**Exhibit 99.4**

** **

**TELUSCORPORATION**

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 

**DECEMBER 31,2007**

 

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**management’sreport**

 

Management is responsibleto the Board of Directors for the preparation of the Consolidated financialstatements of the Company and its subsidiaries. These financial statements havebeen prepared in accordance with Canadian generally accepted accountingprinciples (GAAP) and necessarily include some amounts based on estimates andjudgments.

 

TheCompany maintains a system of internal controls that provides management withreasonable assurance that assets are safeguarded and that reliable financialrecords are maintained. This system includes written policies and procedures,an organizational structure that segregates duties and a comprehensive programof periodic audits by the internal auditors. The Company has also institutedpolicies and guidelines that require TELUS team members (including Boardmembers and Company employees) to maintain the highest ethical standards, andhas established mechanisms for the reporting to the Audit Committee ofperceived accounting and ethics policy complaints. In addition, the ChiefCompliance Officer works to ensure the Company has appropriate policies,controls and measurements in place to comply with all legal and regulatoryrequirements. Annually, the Company performs an extensive risk assessmentprocess, which includes interviews with senior management, a web-enabled riskand control assessment survey distributed to a large sample of employees, andinput from the Company’s strategic planning activities. Results of this processinfluence the development of the internal audit program. Key enterprise-widerisks are assigned to executive owners for the development and implementationof appropriate risk mitigation plans. As required by Canadian securitiesregulations and the United States *Sarbanes-Oxley Act*,the Company has an effective and efficient Sarbanes-Oxley certificationenablement process. In addition to assessing disclosure controls and internalcontrols over financial reporting, this process cascades informativecertifications from the key stakeholders within the financial reportingprocess, which are reviewed by the Chief Executive Officer and the ChiefFinancial Officer as part of their due diligence process.

 

TheCompany has a formal policy on Corporate Disclosure and Confidentiality ofInformation, which sets out policies and practices including the mandate of theDisclosure Committee.

 

TheChief Executive Officer and the Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures related tothe preparation of the Management’s discussion and analysis and theConsolidated financial statements, as well as other information contained inthis report. They have concluded that the Company’s disclosure controls andprocedures were effective, at a reasonable assurance level, to ensure thatmaterial information relating to the Company and its consolidated subsidiarieswould be made known to them by others within those entities, particularlyduring the period in which the Management’s discussion and analysis and theConsolidated financial statements contained in this report were being prepared.

 

TheBoard of Directors has reviewed and approved these Consolidated financialstatements. To assist the Board in meeting its oversight responsibilities, ithas appointed an Audit Committee, which is comprised entirely of independentdirectors. All the members of the committee are financially literate and theChair of the committee has financial expertise and meets the applicablesecurities laws as a financial expert. The committee oversees the Company’saccounting and financial reporting, internal controls and disclosure controls,legal and regulatory compliance, ethics policy and timeliness of filings withregulatory authorities, the independence and performance of the Company’sexternal and internal auditors, the management of the Company’s risks, itscredit worthiness, treasury plans and financial policy, and its whistleblowerand accounting and ethics complaint procedures. The committee meets no lessthan quarterly and, as a standard feature of regularly scheduled meetings,holds an in-camera session with the external auditors and separately with theinternal auditors without other management, including management directors,present. It oversees the work of the external auditors and approves the annualaudit plan. It also receives reports on the external auditor’s internal qualitycontrol procedures and independence. Furthermore, the Audit Committee reviews:the Company’s major accounting policies including alternatives and potentialkey management estimates and judgments; the Company’s financial policies andcompliance with such policies; the evaluation by either the internal or externalauditors of management’s internal control systems; and the evaluation bymanagement of the adequacy and effectiveness in the design and operation of theCompany’s disclosure controls and internal controls for financial reporting.The Audit Committee also considers reports on the Company’s business continuityand disaster recovery plan; reports on financial risk management includingderivative exposure and policies; tax planning, environmental, health andsafety risk management, corporate social responsibility and management’sapproach for safeguarding corporate assets; and regularly reviews materialcapital expenditure initiatives. The committee pre-approves all audit,audit-related and non-audit

 

****

 

2

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services provided to theCompany by the external auditors (and its affiliates). The committee’s terms ofreference are available, on request, to shareholders and at **telus.com/governance**.

 
| /s/  Robert G. McFarlane     | ** ** | /s/  Darren Entwistle        |
|------------------------------|------------|------------------------------|
|                         |       |                         |
| Robert  G. McFarlane         |       | Darren  Entwistle            |
| Executive  Vice-President    |       | President                    |
| and  Chief Financial Officer |       | and  Chief Executive Officer |
| February 13,  2008      |       | February 13,  2008      |

 

**report of management on internal control over financial reporting**

 

Management of TELUS is responsible for establishing andmaintaining adequate internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.

 

TELUS’ Chief Executive Officer and Chief Financial Officerhave assessed the effectiveness of the Company’s internal control overfinancial reporting as at December 31, 2007, in accordance with thecriteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Internal control overfinancial reporting is a process designed by, or under the supervision of, theChief Executive Officer and the Executive Vice-President and Chief FinancialOfficer and effected by the Board of Directors, management and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.

 

Due to its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements on a timely basis.Also, projections of any evaluation of the effectiveness of internal controlover financial reporting to future periods are subject to the risk that thecontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.  Based on this assessment, management hasdetermined that the Company’s internal control over financial reporting iseffective as at December 31, 2007. In connection with this assessment, no material weaknesses in theCompany’s internal control over financial reporting were identified bymanagement.

 

Deloitte & Touche LLP, the Company’sIndependent Registered Chartered Accountants, audited the Company’sConsolidated Financial Statements for the year ended December 31, 2007,and as stated in the Report of Independent Registered Chartered Accountants,they have expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2007.

 
| /s/  Robert G. McFarlane     | ** ** | /s/  Darren Entwistle        |
|------------------------------|------------|------------------------------|
|                         |       |                         |
| Robert  G. McFarlane         |       | Darren  Entwistle            |
| Executive  Vice-President    |       | President                    |
| and  Chief Financial Officer |       | and  Chief Executive Officer |
| February 13,  2008      |       | February 13,  2008      |

 

 

3

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**report of independent registered charteredaccountants**

 

To the Board of Directors and Shareholders ofTELUS Corporation

 

We have audited theaccompanying consolidated balance sheets of TELUS Corporation and subsidiaries(the Company) as at December 31, 2007 and 2006, and the relatedconsolidated statements of income and other comprehensive income, retainedearnings and accumulated other comprehensive income (loss) and cash flows forthe years then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with Canadiangenerally accepted auditing standards and the standards of the Public CompanyAccounting Oversight Board (United States). These standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, these consolidated financial statementspresent fairly, in all material respects, the financial position ofTELUS Corporation and subsidiaries as at December 31, 2007 and 2006,and the results of their operations and their cash flows for the years thenended in accordance with Canadian generally accepted accounting principles.

 

We have also audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the Company’sinternal control over financial reporting as of December 31, 2007, basedon the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 13, 2008, expressed anunqualified opinion on the Company’s internal control over financial reporting.

 
| ** ** | /s/ Deloitte & Touche LLP           |
|------------|----------------------------------------------|
|       |                                         |
|       | Deloitte & Touche LLP               |
|       | Independent Registered Chartered Accountants |
|       | Vancouver, Canada                            |
|       | February 13, 2008                       |
|       |                                         |

 

**comments by independent registered charteredaccountants on Canada-United States of America reporting difference**

 

The standards of the Public Company Accounting OversightBoard  (United States) require theaddition of an explanatory paragraph (following the opinion paragraph) whenthere are changes that have an effect on the comparability of the Company’sfinancial statements, such as the changes described in Note 2 to theconsolidated financial statements.  Ourreport to the Board of Directors and Shareholders, dated February 13,2008, is expressed in accordance with Canadian reporting standards which do notrequire a reference to such changes in accounting principles in the auditors’report when the change is properly accounted for and adequately disclosed inthe financial statements.

 
| ** ** | /s/ Deloitte & Touche LLP           |
|------------|----------------------------------------------|
|       |                                         |
|       | Deloitte & Touche LLP               |
|       | Independent Registered Chartered Accountants |
|       | Vancouver, Canada                            |
|       | February 13, 2008                       |

 

4

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**report of independent registered charteredaccountants**

 

To the Board of Directors and Shareholders of TELUSCorporation

 

We have audited the internal control over financialreporting of TELUS Corporation and subsidiaries (the Company) as of December 31,2007, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in theaccompanying Report of Management on Internal Control over FinancialReporting.  Our responsibility is toexpress an opinion on the Company’s internal control over financial reportingbased on our audit.

 

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtainingan understanding of internal control over financial reporting, assessing therisk that a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting isa process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal controlover financial reporting, including the possibility of collusion or impropermanagement override of controls, material misstatements due to error or fraudmay not be prevented or detected on a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2007, based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance with Canadiangenerally accepted auditing standards and the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2007, of the Companyand our report dated February 13, 2008, expressed an unqualified opinionon those financial statementsand included a separatereport titled Comments by Independent Registered Chartered Accountants onCanada-United States of America Reporting Difference referring to changes thataffect the comparability of the Company’s financial statements..

 
| ** ** | /s/ Deloitte & Touche LLP           |
|------------|----------------------------------------------|
|       |                                         |
|       | Deloitte & Touche LLP               |
|       | Independent Registered Chartered Accountants |
|       | Vancouver, Canada                            |
|       | February 13, 2008                       |

 

5

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**consolidatedstatements of income and other comprehensive income**

 
| **Years ended December 31  (millions except per share amounts)**                                                         | ** ** | **2007**    | ** **  | **2006**                                           | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|----------------------------------------------------|------------|
| * *                                                                                                                      | * *   | * *    | * *    | **(restated  –   Notes 2(b), (e))** | * *   |
| **OPERATING REVENUES**                                                                                                        | ** ** | **$**       | **9,074.4** |                                               | $          | 8,681.0 |   |
| **OPERATING EXPENSES**                                                                                                        |       |        |        |                                               |       |
| Operations                                                                                                                    | ** ** | **5,464.7** |        | 4,998.2                                            |       |
| Restructuring costs *(Note 7)*                                                                                           | ** ** | **20.4**    |        | 67.8                                               |       |
| Depreciation                                                                                                                  | ** ** | **1,354.7** |        | 1,353.4                                            |       |
| Amortization of intangible assets                                                                                             | ** ** | **260.3**   |        | 222.2                                              |       |
| ** **                                                                                                                    |       | **7,100.1** |        | 6,641.6                                            |       |
| **OPERATING INCOME**                                                                                                          | ** ** | **1,974.3** |        | 2,039.4                                            |       |
| Other expense, net                                                                                                            | ** ** | **36.1**    |        | 28.0                                               |       |
| Financing costs *(Note 8)*                                                                                               | ** ** | **440.1**   |        | 504.7                                              |       |
| **INCOME BEFORE INCOME TAXES AND  NON-CONTROLLING INTEREST**                                                                  | ** ** | **1,498.1** |        | 1,506.7                                            |       |
| Income taxes *(Note 9)*                                                                                                  | ** ** | **233.6**   |        | 353.2                                              |       |
| Non-controlling interests                                                                                                     | ** ** | **6.6**     |        | 8.5                                                |       |
| **NET INCOME AND COMMON SHARE AND NON-VOTING  SHARE INCOME**                                                                  | ** ** | **1,257.9** |        | 1,145.0                                            |       |
| **OTHER COMPREHENSIVE INCOME***(Note 18(d))*                                                                                  |       |        |        |                                               |       |
| Change in unrealized fair value of  derivatives designated as cash flow hedges                                                | ** ** | **82.0**    |        | —                                             |       |
| Foreign currency translation adjustment  arising from translating financial statements of self-sustaining foreign  operations | ** ** | **(7.2**    | **)**       | 5.8                                                |       |
| Change in unrealized fair value of  available-for-sale financial assets                                                       | ** ** | **(0.6**    | **)**       | —                                             |       |
| ** **                                                                                                                    |       | **74.2**    |        | 5.8                                                |       |
| **COMPREHENSIVE INCOME**                                                                                                      | ** ** | **$**       | **1,332.1** |                                               | $          | 1,150.8 |   |
| **NET INCOME PER COMMON SHARE AND NON-VOTING  SHARE***(Note 10)*                                                         |       |        |        |                                               |       |
| – Basic                                                                                                                  | ** ** | **$**       | **3.79**    |                                               | $          | 3.33 |   |
| – Diluted                                                                                                                | ** ** | **$**       | **3.76**    |                                               | $          | 3.30 |   |
| **DIVIDENDS DECLARED PER COMMON SHARE AND  NON-VOTING SHARE**                                                                 | ** ** | **$**       | **1.575**   |                                               | $          | 1.20 |   |
| **TOTAL  WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING**                                                   |       |        |        |                                               |       |
| – Basic                                                                                                                  | ** ** | **331.7**   |        | 343.8                                              |       |
| – Diluted                                                                                                                | ** ** | **334.2**   |        | 347.4                                              |       |

 

*The accompanying notes are an integralpart of these consolidated financial statements*

 

6

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**consolidatedstatements of retained earnings and accumulated other comprehensive income(loss)**

 
| **Years ended December 31    (millions)**                                         | ** **             | **2007**                                             | ** **                                                | **2006**                                             | ** ** |
|--------------------------------------------------------------------------------------------------|------------------------|------------------------------------------------------|-----------------------------------------------------------|------------------------------------------------------|------------|
| ** **                                                                                       | **Retained  earnings** | ** **                                           | **Accumulated  other  comprehensive  income (loss)** | ** **                                           | **Total**  | ** ** | **Retained  earnings** | ** ** | **Accumulated  other  comprehensive  income (loss****)** | ** ** | **Total** | ** ** |
| ** **                                                                                       | ** **             | **(restated - Notes 2(b), (e))** | ** **                                                | **(restated - Notes 2(b), (e))** | ** ** |
| **BALANCE AT BEGINNING OF PERIOD**                                                               | ** **             | **$**                                                | **1,200.0**                                               | ** **                                           | **$**      | **(1.5** | **)** | **$** | **1,198.5** | ** ** | $ | 849.7 |   | $ | (7.3 | ) | $ | 842.4 |   |
| Accumulated other comprehensive income  transitional amounts *(Notes 2(b), 18(d))*               | ** **             | **—**                                           | ** **                                                | **(176.2**                                           | **)**      | **(176.2** | **)** | — |   | — |   | — |   |
| Adjustment for transitional pension  asset *(Note 2(e))*                               | ** **             | **—**                                           | ** **                                                | **—**                                           | ** ** | **—** | ** ** | 97.4 |   | — |   | 97.4 |   |
| ** **                                                                                       | ** **             | **1,200.0**                                          | ** **                                                | **(177.7**                                           | **)**      | **1,022.3** | ** ** | 947.1 |   | (7.3 | ) | 939.8 |   |
| Income                                                                                           | ** **             | **1,257.9**                                          | ** **                                                | **74.2**                                             | ** ** | **1,332.1** | ** ** | 1,145.0 |   | 5.8 |   | 1,150.8 |   |
| ** **                                                                                       | ** **             | **2,457.9**                                          | ** **                                                | **(103.5**                                           | **)**      | **2,354.4** | ** ** | 2,092.1 |   | (1.5 | ) | 2,090.6 |   |
| Common Share and Non-Voting Share dividends  paid, or payable, in cash                           | ** **             | **(520.8**                                           | **)**                                                     | **—**                                           | ** ** | **(520.8** | **)** | (411.7 | ) | — |   | (411.7 | ) |
| Purchase of Common Shares and Non-Voting  Shares in excess of stated capital *(Note 18(g))* | ** **             | **(483.3**                                           | **)**                                                     | **—**                                           | ** ** | **(483.3** | **)** | (498.6 | ) | — |   | (498.6 | ) |
| Adjustment of tax treatment of items  charged directly to retained earnings                      | ** **             | **—**                                           | ** **                                                | **—**                                           | ** ** | **—** | ** ** | 16.1 |   | — |   | 16.1 |   |
| Other                                                                                            | ** **             | **3.7**                                              | ** **                                                | **—**                                           | ** ** | **3.7** | ** ** | 2.1 |   | — |   | 2.1 |   |
| **BALANCE AT END OF PERIOD***(Note 18)*                                                     | ** **             | **$**                                                | **1,457.5**                                               | ** **                                           | **$**      | **(103.5** | **)** | **$** | **1,354.0** | ** ** | $ | 1,200.0 |   | $ | (1.5 | ) | $ | 1,198.5 |   |

 

*The accompanying notes are an integralpart of these consolidated financial statements*

 

7

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**consolidatedbalance sheets**

 
| **As at December 31 (millions)**                   | ** ** | **2007**     | ** **   | **2006**                                           | ** ** |
|------------------------------------------------------------------------|------------|--------------|--------------|----------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **   | ** **   | **(restated  –   Notes 2(b), (e))** | ** ** |
| **ASSETS**                                                             |       |         |         |                                               |       |
| Current  Assets                                                        |       |         |         |                                               |       |
| Cash and temporary investments, net                                    | ** ** | **$**        | **19.9**     |                                               | $          | — |   |
| Short-term investments                                                 | ** ** | **42.4**     |         | 110.2                                              |       |
| Accounts receivable *(Notes 13,  20(b))*                          | ** ** | **710.9**    |         | 707.2                                              |       |
| Income and other taxes receivable                                      | ** ** | **120.9**    |         | 95.4                                               |       |
| Inventories*(Note 20(b))*                                         | ** ** | **243.3**    |         | 196.4                                              |       |
| Prepaid expenses and other*(Note 20(b))*                          | ** ** | **199.5**    |         | 195.3                                              |       |
| Derivative assets                                                      | ** ** | **3.8**      |         | 40.4                                               |       |
| ** **                                                             |       | **1,340.7**  |         | 1,344.9                                            |       |
| ** **                                                             |       | ** **   |         |                                               |       |
| Capital Assets, Net *(Note 14)*                                   |       |         |         |                                               |       |
| Property, plant, equipment and other                                   | ** ** | **7,177.3**  |         | 7,117.7                                            |       |
| Intangible assets subject to amortization                              | ** ** | **978.2**    |         | 898.0                                              |       |
| Intangible assets with indefinite lives                                | ** ** | **2,966.5**  |         | 2,966.4                                            |       |
| ** **                                                             |       | **11,122.0** |         | 10,982.1                                           |       |
| Other Assets                                                           |       |         |         |                                               |       |
| Deferred charges*(Note 20(b))*                                    | ** ** | **1,318.0**  |         | 1,129.7                                            |       |
| Investments                                                            | ** ** | **38.9**     |         | 35.2                                               |       |
| Goodwill*(Note 15)*                                               | ** ** | **3,168.0**  |         | 3,169.5                                            |       |
| ** **                                                             |       | **4,524.9**  |         | 4,334.4                                            |       |
| ** **                                                             |       | **$**        | **16,987.6** |                                               | $          | 16,661.4 |   |
|                                                                   |       |         |         |                                               |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                          |       |         |         |                                               |       |
| Current Liabilities                                                    |       |         |         |                                               |       |
| Cash and temporary investments, net                                    | ** ** | **$**        | **—**   |                                               | $          | 11.5 |   |
| Accounts payable and accrued liabilities*(Note 20(b))*            | ** ** | **1,476.6**  |         | 1,363.6                                            |       |
| Income and other taxes payable                                         | ** ** | **7.3**      |         | 10.3                                               |       |
| Restructuring accounts payable and accrued  liabilities*(Note 7)* | ** ** | **34.9**     |         | 53.1                                               |       |
| Advance billings and customer deposits*(Note 20(b))*              | ** ** | **631.6**    |         | 606.3                                              |       |
| Current maturities of long-term debt *(Note 17)*                  | ** ** | **5.4**      |         | 1,433.5                                            |       |
| Current portion of derivative liabilities                              | ** ** | **26.6**     |         | 165.8                                              |       |
| Current portion of future income taxes                                 | ** ** | **503.6**    |         | 137.2                                              |       |
| ** **                                                             |       | **2,686.0**  |         | 3,781.3                                            |       |
| Long-Term Debt *(Note 17)*                                        | ** ** | **4,583.5**  |         | 3,474.7                                            |       |
| Other Long-Term Liabilities*(Note 20(b))*                         | ** ** | **1,717.9**  |         | 1,257.3                                            |       |
| Future Income Taxes                                                    | ** ** | **1,048.1**  |         | 1,076.5                                            |       |
| Non-Controlling Interests                                              | ** ** | **25.9**     |         | 23.6                                               |       |
| Shareholders’**Equity  *(Note 18)*                           | ** ** | **6,926.2**  |         | 7,048.0                                            |       |
| ** **                                                             |       | **$**        | **16,987.6** |                                               | $          | 16,661.4 |   |

 

Commitments and Contingent Liabilities *(Note 19)*

 

*The accompanying notes are an integralpart of these consolidated financial statements*

 
| Approved by the Directors: | ** ** | ** **            |
|----------------------------|------------|-----------------------|
|                       |       |                  |
| Director:                  |       | Director:             |
|                       |       |                  |
| /s/ Brian F. MacNeill      |       | /s/ Brian A. Canfield |
|                       |       |                  |
| Brian F. MacNeill          |       | Brian A. Canfield     |
|                       |       |                  |

8

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**consolidatedstatements of cash flows**

 
| **Years ended December 31 (millions)**                                                      | ** ** | **2007**     | ** **  | **2006**                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------|-------------|----------------------------------|------------|
| * *                                                                                                        | * *   | * *     | * *    | **(restated  – Note 2(e))** | * *   |
| **OPERATING ACTIVITIES**                                                                                        |       |         |        |                             |       |
| Net income                                                                                                      | ** ** | **$**        | **1,257.9** |                             | $          | 1,145.0 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:                                  |       |         |        |                             |       |
| Depreciation and amortization                                                                                   | ** ** | **1,615.0**  |        | 1,575.6                          |       |
| Future income taxes                                                                                             | ** ** | **376.9**    |        | 411.4                            |       |
| Share-based compensation *(Note 11(a))*                                                                         | ** ** | **95.8**     |        | 25.1                             |       |
| Net employee defined benefit plans expense                                                                      | ** ** | **(92.1**    | **)**       | (30.1                            | )          |
| Employer contributions to employee defined  benefit plans                                                       | ** ** | **(92.8**    | **)**       | (123.3                           | )          |
| Restructuring costs, net of cash payments *(Note 7)*                                                       | ** ** | **(18.2**    | **)**       | (4.0                             | )          |
| Amortization of deferred gains on  sale-leaseback of buildings, amortization of deferred charges and other, net | ** ** | **4.1**      | ** **  | 51.7                             |       |
| Net change in non-cash working capital*(Note 20(c))*                                                       | ** ** | **25.1**     | ** **  | (247.7                           | )          |
| Cash provided by operating activities                                                                           | ** ** | **3,171.7**  | ** **  | 2,803.7                          |       |
| **INVESTING ACTIVITIES**                                                                                        |       |         | ** **  |                             |       |
| Capital expenditures *(Notes 6,  14)*                                                                      | ** ** | **(1,770.3** | **)**       | (1,618.4                         | )          |
| Acquisitions                                                                                                    | ** ** | **—**   | ** **  | (49.0                            | )          |
| Proceeds from the sale of property and  other assets                                                            | ** ** | **7.5**      | ** **  | 14.9                             |       |
| Change in non-current materials and  supplies, purchase of investments and other                                | ** ** | **(8.8**     | **)**       | (22.7                            | )          |
| Cash used by investing activities                                                                               | ** ** | **(1,771.6** | **)**       | (1,675.2                         | )          |
| **FINANCING ACTIVITIES**                                                                                        |       |         | ** **  |                             |       |
| Common Shares and Non-Voting Shares issued                                                                      | ** ** | **0.9**      | ** **  | 104.5                            |       |
| Dividends to shareholders                                                                                       | ** ** | **(520.8**   | **)**       | (411.7                           | )          |
| Purchase of Common Shares and Non-Voting  Shares for cancellation *(Note 18(g))*                           | ** ** | **(749.9**   | **)**       | (800.2                           | )          |
| Long-term debt issued*(Notes 17, 20(c))*                                                                   | ** ** | **7,763.3**  | ** **  | 1,585.9                          |       |
| Redemptions and repayment of long-term debt  *(Notes 17, 20(c))*                                                | ** ** | **(7,857.0** | **)**       | (1,314.7                         | )          |
| Partial repayment of deferred hedging  liability                                                                | ** ** | **—**   | ** **  | (309.4                           | )          |
| Dividends paid by a subsidiary to  non-controlling interests                                                    | ** ** | **(4.3**     | **)**       | (3.0                             | )          |
| Other                                                                                                           | ** ** | **(0.9**     | **)**       | —                           |       |
| Cash used by financing activities                                                                               | ** ** | **(1,368.7** | **)**       | (1,148.6                         | )          |
| **CASH POSITION**                                                                                               |       |         | ** **  |                             |       |
| Increase (decrease) in cash and temporary  investments, net                                                     | ** ** | **31.4**     | ** **  | (20.1                            | )          |
| Cash and temporary investments, net,  beginning of period                                                       | ** ** | **(11.5**    | **)**       | 8.6                              |       |
| Cash and temporary investments, net, end of  period                                                             | ** ** | **$**        | **19.9**    | ** **                       | $          | (11.5 | ) |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOWS**                                                                       |       |         | ** **  |                             |       |
| Interest**(paid)*(Note 20(c))*                                                                                  | ** ** | **$**        | **(454.4**  | **)**                            | $          | (516.1 | ) |
| Interest received                                                                                               | ** ** | **$**        | **41.6**    | ** **                       | $          | 24.2 |   |
| Income**taxes  (inclusive of Investment Tax Credits*(Note 9)*)  received, net                                   | ** ** | **$**        | **122.7**   | ** **                       | $          | 98.3 |   |

 

*The accompanying notes are an integralpart of these consolidated financial statements*

 

9

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notes to consolidated financial statements

 

**DECEMBER 31,2007**

** **

TELUS Corporation is one of Canada’s largesttelecommunications companies, providing a full range of telecommunicationsproducts and services. The Company is the largest incumbent telecommunicationsservice provider in Western Canada and provides data, Internet protocol, voiceand wireless services to Central and Eastern Canada.

 
| **Notes to consolidated financial  statements** | ** **                                  | **Description** |
|-------------------------------------------------|---------------------------------------------|-----------------|
| General application                             |                                        |            |
| 1.                                              | Summary of significant  accounting policies | ** **      | Summary review of  accounting principles and the methods used in their application by the Company |
| 2.                                              | Accounting policy  developments             | ** **      | Summary review of  generally accepted accounting principle developments that do, will, or may,  affect the Company |
| 3.                                              | Capital structure  financial policies       | ** **      | Summary review of the  Company’s objectives, policies and processes for managing its capital  structure |
| 4.                                              | Regulation of rates  charged to customers   | ** **      | Summary review of rate  regulation impacts on Company operations and revenues |
| 5.                                              | Financial instruments                       | ** **      | Summary schedule and  review of financial instruments, including fair values thereof |
| Consolidated results of operations focused      |                                        |            |
| 6.                                              | Segmented information                       | ** **      | Summary disclosure of  segmented information regularly reported to the Company’s chief operating  decision maker |
| 7.                                              | Restructuring costs                         | ** **      | Summary continuity  schedule and review of restructuring costs |
| 8.                                              | Financing costs                             | ** **      | Summary schedule of  items comprising financing costs by nature |
| 9.                                              | Income taxes                                | ** **      | Summary  reconciliations of statutory rate income tax expense to provision for income  taxes and analyses of future income tax liability |
| 10.                                             | Per share amounts                           | ** **      | Summary schedule and  review of numerators and denominators used in calculating per share amounts  and related disclosures |
| 11.                                             | Share-based  compensation                   | ** **      | Summary schedules and  review of compensation arising from share option awards, restricted stock  units and employee share purchase plan |
| 12.                                             | Employee future  benefits                   | ** **      | Summary and review of  employee future benefits and related disclosures |
| Consolidated financial position focused         |                                        |            |
| 13.                                             | Accounts receivable                         | ** **      | Summary schedule and  review of arm’s-length securitization trust transactions and related  disclosures |
| 14.                                             | Capital assets                              | ** **      | Summary schedule of  items comprising capital assets |
| 15.                                             | Goodwill                                    | ** **      | Summary schedule of  goodwill and review of reported fiscal year acquisitions from which goodwill  arose and summary disclosure of acquisition completed after the balance sheet  date but before completion of the financial statements |
| 16.                                             | Short-term obligations                      | ** **      | Summary review of  bilateral bank facilities |
| 17.                                             | Long-term debt                              | ** **      | Summary schedule of  long-term debt and related disclosures |
| 18.                                             | Shareholders’ equity                   | ** **      | Summary schedules and  review of shareholders’ equity and changes therein including details of other  comprehensive income, accumulated other comprehensive income, share option  price stratification and normal course issuer bid summaries |
| 19.                                             | Commitments and  contingent liabilities     | ** **      | Summary review of  contingent liabilities, commitments, lease obligations, guarantees, claims  and lawsuits |

 

 

10

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notesto consolidated financial statements

 
| **Notes to consolidated financial  statements** | ** **                                                                                    | **Description** |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------|-----------------|
| Other                                           |                                                                                          |            |
| 20.                                             | Additional financial  information                                                             | ** **      | Summary schedules of  items comprising certain primary financial statement line items |
| 21.                                             | Differences between  Canadian and United States generally accepted accounting principles | ** **      | Summary schedules and  review of differences between Canadian and United States generally  accepted accounting principles as they apply to the Company |

 

## **1****                ****summary of significant accounting policies**

##  

The accompanying consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in Canada and are expressed in Canadian dollars.

 

The terms TELUS or Company areused to mean TELUS Corporation and, where the context of the narrativepermits, or requires, its subsidiaries.

 

### **(a)**          Consolidation

### ** **

The consolidated financial statements include theaccounts of the Company and all of the Company’s subsidiaries, of which theprincipal one is TELUS Communications Inc. TELUS Communications Inc. includessubstantially all of the Company’s Wireline segment’s operations and all of theWireless segment’s operations, currently through the TELUS CommunicationsCompany partnership and the TELE-MOBILE COMPANY partnership.

 

The financingarrangements of the Company and all of its subsidiaries do not imposerestrictions on inter-corporate dividends.

 

On a continuing basis,TELUS Corporation reviews its corporate organization and effects changesas appropriate so as to enhance its value. This process can, and does, affectwhich of the Company’s subsidiaries are considered principal subsidiaries atany particular point in time.

