approximately $231.4 million of cash and cash equivalents together with temporary investments and interest thereon. BCI has invested such funds in investment grade debt instruments with various maturities, not extending beyond May 4, 2006, in such a manner as to preserve the value of capital while also earning interest income. However, there can be no assurance that one or more issuers of such debt instruments might not default on such obligations.

Future Costs

BCI's actual future net costs after December 31, 2005, may be materially different than estimated in this MD&A. Moreover, there can be no assurance that BCI will be in a position to make a final distribution to its shareholders in the first half of 2007. To the extent that BCI has not completed its Plan of Arrangement by June 30, 2007, interest income from BCI's temporary investments may not be sufficient to cover operating costs estimated at approximately $0.75 million per quarter. This estimate of future operating costs is down substantially from the estimate made on October 28, 2005 in connection with the release of the Corporation's third quarter financial results. The reduction is attributable to much lower levels of expected overhead spending should the Corporation not be dissolved by June 30, 2007.

Stock Exchange Listing and US Deregistration

BCI's common shares currently trade on the NEX, a separate board of the TSX Venture Exchange which provides a trading forum for listed companies that have low levels of business activity. Effective December 21, 2004, the Corporation voluntarily de-listed its common shares from the TSX and effective December 31, 2003, the Corporation voluntarily de-listed its common shares from the NASDAQ National market. Subject to TSX approval, BCI would be permitted to remain listed and trade on NEX, an open auction market on which trading takes place on the same electronic system as the TSX Venture Exchange, indefinitely. However, there can be no assurance that NEX will provide BCI's common shares with the same level of liquidity or visibility as the TSX.

In conjunction with the de-listing of its common shares from NASDAQ, on January 8, 2004 BCI filed the appropriate form with the United States Securities and Exchange Commission ("SEC") for the termination of the registration of BCI's common shares with the SEC and the suspension of all reporting obligations in the United States. Although BCI will remain a Canadian reporting issuer and all relevant documents will continue to be available through the company's web site (www.bci.ca) and through SEDAR (System Electronic Document Analysis and Retrieval, www.sedar.com), BCI shareholders in the United States can no longer access documents filed by BCI by means of the SEC, NASDAQ, or the EDGAR electronic reporting system.

(1) Before unaccrued contingencies - See Note 10 to the consolidated financial statements and the discussion that follows. Also assumes no distribution to shareholders will be made before June 30, 2007. To the extent any distribution is made prior to June 30, 2007, it will reduce future interest income and estimated future net assets at June 30, 2007.

Contact Information

  • Bell Canada International Inc.
    Howard N. Hendrick
    Executive Vice-President and Chief Financial Officer
    (514) 392-2260
    howard.hendrick@bci.ca