 

### **(b)**          Use of estimates

### ** **

The preparation of financial statements in conformitywith generally accepted accounting principles (GAAP) requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

Examples of significant estimates include:

 

·                  the key economicassumptions used to determine the fair value of residual cash flows arisingfrom accounts receivable securitization;

·                  the allowance fordoubtful accounts;

·                  the allowance forinventory obsolescence;

·                  the estimated usefullives of assets;

·                  the recoverability oftangible assets;

·                  the recoverability ofintangible assets with indefinite lives;

·                  the recoverability oflong-term investments;

·                  the recoverability ofgoodwill;

·                  the amount andcomposition of income tax assets and income tax liabilities, including theamount of unrecognized tax benefits;

·                  the accruals forCanadian Radio-television and Telecommunications Commission (CRTC) deferralaccount liabilities; and

·                  certain actuarial andeconomic assumptions used in determining defined benefit pension costs, accruedpension benefit obligations and pension plan assets.

 

### **(c)**          Revenue recognition

### ** **

The Company earns the majority of its revenue (voicelocal, voice long distance, data (including data and information technologymanaged services) and wireless network) from access to, and usage of, theCompany’s telecommunications infrastructure. The majority of the balance of theCompany’s revenue (other and wireless equipment) arises from providing productsand services facilitating access to, and usage of, the Company’stelecommunications infrastructure.

 

11

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notes to consolidatedfinancial statements

 

TheCompany offers complete and integrated solutions to meet its customers’ needs.These solutions may involve the delivery of multiple services and productsoccurring at different points in time and/or over different periods of time. Asappropriate, these multiple element arrangements are separated into theircomponent accounting units, consideration is measured and allocated amongst theaccounting units based upon their relative fair values and then the Company’srelevant revenue recognition policies are applied to the accounting units.

 

Multiplecontracts with a single customer are normally accounted for as separatearrangements. In instances where multiple contracts are entered into with acustomer in a short period of time, they are reviewed as a group to ensurethat, similar to multiple element arrangements, relative fair values areappropriate.

 

TheCompany’s revenues are recorded net of any value-added, sales and/or use taxesbilled to the customer concurrent with a revenue-producing transaction.

 

*Voice local, voice long distance, data and wireless network:*The Company recognizes revenues on the accrual basis and includes anestimate of revenues earned but unbilled. Wireline and wireless servicerevenues are recognized based upon usage of the Company’s network andfacilities and upon contract fees.

 

Advancebillings are recorded when billing occurs prior to rendering the associatedservice; such advance billings are recognized as revenue in the period in whichthe services are provided. Similarly, and as appropriate, upfront customeractivation and connection fees, along with the corresponding direct costs notin excess of the revenues, are deferred and recognized over the averageexpected term of the customer relationship.

 

Whenthe Company receives no identifiable, separable benefit for consideration givento a customer (*e.g.* discounts andrebates), the consideration is recorded as a reduction of revenue rather thanas an expense.

 

The Company follows the liability method ofaccounting for its quality of service rate rebate amounts that arise from thejurisdiction of the CRTC.

 

TheCRTC has established a portable subsidy mechanism to subsidize Local ExchangeCarriers, such as the Company, that provide residential service to high costserving areas. The CRTC has determined the per line/per band portable subsidyrate for all Local Exchange Carriers. The Company recognizes the portablesubsidy on an accrual basis by applying the subsidy rate to the number of residentialnetwork access lines it has in high cost serving areas, as further discussed inNote 4(c). Differences, if any, between interim and final subsidy ratesset by the CRTC, are accounted for as a change in estimate in the period inwhich the CRTC finalizes the subsidy rate.

 

*Other and wirelessequipment*: The Company recognizes productrevenues, including wireless handsets sold to re-sellers and customer premisesequipment, when the products are delivered and accepted by the end-usercustomers. Revenues from operating leases of equipment are recognized on asystematic and rational basis (normally a straight-line basis) over the term ofthe lease. When the Company receives no identifiable, separable benefit forconsideration given to a customer (*e.g.*discounts and rebates), the consideration is recorded as a reduction of revenuerather than as an expense.

 

*Non-high cost serving area deferral account*: On May 30,2002, and on July 31, 2002, the CRTC issued Decision 2002-34 andDecision 2002-43, respectively, pronouncements that affected the Company’swireline revenues for five-year periods beginning June 1, 2002, and August 1,2002, respectively. In an effort to foster competition for residential basicservice in non-high cost serving areas, the concept of a deferral accountmechanism was introduced by the CRTC, as an alternative to mandating pricereductions.

 

Thedeferral account arises from the CRTC requiring the Company to defer the incomestatement recognition of a portion of the monies received in respect ofresidential basic services provided to non-high cost serving areas. The revenuedeferral was based on the rate of inflation (as measured by a chain-weightedGross Domestic Product Price Index), less a productivity offset, and anexogenous factor that was associated with allowed recoveries in previous pricecap regimes that have now expired. The Company may recognize the deferredamounts upon the undertaking of qualifying actions, such as Service ImprovementPrograms in qualifying non-high cost serving areas, rate reductions (includingthose provided to competitors as required in Decision 2002-34 and Decision2002-43) and/or rebates to customers. To the extent that a balance remains inthe deferral account, interest expense of the Company is required to be accruedat the Company’s short-term cost of borrowing.

 

TheCompany has adopted the liability method of accounting for the deferralaccount. This results in the Company recording a liability to the extent thatactivities it has undertaken, realized rate reductions for Competitor Servicesand other future qualifying events do not extinguish the balance of thedeferral account, as further discussed in Note 19(a) and quantified inNote 20(b). This also resulted in the Company continuing to recordincremental liability amounts, subject to reductions for the mitigatingactivities, during the Decisions’ four-year periods. Other than for theinterest accrued on the balance of the deferral account, which would beincluded in financing costs, substantially all income statement effects of thedeferral account are recorded through operating revenues. The CRTC can directthat the Company undertake 

 

12

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notes to consolidatedfinancial statements

 

activitiesdrawing down the deferral account that would not affect the income statement;the financial statement impacts of those activities would be contingent on whatthe CRTC directed.

 

### **(d)**          Cost ofacquisition and advertising costs

### ** **

Costsof acquiring customers, which include the total cost of hardware subsidies,commissions, advertising and promotion related to the initial customeracquisition, are expensed as incurred and are included in the ConsolidatedStatements of Income and Other Comprehensive Income as a component of “Operations”expense. Costs of advertising production, airtime and space are expensed asincurred.

 

### **(e)**          Research anddevelopment

### ** **

Researchand development costs are expensed except in cases where development costs meetcertain identifiable criteria for deferral. Deferred development costs areamortized over the life of the commercial production, or in the case ofserviceable property, plant and equipment, are included in the appropriateproperty group and are depreciated over its estimated useful life.

 

### **(f)**            Depreciationand amortization

### ** **

Assets are depreciated on a straight-line basisover their estimated useful life as determined by a continuing program ofstudies. Depreciation includes amortization of assets under capital leases andamortization of leasehold improvements. Leasehold improvements are normallyamortized over the lesser of their expected average service life or the term ofthe lease. Intangible assets with finite lives (intangible assets subject toamortization) are amortized on a straight-line basis over their estimatedlives; estimated lives are reviewed at least annually and are adjusted asappropriate. The continuing program of asset life studies considers such itemsas timing of technological obsolescence, competitive pressures and future infrastructureutilization plans; such considerations could also indicate that carrying valuesof assets may not be recoverable. If the carrying values of assets were notconsidered recoverable, an impairment provision (measured at the amount bywhich the carrying values of the assets exceed their fair values) would berecorded.

 

Estimated useful lives for the majority of the Company’scapital assets subject to depreciation and amortization are as follows:

 
| ** **                                                  | ** ** | **Estimated  useful lives(1)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|
| Property,  plant, equipment and other                       |       |                           |       |
| Telecommunications assets                                   |       |                           |       |
| Outside plant                                               |       | 17  to 40 years                |       |
| Inside plant                                                |       | 5  to 15 years                 |       |
| Wireless site equipment                                     |       | 6.5  to 8 years                |       |
| Balance of depreciable property, plant, equipment and other |       | 4  to 20 years                 |       |
|                                                        |       |                           |       |
| Intangible assets subject  to amortization                  |       |                           |       |
| Subscriber base                                             |       |                           |       |
| Wireline                                                    |       | 40  years                      |       |
| Wireless                                                    |       | 7  years                       |       |
| Software                                                    |       | 3  to 5 years                  |       |
| Access to rights-of-way and other                           |       | 8  to 30 years                 |       |

 

----

(1)          Thecomposite depreciation rate for the year ended December 31, 2007, was 6.0% (2006 –6.3%). The rate is calculated by dividing depreciation expense by an averagegross book value of depreciable assets for the reporting period. A result ofthis methodology is that the composite depreciation rate will be lower in aperiod that has a higher proportion of fully depreciated assets remaining inuse.

 

TheCompany chose to depreciate and amortize its assets on a straight-line basis asit believes that this method better reflects the consumption of resourcesrelated to the economic lifespan of the assets than use of an acceleratedmethod and thus is more representative of the economic substance of theunderlying use of the assets.

 

Thecarrying value of intangible assets with indefinite lives, and goodwill, areperiodically tested for impairment using a two-step impairment test. Thefrequency of the impairment test generally is the reciprocal of the stabilityof the relevant events and circumstances, but intangible assets with indefinitelives and goodwill must, at a minimum, be tested annually; the Company hasselected December as its annual test time. No impairment amounts arosefrom the December 2007 and December 2006 annual tests. The test isapplied to each of the Company’s two reporting units (the reporting units beingidentified in accordance with the criteria in the Canadian Institute ofChartered Accountants (CICA) Handbook section for intangible assets andgoodwill): Wireline and Wireless.

 

TheCompany assesses its goodwill by applying the prescribed method of comparingthe fair value of its reporting units to the carrying amounts of its reportingunits. Consistent with current industry-specific valuation methods, a 

 

13

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notes to consolidated financial statements

 

combinationof the discounted cash flow approach, the market comparable approach andanalytical review of industry and Company-specific facts is used in determiningthe fair value of the Company’s reporting units.

 

### **(g)**         Translation offoreign currencies

### ** **

Tradetransactions completed in foreign currencies are translated into Canadiandollars at the rates prevailing at the time of the transactions. Monetaryassets and liabilities denominated in foreign currencies are translated intoCanadian dollars at the rate of exchange in effect at the balance sheet datewith any resulting gain or loss being included in the Consolidated Statementsof Income and Other Comprehensive Income, as set out in Note 8. Hedge accounting is applied inspecific instances as further discussed in Note 1(i).

 

TheCompany has minor foreign subsidiaries that are considered to beself-sustaining. Accordingly, foreign exchange gains and losses arising fromthe translation of the minor foreign subsidiaries’ accounts into Canadiandollars are reported as a component of other comprehensive income, as set outin Note 18(d) and discussed further in Note 2(b).

 

### **(h)**         Financialinstruments – recognition and measurement

### ** **

In respect of the recognition and measurement of financial instruments,the Company has adopted the following policies:

 
| **Financial instrument**                                                                                                | ** ** | **Classified  as  available-for-sale  or held as part of  a cash flow  hedging  relationship(1)** | ** ** | **Classified  as  held for  trading(1) (2)** | ** ** | **Company’s  reason for classification selection**                                                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·  Short-term  marketable security investments(3)                                                             |       |                                                                                              |       | X                                                 |       | ·  The  Company has selected this method asit better reflects management’s investment intentions                                                              |
| ·  Long-term  investments(3)                                                                                  |       | X                                                                                                 |       |                                              |       | ·  The  Company has selected classification as available-for-sale asit better reflects management’s investment intentions                                     |
| ·  Stand-alone  derivatives which are a part of an established and documented cash flow  hedging relationship |       | X                                                                                                 |       |                                              |       | ·  The  Company believes that classification as held for hedging results in a better  matching of the change in the fair value with the risk exposure being hedged |

 

----

(1)        Thedistinction between classification as available-for-sale (or held as part of acash flow hedging relationship) or held for trading is that *unrealized* changes in the fair values of financialinstruments classified as available-for-sale, or the effective portion of *unrealized*changes in the fair values of financialinstruments held for hedging, are included in other comprehensive income and *unrealized* changes in the fair values of financialinstruments classified as held for trading are included in net income.

(2)        Certainfinancial instruments that are not required to be classified as held fortrading may be classified as held for trading if the Company so chooses.

(3)        Inrespect of investments in securities for which the fair values can be reliablymeasured, the Company determines the classification on aninstrument-by-instrument basis at time of initial recognition.

 

·      Accounts receivable that areavailable-for-sale to an arm’s-length securitization trust are accounted for asloans and receivables. The Company has selected this method as the benefitsthat would have been expected to arise from using the available-for-sale methodwere not expected to exceed the costs of selecting and implementing thatmethod.

·      Regular-way purchases or sales(those which require actual delivery of financial assets or financialliabilities) are recognized on the trade date. The Company has selected thismethod as it is consistent with the mandatory trade-date accounting requiredfor derivative instruments.

·      Transaction costs, other than inrespect of held for trading items, are added to the initial fair value of theacquired financial asset or financial liability. The Company has selected thismethod as it believes that this results in a better matching of the transactioncosts with the periods benefiting from the transaction costs.

·      In respect of hedges ofanticipated transactions, which in the Company’s specific instance currentlyrelates to inventory purchase commitments, hedge gains/losses will be includedin the cost of the inventory and will be expensed when the inventory is sold.The Company has selected this method as it believes that a better matching withthe risk exposure being hedged is achieved.

 

### **(i)**            Hedgeaccounting

### ** **

*General:* The Company applies hedgeaccounting to the financial instruments used to:

 

·      establish designated currencyhedging relationships for its U.S. Dollar denominated long-term debtfuture cash outflows (semi-annual interest payments and principal payments atmaturity), as set out in Note 5 and further discussed in Note 17(b);

 

14

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notes to consolidated financial statements

 

·      fix the compensation cost arisingfrom specific grants of restricted stock units, as set out in Note 5 andfurther discussed in Note 11(c); and

·      for certain U.S. Dollardenominated future purchase commitments, as set out in Note 5.

 

*Hedge accounting:* The purpose of hedgeaccounting, in respect of the Company’s designated hedging relationships, is toensure that counterbalancing gains and losses are recognized in the sameperiods. The Company chose to apply hedge accounting, as it believes this ismore representative of the economic substance of the underlying transactions.

 

Inorder to apply hedge accounting, a high correlation (which indicateseffectiveness) is required in the offsetting changes in the values of thefinancial instruments (the hedging items) used to establish the designatedhedging relationships and all, or a part, of the asset, liability ortransaction having an identified risk exposure that the Company has taken stepsto modify (the hedged items). The Company assesses the anticipatedeffectiveness of designated hedging relationships at inception and for eachreporting period thereafter. A designated hedging relationship is consideredeffective by the Company if the following critical terms match between thehedging item and the hedged item: the notional amount of the hedging item andthe principal of the hedged item; maturity dates; payment dates; and interestrate index (if, and as, applicable). Any ineffectiveness, such as from adifference between the notional amount of the hedging item and the principal ofthe hedged item, or if a previously effective designated hedging relationshipbecomes ineffective, is reflected in the Consolidated Statements of Income andOther Comprehensive Income as Financing costs if in respect of long-term debtor U.S. Dollar denominated temporary investments and as Operations expenseif in respect of share-based compensation or U.S. Dollar denominatedfuture purchase commitments.

 

*Deferred hedging assets and liabilities:* In the applicationof hedge accounting, an amount (the hedge value) is recorded on theConsolidated Balance Sheets in respect of the fair value of the hedging items.The net difference, if any, between the amounts recognized in the determinationof net income and the amount necessary to reflect the fair value of the hedgingitems on the Consolidated Balance Sheets is recognized as a component of othercomprehensive income.

 

Inthe application of hedge accounting to U.S. Dollar denominated long-termdebt future cash outflows, the amount recognized in the determination of netincome is the amount that counterbalances the difference between the Canadiandollar equivalent of the value of the hedged items at the rate of exchange atthe balance sheet date and the Canadian dollar equivalent of the value of thehedged items at the rate of exchange in the hedging items.

 

Inthe application of hedge accounting to the compensation cost arising fromshare-based compensation, the amount recognized in the determination of netincome is the amount that counterbalances the difference between the quotedmarket price of the Company’s Common Shares and/or Non-Voting Shares at thebalance sheet date and the price of the Company’s Common Shares and/orNon-Voting Shares in the hedging items.

 

### **(j)**            Income taxes

### ** **

TheCompany follows the liability method of accounting for income taxes. Under thismethod, current income taxes are recognized for the estimated income taxespayable for the current year. Future income tax assets and liabilities arerecognized for temporary differences between the tax and accounting bases ofassets and liabilities as well as for the benefit of losses available to becarried forward to future years for tax purposes that are more likely than notto be realized based upon the expected timing of the reversal of such temporarydifferences, or usage of such tax losses, and application of the substantivelyenacted tax rates at the time of such reversal or usage.

 

Theoperations of the Company are complex, and related tax interpretations,regulations and legislation are continually changing. As a result, there areusually some tax matters in question that result in uncertain tax positions.The Company only recognizes the income tax benefit of an uncertain tax positionwhen it is more likely than not that the ultimate determination of the taxtreatment of the position will result in that benefit being realized. TheCompany accrues for interest charges on current tax liabilities that have notbeen funded, which would include interest and penalties arising from uncertaintax positions. The Company includes such charges as a component of financingcosts.

 

TheCompany’s research and development activities may be eligible to earnInvestment Tax Credits; the determination of eligibility is a complex matter.The Company only recognizes the Investment Tax Credits when there is reasonableassurance that the ultimate determination of the eligibility of the Company’sresearch and development activities will result in the Investment Tax Creditsbeing received. When there is reasonable assurance that the Investment TaxCredits will be received, they are accounted for using the cost reductionmethod whereby such credits are deducted from the expenditures or assets towhich they relate, as set out in Note 9.

 

### **(k)**        Share-basedcompensation

### ** **

Canadian GAAP requires, for share options granted after2001, that a fair value be determined for share options at the date of grantand that such fair value be recognized in the financial statements. Proceedsarising from the exercise of share options are credited to share capital.

 

15

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notes to consolidated financial statements

 

Share options which have a net-cash settlement feature,as set out in Note 11(b), are accounted for as liability instruments. If shareoption awards which have the net-cash settlement feature and which were grantedsubsequent to 2001 are settled using other than the net-cash settlement feature,they would revert to be being accounted for as equity instruments.

 

In respect of restricted stock units, as set out in Note11(c), the Company accrues a liability equal to the product of the vestingrestricted stock units multiplied by the fair market value of the correspondingshares at the end of the reporting period (unless hedge accounting is applied,as set out in Note 1(i)). The expense for restricted stock units that do notultimately vest is reversed against the expense that had been previouslyrecorded in their respect.

 

When share-based compensation vests in one amount at afuture point in time (cliff vesting), the expense is recognized by the Companyin the Consolidated Statements of Income and Other Comprehensive Income on astraight-line basis over the vesting period. When share-based compensationvests in tranches (graded vesting), the expense is recognized by the Company inthe Consolidated Statements of Income and Other Comprehensive Income using theaccelerated expense attribution method.

 

### **(l)**            Employee future benefit plans

### ** **

The Company accrues for its obligations under employeedefined benefit plans, and the related costs, net of plan assets. The cost ofpensions and other retirement benefits earned by employees is actuariallydetermined using the projected benefit method pro-rated on service andmanagement’s best estimate of expected plan investment performance, salaryescalation and retirement ages of employees.  For the purpose of calculating the expected return on plan assets, thoseassets are valued at fair value.  Theexcess of the net actuarial gain (loss) over 10% of the greater of the benefitobligation and the fair value of the plan assets is amortized over the averageremaining service period of active employees of the plan, as are past servicecosts and transitional assets and liabilities.

 

The Company uses defined contribution accounting for theTelecommunication Workers Pension Plan and the British Columbia Public ServicePension Plan that cover certain of the Company’s employees.

 

### **(m)**      Cash andtemporary investments, net

### ** **

Cashand temporary investments, which include investments in money marketinstruments that are purchased three months or less from maturity, arepresented net of outstanding items including cheques written but not cleared bythe bank as at the balance sheet date. Cash and temporary investments, net, areclassified as a liability on the balance sheet when the amount of the chequeswritten but not cleared by the bank exceeds the amount of the cash and temporaryinvestments. When cash and temporary investments, net, are classified as aliability, they may also include overdraft amounts drawn on the Company’sbilateral bank facilities, which revolve daily and are discussed further inNote 16.

 

### **(n)**         Sales ofreceivables

### ** **

Transfers of receivables in securitization transactionsare recognized as sales when the Company is deemed to have surrendered controlover the transferred receivables and consideration, other than for itsbeneficial interests in the transferred receivables, has been received. Whenthe Company sells its receivables, it retains reserve accounts, which areretained interests in the securitized receivables, and servicing rights. When atransfer is considered a sale, the Company derecognizes all receivables sold,recognizes at fair value the assets received and the liabilities incurred andrecords the gain or loss on sale in the Consolidated Statements of Income andOther Comprehensive Income as Other expense, net. The amount of gain or lossrecognized on the sale of receivables depends in part on the previous carryingamount of the receivables involved in the transfer, allocated between thereceivables sold and the retained interests based upon their relative fairmarket value at the sale date. The Company estimates the fair value for itsretained interests based on the present value of future expected cash flowsusing management’s best estimates of the key assumptions (credit losses, theweighted average life of the receivables sold and discount rates commensuratewith the risks involved).

 

### **(o)**          Inventories

### ** **

The Company’s inventory consistsprimarily of wireless handsets, parts and accessories and communicationsequipment held for resale. Inventories are valued at the lower of cost and netrealizable value, with cost being determined on an average cost basis. See Note2(d).

 

### **(p)**          Capital assets

### ** **

*General*: Capital assets are recorded athistorical cost and, with respect to self-constructed property, plant,equipment and other, include materials, direct labour and applicable overheadcosts. With respect to internally-developed, internal-use software, recordedhistorical costs include materials, direct labour and direct labour-relatedcosts. Where property, plant, equipment and other construction projects exceed $50 millionand are of a sufficiently long duration (generally, longer than 

 

16

----

 

notes to consolidated financial statements

 

twelvemonths), an amount is capitalized for the cost of funds used to finance construction.The rate for calculating the capitalized financing costs is based on theCompany’s one-year cost of borrowing.

 

Whenproperty, plant and/or equipment are sold by the Company, the historical costless accumulated depreciation is netted against the sale proceeds and thedifference is included in the Consolidated Statements of Income and OtherComprehensive Income as Other expense, net.

 

*Asset retirement obligations*: Liabilities are recognized forstatutory, contractual or legal obligations, normally when incurred, associatedwith the retirement of property, plant and equipment (primarily certain itemsof outside plant and wireless site equipment) when those obligations resultfrom the acquisition, construction, development or normal operation of the assets.The obligations are measured initially at fair value, determined using presentvalue methodology, and the resulting costs capitalized into the carrying amountof the related asset. In subsequent periods, the liability is adjusted for theaccretion of discount and any changes in the amount or timing of the underlyingfuture cash flows. The capitalized asset retirement cost is depreciated on thesame basis as the related asset and the discount accretion is included indetermining the results of operations.

 

### **(q)**          Leases

### ** **

Leases are classified as capital or operating depending upon the termsand conditions of the contracts.

 

Wherethe Company is the lessee, asset values recorded under capital leases areamortized on a straight-line basis over the period of expected use. Obligationsrecorded under capital leases are reduced by lease payments net of imputedinterest.

 

Forthe year ended December 31, 2007, real estate and vehicle operating leaseexpenses, which are net of the amortization of the deferred gain on thesale-leaseback of buildings, were $211.0 million (2006 –$187.6 million). The unamortized balances of the deferred gains on thesale-leaseback of buildings are set out in Note 20(b).

 

### **(r)**          Investments

### ** **

TheCompany accounts for its investments in companies over which it has significantinfluence using the equity basis of accounting whereby the investments areinitially recorded at cost and subsequently adjusted to recognize the Company’sshare of earnings or losses of the investee companies and reduced by dividendsreceived. The excess of the cost of equity investments over the underlying bookvalue at the date of acquisition, except for goodwill, is amortized over theestimated useful lives of the underlying assets to which it is attributed.

 

The Company accounts for its other investments using the cost basis ofaccounting whereby investments are initially recorded at cost and earnings fromsuch investments are recognized only to the extent received or receivable.

 

Carrying values of equity and cost investments are reduced to estimatedmarket values if there is other than a temporary decline in the value of theinvestment; such reduction recorded is included in the Consolidated Statementsof Income and Other Comprehensive Income as Other expense, net.

 

### **(s)**          Comparative amounts

### ** **

Certainof the comparative amounts have been reclassified to conform to thepresentation adopted currently.

 

Ofparticular note, assets under construction are now separated between tangibleand intangible, as set out in Note 14(a); previously, although the assetsunder construction were appropriately relieved either to tangible or intangibleclassifications, they were included wholly as tangible assets when underconstruction.

 

## **2****                ****accounting policy developments**

##  

### **(a)**          Convergencewith International Financial Reporting Standards

### ** **

In 2006, Canada’sAccounting Standards Board ratified a strategic plan that will result inCanadian GAAP, as used by public companies, being evolved and converged withInternational Financial Reporting Standards (IFRS) over a transitional periodto be complete by 2011. The Company will be required to report using theconverged standards effective for interim and annual financial statementsrelating to fiscal years beginning on or after January 1, 2011.

 

Canadian GAAP will be converged with IFRS through acombination of two methods: as current joint-convergence projects of the UnitedStates’ Financial Accounting Standards Board and the International AccountingStandards Board are agreed upon, they will be adopted by Canada’s AccountingStandards Board and may be introduced in Canada before the complete changeoverto IFRS; and standards not subject to a joint-convergence project will beexposed in an omnibus manner for introduction at the time of the completechangeover to IFRS. As discussed further in Note 21(h), the United States’Financial Accounting Standards Board and the International Accounting StandardsBoard have completed a joint-project on business combinations andnon-controlling interests.

 

17

----

 

notes to consolidated financial statements

 

As the International Accounting Standards Boardcurrently, and expectedly, has projects underway that should result in newpronouncements that continue to evolve IFRS, and as this Canadian convergenceinitiative is in an early stage as of the date of these consolidated financialstatements, it is premature to currently assess the impact of the Canadianinitiative on the Company.

 

### **(b)**          Comprehensiveincome; recognition and measurement of financial instruments

### ** **

*Overview:* Commencing with theCompany’s 2007 fiscal year, the recommendations of the CICA for accounting forcomprehensive income (CICA Handbook Section 1530), for the recognition andmeasurement of financial instruments (CICA Handbook Section 3855) and forhedges (CICA Handbook Section 3865) apply to the Company. Currently, theconcept of comprehensive income for purposes of Canadian GAAP, in the Company’sspecific instance, is primarily to include changes in shareholders’ equityarising from *unrealized* changes in the fairvalues of certain financial instruments.

 

The majority of the impact on the Company ofadopting the comprehensive income and related standards currently arises fromthe Company’s cross currency interest rate swap agreements, as discussedfurther in Note 17(b) and, to a lesser extent, the cash-settled equityforward agreements that the Company entered into in respect of share-basedcompensation, as discussed further in Note 11(c).

 

Inthe application of hedge accounting to U.S. Dollar denominated long-termdebt future cash outflows, an amount (the hedge value) is recorded in theConsolidated Balance Sheets in respect of the value of the hedging items. Inrespect of these future cash flows, the difference arising from the newlyapplied CICA recommendations is the difference between: (a) the hedgingasset or liability necessary to recognize the Canadian dollar equivalent of thevalue of the hedged items at the rate of exchange in the hedging items; and (b) thefair value of the hedging items. This is illustrated in the following table:

 
| ** **                                                                      | ** ** | **2007**            | ** ** | **2006**            | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **As at December 31 (millions)**                            | ** ** | **2011 Notes** | ** ** | **2007 Notes** | ** ** | **2011 Notes** | ** ** | **Total** | ** ** |
| Canadian dollar equivalent of principal at rates of exchange in  hedging items  |       | $                   | 2,950.5    |                | $          | 1,483.3 |   | $ | 2,950.5 |   | $ | 4,433.8 |   |
| Canadian dollar equivalent of principal at balance sheet date rate of  exchange |       | 1,908.3             |       | 1,357.9             |       | 2,240.2 |   | 3,598.1 |   |
| Hedge value necessary to reflect rates of exchange in hedging items             |       | 1,042.2             |       | 125.4               |       | 710.3 |   | 835.7 |   |
| Difference arising from newly applied CICA recommendations(1)                   |       | 137.3               |       | 14.2                |       | 250.8 |   | 265.0 |   |
| Fair value of hedging items                                                     |       | $                   | 1,179.5    |                | $          | 139.6 |   | $ | 961.1 |   | $ | 1,100.7 |   |

 

----

(1)          The amounts as at December 31, 2006, are included in thetransitional adjustments set out in Note 18(d).

 

Comprehensiveincome as prescribed by U.S. GAAP, and which is disclosed in Note 21(g), is largely aligned withcomprehensive income as prescribed by Canadian GAAP, other than for pensionaccounting impacts. In the Company’s specific instance, U.S. GAAPincludes, in respect of pension and other defined benefit plans, the differencebetween the net funded states of the plans and the net accrued benefit asset orliability.

 

*Implementation and application:* In the Company’s specificinstance, the transitional rules for these sections generally requireprospective implementation at the beginning of a fiscal year (the exceptionbeing in respect of the cumulative foreign currency translation adjustment,which is retrospectively adjusted for at the beginning of the fiscal year ofadoption).

 

Costsof issuing debt securities, less amortization, are now netted against the debtsecurity from which they arose. This resulted in a consolidated balance sheetreclassification from deferred charges to long-term debt of $19.9 millionas at December 31, 2006. Prior to 2007, costs of issuing debt securitieswere amortized on a straight-line basis, such costs are now required to beamortized using the effective interest method; the Company was not materiallyaffected by the change in amortization method, which was prospectively applied.

 

Inthe ongoing application of these recommendations, the Company was required toselect from a number of pertinent alternative acceptable accounting principlesand methods and the Company has made the selections set out in Note 1(h).

 

18

----

 

notes to consolidated financial statements

 

*Effects disclosure:* The effects of the applicationof CICA Handbook Sections 1530, 3855 and 3865 on the Company’s results ofoperations for the year ended December 31, 2007, are as set out in thefollowing table:

 
| **Year ended December 31, 2007 (millions except per share amounts)** | ** ** | **Excluding effect of  application of****HB 1530, HB 3855  and HB 3865** | ** ** | **Incremental effect  of application of   HB 1530, HB 3855  and HB 3865** | ** ** | **As currently  reported** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| Operating revenues                                                                                                |       | $                                                                                                                | 9,074.4    |                                                                                                                   | $          | —                          |       | $ | 9,074.4 |   |
| Operating expenses                                                                                                |       | 7,100.1                                                                                                          |       | —                                                                                                                 |       | 7,100.1                         |       |
| Operating income                                                                                                  |       | 1,974.3                                                                                                          |       | —                                                                                                                 |       | 1,974.3                         |       |
| Other expenses, net                                                                                               |       | 35.8                                                                                                             |       | 0.3                                                                                                                    |       | 36.1                            |       |
| Financing costs                                                                                                   |       | 446.3                                                                                                            |       | (6.2                                                                                                                   | )          | 440.1                           |       |
| Income before income taxes and non-controlling interest                                                           |       | 1,492.2                                                                                                          |       | 5.9                                                                                                                    |       | 1,498.1                         |       |
| Income taxes                                                                                                      |       | 231.5                                                                                                            |       | 2.1                                                                                                                    |       | 233.6                           |       |
| Non-controlling interests                                                                                         |       | 6.6                                                                                                              |       | —                                                                                                                 |       | 6.6                             |       |
| Net income and Common Share and Non-Voting Share income                                                           |       | 1,254.1                                                                                                          |       | 3.8                                                                                                                    |       | 1,257.9                         |       |
| Other comprehensive income                                                                                        |       | —                                                                                                           |       | 74.2                                                                                                                   |       | 74.2                            |       |
| Comprehensive income                                                                                              |       | $                                                                                                                | 1,254.1    |                                                                                                                   | $          | 78.0                            |       | $ | 1,332.1 |   |
| Net income per Common Share and Non-Voting Share                                                                  |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| – Basic                                                                                                      |       | $                                                                                                                | 3.78       |                                                                                                                   | $          | 0.01                            |       | $ | 3.79 |   |
| – Diluted                                                                                                    |       | $                                                                                                                | 3.75       |                                                                                                                   | $          | 0.01                            |       | $ | 3.76 |   |

 

The effects of the application of CICA HandbookSections 1530, 3855 and 3865 on the Company’s retained earnings for theyear ended December 31, 2007, are as set out in the following table:

 
| **Year ended December 31, 2007 (millions)**         | ** ** | **Excluding effect   of application of****   HB 1530, HB 3855  and HB 3865** | ** ** | **Incremental effect of  application of  HB 1530, HB 3855  and HB 3865** | ** ** | **As currently  reported** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| Balance at beginning of period                                               |       | $                                                                                                                              | 1,200.0    |                                                                                                             | $          | —                          |       | $ | 1,200.0 |   |
| Income                                                                       |       | 1,254.1                                                                                                                        |       | 3.8                                                                                                              |       | 1,257.9                         |       |
|                                                                         |       | 2,454.1                                                                                                                        |       | 3.8                                                                                                              |       | 2,457.9                         |       |
| Common Share and Non-Voting Share dividends paid, or payable, in cash        |       | (520.8                                                                                                                         | )          | —                                                                                                           |       | (520.8                          | )          |
| Purchase of Common Shares and Non-Voting Shares in excess of stated  capital |       | (483.3                                                                                                                         | )          | —                                                                                                           |       | (483.3                          | )          |
| Other                                                                        |       | 3.7                                                                                                                            |       | —                                                                                                           |       | 3.7                             |       |
| Balance at end of period                                                     |       | $                                                                                                                              | 1,453.7    |                                                                                                             | $          | 3.8                             |       | $ | 1,457.5 |   |

 

19

----

 

notes to consolidated financial statements

 

The effects of the application of CICA Handbook Sections1530, 3855 and 3865 on the Company’s financial position as at December 31,2007, are as set out in the following table:

 
| **As at December 31, 2007 (millions)** | ** ** | **Excluding effect of  application of****HB 1530, HB 3855  and HB 3865** | ** ** | **Incremental effect  of application of   HB 1530, HB 3855  and HB 3865** | ** ** | **As currently  reported** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Assets**                                                      |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Current assets                                                  |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Cash and temporary investments, net                             |       | $                                                                                                                | 19.9       |                                                                                                                   | $          | —                          |       | $ | 19.9 |   |
| Short-term investments                                          |       | 42.7                                                                                                             |       | (0.3                                                                                                                   | )          | 42.4                            |       |
| Accounts receivable                                             |       | 710.9                                                                                                            |       | —                                                                                                                 |       | 710.9                           |       |
| Income and other taxes receivable                               |       | 120.9                                                                                                            |       | —                                                                                                                 |       | 120.9                           |       |
| Inventories                                                     |       | 243.3                                                                                                            |       | —                                                                                                                 |       | 243.3                           |       |
| Prepaid expenses and other                                      |       | 199.5                                                                                                            |       | —                                                                                                                 |       | 199.5                           |       |
| Derivative assets                                               |       | 3.0                                                                                                              |       | 0.8                                                                                                                    |       | 3.8                             |       |
|                                                            |       | 1,340.2                                                                                                          |       | 0.5                                                                                                                    |       | 1,340.7                         |       |
| Capital assets, net                                             |       | 11,122.0                                                                                                         |       | —                                                                                                                 |       | 11,122.0                        |       |
| Other assets                                                    |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Deferred charges                                                |       | 1,342.2                                                                                                          |       | (24.2                                                                                                                  | )          | 1,318.0                         |       |
| Investments                                                     |       | 37.8                                                                                                             |       | 1.1                                                                                                                    |       | 38.9                            |       |
| Goodwill                                                        |       | 3,168.0                                                                                                          |       | —                                                                                                                 |       | 3,168.0                         |       |
|                                                            |       | 4,548.0                                                                                                          |       | (23.1                                                                                                                  | )          | 4,524.9                         |       |
|                                                            |       | $                                                                                                                | 17,010.2   |                                                                                                                   | $          | (22.6                           | )          | $ | 16,987.6 |   |
| **Liabilities and Shareholders’ Equity**                   |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Current liabilities                                             |       | $                                                                                                                | 2,686.0    |                                                                                                                   | $          | —                          |       | $ | 2,686.0 |   |
| Long-term debt                                                  |       | 4,613.9                                                                                                          |       | (30.4                                                                                                                  | )          | 4,583.5                         |       |
| Other long-term liabilities                                     |       | 1,580.9                                                                                                          |       | 137.0                                                                                                                  |       | 1,717.9                         |       |
| Future income taxes                                             |       | 1,086.3                                                                                                          |       | (38.2                                                                                                                  | )          | 1,048.1                         |       |
| Non-controlling interests                                       |       | 25.9                                                                                                             |       | —                                                                                                                 |       | 25.9                            |       |
| Shareholders’ equity                                       |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Common Shares                                                   |       | 2,227.7                                                                                                          |       | —                                                                                                                 |       | 2,227.7                         |       |
| Non-Voting Shares                                               |       | 3,192.0                                                                                                          |       | —                                                                                                                 |       | 3,192.0                         |       |
|                                                            |       | 5,419.7                                                                                                          |       | —                                                                                                                 |       | 5,419.7                         |       |
| Cumulative foreign  currency translation adjustment             |       | (8.7                                                                                                             | )          | 8.7                                                                                                                    |       | —                          |       |
| Retained earnings and accumulated other comprehensive income    |       |                                                                                                             |       |                                                                                                                   |       |                            |       |
| Retained earnings                                               |       | 1,453.7                                                                                                          |       | 3.8                                                                                                                    |       | 1,457.5                         |       |
| Accumulated other comprehensive income (loss)                   |       | —                                                                                                           |       | (103.5                                                                                                                 | )          | (103.5                          | )          |
|                                                            |       | 1,453.7                                                                                                          |       | (99.7                                                                                                                  | )          | 1,354.0                         |       |
| Contributed surplus                                             |       | 152.5                                                                                                            |       | —                                                                                                                 |       | 152.5                           |       |
|                                                            |       | 7,017.2                                                                                                          |       | (91.0                                                                                                                  | )          | 6,926.2                         |       |
|                                                            |       | $                                                                                                                | 17,010.2   |                                                                                                                   | $          | (22.6                           | )          | $ | 16,987.6 |   |

 

### **(c)**          Financialinstruments – disclosure; presentation

### ** **

Inrespect of its 2007 fiscal year, the Company had to comply with therecommendations of the CICA for financial instrument disclosure andpresentation (CICA Handbook Section 3861). As an activity consistent withCanadian GAAP being evolved and converged with IFRS, the existingrecommendations for financial instrument *disclosure* willbe replaced with new recommendations (CICA Handbook Section 3862); theexisting recommendations for financial instrument *presentation*will be carried forward, unchanged (CICA Handbook Section 3863).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA forfinancial instrument disclosures will apply to the Company. The newrecommendations will result in incremental disclosures, relative to thosecurrently, with an emphasis on risks associated with both recognized andunrecognized financial instruments to which an entity is exposed during theperiod and at the balance sheet date, and how an entity manages those risks.The Company does not expect to be materially affected by the newrecommendations.

 

20

----

 

notes to consolidated financial statements

 

### **(d)**          Inventories

### ** **

Commencingwith the Company’s 2008 fiscal year, the new, IFRS-converged recommendations ofthe CICA for accounting for inventories (CICA Handbook Section 3031) willapply to the Company. The new recommendations provide more guidance on themeasurement and disclosure requirements for inventories; significantly, the newrecommendations allow the reversals of previous write-downs to net realizablevalue where there is a subsequent increase in the value of inventories. TheCompany does not expect to be materially affected by the new recommendations.

 

### **(e)**          Employee futurebenefits transitional pension asset accounting

### ** **

Inthe adoption and implementation of new accounting recommendations for employeefuture benefits (CICA Handbook Section 3461) in its 2000 fiscal year, theCompany was required to make various estimates, assumptions anddeterminations.  At the time ofimplementation, the Company concluded that one defined benefit pension plan hadcertain features that resulted in the Company recognizing one-half of theassociated transitional asset through amortization over the associated expectedaverage remaining service life of the employee group at the time ofimplementing the then new recommendations. During the year, the Companyrevisited the various determinations made in 2000 and concluded that it shouldhave recognized the entire associated transitional asset.

 

Thefollowing schedules reflect the impact of this correction, which the Companyhas concluded is not material to its previously filed consolidated financialstatements, to specific income statement and balance sheet accounts; thiscorrection reflects the retroactive recognition of the entire defined benefitpension plan’s transitional asset, amortized over the expected averageremaining service life of the employee group.

 

The effects of the adjustments to reflect theamortization of the entire transitional asset on the Company’s results ofoperations, including the associated effects of income tax rate changes, forthe year ended December 31, 2006, are as set out in the following table:

 
| **Year ended December 31, 2006 (millions except per share amounts)** | ** ** | **As previously  reported** | ** ** | **Adjustment to  reflect entire  transitional asset  of a defined benefit  pension plan** | ** ** | **As currently  reported(1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| Operating revenues                                                                                                |       | $                                | 8,681.0    |                                                                                                                         | $          | —                             |       | $ | 8,681.0 |   |
| Operating expenses                                                                                                |       |                             |       |                                                                                                                         |       |                               |       |
| Operations                                                                                                        |       | 5,022.9                          |       | (24.7                                                                                                                        | )          | 4,998.2                            |       |
| Restructuring costs                                                                                               |       | 67.8                             |       | —                                                                                                                       |       | 67.8                               |       |
| Depreciation                                                                                                      |       | 1,353.4                          |       | —                                                                                                                       |       | 1,353.4                            |       |
| Amortization of intangible assets                                                                                 |       | 222.2                            |       | —                                                                                                                       |       | 222.2                              |       |
|                                                                                                              |       | 6,666.3                          |       | (24.7                                                                                                                        | )          | 6,641.6                            |       |
| Operating income                                                                                                  |       | 2,014.7                          |       | 24.7                                                                                                                         |       | 2,039.4                            |       |
| Other expenses, net                                                                                               |       | 28.0                             |       | —                                                                                                                       |       | 28.0                               |       |
| Financing costs                                                                                                   |       | 504.7                            |       | —                                                                                                                       |       | 504.7                              |       |
| Income before income taxes and non-controlling interest                                                           |       | 1,482.0                          |       | 24.7                                                                                                                         |       | 1,506.7                            |       |
| Income taxes                                                                                                      |       | 351.0                            |       | 2.2                                                                                                                          |       | 353.2                              |       |
| Non-controlling interests                                                                                         |       | 8.5                              |       | —                                                                                                                       |       | 8.5                                |       |
| Net income and Common Share and Non-Voting Share income                                                           |       | $                                | 1,122.5    |                                                                                                                         | $          | 22.5                               |       | $ | 1,145.0 |   |
| Income per Common Share and Non-Voting Share                                                                      |       |                             |       |                                                                                                                         |       |                               |       |
| – Basic                                                                                                      |       | $                                | 3.27       |                                                                                                                         | $          | 0.06                               |       | $ | 3.33 |   |
| – Diluted                                                                                                    |       | $                                | 3.23       |                                                                                                                         | $          | 0.07                               |       | $ | 3.30 |   |

 

----

(1)          Excluding impacts of adopting accounting recommendations forcomprehensive income, as set out in Note 2(b).

 

21

----

 

notes to consolidated financial statements

 

The effects of the adjustments to reflect theamortization of the entire transitional asset on the Company’s financialposition, including the associated effects of income tax rate changes, as at December 31,2006, are as set out in the following table:

 
| **As at December 31, 2006 (millions)** | ** ** | **As previously  reported(1)** | ** ** | **Adjustment to  reflect entire  transitional asset  of a defined benefit  pension plan** | ** ** | **As currently  reported** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Assets**                                                      |       |                                |       |                                                                                                                         |       |                            |       |
| Current assets                                                  |       | $                                   | 1,344.9    |                                                                                                                         | $          | —                          |       | $ | 1,344.9 |   |
| Capital assets, net                                             |       | 10,982.1                            |       | —                                                                                                                       |       | 10,982.1                        |       |
| Other assets                                                    |       |                                |       |                                                                                                                         |       |                            |       |
| Deferred charges                                                |       | 956.6                               |       | 173.1                                                                                                                        |       | 1,129.7                         |       |
| Investments                                                     |       | 35.2                                |       | —                                                                                                                       |       | 35.2                            |       |
| Goodwill                                                        |       | 3,169.5                             |       | —                                                                                                                       |       | 3,169.5                         |       |
|                                                            |       | 4,161.3                             |       | 173.1                                                                                                                        |       | 4,334.4                         |       |
|                                                            |       | $                                   | 16,488.3   |                                                                                                                         | $          | 173.1                           |       | $ | 16,661.4 |   |
| **Liabilities and Shareholders’ Equity**                   |       |                                |       |                                                                                                                         |       |                            |       |
| Current liabilities                                             |       | $                                   | 3,781.3    |                                                                                                                         | $          | —                          |       | $ | 3,781.3 |   |
| Long-term debt                                                  |       | 3,474.7                             |       | —                                                                                                                       |       | 3,474.7                         |       |
| Other long-term liabilities                                     |       | 1,257.3                             |       | —                                                                                                                       |       | 1,257.3                         |       |
| Future income taxes                                             |       | 1,023.3                             |       | 53.2                                                                                                                         |       | 1,076.5                         |       |
| Non-controlling interests                                       |       | 23.6                                |       | —                                                                                                                       |       | 23.6                            |       |
| Shareholders’ equity(2)                                    |       | 6,928.1                             |       | 119.9                                                                                                                        |       | 7,048.0                         |       |
|                                                            |       | $                                   | 16,488.3   |                                                                                                                         | $          | 173.1                           |       | $ | 16,661.4 |   |

 

----

(1)        The December 31,2006, amounts reflected as previously reported have been adjusted for a $44.0reclassification of future income taxes between current and non-current and a $19.9 reclassification of debt issue costs(Note 2(b)).

(2)        Shareholders’equity changes are restricted to changes in retained earnings.  Retained earnings as at December 31,2005, would increase from $849.7 to $947.1.

 

## **3****                ****capital structure financial policies**

##  

The Company’s objectives when managing capitalare: (i) to maintain a flexible capital structure which optimizes the costof capital at acceptable risk; and (ii) to manage capital in a mannerwhich balances the interests of equity and debt holders.

 

In the management of capital, the Company includesshareholders’ equity (excluding accumulated other comprehensive income),long-term debt (including any associated hedging assets or liabilities, net ofamounts recognized in accumulated other comprehensive income), cash andtemporary investments and securitized accounts receivable in the definition ofcapital.

 

The Company manages the capital structure and makesadjustments to it in the light of changes in economic conditions and the riskcharacteristics of the underlying assets. In order to maintain or adjust thecapital structure, the Company may adjust the amount of dividends paid toshareholders, purchase shares for cancellation pursuant to normal course issuerbids, issue new shares, issue new debt, issue new debt to replace existing debtwith different characteristics and/or increase or decrease the amount of salesof trade receivables to an arm’s-length securitization trust.

 

The Company monitors capital on a number of bases,including: net debt to Earnings Before Interest, Taxes, Depreciation andAmortization – excluding restructuring costs (EBITDA – excluding restructuringcosts); and dividend payout ratio of sustainable net earnings.

 

Net debt to EBITDA – excluding restructuring costs iscalculated as net debt at the end of the period divided by twelve-month trailingEBITDA – excluding restructuring costs. Net debt is a non-GAAP measure, whosenearest GAAP measure is long-term debt; the calculation of net debt is as setout in the following schedule. Net debt is one component of a ratio used todetermine compliance with debt covenants. The calculation of EBITDA – excludingrestructuring costs is a non-GAAP measure whose nearest GAAP measure is netincome; the calculation of EBITDA – excluding restructuring costs is as set outin the following schedule. This measure, historically, is substantially thesame as the leverage ratio covenant in the Company’s credit facilities.

 

Dividend payout ratio of sustainable net earnings iscalculated as the most recent quarterly dividend declared per share multipliedby four and divided by basic earnings per share for the twelve-month trailingperiod.

 

22

----

 

notesto consolidated financial statements

 

During 2007, the Company’s strategy, whichwas unchanged from 2006, was to maintain the financial policies and guidelinesset out in the following schedule. The Company believes that these financialpolicies and guidelines, which are reviewed annually, are currently at theoptimal level and provide access to capital at a reasonable cost by maintainingcredit ratings in the range of BBB+ to A-, or the equivalent.

 
| ** **                                                        | ** ** | **Policies and   guidelines** | ** ** | **2007**   | ** **  | **2006**                         | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|------------|-------------|----------------------------------|------------|
|                                                              |       |                                    |       |       |        | **(restated  – Note 2(e))** |       |
| Components of debt and coverage ratios                            |       |                                    |       |       |        |                             |       |
| Net debt(1)                                                       | ** ** | ** **                              |       | **$**      | **6,141.6** |                             | $          | 6,278.1 |   |
| EBITDA – excluding restructuring costs(2)                    | ** ** | ** **                              |       | **$**      | **3,609.7** |                             | $          | 3,682.8 |   |
| Net interest  cost(3)                                             | ** ** | ** **                              |       | **$**      | **440.1**   |                             | $          | 504.7 |   |
|                                                              | ** ** | ** **                              |       | ** ** |        |                             |       |
| Debt ratio                                                        |       |                                    |       |       |        |                             |       |
| Net debt to EBITDA – excluding  restructuring costs          |       | 1.5 – 2.0                          | ** ** | **1.7**    |        | 1.7                              |       |
|                                                              |       |                                    | ** ** | ** ** |        |                             |       |
| Coverage ratios                                                   |       |                                    |       |       |        |                             |       |
| Interest coverage on long-term debt(4)                            | ** ** | ** **                              |       | **4.2**    |        | 3.9                              |       |
| EBITDA – excluding restructuring costs  interest coverage(5) | ** ** | ** **                              |       | **8.2**    |        | 7.3                              |       |
|                                                              | ** ** | ** **                              |       | ** ** |        |                             |       |
| Other measure                                                     |       |                                    |       |       |        |                             |       |
| Dividend payout ratio of sustainable net  earnings                |       | 45 – 55%                           |       | **47**     | **%**       | 45                               | %          |

 

----

(1)          Net debt is calculated asfollows:

 
| ** **                                                                                                                                                                       | ** ** | **2007**    | ** **  | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|
| Long-term debt (Note 17)                                                                                                                                                         | ** ** | **$**       | **4,588.9** |     | $          | 4,908.2 |   |
| Debt issuance costs netted against long-term  debt                                                                                                                               | ** ** | **30.4**    |        | 19.9     |       |
| Derivative liabilities, net                                                                                                                                                      | ** ** | **1,179.5** |        | 838.5    |       |
| Accumulated other comprehensive income  amounts arising from financial instruments used to manage interest rate and  currency risks associated with U.S. Dollar denominated debt | ** ** | **(137.3**  | **)**       | —   |       |
| Cash and temporary investments, net                                                                                                                                              | ** ** | **(19.9**   | **)**       | 11.5     |       |
| Securitized accounts receivable (Note 13)                                                                                                                                        | ** ** | **500.0**   |        | 500.0    |       |
| Net debt                                                                                                                                                                         | ** ** | **$**       | **6,141.6** |     | $          | 6,278.1 |   |

 

(2)          EBITDA – excluding restructuringcosts is calculated as follows:

 
| ** **                                  | ** ** | **2007**   | ** **  | **2006**                                       | ** ** |
|---------------------------------------------|------------|------------|-------------|------------------------------------------------|------------|
| ** **                                  | ** ** | ** ** | ** **  | **(restated – Note 2(e))** | ** ** |
| EBITDA (Note 6)                             | ** ** | **$**      | **3,589.3** |                                           | $          | 3,615.0 |   |
| Restructuring costs (Note 7)                | ** ** | **20.4**   |        | 67.8                                           |       |
| EBITDA – excluding restructuring costs | ** ** | **$**      | **3,609.7** |                                           | $          | 3,682.8 |   |

 

(3)          Net interest cost isdefined as financing costs before gains on redemption and repayment of debt,calculated on a twelve-month trailing basis (losses recorded on the redemptionof long-term debt are included in net interest cost).

(4)          Interest coverage onlong-term debt is defined as net income before interest expense on long-termdebt and income tax expense, divided by interest expense on long-term debt(including losses recorded on the redemption of long-term debt).

(5)          EBITDA – excluding restructuringcosts interest coverage is defined as EBITDA – excluding restructuring costs divided by net interestcost. This measure is substantially the same as the coverage ratio covenant inthe Company’s credit facilities.

 

Interest coverage on long-term debt improvedby 0.3 because of lower interest expenses. The EBITDA – excluding restructuringcosts interest coverage ratio improved by 1.0 due to lower net interest costand decreased by 0.1 due to lower EBITDA – excluding restructuring costs.

 

The dividend payout ratio for the year ended December 31,2007, was 47% and the ratio calculated to exclude the impacts of taxadjustments and the charge for adding the net-cash settlement feature for shareoptions was 54%.

 

## **4****                ****regulation of rates charged to customers**

##  

### **(a)**          General

 

The provision oftelecommunications services by the Company through TELUS Communications Companypartnership and the TELE-MOBILE COMPANY partnership is subject to regulationunder provisions of the *TelecommunicationsAct*. The regulatory authority designated to implement the *Telecommunications Act* is the CRTC, whichis established pursuant to the terms of the *CanadianRadio-television and Telecommunications Act*.

 

23

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notesto consolidated financial statements

 

Pursuantto Part III of the *TelecommunicationsAct*, the CRTC may forbear, conditionally or unconditionally, fromregulating the rates for certain telecommunications services, or certainclasses of telecommunications service providers, where the CRTC finds that theservice or class of service provided by the telecommunications service provideris subject to competition sufficient to protect the interests of customers.TELUS Communications Company partnership has, for example, been grantedforbearance from regulation in relation to its entire portfolio of wireless andpaging services. In the latter half of 2007, TELUS Communications Companypartnership was granted forbearance in relation to the setting of rates for anumber of its wireline telecommunications services that are provided within 63residential and 35 business exchanges where it was determined that there wassignificant competition for such services to protect the interests ofcustomers. Previously forborne services, including interexchange voiceservices, wide area network services and retail Internet services, remain forborne.TELUS Communications Company partnership also operates as a forbornetelecommunications service provider when it provides telecommunicationsservices (primarily business local exchange service) outside of its traditionalincumbent serving territory (Alberta, British Columbia and parts of Quebec)and, as such, all of its services are not subject to rate regulation.

 

Thefact that a portion of the Company’s operations remain subject to rateregulation does not result in the Company selecting accounting policies thatwould differ from generally accepted accounting principles.

 

Lessthan one-quarter of the Company’s revenues are from Wireline segment regulatedservices and subject to CRTC price regulation; none of the Company’s Wirelesssegment revenues are currently subject to CRTC regulation.

 

The major categories of telecommunications servicesprovided by TELUS Communications Company partnership that are subject to rateregulation or have been forborne from rate regulation are as follows:

 
| **Regulated services**                                                                                                   |   | **Forborne services (not subject to rate regulation)**                                                                                                  |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   Residential wireline  services in incumbent local exchange carrier regions in non-forborne  exchanges |   | ·   Residential wireline services in incumbent local  exchange carrier regions in forborne exchanges(1)                                  |
| ·   Business wireline  services in incumbent local exchange carrier regions in non-forborne  exchanges    |   | ·   Business wireline services in incumbent local  exchange carrier regions in forborne exchanges(2)                                     |
| ·   Competitor services                                                                                   |   | ·   Non-incumbent local exchange carrier services                                                                                        |
| ·   Public telephone  services                                                                            |   | ·   Long distance services                                                                                                               |
|                                                                                                                     |   | ·   Internet services                                                                                                                    |
|                                                                                                                     |   | ·   International  telecommunications services                                                                                           |
|                                                                                                                     |   | ·   Interexchange private  line services(3)                                                                                              |
|                                                                                                                     |   | ·   Certain data services                                                                                                                |
|                                                                                                                     |   | ·   Cellular, enhanced  specialized mobile radio digital (ESMR digital) and personal communications  services digital (PCS digital) |
|                                                                                                                     |   | ·   Other wireless  services, including paging                                                                                           |
|                                                                                                                     |   | ·   Sale of customer  premises equipment (CPE)                                                                                           |

 

----

(1)   Forborne on exchanges where two or morecompetitors, including wireless service providers, are offering or providingsimilar services.

(2)   Forborne on exchanges where one or morecompetitors, including wireless service providers, are offering or providingsimilar services

(3)   Forborne on routes where one or more competitorsare offering or providing services at DS-3 or greater bandwidth.

 

### **(b)**   Price caps form of regulation

### ** **

TheCRTC has adopted a form of price cap regulation as the means by which itregulates the prices for the Company’s telecommunications rate regulatedservices. A four-year price regulation regime commenced on June 1, 2002,with the issuance of the CRTC’s Decision 2002-34; on December 16,2005, the CRTC issued Decision 2005-69 that extended that price capregime, without changes, for a period of one year to May 31, 2007. TheCRTC conducted a review of the existing price cap regulation which included anoral hearing held in Gatineau, Quebec. This proceeding was concluded in thefourth quarter of 2006 with the CRTC issuing its decision in this matter on April 30,2007. The decision was consistent with the Company’s current accountingpolicies.

 

24

----

 

notesto consolidated financial statements

 

*Rate-setting methodology*: Under the prospectiveprice regulation framework, services are separated into seven servicecategories, or baskets, for those exchanges which continue to be regulated.Price constraints within the individual baskets are outlined within thefollowing table.

** **
| **Capped and non-forborne basket**                          | ** ** | **Price cap constraint**               | ** ** | **Overriding   maximum annual   increase** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Residential wireline services in incumbent  local exchange carrier regions |       |                                             |       |                                                      |       |
| In non-high cost serving areas                                             |       | Capped at  existing rates                        |       | 0                                                         | %          |
| In high cost serving areas                                                 |       | Increase by  lesser of inflation(1) or 5%   |       | 5                                                         | %          |
| Business wireline services in incumbent  local exchange carrier regions    |       | Increase  annually by inflation(1)               |       | 10                                                        | %          |
| Other capped services                                                      |       | Increase  annually by inflation(1)               |       | 10                                                        | %          |
| Competitor services                                                        |       | Inflation(1) less  3.2% productivity offset |       | 0                                                         | %          |
| Public telephone services                                                  |       | One-time $0.50  increase                         |       | N/A                                                       |       |
| Services with frozen rates**(*e.g.***9-1-1 service)                        |       | Capped at  existing rates                        |       | 0                                                         | %          |

 

----

(1)           Asmeasured by chain-weighted Gross Domestic Product Price Index.

 

Primary exchange rates for forborne services/exchangesare capped at existing rates.

 

### **(c)**          Other non-price cap regulation

### ** **

*Other:* The CRTC has adopted an imputation test filingrequirement to set floor prices for rate regulated services. The imputationtest filing requirements ensure that the incumbent telephone companies do notreduce rates for services below their costs in an effort to thwart competitiveentry or engage in predatory pricing to drive out existing competitors.

 

*Unbundling of essential facilities:*  In an effort to foster facilities-basedcompetition in the provision of telecommunications services, the CRTC hasmandated that certain essential or near-essential facilities be made availableto competitors at rates based on their incremental costs plus an approvedmark-up. The CRTC has defined essential facilities as facilities which aremonopoly controlled, required by competitors as an input to provide servicesand which cannot be economically or technically duplicated by competitors(which include central office codes, subscriber listings and certain localloops in high cost serving areas). The incumbent local exchange carriers mustprovide certain non-essential facilities, which the CRTC deems to benear-essential, such as local loop facilities in low cost areas and transitingarrangements, at prices determined as if they were essential facilities. Thisobligation on the part of the incumbent local exchange carriers will continueuntil the market for near-essentialloops and transiting arrangements is competitive. The CRTC conducted an oralhearing on this matter in Gatineau, Quebec in the fourth quarter of 2007 andthe Company anticipates that the CRTC will issue its decision in this matter inthe second quarter of 2008.

 

*Voice contribution expense andportable subsidy revenue:* Local exchange carriers’ costs of providing thelevel of basic residential services that the CRTC requires to be provided inhigh cost serving areas is more than the CRTC allows the local exchangecarriers to charge for the level of service. To ameliorate the situation, theCRTC collects contribution payments, in a central fund, from all Canadiantelecommunications service providers (including voice, data and wirelessservice providers) that are then disbursed as portable subsidy payments tosubsidize the costs of providing residential telephone services in high costserving areas. The portable subsidy payments are paid based upon a totalsubsidy requirement calculated on a per line/per band subsidy rate, as furtherdiscussed in Note 1(c). The CRTC currently determines, at a nationallevel, the total contribution requirement necessary to pay the portablesubsidies and then collects contribution payments from the Canadiantelecommunications service providers, calculated as a percentage of theirtelecommunications service revenue (as defined in CRTC Decision 2000-745 andTelecom Order CRTC 2001-220). The final contribution expense rate for 2007 is0.94% and the interim rate for 2008 has been similarly set at 0.94%. TheCompany’s contributions to the central fund, $59.6 million for the yearended December 31, 2007 (2006 – $65.9 million), are accounted for asan operations expense and the portable subsidy receipts, $62.5 million forthe year ended December 31, 2007 (2006 – $63.2 million), areaccounted for as local revenue.

 

25

----

 

notesto consolidated financial statements

 

## **5****                ****financial instruments**

##  

### **(a)**          Risks – overview

### ** **

TheCompany’s financial instruments and the nature of the risks which they may besubject to are as set out in the following table.

 
| ** **                                       | ** ** | **Risks**  | ** ** |
|--------------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** |
| **Financial instrument**                    | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured at amortized cost**                   |       |       |       |   |   |   |   |   |   |   |   |
| Cash and temporary investments                   |       | X          |       |   |   |   |   | X |   |   |   |
| Accounts receivable                              |       | X          |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       |       |       | X |   |   |   |   |   |   |   |
| Restructuring accounts payable                   |       |       |       | X |   |   |   |   |   |   |   |
| Short-term obligations                           |       |       |       | X |   |   |   | X |   |   |   |
| Long-term debt                                   |       |       |       | X |   | X |   | X |   |   |   |
| **Measured at fair value**                       |       |       |       |   |   |   |   |   |   |   |   |
| Short-term investments                           |       |       |       |   |   |   |   | X |   | X |   |
| Long-term investments                            |       |       |       |   |   |   |   |   |   | X |   |
| Cross currency interest rate swap derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |
| Share-based compensation derivatives(1)          |       | X          |       | X |   |   |   |   |   | X |   |
| Foreign exchange derivatives(1)                  |       | X          |       | X |   | X |   |   |   |   |   |

 

----

(1)          Use of derivativefinancial instruments is subject to a policy which requires that no derivativetransaction be entered into for the purpose of establishing a speculative orleveraged position and sets criteria for the credit-worthiness of thetransaction counterparties.

 

### **(b)**          Credit risk

### ** **

The best representation of the Company’s maximumexposure (excluding tax effects) to credit risk, which is a worst-case scenarioand does not reflect results expected by the Company, is as set out in thefollowing table:

 
| **As at December 31 (millions)** | ** ** | **2007**  | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|-----------|------------|----------|------------|
| Cash and temporary investments                       | ** ** | **$**     | **19.9**   |     | $          | — |   |
| Accounts receivable                                  | ** ** | **710.9** |       | 707.2    |       |
| Derivative assets                                    | ** ** | **3.8**   |       | 40.4     |       |
| ** **                                           |       | **$**     | **734.6**  |     | $          | 747.6 |   |

 

*Cashand temporary investments*: Credit risk associated with cash and temporaryinvestments is minimized substantially by ensuring that these financial assetsare placed with governments, well-capitalized financial institutions and othercreditworthy counterparties. An ongoing review is performed to evaluate changesin the status of counterparties.

 

*Accounts receivable*: Credit riskassociated with accounts receivable is minimized by the Company’s largecustomer base, which covers substantially all consumer and business sectors inCanada. The Company follows a program of credit evaluations of customers andlimits the amount of credit extended when deemed necessary. The Companymaintains provisions for potential credit losses, and any such losses to datehave been within management’s expectations.

 

No interest is charged oncustomer accounts which are current. Thereafter, interest is charged at aregulatory-based rate on Wireline segment outstanding balances and a marketrate on Wireless segment outstanding balances.

 

As referred to in Note 1(b), the Company must makesignificant estimates in respect of the allowance for doubtful accounts.Current economic conditions, historical information, why the accounts arepast-due and line of business from which the accounts receivable arose are allconsidered when determining whether past-due accounts should be allowed for.The provision for doubtful accounts is calculated on a specific-identificationbasis for accounts over a specific balance threshold and on a non-specificbasis for the remainder.

 

*Derivative assets*: Counterparties to theCompany’s cross currency interest rate swap agreements, share-basedcompensation cash-settled equity forward agreements and foreign exchangederivatives are major financial institutions that have all been accordedinvestment grade ratings by a primary rating agency. The dollar amount ofcredit exposure under contracts with any one financial institution is limitedand counterparties’ credit ratings are monitored. The Company does not give orreceive collateral on swap agreements and hedges due to its credit rating andthose of its counterparties. 

 

26

----

 

notesto consolidated financial statements

 

While the Company is exposed tocredit losses due to the non-performance of its counterparties, the Companyconsiders the risk of this remote.

 

### **(c)**          Liquidity risk

### ** **

The Company manages liquidity risk by maintainingbilateral bank facilities and a credit facility, by continuously monitoringforecast and actual cash flows and managing maturity profiles of financialassets and financial liabilities.The Company has significant debt maturities in future years. The Company hasaccess to a shelf prospectus, in effect until September 2009, pursuant towhich it can issue $3 billion of debt or equity securities. The Companybelieves that its investment grade credit ratings provide reasonable access tocapital markets to facilitate future debt issuance. The Company does notcurrently believe that it will encounter difficulty in meeting its obligationsassociated with financial liabilities.

 

### **(d)**          Currency risk

### ** **

The Company’s functional currency is the Canadian Dollar,but it regularly transacts in U.S. Dollars due to certain routine revenuesand operating costs being denominated in U.S. Dollars, as well as sourcingsome inventory purchases and capital asset acquisitions internationally. TheU.S. Dollar is the only foreign currency to which the Company has a significantexposure.

 

The Company’s foreign exchange risk management includesthe use of foreign currency forward contracts and currency options to fix theexchange rates on short-term U.S. Dollar denominated transactions andcommitments. Hedge accounting is applied to these short-term foreign currencyforward contracts and currency options on an exception basis only.

 

The Company is also exposed to currency risks in that thefair value or future cash flows of its U.S. Dollar denominated long-term debtwill fluctuate because of changes in foreign exchange rates. Currency hedgingrelationships have been established for the related semi-annual interestpayments and principal payments at maturity, as further discussed inNote 1(i) and set out in Note 17(b).

 

### **(e)**          Interest rate risk

### ** **

The Company is exposed to interest rate risk in thatchanges in market interest rates will cause fluctuations in the fair value orfuture cash flows of its temporary investments (if any), short-term investments(if any), short-term obligations (if any), long-term debt and cross currencyinterest rate swap derivatives.

 

When the Company has temporary investments, they haveshort maturities (Note 1(m)) and fixed rates, thus their fair value willfluctuate with changes in market interest rates; absent monetization prior tomaturity, future cash flows do not change due to changes in market interestrates.

 

If the balance of short-term investments included debtinstruments and/or dividend-paying equity instruments, the Company could beexposed to interest rate risks.

 

As short-term obligations (Note 16), which typicallyhave variable interest rates, are rarely outstanding for periods that exceedone calendar week, interest rate risk associated with this item is immaterial.

 

In respect of the Company’s outstanding long-term debt,other than for commercial paper (Note 17(c)) and amounts drawn on its creditfacility (Note 17(d)), it is all effectively fixed-rate debt. The fair value offixed-rate debt fluctuates with changes in market interest rates, but, absentearly redemption and/or foreign exchange rate fluctuations, future cash flowsdo not. Due to the short maturities of commercial paper, its fair values arenot materially affected by changes in market interest rates but cash flows representinginterest payments may be if the commercial paper is rolled over. Amounts drawnon the Company’s credit facility will be affected by changes in market interestrates in a manner similar to commercial paper.

 

Similar to fixed-rate debt, the fair value of the Company’scross currency interest rate swap derivatives fluctuates with changes in marketinterest rates as the interest rate swapped to is fixed; absent earlyredemption, future cash flows do not change due to changes in market interestrates.

 

### **(f)**            Other price risk

### ** **

*Short-term investments:*If the balance of short-term investments includedequity instruments, the Company would be exposed to equity price risks.

 

*Long-term investments:*The Company is exposedto equity price risks arising from investments accounted for using the costmethod. Such investments are held for strategic rather than trading purposes.

 

*Share-based compensationderivatives*: The Company is exposed to other price risk arising from cash-settledshare-based compensation (an appreciating share price increases both theexpense and the potential cash outflow). Cash-settled equity swap agreementshave been entered into that establish a cap on the Company’s cost associatedwith its net-cash settled share options (Note 11(b)) and fix the Company’s costassociated with its restricted stock units (Note 11(c)).

 

27

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notesto consolidated financial statements

 

### **(g)**         Market risk

### ** **

Had the Canadian Dollar: U.S. Dollar foreignexchange rates, market interest rates and the Company’s Non-Voting Share pricesvaried by reasonably possible amounts from their actual fiscal year values andhad these variances been recognized, net income and other comprehensive incomefor the year ended December 31, 2007, could have varied. The Company isexposed to other price risks in respect of its financial instruments, asdiscussed further in Note 5(f). Changes in the Company’s Common Shareprice would not have materially affected the Company’s net income or its other comprehensiveincome.

 

### **(h)**         Fair values

### ** **

The carrying value of cash and temporary investments,accounts receivable, accounts payable, restructuring accounts payable andshort-term obligations approximates their fair values due to the immediate orshort-term maturity of these financial instruments. The carrying values of theCompany’s investments accounted for using the cost method would not exceedtheir fair values.

 

The carrying value of short-term investments equals theirfair value as they are classified as held for trading. The fair value isdetermined directly by reference to quoted market prices.

 

The fair values of the Company’s long-term debt areestimated based on quoted market prices for the same or similar issues or onthe current rates offered to the Company for debt of the same maturity as wellas the use of discounted future cash flows using current rates for similarfinancial instruments subject to similar risks and maturities. The fair valuesof the Company’s derivative financial instruments used to manage exposure tointerest rate and currency risks are estimated similarly.

 

The fair values of the Company’s derivative financialinstruments used to manage exposure to increases in compensation costs arisingfrom certain forms of share-based compensation are estimated based upon fairvalue estimates of the related cash-settled equity forward agreements providedby the counterparty to the transactions.

 

28

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| ** **                                                                                                                                                                      | ** **         | ** **                                                     | ** ** | **2007**                   | ** ** | **2006**                   | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|----------------------------------------------------------------|------------|----------------------------|------------|----------------------------|-------------|
| **As at December 31 (millions)**                                                                                                                            | ** **         | **Hedging item   maximum   maturity date** | ** ** | **Notional   amount** | ** ** | **Carrying   amount** | ** **  | **Fair value** | ** ** | **Notional   amount** | ** ** | **Carrying   amount** | ** ** | **Fair value** | ** ** |
| **Assets**                                                                                                                                                                      |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| Financial assets designated as held for  trading upon initial recognition                                                                                                       |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| - Short-term investments                                                                                                                                                        |               |                                                           |       |                       | ** ** | **$**                      | **42.4**    | ** ** | **$** | **42.4** |   |   |   | $ | 110.2 |   | $ | 110.2 |   |
| - Derivatives used to manage currency risks  arising from U.S. Dollar denominated revenues to which hedge accounting  is not applied                                       |               | 2008                                                           | ** ** | **$**                      | **22.3**   | ** **                 | **0.7**     | ** ** | **0.7** |   | $ | — |   | — |   | — |   |
| - Derivatives used to manage currency risks  arising from U.S. Dollar denominated purchases to which hedge accounting  is not applied                                      |               | 2008                                                           | ** ** | **$**                      | **55.0**   | ** **                 | **0.3**     | ** ** | **0.3** |   | $ | 141.5 |   | — |   | 5.6 |   |
|                                                                                                                                                                            |               |                                                           |       |                       | ** ** | **$**                      | **43.4**    | ** ** | **$** | **43.4** |   |   |   | $ | 110.2 |   | $ | 115.8 |   |
| Derivatives(1) classified as held for  hedging and used to manage currency risks arising from U.S. Dollar  denominated purchases to which hedge accounting is applied |               | 2008                                                           | ** ** | **$**                      | **44.4**   | ** **                 | **$**       | **0.2** | ** ** | **$** | **0.2** |   | $ | 14.7 |   | $ | — |   | $ | 0.5 |   |
| Long-term investments designated as  available-for-sale upon initial recognition                                                                                                |               |                                                           |       |                       | ** ** | **$**                      | **38.9**    | ** ** | **$** | **38.9** |   |   |   | $ | 35.2 |   | $ | 36.9 |   |
| **Liabilities**                                                                                                                                                                 |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| Derivatives used to manage changes in  share-based compensation costs and classified as held for                                                                                |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| - Trading (Note 11(b))                                                                                                                                                          |               | 2012                                                           | ** ** | **$**                      | **220.4**  | ** **                 | **$**       | **26.1** |   |   |   | $ | — |   | $ | — |   | $ | — |   |
| - Net amounts due to counterparties                                                                                                                                             |               |                                                           |       |                       | ** ** | **0.8**                    |        |   |   |   |   |   |   |   |   |
|                                                                                                                                                                            |               |                                                           |       |                       | ** ** | **26.9**                   | ** **  | **$** | **26.9** |   |   |   |   |   |   |   |
| - Hedging(1) (Note 11(c))                                                                                                                                                  |               | 2009                                                           | ** ** | **$**                      | **49.2**   | ** **                 | **1.4**     |   |   |   | $ | 48.7 |   | (6.0 | ) | (11.4 | ) |
| - Net amounts due to counterparties                                                                                                                                             |               |                                                           |       |                       | ** ** | **3.0**                    |        |   |   |   |   |   |   |   |   |
|                                                                                                                                                                            |               |                                                           |       |                       | ** ** | **4.4**                    | ** **  | **4.4** |   |   |   |   |   |   |   |
|                                                                                                                                                                            |               |                                                           |       |                       | ** ** | **$**                      | **31.3**    | ** ** | **$** | **31.3** |   |   |   | $ | (6.0 | ) | $ | (11.4 | ) |
| Long-term debt                                                                                                                                                                  |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| Principal (Note 17)                                                                                                                                                        |               |                                                           |       |                       | ** ** | **$**                      | **4,588.9** | ** ** | **$** | **4,960.3** |   |   |   | $ | 4,908.2 |   | $ | 5,535.9 |   |
| Derivatives(1) classified as held for  hedging and used to manage interest rate and currency risks associated with  U.S. Dollar denominated debt (Note 17(b))    |               |                                                           |       |                       |       |                       |        |   |   |   |   |   |   |   |   |
| - Derivative asset                                                                                                                                                              |               | 2007                                                           | ** ** | **$**                      | **—** | ** **                 | **—**  |   |   |   | $ | 809.9 |   | (40.4 | ) |   |   |
| - Derivative liability– Current                                                                                                                                            |               | 2007                                                           | ** ** | **$**                      | **—** | ** **                 | **—**  |   |   |   | $ | 673.4 |   | 165.8 |   |   |   |
|                                                                                                                                                                            | – Non-current |                                                           | 2011       | ** **                 | **$**      | **2,950.5**                | ** **  | **1,179.5** |   |   |   | $ | 2,950.5 |   | 710.3 |   |   |   |
|                                                                                                                                                                            |               |                                                           | ** ** | ** **                 |       | **1,179.5**                |        |   |   |   |   | 835.7 |   |   |   |
| - Interest payable                                                                                                                                                              |               |                                                           |       |                       | ** ** | **8.2**                    |        |   |   |   |   | 6.3 |   |   |   |
| Net                                                                                                                                                                             |               |                                                           |       |                       | ** ** | **1,187.7**                | ** **  | **1,187.7** |   |   |   | 842.0 |   | 1,090.6 |   |
| Derivatives(1) used to manage interest  rate risk associated with planned refinancing of debt maturing June 1,  2007                                                  |               | 2007                                                           | ** ** | **$**                      | **—** | ** **                 | **—**  | ** ** | **—** |   | $ | 500.0 |   | — |   | 6.5 |   |
|                                                                                                                                                                            |               |                                                           |       |                       | ** ** | **$**                      | **5,776.6** | ** ** | **$** | **6,148.0** |   |   |   | $ | 5,750.2 |   | $ | 6,633.0 |   |
|                                                                                                                                                                                 |                    |                                                                |            |                            |            |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Designated as cash flowhedging items.

 

29

----

 

notesto consolidated financial statements

 

## **6****                ****segmented information**

##  

TheCompany’s reportable segments are Wireline and Wireless. The Wireline segment****includes****voice local, voice long distance, data and other telecommunicationsservices excluding wireless. The Wireless segment includes digital personalcommunications services, equipment sales and wireless Internet services.Segmentation is based on similarities in technology, the technical expertiserequired to deliver the products and services, the distribution channels usedand regulatory treatment. Intersegment sales are recorded at the exchangevalue, which is the amount agreed to by the parties. The following segmentedinformation is regularly reported to the Company’s Chief Executive Officer (theCompany’s chief operating decision maker).

 
| **Years ended December 31**                    | ** ** | **Wireline** | ** **  | **Wireless**                                     | ** ** | **Eliminations** | ** ** | **Consolidated**                                 | ** **  |
|---------------------------------------------------------------|------------|--------------|-------------|--------------------------------------------------|------------|------------------|------------|--------------------------------------------------|-------------|
| **(millions)**                                                | ** ** | **2007**     | ** **  | **2006**                                         | ** ** | **2007**         | ** ** | **2006**                                         | ** **  | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **   | ** **  | **(restated –   Note 2(e))** | ** ** | ** **       | ** ** | **(restated –   Note 2(e))** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated –   Note 2(e))** | ** ** |
| **Operating revenues**                                        |       |         |        |                                             |       |             |       |                                             |        |   |   |   |   |   |   |   |   |
| External revenue                                              | ** ** | **$**        | **4,810.6** |                                             | $          | 4,823.1          | ** ** | **$**                                            | **4,263.8** |   | $ | 3,857.9 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **9,074.4** |   | $ | 8,681.0 |   |
| Intersegment revenue                                          | ** ** | **114.2**    |        | 98.3                                             | ** ** | **26.9**         |       | 23.4                                             | ** **  | **(141.1** | **)** | (121.7 | ) | **—** |   | — |   |
| ** **                                                    |       | **4,924.8**  |        | 4,921.4                                          | ** ** | **4,290.7**      |       | 3,881.3                                          | ** **  | **(141.1** | **)** | (121.7 | ) | **9,074.4** |   | 8,681.0 |   |
| **Operating expenses**                                        |       |         |        |                                             |       |             |       |                                             |        |   |   |   |   |   |   |   |   |
| Operations expense                                            | ** ** | **3,221.8**  |        | 2,997.7                                          | ** ** | **2,384.0**      |       | 2,122.2                                          | ** **  | **(141.1** | **)** | (121.7 | ) | **5,464.7** |   | 4,998.2 |   |
| Restructuring costs                                           | ** ** | **19.5**     |        | 61.6                                             | ** ** | **0.9**          |       | 6.2                                              | ** **  | **—** |   | — | ** ** | **20.4** |   | 67.8 |   |
| ** **                                                    |       | **3,241.3**  |        | 3,059.3                                          | ** ** | **2,384.9**      |       | 2,128.4                                          | ** **  | **(141.1** | **)** | (121.7 | ) | **5,485.1** |   | 5,066.0 |   |
| EBITDA(1)                                                     | ** ** | **$**        | **1,683.5** |                                             | $          | 1,862.1          | ** ** | **$**                                            | **1,905.8** |   | $ | 1,752.9 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **3,589.3** |   | $ | 3,615.0 |   |
| CAPEX(2)                                                      | ** ** | **$**        | **1,219.0** |                                             | $          | 1,191.0          | ** ** | **$**                                            | **551.3**   |   | $ | 427.4 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1,770.3** |   | $ | 1,618.4 |   |
| EBITDA less CAPEX                                             | ** ** | **$**        | **464.5**   |                                             | $          | 671.1            | ** ** | **$**                                            | **1,354.5** |   | $ | 1,325.5 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1,819.0** |   | $ | 1,996.6 |   |
| **Operating expenses (as adjusted)(3)**                       |       |         |        |                                             |       |             |       |                                             |        |   |   |   |   |   |   |   |   |
| Operations expense (as adjusted)(3)                           | ** ** | **3,076.7**  |        | 2,997.7                                          | ** ** | **2,360.4**      |       | 2,122.2                                          | ** **  | **(141.1** | **)** | (121.7 | ) | **5,296.0** |   | 4,998.2 |   |
| Restructuring costs                                           | ** ** | **19.5**     |        | 61.6                                             | ** ** | **0.9**          |       | 6.2                                              | ** **  | **—** |   | — | ** ** | **20.4** |   | 67.8 |   |
| ** **                                                    |       | **3,096.2**  |        | 3,059.3                                          | ** ** | **2,361.3**      |       | 2,128.4                                          | ** **  | **(141.1** | **)** | (121.7 | ) | **5,316.4** |   | 5,066.0 |   |
| EBITDA (as adjusted)(3)                                       | ** ** | **$**        | **1,828.6** |                                             | $          | 1,862.1          | ** ** | **$**                                            | **1,929.4** |   | $ | 1,752.9 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **3,758.0** |   | $ | 3,615.0 |   |
| CAPEX(2)                                                      | ** ** | **$**        | **1,219.0** |                                             | $          | 1,191.0          | ** ** | **$**                                            | **551.3**   |   | $ | 427.4 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1,770.3** |   | $ | 1,618.4 |   |
| EBITDA (as adjusted) less CAPEX                               | ** ** | **$**        | **609.6**   |                                             | $          | 671.1            | ** ** | **$**                                            | **1,378.1** |   | $ | 1,325.5 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1,987.7** |   | $ | 1,996.6 |   |
| EBITDA (as adjusted)(from above)                              | ** ** | **$**        | **3,758.0** |                                             | $          | 3,615.0          |       |
| Incremental charge(3)                                         | ** ** | **168.7**    |        | —                                           |       |
| EBITDA (from above)                                           | ** ** | **3,589.3**  |        | 3,615.0                                          |       |
| Depreciation                                                  | ** ** | **1,354.7**  |        | 1,353.4                                          |       |
| Amortization                                                  | ** ** | **260.3**    |        | 222.2                                            |       |
| **Operating income**                                          | ** ** | **1,974.3**  |        | 2,039.4                                          |       |
| Other expense, net                                            | ** ** | **36.1**     |        | 28.0                                             |       |
| Financing costs                                               | ** ** | **440.1**    |        | 504.7                                            |       |
| **Income before income taxes and  non-controlling interests** | ** ** | **1,498.1**  |        | 1,506.7                                          |       |
| Income taxes                                                  | ** ** | **233.6**    |        | 353.2                                            |       |
| Non-controlling interests                                     | ** ** | **6.6**      |        | 8.5                                              |       |
| **Net income**                                                | ** ** | **$**        | **1,257.9** |                                             | $          | 1,145.0          |       |
|                                                               |            |              |             |                                                  |            |                  |            |                                                  |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Earnings Before Interest,Taxes, Depreciation and Amortization (EBITDA) is a measure that does not haveany standardized meaning prescribed by GAAP and is therefore unlikely to becomparable to similar measures presented by other issuers; EBITDA is defined bythe Company as operating revenues less operations expense and restructuringcosts. The Company has issued guidance on, and reports, EBITDA because it is akey measure used by management to evaluate performance of its business segmentsand is utilized in measuring compliance with certain debt covenants.

(2)   Total capital expenditures (CAPEX).

(3)   Substantially all of the Company’s share optionawards that were granted prior to January 1, 2005, and which wereoutstanding on January 1, 2007, were amended by adding a net-cashsettlement feature; such amendment resulted in an incremental charge tooperations of $168.7 and did not result in an immediate cash outflow. Inrespect of 2007 results provided to the Company’s chief operating decisionmaker, operations expense and EBITDA are being presented both with, andwithout, the impact of such amendment.

 

30

----

 

notesto consolidated financial statements

 

## **7****                ****restructuring costs**

 
| **Years ended December 31 (millions)** | ** ** | **2007**  |     | **2006** | ** ** |
|------------------------------------------------------------|------------|-----------|----------|----------|------------|
| Restructuring costs                                        |       |      |     |     |       |
| Workforce                                                  |       |      |     |     |       |
| Voluntary                                                  | ** ** | **$**     | **4.9**  |     | $          | 28.0 |   |
| Involuntary                                                | ** ** | **13.7**  |     | 35.7     |       |
| Other                                                      | ** ** | **1.8**   |     | 4.1      |       |
| ** **                                                 |       | **20.4**  |     | 67.8     |       |
| Disbursements                                              |       |      |     |     |       |
| Workforce                                                  |       |      |     |     |       |
| Voluntary                                                  | ** ** | **14.1**  |     | 26.3     |       |
| Involuntary and other                                      | ** ** | **23.1**  |     | 40.6     |       |
| Other                                                      | ** ** | **1.4**   |     | 4.9      |       |
| ** **                                                 |       | **38.6**  |     | 71.8     |       |
| Expenses greater than (less than)  disbursements           | ** ** | **(18.2** | **)**    | (4.0     | )          |
| Restructuring accounts payable and accrued  liabilities    |       |      |     |     |       |
| Balance, beginning of period                               | ** ** | **53.1**  |     | 57.1     |       |
| Balance, end of period                                     | ** ** | **$**     | **34.9** |     | $          | 53.1 |   |

 

In 2007, arising from its competitive efficiencyprogram, the Company undertook a number of smaller initiatives, such asoperational consolidation, rationalization and integration. These initiativeswere aimed to improve the Company’s operating productivity and competitiveness.The Company’s estimate of restructuring costs in 2008 is approximately$50 million.

 

## **8****                ****financing costs**

 
| **Years ended December 31 (millions)** | ** ** | **2007**  |      | **2006** | ** ** |
|------------------------------------------------------------|------------|-----------|-----------|----------|------------|
| Interest on long-term debt                                 | ** ** | **$**     | **464.2** |     | $          | 508.0 |   |
| Interest on short-term obligations and  other              | ** ** | **0.3**   |      | 2.6      |       |
| Foreign exchange(1)                                        | ** ** | **13.0**  |      | 6.4      |       |
| ** **                                                 |       | **477.5** |      | 517.0    |       |
| Interest income                                            |       |      |      |     |       |
| Interest on tax refunds                                    | ** ** | **(26.9** | **)**     | (9.3     | )          |
| Other interest income                                      | ** ** | **(10.5** | **)**     | (3.0     | )          |
| ** **                                                 |       | **(37.4** | **)**     | (12.3    | )          |
| ** **                                                 |       | **$**     | **440.1** |     | $          | 504.7 |   |

 

----

(1)          For the year ended December 31,2007, these amounts include gains of $0.5 (2006 — $NIL) in respect of cash flowhedge ineffectiveness.

 

## **9****                ****income taxes**

 
| **Years ended December 31 (millions)** | ** ** | **2007**  | ** ** | **2006**                        | ** ** |
|------------------------------------------------------------|------------|-----------|------------|---------------------------------|------------|
|                                                       |       |      |       | **(restated – Note 2(e))** | ** ** |
| Current                                                    | ** ** | **$**     | **(143.3** | **)**                           | $          | (58.2 | ) |
| Future                                                     | ** ** | **376.9** |       | 411.4                           |       |
| ** **                                                 |       | **$**     | **233.6**  |                            | $          | 353.2 |   |

 

31

----

 

notes to consolidated financial statements

 

The Company’s income tax expense differs from thatcalculated by applying statutory rates for the following reasons:

 
| **Years ended December 31 ($ in millions)**                            | ** ** | **2007**   | ** ** | **2006 (restated – Note 2(e))** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Basic blended federal and provincial tax at  statutory income tax rates                              | ** ** | **$**      | **503.0**  | ** **                                               | **33.6**   | **%** | $ | 505.6 |   | 33.6 | % |
| Revaluation of future income tax liability  to reflect future statutory income tax rates             | ** ** | **(177.3** | **)**      |                                                     |       | (113.1 | )  |   |   |
| Tax rate differential on, and consequential  adjustments from, reassessment of prior year tax issues | ** ** | **(79.2**  | **)**      |                                                     |       | (40.3 | ) |   |   |
| Share option award compensation                                                                      | ** ** | **(3.6**   | **)**      |                                                     |       | 6.4 |   |   |   |
| Other                                                                                                | ** ** | **(9.3**   | **)**      |                                                     |       | (5.4 | ) |   |   |
| Income tax expense per Consolidated  Statements of Income and Other Comprehensive Income             | ** ** | **$**      | **233.6**  | ** **                                               | **15.6**   | **%** | $ | 353.2 |   | 23.4 | % |

 

As referred to in Note 1(b), the Company must makesignificant estimates in respect of the composition of its future income taxasset and future income tax liability. The operations of the Company arecomplex, and related tax interpretations, regulations and legislation arecontinually changing. As a result, there are usually some tax matters inquestion. Temporary differences comprising the future income tax liability areestimated as follows:

 
| **As at December 31**** (millions)**                         | ** ** | **2007**     | ** **   | **2006**                        | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|--------------|---------------------------------|------------|
| ** **                                                                       | ** ** | ** **   | ** **   | **(restated – Note 2(e))** | ** ** |
| Capital assets                                                                   |       |         |         |                            |       |
| Property, plant, equipment, other and  intangible assets subject to amortization | ** ** | **$**        | **(47.8**    | **)**                           | $          | 15.8 |   |
| Intangible assets with indefinite lives                                          | ** ** | **(749.1**   | **)**        | (866.1                          | )          |
| Partnership income unallocated for income  tax purposes                          | ** ** | **(630.5**   | **)**        | (550.1                          | )          |
| Pension amounts                                                                  | ** ** | **(259.6**   | **)**        | (246.1                          | )          |
| Reserves not currently deductible                                                | ** ** | **71.1**     | ** **   | 97.7                            |       |
| Losses available to be carried forward                                           | ** ** | **17.8**     | ** **   | 315.4                           |       |
| Other                                                                            | ** ** | **46.4**     | ** **   | 19.7                            |       |
| ** **                                                                       |       | **$**        | **(1,551.7** | **)**                           | $          | (1,213.7 | ) |
| Presented on the Consolidated Balance  Sheets as:                                |       |         | ** **   |                            |       |
| Future income tax liability                                                      |       |         | ** **   |                            |       |
| Current                                                                          | ** ** | **$**        | **(503.6**   | **)**                           | $          | (137.2 | ) |
| Non-current                                                                      | ** ** | **(1,048.1** | **)**        | (1,076.5                        | )          |
| Net future income tax asset (liability)                                          | ** ** | **$**        | **(1,551.7** | **)**                           | $          | (1,213.7 | ) |

 

The Company expects to be able to substantially utilizeits non-capital losses over the next year. The Company’s assessment is that theprobabilistic risk of expiry of such non-capital losses is remote.

 

The Company has net capital losses and such losses mayonly be applied against realized taxable capital gains. The Company hasincluded a net capital loss carry-forward of $618.3 million (2006 –$799.7 million) in its Canadian income tax returns. During the year ended December 31,2007, the Company recognized the benefit of $6.6 million (2006 –$188.0 million) in net capital losses. Of the net capital lossescarried-forward, as at December 31, 2007, $603.7 million (2006 –$603.7 million) have been denied on audit by the Canada Revenue Agency andthe Company is considering various courses of action with a view to confirmingall or a part of such net capital losses.

 

The Company conducts research and development activities,which are eligible to earn Investment Tax Credits. During the year ended December 31,2007, the Company recorded Investment Tax Credits of $10.7 million (2006 –$18.5 million), $3.3 million (2006 – $18.1 million) of which wasrecorded as a reduction of capital and the balance of which was recorded as areduction of Operations expense.

 

## **10****         ****per share amounts**

##  

Basic net income per Common Share and Non-Voting Share iscalculated by dividing Common Share and Non-Voting Share income by the totalweighted average Common Shares and Non-Voting Shares outstanding during theperiod. Diluted income per Common Share and Non-Voting Share is calculated togive effect to share option awards.

 

The following table presents the reconciliations of thedenominators of the basic and diluted per share computations. Net income equalleddiluted Common Share and Non-Voting Share income for all periods presented.

 

32

----

 

notes to consolidated financial statements

 
| **Years ended December 31 (millions)**                      | ** ** | **2007**  | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Basic total weighted average Common Shares  and Non-Voting Shares outstanding   | ** ** | **331.7** |       | 343.8    |       |
| Effect of dilutive securities                                                   |       |      |       |     |       |
| Exercise of share option awards                                                 | ** ** | **2.5**   |       | 3.6      |       |
| Diluted total weighted average Common  Shares and Non-Voting Shares outstanding | ** ** | **334.2** |       | 347.4    |       |

 

For the year ended December 31, 2007, certainoutstanding share option awards, in the amount of 1.3 million (2006 –0.3 million), were not included in the computation of diluted income per CommonShare and Non-Voting Share because the share option awards’ exercise priceswere greater than the average market price of the Common Shares and Non-Voting Sharesduring the reported periods.

 

## **11****         ****share-based compensation**

##  

### **(a)**          Details of share-basedcompensation expense

### ** **

Reflected in the Consolidated Statements of Income and OtherComprehensive Income as Operations expense and the Consolidated Statements ofCash Flows are the following share-based compensation amounts:

 
| **Years ended December 31** | ** ** | **2007**                | ** ** | **2006**                                 | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|
| **(millions)**                             | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement of  cash flows  adjustment** | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement of  cash flows  adjustment** | ** ** |
| Share option awards(1)                     | ** ** | **$**                   | **183.6**  | ** **                               | **$**      | **(83.8** | **)** | **$** | **99.8** |   | $ | 19.0 |   | $ | — |   | $ | 19.0 |   |
| Restricted stock units                     | ** ** | **29.5**                | ** ** | **(33.5**                                | **)**      | **(4.0** | **)** | 26.5 |   | (20.4 | ) | 6.1 |   |
| Employee share purchase plan               | ** ** | **34.2**                | ** ** | **(34.2**                                | **)**      | **—** |   | 32.2 |   | (32.2 | ) | — |   |
| ** **                                 | ** ** | **$**                   | **247.3**  | ** **                               | **$**      | **(151.5** | ** ** | **$** | **95.8** |   | $ | 77.7 |   | $ | (52.6 | ) | $ | 25.1 |   |

 

----

(1)          For the year ended December 31,2007, the expense arising from share options with the net-cash settlementfeature, net of hedging effects, was $168.9 (2006 – $NIL).

 

For the year ended December 31, 2007, the associatedoperating cash outflows in respect of share option awards are net of cash netinflows from the cash-settled equity swap agreements of $8.1 million (2006– $NIL). Similarly, for the year ended December 31, 2007, the associatedoperating cash outflows in respect of restricted stock units are net of cashinflows from hedging of $5.2 million (2006 – $18.6 million). For theyear ended December 31, 2007, the income tax benefit arising fromshare-based compensation was $84.9 million (2006 – $19.7 million); asdisclosed in Note 9, not all share-based compensation amounts aredeductible for income tax purposes.

 

### **(b)**          Share option awards

### ** **

The Company applies the fair valuebased method of accounting for share-based compensation awards granted toemployees. Share option awards typically vest over a three-year period (therequisite service period), but may vest over periods of up to five years. Thevesting method of share option awards, which is determined on or before thedate of grant, may be either cliff or graded; all share option awards grantedsubsequent to 2004 have been cliff-vesting awards.

 

The weighted average fair value ofshare option awards granted, and the weighted average assumptions used in thefair value estimation at the time of grant, using the Black-Scholes model (aclosed-form option pricing model), are as follows:

 
| **Years ended December 31**        | ** ** | **2007** | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|----------|------------|------------|------------|
| Share option award fair value (per share  option) | ** ** | **$**    | **12.34**  | ** ** | $          | 12.45 |   |
| Risk free interest rate                           | ** ** | **4.1**  | **%**      | 4.0        | %          |
| Expected lives(1) (years)                    | ** ** | **4.5**  | ** ** | 4.6        |       |
| Expected volatility                               | ** ** | **26.3** | **%**      | 35.7       | %          |
| Dividend yield                                    | ** ** | **2.7**  | **%**      | 2.6        | %          |
|                                                   |            |          |            |            |            |  |  |

 

----

(1)   The maximumcontractual term of the share option awards granted in 2007 and 2006 was sevenyears.

 

The risk free interest rate used in determining the fairvalue of the share option awards is based on a Government of Canada yield curvethat is current at the time of grant. The expected lives of the share optionawards are based on historical share option award exercise data of the Company.Similarly, expected volatility considers the historical volatility of theCompany’s Non-Voting Shares. The dividend yield is the annualized dividendcurrent at the date of grant

 

33

----

 

notes to consolidated financial statements

 

divided by the share option award exercise price.Dividends are not paid on unexercised share option awards and are not subjectto vesting.

 

Had weighted average assumptions for grants of shareoptions that are reflected in the expense disclosures above been varied by 10%and 20% changes, the compensation cost arising from share options for the yearended December 31, 2007, would have varied as follows:

 
| ** **              | ** ** | **Hypothetical change in  assumptions(1)** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| **($in  millions)**     | ** ** | **10%**                                              | ** ** | **20%** | ** ** |
| Risk free interest rate |       | $                                                    | 0.3        |   | $ | 0.6 |   |
| Expected lives (years)  |       | $                                                    | 0.6        |   | $ | 1.1 |   |
| Expected volatility     |       | $                                                    | 1.2        |   | $ | 2.5 |   |
| Dividend yield          |       | $                                                    | 0.4        |   | $ | 0.8 |   |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in a decreased amount, and unfavourable hypotheticalchanges in the assumptions result in an increased amount, of the compensationcost arising from share options. As the figures indicate, changes in fair valuebased on a 10% variation in assumptions generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in fairvalue may not be linear; in particular, variations in expected lives areconstrained by vesting periods and legal lives. Also, in this table, the effectof a variation in a particular assumption on the amount of the compensationcost arising from share options is calculated without changing any otherassumption; in reality, changes in one factor may result in changes in another(for example, increases in risk free interest rates may result in increaseddividend yields), which might magnify or counteract the sensitivities.

 

Some share option awards have anet-equity settlement feature. As discussed further in Note 18(f), it isat the Company’s option whether the exercise of a share option is settled as ashare option or using the net-equity settlement feature. So as to align with the accounting treatment thatis afforded to the associated share options, the Company has selected theequity instrument fair value method of accounting for the net-equity settlementfeature.

 

In 2007, the Company amended substantially all of itsshare option awards that were granted prior to January 1, 2005, and whichwere outstanding on January 1, 2007, by adding a net-cash settlementfeature; the optionee has the choice of exercising the net-cash settlementfeature. The result of such amendment is that the affected outstanding shareoption awards largely take on the characteristics of liability instrumentsrather than equity instruments. For the outstanding share option awards thatwere amended and which were granted subsequent to 2001, the minimum expenserecognized for them will be their grant-date fair values.

 

In conjunction with the amendment, the Company enteredinto a cash-settled equity swap agreementthat establishes a cap on the Company’s cost associated with the affectedoutstanding share option awards. The following table sets out the number ofaffected outstanding share option awards and the composition of their cappedexercise date fair values.

 
| **As at December 31, 2007 ($ per affected outstanding share   option award)** | ** ** | **Affected share option awards granted for** | ** ** | ** **                 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                           | ** ** | **Common Shares**                                                | ** ** | **Non-Voting Shares** | ** ** | ** ** | ** ** |
| ** **                                                                                                                           | ** ** | **prior to 2002**                                           | ** ** | **after 2001**        | ** ** | **Total** | ** ** |
| Weighted average exercise price                                                                                                      |       | $                                                                     | 35.92      |                       | $          | 30.48 |   | $ | 21.74 |   | $ | 27.00 |   |
| Weighted  average grant date fair value                                                                                              |       | —                                                                |       | —                     |       | 6.70 |   | 3.21 |   |
|                                                                                                                                 |       | 35.92                                                                 |       | 30.48                      |       | 28.44 |   | 30.21 |   |
| Weighted average incremental share-based  compensation award expense arising from net-cash settlement feature                        |       | 18.34                                                                 |       | 24.67                      |       | 26.71 |   | 24.82 |   |
| Exercise date fair value capped by  cash-settled equity swap agreement                                                               |       | $                                                                     | 54.26      |                       | $          | 55.15 |   | $ | 55.15 |   | $ | 55.03 |   |
| Affected share option awards outstanding                                                                                             |       | 496,173                                                               |       | 1,484,613                  |       | 1,824,853 |   | 3,805,639 |   |

 

### **(c)**          Restricted stock units

### ** **

The Company uses restricted stockunits as a form of incentive compensation. Each restricted stock unit is equalin value to one Non-Voting Share and the dividends that would have arisenthereon had it been an issued and outstanding Non-Voting Share; the notionaldividends are recorded as additional issuances of restricted stock units duringthe life of the restricted stock unit. The restricted stock units becomepayable as they vest over their lives. Typically, the restricted stock unitsvest over a period of 33 months. The vesting method, which is determined onor before the date of grant, may be either cliff or graded. Theassociated liability is normally cash-settled.

 

The following table presents a summary of the activityrelated to the Company’s restricted stock units.

 

34

----

 

notes to consolidated financial statements

 
| ** **                                 | ** ** | **2007**                                             | ** ** | **2006**                               | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|
| **Years ended December 31** | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant date** | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant date** | ** ** |
| ** **                                 | ** ** | **Non-vested**                                       | ** ** | **Vested**                             | ** ** | **fair value** | ** ** | **Non-vested** | ** ** | **Vested** | ** ** | **fair value** | ** ** |
| Outstanding, beginning of period           |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-vested                                 | ** ** | **1,518,613**                                        | ** ** | **—**                             | ** ** | **$** | **40.99** |   | 1,645,530 |   | — |   | $ | 32.16 |   |
| Vested                                     | ** ** | **—**                                           | ** ** | **37,251**                             | ** ** | **38.85** |   | — |   | 62,437 |   | 26.43 |   |
| Issued                                     |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Initial allocation                         | ** ** | **576,233**                                          | ** ** | **—**                             | ** ** | **56.21** |   | 659,682 |   | — |   | 44.70 |   |
| In lieu of dividends                       | ** ** | **52,132**                                           | ** ** | **—**                             | ** ** | **55.84** |   | 48,293 |   | — |   | 49.17 |   |
| Vested                                     | ** ** | **(662,437**                                         | **)**      | **662,437**                            | ** ** | **37.12** |   | (706,599 | ) | 706,599 |   | 24.46 |   |
| Settled in cash                            | ** ** | **—**                                           | ** ** | **(668,552**                           | **)**      | **36.67** |   | — |   | (731,785 | ) | 24.58 |   |
| Forfeited and cancelled                    | ** ** | **(86,450**                                          | **)**      | **—**                             | ** ** | **42.48** |   | (128,293 | ) | — |   | 32.40 |   |
| Outstanding, end of period                 |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-vested                                 | ** ** | **1,398,091**                                        | ** ** | **—**                             | ** ** | **49.19** |   | 1,518,613 |   | — |   | 40.99 |   |
| Vested                                     | ** ** | **—**                                           | ** ** | **31,136**                             | ** ** | **$** | **48.74** |   | — |   | 37,251 |   | $ | 38.85 |   |

 

With respect to certain issuancesof restricted stock units, the Company entered into cash-settled equity forwardagreements that fix the cost to the Company; that information, as well as aschedule of the Company’s non-vested restricted stock units outstanding as at December 31,2007, is set out in the following table.

 
| ** **                                | ** ** | **Number of  fixed-cost  restricted  stock units** | ** ** | **Cost fixed to  the Company  per restricted  stock unit** | ** ** | **Number of  variable-cost  restricted  stock units** | ** ** | **Total number  of non-vested  restricted  stock units** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Vesting in years ending December 31: |       |                                                         |       |                                                                                |       |                                                            |       |                                                                    |       |
| 2008                                      |       | 160,000                                                      |       | $                                                                                   | 50.91      |                                                            |       |                                                                    |       |   |
|                                      |       | 440,000                                                      |       | $                                                                                   | 50.02      |                                                            |       |                                                                    |       |   |
|                                      |       | 600,000                                                      |       |                                                                                |       | 247,359                                                         |       | 847,359                                                                 |       |
| 2009                                      |       | 400,000                                                      |       | $                                                                                   | 64.26      |                                                            | 150,732    |                                                                    | 550,732    |   |
|                                      |       | 1,000,000                                                    |       |                                                                                |       | 398,091                                                         |       | 1,398,091                                                               |       |

 

### **(d)**          Employee share purchase plan

 

The Company has an employee share purchase plan underwhich eligible employees can purchase Common Shares through regular payrolldeductions by contributing between 1% and 10% of their pay. The Companycontributes 45%, for employees up to a certain job classification, for everydollar contributed by an employee, to a maximum of 6% of employee pay; for morehighly compensated job classifications, the Company contributes 40%. There areno vesting requirements and the Company records its contributions as acomponent of operating expenses.

 
| **Years ended December 31 (millions)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Employee contributions                                     | ** ** | **$**    | **81.4**   |     | $          | 75.9 |   |
| Company contributions                                      | ** ** | **34.2** |       | 32.2     |       |
| ** **                                                 |       | **$**    | **115.6**  |     | $          | 108.1 |   |

 

Under this plan, the Company has the option of offeringshares from Treasury or having the trustee acquire shares in the stock market.For the years ended December 31, 2007 and 2006, all Common Shares issuedto employees under the plan were purchased on the market at normal tradingprices.

 

### **(e)**          Unrecognized, non-vestedshare-based compensation

### ** **

As at December 31, 2007, compensation cost relatedto non-vested share-based compensation that has not yet been recognized is setout in the following table and is expected to be recognized over a weightedaverage period of 1.7 years (2006 – 1.3 years).

 

35

----

 

notes to consolidated financial statements

 
| **As at December 31 ****(millions)(1)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Share option awards                                         | ** ** | **$**    | **22.5**   |     | $          | 24.1 |   |
| Restricted stock units(2)                                   | ** ** | **32.2** |       | 38.8     |       |
| ** **                                                  |       | **$**    | **54.7**   |     | $          | 62.9 |   |

 

----

(1)          These disclosures are notlikely to be representative of the effects on reported net income for futureperiods for the following reasons: these amounts reflect an estimate offorfeitures; these amounts do not reflect any provision for future awards;these amounts do not reflect any provision for changes in the intrinsic valueof vested restricted stock units; these amounts do not reflect any provisionfor the impacts of future, if any, modification of share option awards allowingfor net-cash settlement; and for non-vested restricted stock units, theseamounts reflect intrinsic values as at the balance sheet dates.

(2)          The compensation costthat has not yet been recognized in respect of non-vested restricted stockunits is calculated based upon the intrinsic value of the non-vested restrictedstock units as at the balance sheet dates, net of the impacts of associatedcash-settled equity forward agreements.

 

## **12****         ****employee future benefits**

##  

The Company has a number of definedbenefit and defined contribution plans providing pension, other retirement andpost-employment benefits to most of its employees. Other benefit plans includea TELUS Québec Inc. retiree healthcare plan. The benefit plan(s) in whichan employee is a participant reflects the general development of the Company.

 

*Pension Plan for Management andProfessional Employees of TELUS Corporation*: This defined benefitpension plan, which ceased accepting new participants on January 1, 2006,and which comprises approximately one-quarter of the Company’s total accruedbenefit obligation, provides a non-contributory base level of pension benefits.Additionally, on a contributory basis, employees can annually choose increasedand/or enhanced levels of pension benefits over the base level of pensionbenefits. At an enhanced level of pension benefits, the defined benefit pensionplan has indexation of 100% of a specified cost-of-living index, to an annualmaximum of 2%. Pensionable remuneration is determined by the annualized averageof the best sixty consecutive months.

 

*TELUS Corporation Pension Plan*: Management andprofessional employees in Alberta who joined the Company prior to January 1,2001, and certain unionized employees are covered by this contributory definedbenefit pension plan, which comprises slightly more than one-half of theCompany’s total accrued benefit obligation. The plan contains a supplementalbenefit account which may provide indexation up to 70% of the annual change ofa specified cost-of-living index and pensionable remuneration is determined bythe average of the best five years in the last ten years preceding retirement.

 

*TELUS Québec Defined BenefitPension Plan (formerly the TELUS Corporation Pension Plan for Employees ofTELUS Communications (Québec) Inc.)*: Any employee not governed by a collectiveagreement in Quebec who joined the Company prior to April 1, 2006, anynon-supervisory employee governed by a collective agreement prior to September 6,2006, and certain other unionized employees are covered by this contributorydefined benefit pension plan, which comprises approximately one-tenth of theCompany’s total accrued benefit obligation. The plan has no indexation andpensionable remuneration is determined by the average of the best four years.

 

*TELUS Edmonton Pension Plan*: This contributorydefined benefit pension plan ceased accepting new participants on January 1,1998. Indexation is 60% of the annual change of a specified cost-of-livingindex and pensionable remuneration is determined by the annualized average ofthe best sixty consecutive months.

 

*Otherdefined benefit pension plans*: In addition to theforegoing plans, the Company has non-registered, non-contributory supplementarydefined benefit pension plans which have the effect of maintaining the earnedpension benefit once the allowable maximums in the registered plans areattained. As is common with non-registered plans of this nature, these plansare funded only as benefits are paid.

 

The Company has three contributory,non-indexed pension plans arising from a pre-merger acquisition which compriseless than 1% of the Company’s total accrued benefit obligation; these plansceased accepting new participants in September 1989.

 

*Otherdefined benefit plans*: Other defined benefit plans,which are all non-contributory, are comprised of a disability income plan, ahealthcare plan for retired employees and a life insurance plan. The healthcareplan for retired employees and the life insurance plan ceased accepting newparticipants effective January 1, 1997. In connection with the collectiveagreement signed in 2005, an external supplier commenced providing a newlong-term disability plan effective January 1, 2006. The existingdisability income plan will continue to provide payments to previously approvedclaimants and qualified eligible employees.

 

*Telecommunication WorkersPension Plan*: Certain employees in British Columbia are covered by aunion pension plan. Contributions are determined in accordance with provisionsof the negotiated labour contract and are generally based on employee grossearnings.

 

36

----

 

notes to consolidated financial statements

 

*British Columbia Public ServicePension Plan*: Certain employees in British Columbia are covered by apublic service pension plan. Contributions are determined in accordance withprovisions of labour contracts negotiated by the Province of British Columbiaand are generally based on employee gross earnings.

 

*Defined contribution pensionplans*: During the latter half of 2006, the Company revised its definedcontribution pension plan offerings for 2007. Effective January 1, 2007,the Company offered one defined contribution pension plan, which iscontributory, and is the only Company-sponsored pension plan available tonon-unionized and certain unionized employees joining the Company after thatdate. Generally, employees can annually choose to contribute to the plan at arate of between 3% and 6% of their pensionable earnings. The Company will match100% of the contributions of the employees up to 5% of their pensionableearnings and will match 80% of employee contributions greater than that.

 
| ** **                                                                              | ** ** | **2007 and 2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Contributions as a percentage of pensionable earnings** | ** ** | **Minimum**                 | ** ** | **Maximum** | ** ** |
| Employee contribution(1)                                                                |       | 3.0                         | %          | 6.0 | % |
| Employer contribution                                                                   |       | 3.0                         | %          | 5.8 | % |
| Total contribution(2)                                                                   |       | 6.0                         | %          | 11.8 | % |

 

----

(1)          Generally, membership in the defined contributionpension plan is voluntary until an employee’s third year service anniversary.

(2)          In the event that annual contributions exceedallowable maximums, excess amounts are contributed to a non-registeredsupplementary defined contribution pension plan.

 

### **(a)**          Defined benefit plans

### ** **

Information concerning the Company’s defined benefitplans, in aggregate, is as follows:

 
| ** **                                  | ** ** | **Pension benefit plans** | ** **  | **Other benefit plans**              | ** ** |
|---------------------------------------------|------------|-------------------------------------|-------------|------------------------------------------------|------------|
| **(millions)**                              | ** ** | **2007**                            | ** **  | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | ** **                          | ** **  | **(restated – Note 2(e))** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued benefit obligation:                 |       |                                |        |                                           |       |   |   |   |   |
| Balance at beginning of year                | ** ** | **$**                               | **6,579.6** |                                           | $          | 6,345.3 | ** ** | **$** | **71.7** | ** ** | $ | 69.1 |   |
| Current service cost                        | ** ** | **136.3**                           |        | 132.4                                          | ** ** | **—** | ** ** | 3.5 |   |
| Interest cost                               | ** ** | **327.3**                           | ** **  | 315.9                                          | ** ** | **6.5** | ** ** | 3.7 |   |
| Benefits paid (b)                           | ** ** | **(281.5**                          | **)**       | (273.9                                         | )          | **(5.6** | **)** | (5.5 | ) |
| Actuarial loss (gain)                       | ** ** | **(408.3**                          | **)**       | 59.9                                           |       | **(0.2** | **)** | 0.9 |   |
| Plan amendments                             | ** ** | **26.9**                            | ** **  | —                                         |       | **—** | ** ** | — |   |
| Transfers out                               | ** ** | **(33.4**                           | **)**       | —                                         |       | **—** | ** ** | — |   |
| Balance at end of year (c)-(d)              | ** ** | **6,346.9**                         | ** **  | 6,579.6                                        |       | **72.4** | ** ** | 71.7 |   |
| Plan assets (f):                            |       |                                | ** **  |                                           |       |   | ** ** |   |   |
| Fair value at beginning of year             | ** ** | **6,843.2**                         | ** **  | 6,198.9                                        |       | **40.3** | ** ** | 43.8 |   |
| Actual return on plan assets                | ** ** | **256.5**                           | ** **  | 759.5                                          |       | **1.0** | ** ** | 0.7 |   |
| Employer contributions (g)                  | ** ** | **91.6**                            | ** **  | 123.4                                          |       | **1.2** | ** ** | 1.3 |   |
| Employees’ contributions               | ** ** | **36.8**                            | ** **  | 35.3                                           |       | **—** | ** ** | — |   |
| Benefits paid (b)                           | ** ** | **(281.5**                          | **)**       | (273.9                                         | )          | **(5.6** | **)** | (5.5 | ) |
| Transfers out                               | ** ** | **(33.4**                           | **)**       | —                                         |       | **—** | ** ** | — |   |
| Fair value at end of year                   | ** ** | **6,913.2**                         | ** **  | 6,843.2                                        |       | **36.9** | ** ** | 40.3 |   |
| Funded status – plan surplus (deficit) | ** ** | **566.3**                           | ** **  | 263.6                                          |       | **(35.5** | **)** | (31.4 | ) |
| Unamortized net actuarial loss (gain)       | ** ** | **628.6**                           | ** **  | 812.5                                          |       | **(10.3** | **)** | (12.8 | ) |
| Unamortized past service costs              | ** ** | **31.4**                            | ** **  | 5.3                                            |       | **—** | ** ** | — |   |
| Unamortized transitional obligation (asset) | ** ** | **(196.5**                          | **)**       | (239.0                                         | )          | **1.6** | ** ** | 2.4 |   |
| Accrued benefit asset (liability)           | ** ** | **$**                               | **1,029.8** | ** **                                     | $          | 842.4 | ** ** | **$** | **(44.2** | **)** | $ | (41.8 | ) |

 

In 2001, the Company soldsubstantially all of the TELUS Advertising Services directory business and theTELUS Québec directory business. As a result of this transaction, the pensionobligation relating to the former TELUS Advertising Services employees,contained within the TELUS Corporation Pension Plan and the TELUS EdmontonPension Plan, were to be transferred upon receipt of the requisite regulatoryapprovals; such approvals were received November 14, 2007. TheTELUS Corporation Pension Plan pension obligation of $17.2 millionand the TELUS Edmonton Pension Plan pension obligation of $3.8 millionhave been actuarially determined as at July 31, 2001. In accordance withthe sale agreement, TELUS Corporation Pension Plan assets of$17.2 million, plus interest accrued to November 30, 2007, of$9.2 million (December 31, 2006 – $7.6 million), weretransferred along with the pension obligation; the corresponding amounts inrespect of the TELUS Edmonton Pension Plan are $3.8 million, plus interestaccrued to November 30, 2007, of 

 

37

----

** **

notes to consolidated financial statements

** **

$2.0 million (December 31,2006 – $1.7 million). Interest accrued, at 7% per annum, up to the datethat the assets were transferred.

 

The accrued benefit asset(liability) is reflected in the Consolidated Balance Sheets as follows:

 
| **As at December 31**** (millions)** | ** ** | **2007**   | ** **  | **2006**                        | ** ** |
|----------------------------------------------------------|------------|------------|-------------|---------------------------------|------------|
| ** **                                               | ** ** | ** ** | ** **  | **(restated – Note 2(e))** | ** ** |
| Pension benefit plans                                    | ** ** | **$**      | **1,029.8** |                            | $          | 842.4 |   |
| Other benefit plans                                      | ** ** | **(44.2**  | **)**       | (41.8                           | )          |
| ** **                                               |       | **$**      | **985.6**   |                            | $          | 800.6 |   |
| Presented on the Consolidated Balance  Sheets as:        |       |       | ** **  |                            |       |
| Deferred charges (Note 20(b))                       | ** ** | **$**      | **1,194.1** | ** **                      | $          | 999.3 |   |
| Other long-term liabilities  (Note 20(b))           | ** ** | **(208.5** | **)**       | (198.7                          | )          |
| ** **                                               |       | **$**      | **985.6**   | ** **                      | $          | 800.6 |   |

 

The measurement date used to determine the plan assetsand accrued benefit obligation was December 31.

 

### **(b)**          Defined benefit plans – cost(recovery)

### ** **

TheCompany’s net defined benefit plan costs (recoveries) were as follows:

 
| ** **                                             | ** ** | **2007**                     | ** ** | **2006 (restated – Note 2(e))** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments(1)**                             | ** ** | **Recognized  in period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments(1)** | ** ** | **Recognized  in period** | ** ** |
| **Pension  benefit plans**                             |       |                         |       |                                                     |       |   |   |   |   |   |   |   |   |
| Current service cost (employer portion)                | ** ** | **$**                        | **99.5**   | ** **                                               | **$**      | **—** | ** ** | **$** | **99.5** | ** ** | $ | 97.1 |   | $ | — |   | $ | 97.1 |   |
| Interest cost                                          | ** ** | **327.3**                    | ** ** | **—**                                               | ** ** | **327.3** | ** ** | 315.9 |   | — |   | 315.9 |   |
| Return on plan assets                                  | ** ** | **(256.5**                   | **)**      | **(235.2**                                               | **)**      | **(491.7** | **)** | (759.5 | ) | 314.4 |   | (445.1 | ) |
| Past service costs                                     | ** ** | **—**                   | ** ** | **0.8**                                                  | ** ** | **0.8** | ** ** | — |   | 0.7 |   | 0.7 |   |
| Actuarial loss (gain)                                  | ** ** | **(408.3**                   | **)**      | **419.1**                                                | ** ** | **10.8** | ** ** | 59.9 |   | (17.9 | ) | 42.0 |   |
| Amortization of transitional asset                     | ** ** | **—**                   | ** ** | **(42.5**                                                | **)**      | **(42.5** | **)** | — |   | (43.2 | ) | (43.2 | ) |
| ** **                                             | ** ** | **$**                        | **(238.0** | **)**                                                    | **$**      | **142.2** | ** ** | **$** | **(95.8** | **)** | $ | (286.6 | ) | $ | 254.0 |   | $ | (32.6 | ) |

 

----

(1)   Accounting adjustments to allocate costs todifferent periods so as to recognize the long-term nature of employee futurebenefits.

 
| ** **                                             | ** ** | **2007**                     | ** ** | **2006**                     | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments(1)** | ** ** | **Recognized  in period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments(1)** | ** ** | **Recognized in   period** | ** ** |
| **Other  benefit plans**                               |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Current service cost (employer portion)                | ** ** | **$**                        | **—** | ** **                   | **$**      | **—** | ** ** | **$** | **—** |   | $ | 3.5 |   | $ | — |   | $ | 3.5 |   |
| Interest cost                                          | ** ** | **6.5**                      | ** ** | **—**                   | ** ** | **6.5** |   | 3.7 |   | — |   | 3.7 |   |
| Return on plan assets                                  | ** ** | **(1.0**                     | **)**      | **(0.2**                     | **)**      | **(1.2** | ) | (0.7 | ) | (1.8 | ) | (2.5 | ) |
| Actuarial loss (gain)                                  | ** ** | **(0.2**                     | **)**      | **(2.3**                     | **)**      | **(2.5** | ) | 0.9 |   | (2.5 | ) | (1.6 | ) |
| Amortization of transitional obligation                | ** ** | **—**                   | ** ** | **0.8**                      | ** ** | **0.8** |   | — |   | 0.8 |   | 0.8 |   |
| ** **                                             | ** ** | **$**                        | **5.3**    | ** **                   | **$**      | **(1.7** | **)** | **$** | **3.6** |   | $ | 7.4 |   | $ | (3.5 | ) | $ | 3.9 |   |

 

----

(1)   Accounting adjustments to allocate costs todifferent periods so as to recognize the long-term nature of employee futurebenefits.

 

### **(c)**          Benefit payments

### ** **

Estimated future benefitpayments from the Company’s defined benefit plans, calculated as at December 31,2007, are as follows:

** **
| **Years ending December 31 (millions)** | ** ** | **Pension  benefit plans** | ** ** | **Other  benefit plans** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| 2008                                                        |       | $                               | 296.4      |                          | $          | 5.8 |   |
| 2009                                                        |       | 310.6                           |       | 6.0                           |       |
| 2010                                                        |       | 326.4                           |       | 6.1                           |       |
| 2011                                                        |       | 345.1                           |       | 6.1                           |       |
| 2012                                                        |       | 361.6                           |       | 6.2                           |       |
| 2013-2017                                                   |       | 2,053.5                         |       | 32.0                          |       |
|                                                             |            |                                 |            |                               |            |  |  |

** **

38

----

### ** **

notes to consolidated financialstatements

 

### **(d)**          Disaggregation of definedbenefit pension plan funding status

### ** **

Accrued benefit obligations are the actuarial presentvalues of benefits attributed to employee services rendered to a particulardate. The Company’sdisaggregation of defined benefit pension plans surplus and deficits atyear-end are as follows:

 
| ** **                                                                    | ** ** | **2007**                         | ** **  | **2006**             | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|-------------|----------------------|------------|
| **As at December 31**** (millions)**                      | ** ** | **Accrued  benefit  obligation** | ** **  | **Plan assets** | ** ** | **Funded status -   plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Pension plans that have plan assets in  excess of accrued benefit obligations | ** ** | **$**                            | **6,173.6** | ** **           | **$**      | **6,913.2** | ** ** | **$** | **739.6** |   | $ | 4,130.3 |   | $ | 4,602.9 |   | $ | 472.6 |   |
| Pension plans that have accrued benefit  obligations in excess of plan assets |       |                             |        |                 |       |   |   |   |   |   |   |   |   |
| Funded                                                                        | ** ** | **—**                       | ** **  | **—**           | ** ** | **—** |   | 2,270.0 |   | 2,240.3 |   | (29.7 | ) |
| Unfunded                                                                      | ** ** | **173.3**                        | ** **  | **—**           | ** ** | **(173.3** | **)** | 179.3 |   | — |   | (179.3 | ) |
| ** **                                                                    | ** ** | **173.3**                        | ** **  | **—**           | ** ** | **(173.3** | **)** | 2,449.3 |   | 2,240.3 |   | (209.0 | ) |
| (see (a))                                                                     | ** ** | **$**                            | **6,346.9** | ** **           | **$**      | **6,913.2** | ** ** | **$** | **566.3** |   | $ | 6,579.6 |   | $ | 6,843.2 |   | $ | 263.6 |   |

 

As at December 31, 2007 and 2006, undrawn Letters ofCredit, further discussed in Note 17(d), secured certain of the unfundeddefined benefit pension plans.

 

### **(e)**          Disaggregation of other definedbenefit plan funding status

### ** **

Accrued benefit obligations are theactuarial present values of benefits attributed to employee services renderedto a particular date. The Company’s disaggregation of other defined benefitplans surplus and deficits at year-end are as follows:

 
| ** **                                                                                   | ** ** | **2007**                         | ** ** | **2006**             | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| **As at December 31**** (millions)**                                     | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -   plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Other benefit plans that have plan assets  in excess of accrued benefit obligations          | ** ** | **$**                            | **29.0**   | ** **           | **$**      | **36.9** | ** ** | **$** | **7.9** |   | $ | 31.0 |   | $ | 40.3 |   | $ | 9.3 |   |
| Unfunded other benefit plans that have  accrued benefit obligations in excess of plan assets | ** ** | **43.4**                         | ** ** | **—**           | ** ** | **(43.4** | **)** | 40.7 |   | — |   | (40.7 | ) |
| (see (a))                                                                                    | ** ** | **$**                            | **72.4**   | ** **           | **$**      | **36.9** | ** ** | **$** | **(35.5** | **)** | $ | 71.7 |   | $ | 40.3 |   | $ | (31.4 | ) |

 

### **(f)**            Accumulated pension benefitobligations

### ** **

Accumulatedbenefit obligations differ from accrued benefit obligations in that accumulatedbenefit obligations do not include assumptions about future compensationlevels. The Company’s disaggregation of defined pension benefit plansaccumulated benefit obligations and plan assets at year-end are as follows:

 
| ** **                                                                        | ** ** | **2007**                             | ** **  | **2006**             | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|-------------|----------------------|------------|
| **As at December 31**** (millions)**                          | ** ** | **Accumulated  benefit  obligation** | ** **  | **Plan assets** | ** ** | **Difference** | ** ** | **Accumulated  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Difference** | ** ** |
| Pension plans that have plan assets in  excess of accumulated benefit obligations | ** ** | **$**                                | **5,830.7** | ** **           | **$**      | **6,913.2** | ** ** | **$** | **1,082.5** |   | $ | 5,994.3 |   | $ | 6,825.7 |   | $ | 831.4 |   |
| Pension plans that have accumulated benefit  obligations in excess of plan assets |       |                                 |        |                 |       |   | ** ** |   |   |   |   |   |   |
| Funded                                                                            | ** ** | **—**                           | ** **  | **—**           | ** ** | **—** | ** ** | 18.1 |   | 17.5 |   | (0.6 | ) |
| Unfunded                                                                          | ** ** | **159.8**                            | ** **  | **—**           | ** ** | **(159.8** | **)** | 166.0 |   | — |   | (166.0 | ) |
| ** **                                                                        | ** ** | **159.8**                            | ** **  | **—**           | ** ** | **(159.8** | **)** | 184.1 |   | 17.5 |   | (166.6 | ) |
| ** **                                                                        | ** ** | **$**                                | **5,990.5** | ** **           | **$**      | **6,913.2** | ** ** | **$** | **922.7** | ** ** | $ | 6,178.4 |   | $ | 6,843.2 |   | $ | 664.8 |   |
|                                                                                   |            |                                      |             |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

### **(g)**         Plan investment strategies andpolicies

### ** **

TheCompany’s primary goal for the defined benefit plans is to ensure the securityof the retirement income and other benefits of the plan members and theirbeneficiaries. A secondary goal of the Company is to maximize the long-term rateof return of the defined benefit plans’ assets within a level of riskacceptable to the Company.

 

*Risk management*: The Company considersabsolute risk (the risk of contribution increases, inadequate plan surplus andunfunded obligations) to be more important than relative return risk.Accordingly, the defined benefit plans’ designs,

 

39

----

 

notes toconsolidated financial statements

 

thenature and maturity of defined benefit obligations and characteristics of theplans’ memberships significantly influence investment strategies and policies.The Company manages risk through specifying allowable and prohibited investmenttypes, setting diversification strategies and determining target assetallocations.

 

*Allowable and prohibited investmenttypes*: Allowable and prohibited investment types, along with associatedguidelines and limits, are set out in each fund’s *Pension Benefits Standards Act* required Statement ofInvestment Policies and Procedures (SIP&P), which is reviewed and approvedannually by the designated governing fiduciary. The SIP&P guidelines andlimits are further governed by the *PensionBenefits Standards Regulations*’ permitted investments and lendinglimits. As well as conventional investments, each fund’s SIP&P may providefor the use of derivative products to facilitate investment operations and tomanage risk provided that no short position is taken, no use of leverage ismade and there is no violation of guidelines and limits established in the SIP&P.Internally managed funds are prohibited from increasing grandfatheredinvestments in securities of the Company; grandfathered investments were madeprior to the merger of BC TELECOM Inc. and TELUS Corporation, theCompany’s predecessors. Externally managed funds are permitted to invest insecurities of the Company, provided that the investments are consistent withthe funds’ mandate and are in compliance with the relevant SIP&P.

 

*Diversification*: The Company’s strategyfor equity security investments is to be broadly diversified across individualsecurities, industry sectors and geographical regions. A meaningful portion(15-25% of total plans’ assets) of the investment in equity securities isallocated to foreign equity securities with the intent of further increasingthe diversification of the plans’ assets. Debt securities may include ameaningful allocation to mortgages with the objective of enhancing cash flowand providing greater scope for the management of the bond component of theplans’ assets. Debt securities also may include real return bonds to provideinflation protection, consistent with the indexed nature of some definedbenefit obligations. Real estate investments are used to providediversification of plans’ assets, potential long-term inflation hedging andcomparatively stable investment income.

 

*Relationship between plan assets andbenefit obligations*: With the objective of lowering its long-term costs ofdefined benefit plans, the Company purposely mismatches plan assets and benefitobligations. This mismatching is implemented by including equity investments inthe long-term asset mix as well as fixed income securities and mortgages withdurations that differ from the benefit obligations. Compensation for liquidityissues that may have otherwise arisen from mismatching of plan assets andbenefit obligations comes from broadly diversified investment holdings(including cash and short-term investment holdings) and cash flows fromdividends, interest and rents from diversified investment holdings.

 

*Asset allocations*: Information concerningthe Company’s defined benefit plans’ target asset allocation and actual assetallocation is as follows:

 
| ** **        | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans**                                           | ** ** |
|-------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **        | ** ** | **Target  allocation**              | ** ** | **Percentage of plan assets  at end of year** | ** ** | **Target  allocation** | ** ** | **Percentage of plan assets  at end of year** | ** ** |
| ** **        | ** ** | **2008**                            | ** ** | **2007**                                                                    | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Equity securities |       | 55-61                               | %          | **58**                                                                      | **%**      | 61 | % | — | ** ** | **—** |   | — |   |
| Debt securities   |       | 31-39                               | %          | **36**                                                                      | **%**      | 33 | % | — | ** ** | **—** |   | — |   |
| Real estate       |       | 4-6                                 | %          | **5**                                                                       | **%**      | 5 | % | — | ** ** | **—** |   | — |   |
| Other             |       | 0-2                                 | %          | **1**                                                                       | **%**      | 1 | % | 100 | % | **100** | **%** | 100 | % |
| ** **        |       |                                |       | **100**                                                                     | **%**      | 100 | % |   |   | **100** | **%** | 100 | % |

 

At December 31,2007, shares of TELUS Corporation accounted for less than 1% of the assetsheld in the pension and other benefit trusts administered by the Company.

 

### **(h)**         Employer contributions

### ** **

The best estimates of fiscal 2008 employer contributions to the Company’sdefined benefit plans are approximately $92 million and $1 millionfor defined benefit pension plans and other defined benefit plans,respectively. These estimates are based upon the mid-year 2007 annual fundingreports that were prepared by actuaries using December 31, 2006, actuarialvaluations. The funding reports are based on the pension plans’ fiscal years,which are calendar years. The next annual funding valuations are expected to beprepared mid-year 2008.

 

### **(i)**            Assumptions

### ** **

Managementis required to make significant estimates about certain actuarial and economicassumptions to be used in determining defined benefit pension costs, accruedbenefit obligations and pension plan assets. These significant estimates are ofa long-term nature, which is consistent with the nature of employee futurebenefits. The significant weighted average actuarial assumptions arising fromthese estimates and adopted in measuring the Company’s accrued benefitobligations are as follows:

 

40

----

 

notes toconsolidated financial statements

 
| ** **                                                                   | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                            | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate used to determine:                                             |       |                                |       |                              |       |   |   |   |   |
| Net benefit costs for the year ended  December 31                       | ** ** | **5.00**                            | **%**      | 5.00                              | %          | **4.86** | **%** | 5.00 | % |
| Accrued benefit obligation as at  December 31                           | ** ** | **5.50**                            | **%**      | 5.00                              | %          | **5.36** | **%** | 4.84 | % |
| Expected long-term rate of  return(1) on plan assets used to determine: |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Net benefit costs for the year ended  December 31                       | ** ** | **7.25**                            | **%**      | 7.25                              | %          | **3.00** | **%** | 5.50 | % |
| Accrued benefit obligation as at  December 31                           | ** ** | **7.25**                            | **%**      | 7.25                              | %          | **3.00** | **%** | 5.50 | % |
| Rate of future increases in compensation  used to determine:                 |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Net benefit costs for the year ended December 31                        | ** ** | **3.00**                            | **%**      | 3.00                              | %          | **—** | ** ** | — |   |
| Accrued benefit obligation as at  December 31                           | ** ** | **3.00**                            | **%**      | 3.00                              | %          | **—** |   | — |   |

 

----

(1)          The expected long-termrate of return is based upon forecasted returns of the major asset categoriesand weighted by the plans’ target asset allocations (see (g)). Forecastedreturns arise from the Company’s ongoing review of trends, economic conditions,data provided by actuaries and updating of underlying historical information.

 
| ** **                                                              | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **2007 sensitivity of key assumptions  (millions)** | ** ** | **Change in  obligation**      | ** ** | **Change in  expense**       | ** ** | **Change in  obligation** | ** ** | **Change in  expense** | ** ** |
| Impact of hypothetical 0.25%  decrease(1) in:                      |       |                                |       |                              |       |   |   |   |   |
| Discount rate                                                           |       | $                                   | 217.4      |                              | $          | 23.6 |   | $ | 0.9 |   | $ | — |   |
| Expected long-term rate of return on plan  assets                       |       |                                |       | $                                 | 16.9       |   |   |   | $ | 0.1 |   |
| Rate of future increases in compensation                                |       | $                                   | 27.6       |                              | $          | 6.2 |   | $ | — |   | $ | — |   |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in decreased amounts, and unfavourable hypotheticalchanges in the assumptions result in increased amounts, of the obligations andexpenses. Changes in amounts based on a 0.25% variation in assumptionsgenerally cannot be extrapolated because the relationship of the change inassumption to the change in amounts may not be linear. Also, in this table, theeffect of a variation in a particular assumption on the change in obligation orchange in expense is calculated without changing any other assumption; inreality, changes in one factor may result in changes in another (for example,increases in discount rates may result in increased expectations about thelong-term rate of return on plan assets), which might magnify or counteract thesensitivities.

 

The Company’s health benefitcosts for the defined benefit plan for retired employees were estimated toincrease at an annual rate of 10% (2006 – 10%), decreasing to an annual growthrate of 5% (2006 – 5%) over a ten-year period (2006 – ten-year period).

 

### **(j)**            Defined contribution plans

### ** **

The Company’s total defined contribution pensionplan costs recognized were as follows:

 
| **Years ended December 31 (millions)**        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Union pension plan and public service  pension plan contributions | ** ** | **$**    | **31.1**   |     | $          | 30.7 |   |
| Other defined contribution pension plans                          | ** ** | **26.0** |       | 18.2     |       |
| ** **                                                        |       | **$**    | **57.1**   |     | $          | 48.9 |   |
|                                                                   |            |          |            |          |            |  |  |  |  |

 

## **13****         ****accounts receivable**

##  

On July 26, 2002, TELUS Communications Inc., awholly owned subsidiary of TELUS, entered into an agreement, which was amended September 30,2002, March 1, 2006, and November 30, 2006, with an arm’s-lengthsecuritization trust associated with a major Schedule I bank under whichTELUS Communications Inc. is able to sell an interest in certain of its tradereceivables up to a maximum of $650 million. As a result of selling theinterest in certain of the trade receivables on a fully-serviced basis, aservicing liability is recognized on the date of sale and is, in turn,amortized to earnings over the expected life of the trade receivables. Thisrevolving-period securitization agreement had an initial term ending July 18,2007; the November 30, 2006, amendment resulted in the term being extendedto July 18, 2008. TELUS Communications Inc. is required to maintain atleast a BBB (low) credit rating by Dominion Bond Rating Service or the securitizationtrust may require the sale program to be wound down prior to the end of theterm; at December 31, 2007, the rating was A (low).

 

41

----

 

notes to consolidated financial statements

 
| **As at December 31 ****(millions)** | ** ** | **2007**   | ** **  | **2006** | ** ** |
|----------------------------------------------------------|------------|------------|-------------|----------|------------|
| Total managed portfolio                                  | ** ** | **$**      | **1,221.7** |     | $          | 1,216.1 |   |
| Securitized receivables                                  | ** ** | **(570.4** | **)**       | (567.3   | )          |
| Retained interest in receivables sold                    | ** ** | **59.6**   |        | 58.4     |       |
| Receivables held                                         | ** ** | **$**      | **710.9**   |     |       | $ | 707.2 |   |
|                                                          |            |            |             |          |            |  |  |  |  |  |

 

For the year ended December 31, 2007, theCompany recognized composite losses of $20.7 million (2006 —$18.0 million) on the sale of receivables arising from the securitization.

Cash flows from the securitization are as follows:

 
| **Years ended December 31 (millions)**                | ** ** | **2007**   | ** **  | **2006** | ** ** |
|---------------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Cumulative proceeds from securitization,  beginning of period             | ** ** | **$**      | **500.0**   |     | $          | 500.0 |   |
| Proceeds from new securitizations                                         | ** ** | **720.0**  | ** **  | 410.0    |       |
| Securitization reduction payments                                         | ** ** | **(720.0** | **)**       | (410.0   | )          |
| Cumulative proceeds from securitization,  end of period                   | ** ** | **$**      | **500.0**   |     | $          | 500.0 |   |
| Proceeds from collections reinvested in  revolving-period securitizations | ** ** | **$**      | **3,946.6** |     | $          | 3,863.0 |   |
| Proceeds from collections pertaining to  retained interest                | ** ** | **$**      | **477.3**   |     | $          | 499.3 |   |
|                                                                           |            |            |             |          |            |  |  |  |  |

 

The key economic assumptions used to determine the losson sale of receivables, the future cash flows and fair values attributed to theretained interest, as further discussed in Note 1(n), are as follows:

 
| **Years ended December 31**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected credit losses as a percentage of  accounts receivable sold | ** ** | **1.1**  | **%**      | 1.2      | %          |
| Weighted average life of the receivables  sold (days)               | ** ** | **37**   | ** ** | 39       |       |
| Effective annual discount rate                                      | ** ** | **5.0**  | **%**      | 4.7      | %          |
| Servicing                                                           | ** ** | **1.0**  | **%**      | 1.0      | %          |

 

Generally, the sold trade receivables do not experienceprepayments.

 

At December 31, 2007, key economic assumptions andthe sensitivity of the current fair value of residual cash flows to immediate10% and 20% changes in those assumptions are as follows:

 
| ** **                                                          | ** ** | ** ** | ** ** | **Hypothetical change in  assumptions(1)** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|
| **($ in millions)**                                       | ** ** | **2007**   | ** ** | **10%**                                              | ** ** | **20%** | ** ** |
| Carrying amount/fair value of future cash  flows                    | ** ** | **$**      | **59.6**   |                                                 |       |   |   |   |
| Expected credit losses as a percentage of  accounts receivable sold |       |       |       | $                                                    | 0.8        |   | $ | 1.6 |   |
| Weighted average life of the receivables  sold (days)               |       |       |       | $                                                    | —     |   | $ | 0.1 |   |
| Effective annual discount rate                                      |       |       |       | $                                                    | —     |   | $ | 0.1 |   |
|                                                                     |            |            |            |                                                      |            |  |  |  |  |  |  |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in an increased value, and unfavourable hypotheticalchanges in the assumptions result in a decreased value, of the retainedinterest in receivables sold. As the figures indicate, changes in fair valuebased on a 10% variation in assumptions generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in fairvalue may not be linear. Also, in this table, the effect of a variation in aparticular assumption on the fair value of the retained interest is calculatedwithout changing any other assumption; in reality, changes in one factor mayresult in changes in another (for example, increases in market interest ratesmay result in increased credit losses), which might magnify or counteract thesensitivities.

 

42

----

 

 

notes to consolidated financialstatements

 

## **14****         ****capital assets**

##  

### **(a)**          Capital assets, net

 
| ** **                                               | ** ** | **2007**     | ** **   | **2006**                                         | ** ** |
|----------------------------------------------------------|------------|--------------|--------------|--------------------------------------------------|------------|
| **As at December 31 ****(millions)** | ** ** | **Cost**     | ** **   | **Accumulated  depreciation  and  amortization** | ** ** | **Net book  value** | ** ** | **Cost** | ** ** | **Accumulated  depreciation  and  amortization** | ** ** | **Net book  value** | ** ** |
| Property, plant, equipment and other                     |       |         |         |                                             |       |   |   |   |   |   |   |   |   |
| Telecommunications assets                                | ** ** | **$**        | **19,082.2** | ** **                                       | **$**      | **13,730.2** | ** ** | **$** | **5,352.0** |   | $ | 18,061.8 |   | $ | 12,755.3 |   | $ | 5,306.5 |   |
| Assets on customers’ premises                       | ** ** | **765.8**    | ** **   | **614.4**                                        | ** ** | **151.4** |   | 693.3 |   | 550.9 |   | 142.4 |   |
| Buildings and leasehold improvements                     | ** ** | **1,992.7**  | ** **   | **1,112.8**                                      | ** ** | **879.9** |   | 1,852.5 |   | 1,002.7 |   | 849.8 |   |
| Office equipment and furniture                           | ** ** | **1,146.8**  | ** **   | **894.2**                                        | ** ** | **252.6** |   | 1,110.6 |   | 840.8 |   | 269.8 |   |
| Assets under capital lease                               | ** ** | **18.4**     | ** **   | **12.7**                                         | ** ** | **5.7** |   | 18.5 |   | 9.4 |   | 9.1 |   |
| Other                                                    | ** ** | **344.9**    | ** **   | **267.3**                                        | ** ** | **77.6** |   | 340.6 |   | 259.6 |   | 81.0 |   |
| Land                                                     | ** ** | **48.2**     | ** **   | **—**                                       | ** ** | **48.2** |   | 48.9 |   | — |   | 48.9 |   |
| Assets under construction (Note 1(s))                    | ** ** | **375.5**    | ** **   | **—**                                       | ** ** | **375.5** |   | 376.6 |   | — |   | 376.6 |   |
| Materials and supplies                                   | ** ** | **34.4**     | ** **   | **—**                                       | ** ** | **34.4** |   | 33.6 |   | — |   | 33.6 |   |
| ** **                                               | ** ** | **23,808.9** | ** **   | **16,631.6**                                     | ** ** | **7,177.3** |   | 22,536.4 |   | 15,418.7 |   | 7,117.7 |   |
| Intangible assets subject to amortization                |       |         |         |                                             |       |   |   |   |   |   |   |   |   |
| Subscriber base                                          | ** ** | **250.1**    | ** **   | **44.3**                                         | ** ** | **205.8** |   | 362.9 |   | 138.3 |   | 224.6 |   |
| Software                                                 | ** ** | **1,761.4**  | ** **   | **1,242.7**                                      | ** ** | **518.7** |   | 1,306.0 |   | 1,043.4 |   | 262.6 |   |
| Access to rights-of-way and other                        | ** ** | **140.6**    | ** **   | **70.4**                                         | ** ** | **70.2** |   | 122.3 |   | 60.3 |   | 62.0 |   |
| Assets under construction (Note 1(s))                    | ** ** | **183.5**    | ** **   | **—**                                       | ** ** | **183.5** |   | 348.8 |   | — |   | 348.8 |   |
| ** **                                               | ** ** | **2,335.6**  | ** **   | **1,357.4**                                      | ** ** | **978.2** |   | 2,140.0 |   | 1,242.0 |   | 898.0 |   |
| Intangible assets with indefinite lives                  |       |         |         |                                             |       |   |   |   |   |   |   |   |   |
| Spectrum licences(1)                                     | ** ** | **3,985.0**  | ** **   | **1,018.5**                                      | ** ** | **2,966.5** |   | 3,984.9 |   | 1,018.5 |   | 2,966.4 |   |
| ** **                                               | ** ** | **$**        | **30,129.5** | ** **                                       | **$**      | **19,007.5** | ** ** | **$** | **11,122.0** |   | $ | 28,661.3 |   | $ | 17,679.2 |   | $ | 10,982.1 |   |
|                                                          |            |              |              |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Accumulated amortization ofspectrum licences is amortization recorded prior to 2002.

 

The following table presents items included incapital expenditures. Additions of intangible assets subject to amortizationinclude amounts reclassified from assets under construction.

 
| **Years ended December 31 (millions)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Additions of intangible assets                             |       |     |       |     |       |
| – Subject to amortization                             | ** ** | **$**    | **513.3**  |     | $          | 139.1 |   |
| – With indefinite lives                               | ** ** | **0.1**  |       | 1.8      |       |
| ** **                                                 |       | **$**    | **513.4**  |     | $          | 140.9 |   |
|                                                            |            |          |            |          |            |  |  |  |  |

 

The following table presents items included incapital expenditures.

 
| **Years ended December 31 (millions)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Capitalized internal labour costs                          | ** ** | **$**    | **335.3**  |     | $          | 306.8 |   |
|                                                            |            |          |            |          |            |  |  |

 

### **(b)**          Intangible assets subject to amortization

### ** **

Estimated aggregate amortization expense forintangible assets subject to amortization, calculated upon such assets held asat December 31, 2007, for each of the next five fiscal years is asfollows:

 
| **Years ending December 31 (millions)** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
| 2008                                                        | ** ** | **$**      | **233.9**  | ** ** |
| 2009                                                        | ** ** | **177.6**  | ** ** |
| 2010                                                        | ** ** | **93.3**   | ** ** |
| 2011                                                        | ** ** | **50.1**   | ** ** |
| 2012                                                        | ** ** | **19.6**   | ** ** |
|                                                             |            |            |            |  |

 

### **(c)**          Intangible assets with indefinite lives

### ** **

As referred to in Note 1(b) and Note 1(f),the carrying value of intangible assets with indefinite lives and goodwill areperiodically tested for impairment and this test represents a significantestimate for the Company. There is a material

 

43

----

 

notes to consolidated financial statements

 

degree of uncertainty with respect to this estimate giventhe necessity of making key economic assumptions about the future. The Companyconsiders a range of reasonably possible amounts and decides upon an amountthat represents management’s best estimate. If the future was to adverselydiffer from management’s best estimate of key economic assumptions andassociated cash flows were to be materially adversely affected, the Companycould potentially experience future material impairment charges in respect ofits intangible assets with indefinite lives and goodwill.

 

Consistent with current industry-specific valuationmethods, a combination of the discounted cash flow approach, themarket-comparable approach and analytical review of industry andCompany-specific facts is used in determining the fair value of its spectrumlicences and goodwill. The discounted cash flow methodology uses management’sbest estimate of the cash flows and a discount rate established by calculatinga weighted average cost of capital for each reporting unit. Themarket-comparable approach uses current (at the time of test) market consensusestimates and equity trading prices for U.S. and Canadian firms in the sameindustry. In addition, the Company ensures that the combination of thevaluations of the reporting units is reasonable based on current market valuesof the Company.

 

Sensitivity testing was conducted as a part of the December 2007annual test. A component of the sensitivity testing was a break-even analysis.An assumption of no growth rate, with all other assumptions being heldconstant, resulted in the Company continuing to be able to recover the carryingvalue of its intangible assets with indefinite lives and goodwill for theforeseeable future. Stress testing included moderate declines in annual cashflows with all other assumptions being held constant; this too resulted in theCompany continuing to be able to recover the carrying value of its intangibleassets with indefinite lives and goodwill for the foreseeable future.

 

## **15****         ****goodwill**

##  

### **(a)**          2007 and prior

 
| **Years ended December 31 (millions)**          | ** ** | **2007**   | ** **  | **2006** | ** ** |
|---------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Balance, beginning of period                                        | ** ** | **$**      | **3,169.5** |     | $          | 3,156.9 |   |
| Foreign exchange on goodwill of  self-sustaining foreign operations | ** ** | **(1.5**   | **)**       | 0.7      |       |
| Goodwill arising from current period  acquisitions                  | ** ** | **—** |        | 40.4     |       |
| Other                                                               | ** ** | **—** |        | (28.5    | )          |
| Balance, end of period                                              | ** ** | **$**      | **3,168.0** |     | $          | 3,169.5 |   |
|                                                                     |            |            |             |          |            |  |  |  |  |

 

*FSC Internet Corp.:* Of the 2006goodwill addition, $17.5 million, none of which is expected to bedeductible for tax purposes, arose from the April 7, 2006, cashacquisition of FSC Internet Corp., operating as Assurent Secure Technologies, aprovider of information technology security services and products. Theinvestment was made with a view to the ongoing advancement of the Company’sexisting suite of security solutions.

 

The primary factor thatcontributed to a purchase price that resulted in the recognition of goodwill isthe low degree of net tangible assets relative to the earnings capacity of theacquired business. Effective the acquisition date, the acquired company’sresults are included in the Company’s Consolidated Statements of Income andOther Comprehensive Income and are included in the Company’s Wireline segment.

 

*TELUS International PhilippinesInc. (formerly Ambergris Solutions Inc.):*  In 2005, the Company acquired, for cash, aneffective 52.5% economic interest in TELUS International Philippines Inc., abusiness process outsourcing company. The acquisition was effected in twosteps: one on February 15, 2005, for an effective 49% economic interestand one on May 13, 2005, for an effective 3.5% economic interest. Theinitial effective 49% economic interest resulted in the Company controllingTELUS International Philippines Inc. as the Company controlled, but did notwholly own, an intermediate holding company which, in turn, controlled, but didnot wholly own, TELUS International Philippines Inc. This investment was madewith a view to enhancing the Company’s competitiveness in contact centreofferings.

 

In the second half of2006, the Company increased its total effective economic interest in the entityfrom 52.5% to 97.4%, resulting in a 2006 goodwill addition of$22.9 million, none of which is expected to be deductible for taxpurposes.

 

The primary factor thatcontributed to a purchase price that resulted in the recognition of goodwill isthe low degree of net tangible assets in the industry relative to the marketvalue of established Asian operations. TELUS International Philippines Inc.’sresults have been included in the Company’s Consolidated Statements of Incomeand Other Comprehensive Income and the Company’s Wireline segment since theacquisition of control on February 15, 2005.

 

*Other:* During 2006, theCompany updated its estimate of the net income tax benefits that were obtainedin the course of pre-2005 business combinations. This has resulted in adecrease in the future income tax liability of $26.5 million, which hasbeen recorded as a reduction of the unamortized balance of goodwill arisingfrom the acquisitions.

 

44

----

 

notes to consolidated financialstatements

 

### **(b)**          2008 – Emergis Inc.

### ** **

On November 29, 2007, the Company announced that ithad agreed to offer to acquire 100% of the outstanding shares ofEmergis Inc. for $8.25 per common share by way of a take-over bid (intotal, an initially estimated purchase price of approximately $763 millionon a fully-diluted basis). Emergis Inc. is a business process outsourcer, based in Canada,with a focus on healthcare and financial services sectors, two of the four keyindustries the Company’s Business Solutions team has invested in developingexpertise in (the other two being energy and the public sector). The Companybelieves that its national sales and marketing capabilities will enhance growthin Emergis Inc. solutions, particularly in light of the complementarynature of the parties’ businesses and customer bases.

 

As at December 31, 2007, the Company had made marketpurchases of 1,017,000 Emergis Inc. common shares for $8.3 million, asdisclosed in the Company’s press releases. On January 17, 2008, theCompany drew $500 million of bankers acceptances on its credit facilities,issued incremental commercial paper and, including utilization of cash on hand,remitted $743.4 million to the depository in payment for:

 

·                  the approximately84,876,494 Emergis Inc. common shares (representing approximately 94% ofthe outstanding common shares of Emergis Inc. on a fully-diluted basis) thatwere validly deposited to the Company’s offer; and

 

·                  the remainingoutstanding common shares of Emergis Inc. which the Company acquired on January 18,2008, utilizing the compulsory acquisition provisions of the *Canada Business Corporations Act*.

 

The primary factor that contributed to a purchase pricethat resulted in the recognition of goodwill is the degree of net tangibleassets and net intangible assets relative to the earnings capacity of theacquired business. Emergis Inc.’s results of operations will be includedin the Company’s Wireline segment effective January 17, 2008. The amountsassigned to goodwill are not expected to be deductible for tax purposes.  Acquired intangible assets are not expectedto have significant residual values.

 

45

----

 

notes to consolidated financial statements

 
| **As at January 16, 2008 (millions)**                          | ** ** | **Preliminary(1)  purchase price  amount assigned** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Assets**                                                                              |       |                                                          |       |
| Current assets                                                                          |       | $                                                             | 112.6      |   |
| Capital assets                                                                          |       |                                                          |       |
| Property, plant, equipment and other                                                    |       | 18.9                                                          |       |
| Intangible assets subject to  amortization(2)                                           |       |                                                          |       |
| Customer contracts and the related customer  relationships                              |       | 134.8                                                         |       |
| Software                                                                                |       | 186.1                                                         |       |
| Other                                                                                   |       | 2.4                                                           |       |
|                                                                                    |       | 323.3                                                         |       |
|                                                                                    |       | 342.2                                                         |       |
| Other assets                                                                            |       | 5.0                                                           |       |
| Goodwill                                                                                |       | 365.8                                                         |       |
|                                                                                    |       | $                                                             | 825.6      |   |
| **Liabilities**                                                                         |       |                                                          |       |
| Current liabilities                                                                     |       | $                                                             | 51.4       |   |
| Long-term debt                                                                          |       | 2.8                                                           |       |
| Other long-term liabilities                                                             |       | 1.1                                                           |       |
| Future income taxes                                                                     |       | 25.0                                                          |       |
|                                                                                    |       | 80.3                                                          |       |
| **Purchase price**                                                                      |       |                                                          |       |
| Market purchase of shares prior to closing                                              |       | 8.3                                                           |       |
| Remitted to depository (net of amounts for  market purchase of shares prior to closing) |       | 735.1                                                         |       |
|                                                                                    |       | 743.4                                                         |       |
| Direct costs of the business combination                                                |       | 1.9                                                           |       |
|                                                                                    |       | 745.3                                                         |       |
|                                                                                    |       | $                                                             | 825.6      |   |

 

Contingent Liabilities *(Note 19(e))*

 

----

(1)          The purchase priceallocation has not been finalized as of the date of issuance of theseconsolidated financial statements. As is customary in a business acquisitiontransaction, until the time of acquisition of control, the Company did not havefull access to Emergis Inc.’s books and records. Upon having sufficient time toadequately review Emergis Inc.’s books and records, the Company expects tofinalize its purchase price allocation.

(2)          Customer contracts andthe related customer relationships and software are expected to be amortizedover amortization periods of 10 years and 5 years, respectively.

 

## **16****         ****short-term obligations**

##  

At December 31, 2007, the Company’s availablebilateral bank facilities totalled $77 million (2006 – $74 million),$NIL (2006 – $1.2 million) of which was utilized in the form of anoverdraft; $2.9 million (2006 – $2.6 million) was utilized asoutstanding undrawn letters of credit.

 

On February 12, 2008, TELUS Corporation accepted acommitted term sheet from a small group of Canadian banks to provide a new$700 million 364-day revolving credit facility. Availability of the newfacility is conditional on entering into the final definitive documentation,including customary representations and warranties and no existing defaults orevents of default. The new credit facility will expire 364 days after the dateof record in final documentation.

 

The credit facility will be unsecured and bear interestat primerate or bankers’ acceptance rate (all such terms as used or defined in thecredit facility), plus applicable margins. The credit facility will containcustomary representations, warranties and covenants including two financialquarter end financial ratio tests. The financial ratio tests will be that theCompany may not permit its net debt to operating cash flow ratio to exceed4.0:1 and may not permit its operating cash flow to interest expense ratio tobe less than 2.0:1, each as defined under the credit facility.

 

46

----

 

notes to consolidated financial statements

 

## **17****         ****long-term debt**

##  

### **(a)**          Details of long-term debt

 
| **As at December 31($ in millions)  Series**                                          | ** ** | **Rate of interest** | ** ** | **Maturity**             | ** ** | **2007**    | ** **  | **2006**                             | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-------------|-------------|--------------------------------------|------------|
|                                                                                                           |       |                           |       |                     |       |        |        | **(adjusted – Note 2(b))** |       |
| TELUS Corporation Notes                                                                                        |       |                           |       |                     |       |        |        |                                 |       |
| U.S. (2)                                                                                                       |       | 7.50                           | %(1)       | June 2007           | ** ** | **$**       | **—**  |                                 | $          | 1,357.9 |   |
| U.S. (3)                                                                                                       |       | 8.00                           | %(1)       | June 2011           | ** ** | **1,892.1** |        | 2,227.1                              |       |
| CB                                                                                                             |       | 5.00                           | %(1)       | June 2013           | ** ** | **298.2**   |        | 298.0                                |       |
| CC                                                                                                             |       | 4.50                           | %(1)       | March 2012          | ** ** | **298.8**   |        | —                               |       |
| CD                                                                                                             |       | 4.95                           | %(1)       | March 2017          | ** ** | **687.0**   |        | —                               |       |
| ** **                                                                                                     |       |                           |       |                     |       | **3,176.1** |        | 3,883.0                              |       |
| TELUS Corporation Commercial Paper                                                                             |       | 4.86                           | %          | Through  April 2008 |       | **584.9**   |        | —                               |       |
| TELUS Corporation Credit Facility                                                                              |       | —                         | %          | May 2012            | ** ** | **—**  |        | 120.0                                |       |
| TELUS Communications Inc. Debentures                                                                           |       |                           |       |                     |       |        |        |                                 |       |
| 1                                                                                                              |       | 12.00                          | %(1)       | May 2010            | ** ** | **49.8**    |        | 49.8                                 |       |
| 2                                                                                                              |       | 11.90                          | %(1)       | November 2015       | ** ** | **124.1**   |        | 124.5                                |       |
| 3                                                                                                              |       | 10.65                          | %(1)       | June 2021           | ** ** | **173.3**   |        | 174.0                                |       |
| 5                                                                                                              |       | 9.65                           | %(1)       | April 2022          | ** ** | **244.5**   |        | 246.1                                |       |
| B                                                                                                              |       | 8.80                           | %(1)       | September 2025      | ** ** | **197.4**   |        | 198.1                                |       |
| ** **                                                                                                     |       |                           |       |                     |       | **789.1**   |        | 792.5                                |       |
| TELUS  Communications Inc. First Mortgage Bonds                                                                |
| U                                                                                                              |       | 11.50                          | %(1)       | July 2010           | ** ** | **29.9**    |        | 30.0                                 |       |
| TELUS Communications Inc. Medium Term Notes                                                                    |
| 1                                                                                                              |       | 7.10                           | %(1)       | February 2007       | ** ** | **—**  |        | 70.0                                 |       |
| Capital leases issued at varying rates of  interest from 4.1% to 6.4% and maturing on various dates up to 2013 |       | **6.1**                        |       | 9.2                      |       |
| Other                                                                                                          | ** ** | ** **                     | ** ** | ** **               |       | **2.8**     | ** **  | 3.5                                  |       |
| Long-Term Debt                                                                                                 | ** ** | ** **                     |       |                     |       | **4,588.9** |        | 4,908.2                              |       |
| Less: Current maturities                                                                                       | ** ** | ** **                     |       |                     |       | **5.4**     |        | 1,433.5                              |       |
| Long-Term Debt – non-current                                                                              | ** ** | ** **                     |       |                     |       | **$**       | **4,583.5** |                                 |       | $ | 3,474.7 |   |
|                                                                                                                |            |                                |            |                          |            |             |             |                                      |            |  |  |  |

 

----

(1)          Interest is payablesemi-annually.

(2)          Principal face value ofnotes at December 31, 2006 – U.S.$1,166.5 million.

(3)          Principal face value ofnotes is U.S.$1,925.0 million (2006 –  U.S.$1,925.0 million).

 

### **(b)**          TELUS Corporation notes

### ** **

The notes are senior,unsecured and unsubordinated obligations of the Company and rank equally inright of payment with all existing and future unsecured, unsubordinatedobligations of the Company, are senior in right of payment to all existing andfuture subordinated indebtedness of the Company, and are effectivelysubordinated to all existing and future obligations of, or guaranteed by, theCompany’s subsidiaries.

 

The indentures governing the notes contain certaincovenants which, among other things, place limitations on the ability of TELUSand certain of its subsidiaries to: grant security in respect of indebtedness,enter into sale and lease-back transactions and incur new indebtedness.

 
| ** **                         | ** ** | ** **      | ** ** | ** **           | ** ** | ** **                          | ** ** | **Redemption  present value  spread  (basis points)(1)** | ** ** |
|------------------------------------|------------|-----------------|------------|----------------------|------------|-------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **      | ** ** | ** **           | ** ** | **Principal face amount** | ** ** | ** **                                                         |
| **Series**                         | ** ** | **Issued**      | ** ** | **Issue price** | ** ** | **Originally  issued**              | ** ** | **Outstanding**                                                    | ** ** | ** ** |
| 7.50% (U.S. Dollar) Notes due 2007 |       | May 2001   |       | U.S.$995.06          |       | U.S.$1.3 billion                    |       | —                                                             |       | 25 |   |
| 8.00% (U.S. Dollar) Notes due 2011 |       | May 2001   |       | U.S.$994.78          |       | U.S.$2.0 billion                    |       | U.S.$1.9 billion                                              |       | 30 |   |
| 5.00% Notes, Series CB        |       | May 2006   |       | $                    | 998.80     |                                | $          | 300 million                                                        |       | $ | 300 million |   | 16 |   |
| 4.50% Notes, Series CC        |       | March 2007 |       | $                    | 999.91     |                                | $          | 300 million                                                        |       | $ | 300 million |   | 15 |   |
| 4.95% Notes, Series CD        |       | March 2007 |       | $                    | 999.53     |                                | $          | 700 million                                                        |       | $ | 700 million |   | 24 |   |

 

----

(1)          The notes are redeemableat the option of the Company, in whole at any time, or in part from time totime, on not fewer than 30 and not more than 60 days’ prior notice. Theredemption price is equal to the greater of (i) the present value of thenotes discounted at the Adjusted Treasury Rate (in respect of the U.S. Dollardenominated notes) or the Government of Canada yield (in respect of theCanadian dollar denominated notes) plus the redemption present value spread, or(ii) 100% of the principal amount thereof. In addition, accrued and unpaidinterest, if any, will be paid to the date fixed for redemption.

 

47

----

 

notes to consolidated financial statements

 

*2007 and 2011 Cross CurrencyInterest Rate Swap Agreements:*  Withrespect to the 2011 (U.S. Dollar) Notes, U.S.$1.9 billion (withrespect to the 2007 and 2011 (U.S. Dollar) Notes, December 31, 2006 –U.S.$3.1 billion) in aggregate, the Company entered into cross currencyinterest rate swap agreements which effectively convert the principalrepayments and interest obligations to Canadian dollar obligations witheffective fixed interest rates and fixed economic exchange rates.

 

The cross currency interest rate swap agreements containan optional early termination provision which states that either party couldelect to terminate these swap agreements on May 30, 2006, if (i) thehighest of the long-term unsecured unsubordinated debt ratings of the Companyfalls below BBB as determined by Standard & Poor’s Rating Services orBaa2 as determined by Moody’s Investors Service or (ii) in the case ofthese two ratings having a difference of two or more rating increments, thelower of the two ratings is below BBB- or Baa3 or (iii) the ratings forthe Company’s counterparties fall below A or A2.

 

In contemplation of the planned refinancing of the 2007(U.S. Dollar) Notes, in May 2006 the Company replaced approximately63% of the notional value of the existing cross currency interest rate swapagreements with a like amount of new cross currency interest rate swapagreements which had a lower effective fixed interest rate and a lowereffective fixed exchange rate. This replacement happened concurrent with theissuance of the 5.00% Notes, Series CB; the two transactions had thecomposite effect of deferring, from June 2007 to June 2013, thepayment of $300 million, representing a portion of the amount that wouldhave been due either under the cross currency interest rate swap agreements orto the 2007 (U.S. Dollar) Note holders (to whom the amounts wouldultimately have been paid would depend upon changes in interest and foreignexchange rates over the period to maturity of the underlying debt).

 

To terminate the previous cross currency interest rateswap agreements, the Company made a payment of $354.6 million, including$14.0 million in respect of hedging of then-current period interestpayments, to the counterparties. The remaining $340.6 million portion ofthe payment made to the counterparties of the previous cross currency interestrate swap agreements exceeded the associated amount of the derivativeliability, such excess being $25.8 million and which was deferred andamortized over the remainder of the life of the 2007 (U.S. Dollar) Notes.

 

The weighted average effectivefixed interest rates and effective fixed exchange rates arising from the crosscurrency interest rate swap agreements are summarized in the following table:

 
| ** **                           | ** ** | **2007**                            | ** ** | **2006**                                              | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------|------------|
| **As at December 31** |       | **Effective  fixed  interest rate** | ** ** | **Effective  fixed   exchange rate   ($: U.S.$1.00)** | ** ** | **Effective  fixed  interest rate** | ** ** | **Effective  fixed exchange rate  ($: U.S.$1.00)** | ** ** |
| 2007 (U.S. Dollar) Notes        | ** ** | **—**                          | ** ** | **$**                                                 | **—** |   | 7.046 | % | $ | 1.2716 |   |
| 2011 (U.S. Dollar) Notes        | ** ** | **8.493**                           | **%**      | **$**                                                 | **1.5327** |   | 8.493 | % | $ | 1.5327 |   |

 

The counterparties of the swap agreements are highlyrated financial institutions and the Company does not anticipate anynon-performance. TELUS has not required collateral or other security from thecounterparties due to its assessment of their creditworthiness.

 

The Company translates items such as the U.S. Dollarnotes into equivalent Canadian dollars at the rate of exchange in effect at thebalance sheet date. The swap agreements at December 31, 2007, comprised anet derivative liability of $1,179.5 million, as set out in Note 5(h) (2006– $835.7 million). The asset value of the swap agreements increases (decreases)when the balance sheet date exchange rate increases (decreases) the Canadiandollar equivalent of the U.S. Dollar notes.

### ** **

### **(c)**          TELUS Corporation commercial paper

### ** **

On May 15, 2007,TELUS Corporation entered into an unsecured commercial paper program,which is backstopped by a portion of its credit facility, enabling it to issuecommercial paper up to a maximum aggregate of $800 million (or U.S. Dollarequivalent), to be used for general corporate purposes, including capitalexpenditures and investments.  Commercialpaper debt is due within one year but is classified as long-term debt as theamounts are fully supported, and the Company expects that they will continue tobe supported, by the revolving credit facility which has no repaymentrequirements within the next year.

 

### **(d)**          TELUS Corporation credit facility

### ** **

On March 2, 2007, TELUS Corporation enteredinto a new $2.0 billion bank credit facility with a syndicate of financialinstitutions. The new credit facility consists of a $2.0 billion (orU.S. Dollar equivalent) revolving credit facility expiring on May 1,2012, to be used for general corporate purposes including the backstop ofcommercial paper. This new facility replaced the Company’s pre-existingcommitted credit facilities prior to the availability termination dates of suchfacilities.

 

48

----

 

notes to consolidated financial statements

 

TELUS Corporation’s credit facility is unsecured andbears interest at prime rate, U.S. Dollar Base Rate, a bankers’ acceptancerate or London interbank offered rate (LIBOR) (all such terms as used ordefined in the credit facility), plus applicable margins. The credit facilitycontains customary representations, warranties and covenants including twofinancial quarter end financial ratio tests. The financial ratio tests are thatthe Company may not permit its net debt to operating cash flow ratio to exceed4.0:1 and may not permit its operating cash flow to interest expense ratio tobe less than 2.0:1, each as defined under the credit facility.

 

Continued access to TELUS Corporation’s creditfacility is not contingent on the maintenance by TELUS Corporation of aspecific credit rating.

 
| ** **                                           | ** ** | **2007**                  | ** **  | **2006**                  | ** ** |
|------------------------------------------------------|------------|---------------------------|-------------|---------------------------|------------|
| **As at December 31 (millions)** | ** ** | **May 1, 2012** | ** **  | **May 7, 2008** | ** ** | **May 4, 2010** | ** ** | **Total** | ** ** |
| Revolving credit facility expiring    | ** ** | ** **                |        |                      |       |   |   |   |   |
| Net available (see Note 15(b))                       | ** ** | **$**                     | **1,309.1** |                      | $          | 579.9 |   | $ | 800.0 |   | $ | 1,379.9 |   |
| Drawn                                                | ** ** | **—**                |        | 120.0                     |       | — |   | 120.0 |   |
| Outstanding, undrawn letters of credit               | ** ** | **103.7**                 |        | 100.1                     |       | — |   | 100.1 |   |
| Backstop of commercial paper                         | ** ** | **587.2**                 |        | —                    |       | — |   | — |   |
| Gross available                                      | ** ** | **$**                     | **2,000.0** |                      | $          | 800.0 |   | $ | 800.0 |   | $ | 1,600.0 |   |

 

### **(e)**          TELUS Communications Inc. debentures

### ** **

The outstanding Series 1 through 5 debentures wereissued by a predecessor corporation of TELUS Communications Inc., BC TEL,under a Trust Indenture dated May 31, 1990, and are non-redeemable.

 

The outstanding Series B Debentures were issued by apredecessor corporation of TELUS Communications Inc.,AGT Limited, under a Trust Indenture dated August 24, 1994, and asupplemental trust indenture dated September 22, 1995. They are redeemableat the option of the Company, in whole at any time or in part from time totime, on not less than 30 days’ notice at the higher of par and the pricecalculated to provide the Government of Canada Yield plus 15 basis points.

 

Pursuant to an amalgamation on January 1, 2001, theDebentures became obligations of TELUS Communications Inc. Thedebentures are not secured by any mortgage, pledge or other charge and aregoverned by certain covenants including a negative pledge and a limitation onissues of additional debt, subject to a debt to capitalization ratio andinterest coverage test.

 

### **(f)**            TELUS Communications Inc. firstmortgage bonds

### ** **

The first mortgage bonds were issued by TELUSCommunications (Québec) Inc. and are secured by an immovable hypothec and by amovable hypothec charging specifically certain immovable and movable propertyof the subsidiary TELUS Communications Inc., such as land, buildings,equipment, apparatus, telephone lines, rights-of-way and similar rights limitedto certain assets located in the province of Quebec. The first mortgage bondsare non-redeemable. Pursuant to a corporate reorganization effected July 1,2004, the outstanding first mortgage bonds became obligations of TELUSCommunications Inc.

 

### **(g)**         TELUS Communications Inc. medium term notes

### ** **

The medium term notes were issued by TELUS Communications(Québec) Inc. under a trust indenture dated September 1, 1994, assupplemented from time to time, were unsecured and were non-redeemable. Newissues of medium term notes are subject to restrictions as to debt ratio andinterest coverage. Pursuant to a corporate reorganization effected July 1,2004, the medium term notes became obligations ofTELUS Communications Inc.

 

### **(h)**         Long-term debt maturities

### ** **

Anticipated requirements to meet long-term debtrepayments, including related hedge amounts and calculated upon such long-termdebts owing as at December 31, 2007, for each of the next five fiscalyears are as follows:

 
| **Years ending December 31 (millions)** | ** ** | **Principal(1)** | ** ** | **Derivative liability** | ** ** | **Total**   | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|-------------|------------|
| 2008                                                        | ** ** | **$**            | **5.4**    | ** **                    | **$**      | **—**  | ** ** | **$** | **5.4** | ** ** |
| 2009                                                        | ** ** | **1.5**          | ** ** | **—**                    | ** ** | **1.5**     | ** ** |
| 2010                                                        | ** ** | **80.8**         | ** ** | **—**                    | ** ** | **80.8**    | ** ** |
| 2011                                                        | ** ** | **1,909.2**      | ** ** | **1,042.2**                   | ** ** | **2,951.4** | ** ** |
| 2012                                                        | ** ** | **887.4**        | ** ** | **—**                    | ** ** | **887.4**   | ** ** |
|                                                             |            |                  |            |                               |            |             |            |  |  |  |

 

----

(1)   Where applicable, principal repayments reflect foreign exchangerates at December 31, 2007.

 

49

----

 

notes to consolidated financial statements

 

## **18****         ****shareholders’ equity**

##  

### **(a)**          Details of shareholders’ equity

 
| **As at December 31 ****($ in millions)** | ** **    | **2007**    | ** **  | **2006**                                                  | ** ** |
|-------------------------------------------------------------------------|---------------|-------------|-------------|-----------------------------------------------------------|------------|
| ** **                                                              | ** **    | ** **  | ** **  | **(restated – Notes 2(b), (e))** | ** ** |
| **Preferred equity**                                                    |          |        |        |                                                      |       |
| Authorized                                                              | Amount        |        |        |                                                      |       |   |   |
| First Preferred Shares                                                  | 1,000,000,000 |        |        |                                                      |       |   |   |
| Second Preferred Shares                                                 | 1,000,000,000 |        |        |                                                      |       |   |   |
| **Common equity**                                                       |          |        |        |                                                      |       |
| Share capital                                                           |          |        |        |                                                      |       |
| Shares                                                                  |          |        |        |                                                      |       |
| Authorized                                                              | Amount        |        |        |                                                      |       |   |   |
| Common Shares                                                           | 1,000,000,000 |        |        |                                                      |       |   |   |
| Non-Voting Shares                                                       | 1,000,000,000 |        |        |                                                      |       |   |   |
| Issued                                                                  |          |        |        |                                                      |       |
| Common Shares (b)                                                       | ** **    | **$**       | **2,227.7** |                                                      | $          | 2,264.4 |   |
| Non-Voting Shares (b)                                                   | ** **    | **3,192.0** |        | 3,420.8                                                   |       |
| ** **                                                              |          | **5,419.7** |        | 5,685.2                                                   |       |
| Options (c)                                                             | ** **    | **—**  |        | 0.8                                                       |       |
| Retained earnings and accumulated other  comprehensive income           |          |        |        |                                                      |       |
| Retained earnings                                                       | ** **    | **1,457.5** |        | 1,200.0                                                   |       |
| Accumulated other comprehensive income  (loss) (d)                      | ** **    | **(103.5**  | **)**       | (1.5                                                      | )          |
| Total                                                                   | ** **    | **1,354.0** |        | 1,198.5                                                   |       |
| Contributed surplus (e)                                                 | ** **    | **152.5**   |        | 163.5                                                     |       |
| Total Shareholders’ Equity                                         | ** **    | **$**       | **6,926.2** |                                                      | $          | 7,048.0 |   |
|                                                                         |               |             |             |                                                           |            |  |  |  |  |  |

 

### **(b)**          Changes in Common Shares and Non-Voting Shares

 
| ** **                                                                                             | ** ** | **2007**                       | ** ** | **2006**               | ** **  |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|-------------|
| **Years ended December 31 ($ in millions)**                              | ** ** | **Number of shares** | ** ** | **Share capital** | ** **  | **Number of shares** | ** ** | **Share capital** | ** ** |
| **Common Shares**                                                                                      |       |                           |       |                   |        |   |   |   |   |
| Beginning of period                                                                                    | ** ** | **178,667,834**                | ** ** | **$**                  | **2,264.4** |   | 183,530,655 |   | $ | 2,311.6 |   |
| Common Shares issued pursuant to exercise  of share options (f)                                        | ** ** | **3,180**                      | ** ** | **0.1**                |        | 627,779 |   | 21.9 |   |
| Purchase of shares for cancellation  pursuant to normal course issuer bid (g)                          | ** ** | **(2,904,900**                 | **)**      | **(36.8**              | )           | (5,490,600 | ) | (69.1 | ) |
| End of period                                                                                          | ** ** | **175,766,114**                | ** ** | **$**                  | **2,227.7** |   | 178,667,834 |   | $ | 2,264.4 |   |
| **Non-Voting Shares**                                                                                  | ** ** | ** **                     | ** ** | ** **             | ** **  | ** ** | ** ** | ** ** | ** ** |
| Beginning of period                                                                                    | ** ** | **159,240,734**                | ** ** | **$**                  | **3,420.8** |   | 166,566,504 |   | $ | 3,556.7 |   |
| Non-Voting Shares issued pursuant to  exercise of share options (f)                                    | ** ** | **29,790**                     | ** ** | **0.9**                |        | 3,190,967 |   | 94.2 |   |
| Non-Voting Shares issued pursuant to use of  share option award net-equity settlement feature (f) | ** ** | **16,647**                     | ** ** | **0.1**                |        | 371,386 |   | 2.4 |   |
| Purchase of shares for cancellation  pursuant to normal course issuer bid (g)                          | ** ** | **(10,706,000**                | **)**      | **(229.8**             | **)**       | (10,888,123 | ) | (232.5 | ) |
| End of period                                                                                          | ** ** | **148,581,171**                | ** ** | **$**                  | **3,192.0** |   | 159,240,734 |   | $ | 3,420.8 |   |

 

The amounts credited to theCommon Share capital account upon exercise of share options in the precedingtable are all for cash received from exercise. Amounts credited to theNon-Voting Share capital account are comprised as follows:

 
| **Years ended December 31 (millions)**                                                                             | ** ** | **2007**   | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Non-Voting Shares issued pursuant to  exercise of share options                                                                        |       |       |       |     |       |
| Cash received from exercise of share  options                                                                                          | ** ** | **$**      | **0.8**    |     | $          | 82.6 |   |
| Share option award expense reclassified  from contributed surplus upon exercise of share options (e)                                   | ** ** | **0.1**    |       | 6.6      |       |
| Amounts credited to share capital arising  from intrinsic value accounting applied to former Clearnet Communications  Inc. options (c) | ** ** | **—** |       | 5.0      |       |
| ** **                                                                                                                             |       | **$**      | **0.9**    |     |       | $ | 94.2 |   |
|                                                                                                                                        |            |            |            |          |            |  |  |  |  |  |

 

50

----

### ** **

notes to consolidated financialstatements

 

### **(c)**          Options

### ** **

Upon its acquisition of Clearnet Communications Inc. in2000, the Company was required to record the intrinsic value of ClearnetCommunications Inc. options outstanding at that time. As these options areexercised, the corresponding intrinsic values are reclassified to sharecapital. As these options are forfeited, or as they expire, the correspondingintrinsic value is reclassified to contributed surplus. Proceeds arising fromthe exercise of these options are credited to share capital.

 

### **(d)**          Accumulated other comprehensive income (loss)

** **
| ** **                                                                                                                        | ** ** | ** **                                           | ** ** | **Accumulated other comprehensive income (loss)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **Other comprehensive income (loss)** | ** ** | **Opening balance**                                              | ** ** | ** ** | ** ** |
| **Year ended December 31, 2007 (millions)**                                                              | ** ** | **Amount  arising**                                  | ** ** | **Income  taxes**                                                     | ** ** | **Net** | ** ** | **Beginning  of period** | ** ** | **Transitional  adjustments(1)** | ** ** | **As  adjusted** | ** ** | **End of  period** | ** ** |
| **Change in unrealized fair value of  derivatives designated as cash flow hedges**                                                |       |                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Gains (losses) on derivatives designated as  cash flow hedges                                                                     |       | $                                                    | (353.4     | )                                                                     | $          | (39.2 | ) | $ | (314.2 | ) |   |   |   |   |   |   |   |   |
| Gains and losses on derivatives designated  as cash flow hedges in prior periods transferred to net income in the current  period |       | 476.7                                                |       | 80.5                                                                  |       | 396.2 |   |   |   |   |   |   |   |   |   |
|                                                                                                                              |       | 123.3                                                |       | 41.3                                                                  |       | 82.0 |   | $ | — |   | $ | (177.9 | ) | $ | (177.9 | ) | $ | (95.9 | ) |
| **Cumulative foreign currency translation  adjustment**                                                                           |       | (7.2                                                 | )          | —                                                                |       | (7.2 | ) | (1.5 | ) | — |   | (1.5 | ) | (8.7 | ) |
| **Change in unrealized fair value of  available-for-sale financial assets**                                                       |       | (0.6                                                 | )          | —                                                                |       | (0.6 | ) | — |   | 1.7 |   | 1.7 |   | 1.1 |   |
|                                                                                                                              |       | $                                                    | 115.5      |                                                                  | $          | 41.3 |   | $ | 74.2 |   | $ | (1.5 | ) | $ | (176.2 | ) | $ | (177.7 | ) | $ | (103.5 | ) |
|                                                                                                                                   |            |                                                      |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          The transitionaladjustments arise primarily from the 2007 and 2011 cross currency interest rateswap agreements (Notes 2(b), 17(b)) and are net of income taxes on the cashflow hedges of $81.7.

 

The net amount of the existinggains (losses) arising from the unrealized fair value of the 2011 crosscurrency interest rate swap agreements, which are derivatives that aredesignated as cash flow hedges, and which are reported in accumulated othercomprehensive income, would be reclassified to net income if the agreements(see Note 17(b)) were early terminated; the amount of such reclassificationwould be dependent upon fair values and amounts of the agreements terminated.As at December 31, 2007, the Company’s estimate of the net amount ofexisting gains (losses) arising from the unrealized fair value of derivativesdesignated as cash flow hedges, other than in respect of the 2011 crosscurrency interest rate swap agreements, which are reported in accumulated othercomprehensive income and which are expected to be reclassified to net income inthe next twelve months is $(0.5 million).

 

### **(e)**          Contributed surplus

 
| **Years ended December 31 (millions)**                                                                                                                                  | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Balance, beginning of period                                                                                                                                                                | ** ** | **$**      | **163.5**  |     | $          | 153.4 |   |
| Share option award expense                                                                                                                                                                  |       |       |       |     |       |
| - Recognized in  period(1) (Note 11(a))                                                                                                                                           | ** ** | **14.6**   |       | 19.0     |       |
| - Reclassified to Non-Voting Share capital  account                                                                                                                                         |       |       |       |     |       |
| - Upon exercise of share options                                                                                                                                                            | ** ** | **(0.1**   | **)**      | (6.6     | )          |
| - Upon use of share option award net-equity  settlement feature                                                                                                                             | ** ** | **(0.1**   | **)**      | (2.4     | )          |
| - Reclassified to current liabilities upon  addition of net-cash settlement feature (Note 11(b)), net of eligible awards  settled other than through the use of net-cash settlement feature | ** ** | **(25.4**  | **)**      | —   |       |
| - Amounts credited to contributed surplus  arising from intrinsic value accounting applied to former Clearnet  Communications Inc. options (c)                                              | ** ** | **—** |       | 0.1      |       |
| Balance, end of period                                                                                                                                                                      | ** ** | **$**      | **152.5**  |     |       | $ | 163.5 |   |
|                                                                                                                                                                                             |            |            |            |          |            |  |  |  |  |  |

 

----

(1)          This amount representsthe expense for share option awards accounted for as equity instruments; thedifference between this amount and the amount disclosed in Note 11(a) isthe expense for share option awards accounted for as liability instruments.

 

### **(f)**            Share option plans

### ** **

The Company has a number of share option plans underwhich officers and other employees may receive options to purchase Non-VotingShares at a price equal to the fair market value at the time of grant; prior to2001, options were also similarly awarded in respect of Common Shares. Prior to2002, directors were also awarded options to purchase Non-Voting Shares andCommon Shares at a price equal to the fair market value at the time of grant.Option awards 

 

51

----

 

notes to consolidated financial statements

 

currently granted under the plans may be exercised overspecific periods not to exceed seven years from the time of grant; prior to2003, share option awards were granted with exercise periods not to exceed tenyears.

 

The following table presents asummary of the activity related to the Company’s share option plans for theyears ended December 31.

 
| ** **                                 | ** ** | **2007**                        | ** ** | **2006**                                    | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| **Years ended December 31** | ** ** | **Number  of   share  options** | ** ** | **Weighted    average share  option price** | ** ** | **Number  of  share  options** | ** ** | **Weighted  average share  option price** | ** ** |
| Outstanding, beginning of period           | ** ** | **10,569,462**                  | ** ** | **$**                                       | **31.46**  |   | 13,894,601 |   | $ | 28.14 |   |
| Granted                                    | ** ** | **1,347,893**                   | ** ** | **56.59**                                   |       | 1,627,132 |   | 43.66 |   |
| Exercised(1)                               | ** ** | **(3,041,122**                  | **)**      | **26.60**                                   |       | (4,365,475 | ) | 25.94 |   |
| Forfeited and other                        | ** ** | **(591,599**                    | **)**      | **33.74**                                   |       | (586,796 | ) | 27.78 |   |
| Outstanding, end of period                 | ** ** | **8,284,634**                   | ** ** | **$**                                       | **37.17**  |   | 10,569,462 |   | $ | 31.46 |   |

 

----

(1)          The total intrinsic value ofshare option awards exercised for the year ended December 31, 2007, was$93.8 million (2006 – $105.7 million).

 

In 2006, certain outstanding grants of share optionawards, which were made after 2001, had a net-equity settlement feature appliedto them. This event did not result in the optionees receiving incremental valueand therefore modification accounting was not required for it. The optioneedoes not have the choice of exercising the net-equity settlement feature. It isat the Company’s discretion whether an exercise of the share option award issettled as a share option or using the net-equity settlement feature. In 2007,certain outstanding grants of share option awards had a net-cash settlementfeature applied to them, as further discussed in Note 11(b); the optionee hasthe choice of exercising the net-cash settlement feature.

 

The following table reconcilesthe number of share options exercised and the associated number of CommonShares and Non-Voting Shares issued.

 
| ** **                                                                                             | ** ** | **2007**           | ** ** | **2006**               | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Years ended December 31**                                                             | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** |
| Shares issued pursuant to exercise of share  options                                                   |       | 3,180              |       | 29,790                 |       | 32,970 |   | 627,779 |   | 3,190,967 |   | 3,818,746 |   |
| Impact of optionee choosing to settle share  option award exercises using net-cash settlement feature  |       | 339,002            |       | 2,643,953              |       | 2,982,955 |   | — |   | — |   | — |   |
| Shares issued pursuant to use of share  option award net-equity settlement feature                     |       | N/A(1              | )          | 16,647                 |       | 16,647 |   | N/A(1 | ) | 371,386 |   | 371,386 |   |
| Impact of Company choosing to settle share  option award exercises using net-equity settlement feature |       | N/A(1              | )          | 8,550                  |       | 8,550 |   | N/A(1 | ) | 175,343 |   | 175,343 |   |
| Share options exercised                                                                                |       | 342,182            |       | 2,698,940              |       | 3,041,122 |   | 627,779 |   | 3,737,696 |   | 4,365,475 |   |

 

----

(1)          Share option awards forCommon Shares do not have a net-equity settlement feature.

 

52

----

 

notes to consolidated financial statements

 

The following is a life and exercise price stratificationof the Company’s share options outstanding as at December 31, 2007.

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Options exercisable** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number  of**               | ** ** | ** average** | ** ** |
| **Options outstanding(1)**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total**  | ** ** | **shares**                   | ** ** | **price** | ** ** |
| Range  of option prices                              |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |                         |       |   |   |
| Low                                                  |       | $          | 5.95       |       | $          | 10.56      |       | $          | 16.15      |       | $          | 24.72      |       | $          | 37.40      |                         | $          | 56.34 |   | $ | 5.95 |   |   |   |   |   |
| High                                                 |       | $          | 8.43       |       | $          | 14.93      |       | $          | 24.09      |       | $          | 35.90      |       | $          | 55.96      |                         | $          | 64.64 |   | $ | 64.64 |   |   |   |   |   |
| **Year of expiry and number of shares**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** |
| 2008                                                 |       | 3,272      |       | —     |       | —     |       | 22,913     |       | 32,500     |       | —     |       | 58,685     |       | 58,685                       |       | $ | 38.18 |   |
| 2009                                                 |       | —     |       | 2,944      |       | 338,667    |       | 131,750    |       | 26,000     |       | —     |       | 499,361    |       | 499,361                      |       | $ | 21.51 |   |
| 2010                                                 |       | —     |       | 75,537     |       | 567,900    |       | 52,806     |       | 261,187    |       | —     |       | 957,430    |       | 957,430                      |       | $ | 27.36 |   |
| 2011                                                 |       | —     |       | —     |       | 596,071    |       | 1,477,726  |       | —     |       | —     |       | 2,073,797  |       | 2,073,797                    |       | $ | 28.76 |   |
| 2012                                                 |       | 4,966      |       | 6,500      |       | 204,900    |       | 906,624    |       | 737,735    |       | —     |       | 1,860,725  |       | 216,366                      |       | $ | 18.19 |   |
| 2013                                                 |       | —     |       | —     |       | —     |       | —     |       | 1,500,728  |       | 13,056     |       | 1,513,784  |       | —                       |       | $ | — |   |
| 2014                                                 |       | —     |       | —     |       | —     |       | —     |       | 78,320     |       | 1,242,532  |       | 1,320,852  |       | —                       |       | $ | — |   |
|                                                 |       | 8,238      |       | 84,981     |       | 1,707,538  |       | 2,591,819  |       | 2,636,470  |       | 1,255,588  |       | 8,284,634  |       | 3,805,639                    |       |   |   |
| Weighted  average remaining contractual life (years) |       | 3.1        |       | 2.3        |       | 3.3        |       | 3.4        |       | 4.8        |       | 6.2        |       | 4.2        |       |                         |       |   |   |
| Weighted  average price                              |       | $          | 7.44       |       | $          | 14.44      |       | $          | 21.75      |       | $          | 32.41      |       | $          | 43.26      |                         | $          | 56.91 |   | $ | 37.17 |   |   |   |   |   |
| Aggregate  intrinsic value(2) (millions)             |       | $          | 0.3        |       | $          | 2.9        |       | $          | 44.8       |       | $          | 40.7       |       | $          | 13.6       |                         | $          | — |   | $ | 102.3 |   |   |   |   |   |
| **Options exercisable**                              |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |                         |       |   |   |
| Number  of shares                                    |       | 8,238      |       | 84,981     |       | 1,707,538  |       | 1,685,195  |       | 319,687    |       | —     |       | 3,805,639  |       |                         |       |   |   |
| Weighted  average remaining contractual life (years) |       | 3.1        |       | 2.3        |       | 3.3        |       | 3.0        |       | 2.1        |       | —     |       | 3.0        |       |                         |       |   |   |
| Weighted  average price                              |       | $          | 7.44       |       | $          | 14.44      |       | $          | 21.75      |       | $          | 30.73      |       | $          | 39.23      |                         | $          | — |   | $ | 27.00 |   |   |   |   |   |
| Aggregate  intrinsic value(2) (millions)             |       | $          | 0.3        |       | $          | 2.9        |       | $          | 44.8       |       | $          | 29.4       |       | $          | 3.3        |                         | $          | — |   | $ | 80.7 |   |   |   |   |   |

 

----

| (1) |   | As at December 31, 2007, 8,061,219 share options,  with a weighted average remaining contractual life of 3.3 years, a  weighted average price of $36.80 and an aggregate intrinsic value of  $101.9 million, are vested or were expected to vest; these amounts  differ from the corresponding amounts for all share options outstanding due  to an estimate for expected forfeitures. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The aggregate intrinsic value is calculated upon  December 31, 2007, per share prices of $49.44 for Common Shares and  $48.01 for Non-Voting Shares.                                                                                                                                                                                                                                        |

 

As at December 31, 2007, 0.5 million CommonShares and 15.6 million Non-Voting Shares were reserved for issuance, fromTreasury, under the share option plans.

 

### **(g)**         Purchase of shares forcancellation pursuant to normal course issuer bid

 

As referred to in Note 3, the Company may purchase sharesfor cancellation pursuant to normal course issuer bids in order to maintain oradjust its capital structure. The Company has in fact purchased, forcancellation, through the facilities of the Toronto Stock Exchange, CommonShares and Non-Voting Shares pursuant to successive normal course issuer bids;the Company’s most current normal course issuer bid runs for a twelve-monthperiod ending December 19, 2008, for up to 8 million Common Sharesand 12 million Non-Voting Shares. The excess of the purchase price overthe average stated value of shares purchased for cancellation was charged toretained earnings. The Company ceases to consider shares outstanding on thedate of the Company’s purchase of its shares although the actual cancellationof the shares by the transfer agent and registrar occurs on a timely basis on adate shortly thereafter.

 

53

----

 

notes to consolidated financial statements

 
| ** **                                                                | ** ** | ** **                 | ** ** | **Purchase price** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| **Years ended December 31 ($ in millions)** | ** ** | **Number of  shares** | ** ** | **Paid**                | ** ** | **Charged to  share capital** | ** ** | **Charged to  retained earnings** | ** ** |
| **Common  Shares purchased for cancellation**                             |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 10,259,011                 |       | $                       | 439.8      |   | $ | 128.5 |   | $ | 311.3 |   |
| Program commencing December 20, 2005                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2005 year                                                   |       | 634,469                    |       | 29.7                    |       | 8.0 |   | 21.7 |   |
| During fiscal 2006 year                                                   |       | 5,490,600                  |       | 260.4                   |       | 69.1 |   | 191.3 |   |
| Program total                                                             |       | 6,125,069                  |       | 290.1                   |       | 77.1 |   | 213.0 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | —                     |       | —                  |       | — |   | — |   |
| During fiscal 2007 year                                                   |       | 2,904,900                  |       | 166.3                   |       | 36.8 |   | 129.5 |   |
| Program total                                                             |       | 2,904,900                  |       | 166.3                   |       | 36.8 |   | 129.5 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | —                     |       | —                  |       | — |   | — |   |
| All programs – inception to date                                     |       | 19,288,980                 |       | $                       | 896.2      |   | $ | 242.4 |   | $ | 653.8 |   |
| All programs – during fiscal 2007 year                               | ** ** | **2,904,900**              | ** ** | **$**                   | **166.3**  | ** ** | **$** | **36.8** | ** ** | **$** | **129.5** | ** ** |
| All programs – during fiscal 2006 year                               |       | 5,490,600                  |       | $                       | 260.4      |   | $ | 69.1 |   | $ | 191.3 |   |
| **Non-Voting  Shares purchased for cancellation**                         |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 11,500,000                 |       | $                       | 472.8      |   | $ | 241.0 |   | $ | 231.8 |   |
| Program commencing December 20, 2005                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2005 year                                                   |       | 607,700                    |       | 27.8                    |       | 12.9 |   | 14.9 |   |
| During fiscal 2006 year                                                   |       | 10,701,400                 |       | 530.0                   |       | 228.5 |   | 301.5 |   |
| Program total                                                             |       | 11,309,100                 |       | 557.8                   |       | 241.4 |   | 316.4 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | 186,723                    |       | 9.8                     |       | 4.0 |   | 5.8 |   |
| During fiscal 2007 year                                                   |       | 10,571,800                 |       | 577.4                   |       | 226.9 |   | 350.5 |   |
| Program total                                                             |       | 10,758,523                 |       | 587.2                   |       | 230.9 |   | 356.3 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | 134,200                    |       | 6.2                     |       | 2.9 |   | 3.3 |   |
| All programs – inception to date                                     |       | 33,701,823                 |       | $                       | 1,624.0    |   | $ | 716.2 |   | $ | 907.8 |   |
| All programs – during fiscal 2007 year                               | ** ** | **10,706,000**             | ** ** | **$**                   | **583.6**  | ** ** | **$** | **229.8** | ** ** | **$** | **353.8** | ** ** |
| All programs – during fiscal 2006 year                               |       | 10,888,123                 |       | $                       | 539.8      |   | $ | 232.5 |   | $ | 307.3 |   |
| **Common  Shares and Non-Voting Shares purchased for cancellation**       |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 21,759,011                 |       | $                       | 912.6      |   | $ | 369.5 |   | $ | 543.1 |   |
| Program commencing December 20, 2005                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2005 year                                                   |       | 1,242,169                  |       | 57.5                    |       | 20.9 |   | 36.6 |   |
| During fiscal 2006 year                                                   |       | 16,192,000                 |       | 790.4                   |       | 297.6 |   | 492.8 |   |
| Program total                                                             |       | 17,434,169                 |       | 847.9                   |       | 318.5 |   | 529.4 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | 186,723                    |       | 9.8                     |       | 4.0 |   | 5.8 |   |
| During fiscal 2007 year                                                   |       | 13,476,700                 |       | 743.7                   |       | 263.7 |   | 480.0 |   |
| Program total                                                             |       | 13,663,423                 |       | 753.5                   |       | 267.7 |   | 485.8 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | 134,200                    |       | 6.2                     |       | 2.9 |   | 3.3 |   |
| All programs – inception to date                                     |       | 52,990,803                 |       | $                       | 2,520.2    |   | $ | 958.6 |   | $ | 1,561.6 |   |
| All programs – during fiscal 2007 year                               | ** ** | **13,610,900**             | ** ** | **$**                   | **749.9**  | ** ** | **$** | **266.6** | ** ** | **$** | **483.3** | ** ** |
| All programs – during fiscal 2006 year                               |       | 16,378,723                 |       | $                       | 800.2      |   | $ | 301.6 |   | $ | 498.6 |   |

 

54

----

 

notes to consolidated financial statements

 

### **(h)**         Dividend Reinvestment and SharePurchase Plan

 

The Company has a Dividend Reinvestment and SharePurchase Plan under which eligible shareholders may acquire Non-Voting Sharesthrough the reinvestment of dividends and making additional optional cashpayments to the trustee.

 

Excluding Non-Voting Shares purchased by way ofadditional optional cash payments, the Company, at its discretion, may offerthe Non-Voting Shares at up to a 5% discount from the market price. During theyears ended December 31, 2007 and 2006, the Company did not offerNon-Voting Shares at a discount. Shares purchased through optional cashpayments are subject to a minimum investment of $100 per transaction and amaximum investment of $20,000 per calendar year.

 

Under this Plan, the Company has the option of offeringshares from Treasury or having the trustee acquire shares in the stock market.Prior to July 1, 2001, when the acquisition of shares from Treasurycommenced, all Non-Voting Shares were acquired in the market at normal tradingprices; acquisition in the market at normal trading prices recommenced on January 1,2005.

 

In respect of Common Share and Non-Voting Share dividendsdeclared during the year ended December 31, 2007, $17.0 million (2006– $7.4 million) was to be reinvested in Non-Voting Shares.

 

## **19****         ****commitments and contingent liabilities**

##  

### **(a)**          Canadian Radio-television andTelecommunications Commission Decisions 2002-34, 2002-43 and 2006-9deferral accounts

 

On May 30, 2002, and on July 31, 2002, the CRTCissued Decisions 2002-34 and 2002-43, respectively, and introduced theconcept of a deferral account. The Company must make significant estimates andassumptions in respect of the deferral accounts given the complexity andinterpretation required of Decisions 2002-34 and 2002-43. Accordingly, theCompany estimates, and records, an aggregate liability of $147.1 millionas at December 31, 2007 (2006 — $164.8 million), to the extent thatactivities it has undertaken, other qualifying events and realized ratereductions for Competitor Services do not extinguish it; management is requiredto make estimates and assumptions in respect of the offsetting nature of theseitems. If the CRTC, upon its periodic review of the Company’s deferral account,disagrees with management’s estimates and assumptions, the CRTC may adjust thedeferral account balance and such adjustment may be material. Ultimately, thisprocess results in the CRTC determining if, and when, the deferral accountliability is settled.

 

On March 24, 2004, the CRTC issued Telecom PublicNotice CRTC 2004-1 *Review and disposition ofthe deferral accounts for the second price cap period*, whichinitiated a public proceeding inviting proposals on the disposition of theamounts accumulated in the incumbent local exchange carriers’ deferral accountsduring the first two years of the second price cap period.

 

On February 16, 2006, the CRTC issued DecisionCRTC 2006-9, *Disposition of funds in the deferral account*.In its decision the CRTC determined that the majority of the accumulatedliability within the respective incumbent local exchange carrier’s deferralaccount was to be made available for initiatives to expand broadband serviceswithin their incumbent local exchange carrier operating territories to ruraland remote communities where service is currently not available. In addition, aminimum of five per cent of the accumulated deferral account balance mustbe used for initiatives that enhance accessibility to telecommunicationsservices for individuals with disabilities. To the extent that the deferralaccount balance exceeds the approved initiatives, the remaining balance will bedistributed in the form of a one-time rebate to local residential servicecustomers in non-high cost serving areas. Finally, the CRTC indicated thatsubsequent to May 31, 2006, no additional amounts are to be added to thedeferral account and, instead, are to be dealt with via prospective ratereductions.

 

In September 2006, the Federal Court of Appealgranted the Consumers Association of Canada, the National Anti-PovertyOrganization and also Bell Canada leave to appeal CRTC TelecomDecision 2006-9. The consumer groups have filed their appeal asking theCourt to direct rebates to local telephone subscribers, rather than have theaccumulated deferral account funds used for purposes determined by the CRTC, asnoted above. Bell Canada has also filed its appeal of Decision 2006-9 on thegrounds that the CRTC exceeded its jurisdiction to the extent it approvesrebates from the deferral account. These two appeals have been consolidated andwere heard by the Federal Court of Appeal in January 2008 with a judgmentexpected to be issued by the Federal Court of Appeal within the first quarterof 2008. Within that hearing the Federal Court of Appeal further granted BellCanada a motion for a stay of CRTC Telecom Decision 2006-9 in so far as itrequires the disposition of funds in the deferral accounts for any activitiesother than the improvement of accessibility to communications services forpersons with disabilities.

 

In the event that Bell Canada is successful in itsappeal, the Company may realize additional revenue equal to the amount of thedeferral account that would otherwise have been rebated by the CRTC. Should theconsumer groups be successful in their appeals, the Company may be required toremit a one-time refund of an amount up to, but not 

 

55

----

 

notes to consolidated financial statements

 

exceeding, the aggregate liability of approximately$147 million in individually small amounts to its entire local residentialsubscriber base. As the deferral account balance was fully provided for inprevious financial statements, the potential refund will not impact the Company’ssubsequent income from operations. In addition, subject to the potentialoutcome of this leave to appeal, the Company may need to re-address its intentto extend broadband services to uneconomic remote and rural communities. TheCompany supports Decision 2006-9 and its designated uses of the deferralaccount in order to extend high-speed broadband Internet service to rural andremote communities and improve telecommunications services for people withdisabilities.

 

In the event that Bell Canada and/or the ConsumersAssociation of Canada are unsuccessful in their appeal, there is a possibilitythat the unsuccessful parties may further file for a leave to appeal to theSupreme Court of Canada.

 

Due to the Company’s use of the liability method ofaccounting for the deferral account, the CRTC Decision 2005-6, as itrelates to the Company’s provision of Competitor Digital Network services, isnot expected to affect the Company’s consolidated revenues. Specifically, tothe extent that the CRTC Decision 2005-6 requires the Company to providediscounts on Competitor Digital Network services, through May 31, 2006,the Company drew down the deferral account by an offsetting amount; subsequentto May 31, 2006, the income statement effects did not change and theCompany no longer needed to account for these amounts through the deferralaccount. For the year ended December 31, 2007, the Company drew down thedeferral account by $17.7 million (2006 – $19.9 million),in respect of discounts on Competitor Digital Network services and otherqualifying expenditures.

 

On November 30, 2006, the CRTC issued Telecom PublicNotice CRTC 2006-15, *Review of proposals todispose of the funds accumulated in the deferral accounts*, whichinitiated a public proceeding to consider the proposals submitted by theincumbent local exchange carriers to dispose of the funds accumulated in theirrespective deferral accounts. The Company expects the CRTC to render itsdecision in this matter in the latter part of 2007.

 

On July 6, 2007, the CRTC issued decision CRTC2007-50, *Use of deferral account to expand broadbandservices to certain rural and remote communities*.  In this decision the CRTC approved the use ofthe deferral account for the purpose of expanding broadband services to 115communities in British Columbia and Quebec. The Company is currently reviewing the implications of this decision inconjunction with its previously filed submission for use of the deferralaccount funds and, as directed by the CRTC, filed an update to the previouslyfiled submission on September 4, 2007.

 

Subsequent to December 2007, on January 17,2008, the CRTC issued Telecom Decision CRTC 2008-1, *Use ofdeferral account funds to improve access to telecommunications services forpersons with disabilities and to expand broadband services to rural and remotecommunities*. This decision identified an additional 119 rural andremote communities in the Company’s incumbent operating territory that areeligible for broadband expansion using deferral account funds. In addition, thedecision approves the use of approximately 5% of the accumulated balance of theCompany’s deferral account, for improving access to telecommunications servicesfor persons with disabilities.  The CRTCalso determined that any funds remaining in the Company’s deferral account,other than those required to implement the broadband expansion andaccessibility initiative, should be rebated to the Company’s residential localcustomers in non-high cost serving areas. On February 11, 2008, BellCanada applied to the Federal Court of Appeal for leave to appeal, and for astay of, Decision 2008-1. The stay, if granted, would apply to the rebate andbroadband expansion determinations in Decision 2008-1. The Company would stillbe obligated to implement the accessibility initiatives.

 

56

----

 

notes to consolidated financial statements

 

### **(b)**          Contractual obligations

 

The Company’s known contractual obligations at December 31,2007, are as follows:

 
|           |       | **Long-term debt maturities(1)** |       |                     |       |                                              |       |                                   |       |                         |       |
|----------------|------------|--------------------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
|           |       | **(see Note 17(h))**             |       | **Other long-term** |       | **Operating**                                     |       |                                   |       |                         |       |
| **(millions)** | ** ** | **All except  capital leases**   | ** ** | **Capital leases**  | ** ** | **liabilities(2)(3)  (see Note 20(b))** | ** ** | **leases  (see Note 19(c))** | ** ** | **Purchase  obligations(4)** | ** ** | **Total** |   |
| 2008           |       | $                                          | 2.0        |                     | $          | 3.4                                               |       | $                                      | 16.8       |                         | $          | 230.5 |   | $ | 415.5 |   | $ | 668.2 |   |
| 2009           |       | 0.7                                        |       | 0.8                      |       | 27.6                                              |       | 224.5                                  |       | 97.0                         |       | 350.6 |   |
| 2010           |       | 80.0                                       |       | 0.8                      |       | 18.3                                              |       | 223.3                                  |       | 35.5                         |       | 357.9 |   |
| 2011           |       | 2,950.5                                    |       | 0.9                      |       | 18.4                                              |       | 209.6                                  |       | 24.6                         |       | 3,204.0 |   |
| 2012           |       | 887.2                                      |       | 0.2                      |       | 18.6                                              |       | 195.9                                  |       | 17.4                         |       | 1,119.3 |   |
| Thereafter     |       | 1,749.1                                    |       | —                   |       | 166.6                                             |       | 1,366.6                                |       | 49.7                         |       | 3,332.0 |   |
| Total          |       | $                                          | 5,669.5    |                     | $          | 6.1                                               |       | $                                      | 266.3      |                         | $          | 2,450.4 |   | $ | 639.7 |   | $ | 9,032.0 |   |
|                |            |                                            |            |                          |            |                                                   |            |                                        |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) |   | Where applicable, long-term debt maturities reflect  hedged foreign exchange rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Items that do not result in a future outlay of economic  resources, such as deferred gains on sale-leasebacks of buildings and  deferred customer activation and connection fees, have been excluded. As  long-term debt maturities reflect hedged foreign exchange rates, the deferred  hedging liability is included therein. Funding of pension and other benefit  plans has been included for 2008 for all plans that have a net accrued  benefit liability position as at the current year end; only funding of  unfunded plans has been included in years subsequent to 2008, up to the  liability recognized at the current year end. |
| (3) |   | Uncertain income tax positions are fully funded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (4) |   | Where applicable, purchase obligations reflect foreign  exchange rates as at the current year end. Purchase obligations include both  future operating and capital expenditures that have been contracted for as at  the current year end and include most likely estimates of prices and volumes  where necessary. As purchase obligations reflect market conditions at the  time the obligation was incurred for the items being purchased, they may not  be representative of future years. Obligations arising from personnel supply  contracts and other such labour agreements have been excluded.                                     |

 

### **(c)**          Leases

 

The Company occupies leased premises in various centresand has land, buildings and equipment under operating leases. At December 31,2007, the future minimum lease payments under capital leases and operatingleases are as follows:

 
|                                |       |                   |       | **Operating lease payments** |       |
|-------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
|                                |       |                   |       | **Land and buildings**       |       | **Vehicles and** |   |   |   |
| ** **                          | ** ** | **Capital lease** | ** ** | ** **                             | ** ** | **Occupancy** | ** ** | ** ** | ** ** | **other** | ** ** | ** ** |   |
| **(millions)**                      | ** ** | **payments**           | ** ** | **Rent**                               | ** ** | **costs** | ** ** | **Gross** | ** ** | **equipment** | ** ** | **Total** |   |
| 2008                                |       | $                      | 3.6        |                                   | $          | 135.3 |   | $ | 73.7 |   | $ | 209.0 |   | $ | 21.5 |   | $ | 230.5 |   |
| 2009                                |       | 0.9                    |       | 133.3                                  |       | 75.6 |   | 208.9 |   | 15.6 |   | 224.5 |   |
| 2010                                |       | 0.9                    |       | 129.4                                  |       | 77.9 |   | 207.3 |   | 16.0 |   | 223.3 |   |
| 2011                                |       | 0.8                    |       | 119.8                                  |       | 77.9 |   | 197.7 |   | 11.9 |   | 209.6 |   |
| 2012                                |       | 0.2                    |       | 112.1                                  |       | 78.7 |   | 190.8 |   | 5.1 |   | 195.9 |   |
| Total future minimum lease payments |       | 6.4                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Less imputed interest               |       | 0.3                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital lease liability             |       | $                      | 6.1        |                                   |       |   |   |   |   |   |   |   |   |   |
|                                     |            |                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total future minimum operating lease payments at December 31,2007, were $2,450.4 million.  Ofthis amount, $2,378.8 million was in respect of land and buildings;approximately 60% of this amount was in respect of the Company’s five largestleases, all of which were for office premises over various terms, with expirydates which range from 2016 to 2026.

 

### **(d)**          Guarantees

 

*Guarantees:* Canadian generally accepted accounting principlesrequire the disclosure of certain types of guarantees and their maximum,undiscounted amounts. The maximum potential payments represent a worst-casescenario and do not necessarily reflect results expected by the Company.Guarantees requiring disclosure are those obligations that require paymentscontingent on specified types of future events. In the normal course of itsoperations, the Company enters into obligations that GAAP may consider to beguarantees. As defined by Canadian GAAP, guarantees subject to these disclosureguidelines do not include guarantees that relate to the future performance ofthe Company. As at December 31, 2007, the Company’s maximum undiscountedguarantee amounts, without regard for the likelihood of having to make suchpayment, were not material.

 

57

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notes to consolidated financial statements

 

*Indemnification obligations:* In the normal course ofoperations, the Company may provide indemnification in conjunction with certaintransactions. The term of these indemnification obligations ranges in durationand often is not explicitly defined. Where appropriate, an indemnificationobligation is recorded as a liability. In many cases, there is no maximum limiton these indemnification obligations and the overall maximum amount of theobligations under such indemnification obligations cannot be reasonablyestimated. Other than obligations recorded as liabilities at the time of thetransaction, historically the Company has not made significant payments underthese indemnifications.

 

In connection with its 2001 disposition of TELUS’directory business, the Company agreed to bear a proportionate share of the newowner’s increased directory publication costs if the increased costs were toarise from a change in the applicable CRTC regulatory requirements. The Company’sproportionate share would have been 80% through May 2006, declining to 40%in the next five-year period and then to 15% in the final five years. As well,should the CRTC take any action which would result in the owner being preventedfrom carrying on the directory business as specified in the agreement, TELUSwould indemnify the owner in respect of any losses that the owner incurred.

 

As at December 31, 2007, the Company has noliability recorded in respect of indemnification obligations.

 

### **(e)**          Claims and lawsuits

 

*General:* A number of claims andlawsuits seeking damages and other relief are pending against the Company. Itis impossible at this time for the Company to predict with any certainty theoutcome of such litigation. However, management is of the opinion, based uponlegal assessment and information presently available, that it is unlikely thatany liability, to the extent not provided for through insurance or otherwise,would be material in relation to the Company’s consolidated financial position,excepting the items enumerated following.

 

*TELUS Corporation Pension Planand TELUS Edmonton Pension Plan:* Two statements of claim were filed in the AlbertaCourt of Queen’s Bench on December 31, 2001, and January 2, 2002,respectively, by plaintiffs alleging to be either members or business agents ofthe Telecommunications Workers Union. In one action, the three plaintiffsalleged to be suing on behalf of all current or future beneficiaries of theTELUS Corporation Pension Plan and in the other action, the two plaintiffsalleged to be suing on behalf of all current or future beneficiaries of theTELUS Edmonton Pension Plan. The statement of claim in theTELUS Corporation Pension Plan related action named the Company, certainof its affiliates and certain present and former trustees of theTELUS Corporation Pension Plan as defendants, and claims damages in thesum of $445 million. The statement of claim in the TELUS Edmonton PensionPlan related action named the Company, certain of its affiliates and certainindividuals who are alleged to be trustees of the TELUS Edmonton Pension Planand claims damages in the sum of $15.5 million. On February 19, 2002,the Company filed statements of defence to both actions and also filed noticesof motion for certain relief, including an order striking out the actions asrepresentative or class actions. On May 17, 2002, the statements of claimwere amended by the plaintiffs and include allegations, *inter alia*, that benefits providedunder the TELUS Corporation Pension Plan and the TELUS Edmonton PensionPlan are less advantageous than the benefits provided under the respectiveformer pension plans, contrary to applicable legislation, that insufficientcontributions were made to the plans and contribution holidays were taken andthat the defendants wrongfully used the diverted funds, and that administrationfees and expenses were improperly deducted. The Company filed statements ofdefence to the amended statements of claim on June 3, 2002. The Companybelieves that it has good defences to the actions. As a term of the settlementreached between TELUS Communications Inc. and the Telecommunications WorkersUnion that resulted in a collective agreement effective November 20, 2005,the Telecommunications Workers Union has agreed to not provide any direct orindirect financial or other assistance to the plaintiffs in these actions, andto communicate to the plaintiffs the Telecommunications Workers Union’s desireand recommendation that these proceedings be dismissed or discontinued. TheCompany has been advised by the Telecommunications Workers Union that theplaintiffs have not agreed to dismiss or discontinue these actions. Should the lawsuits continue because of the actions of thecourt, the plaintiffs or for any other reason, and their ultimateresolution differ from management’s assessment and assumptions, a materialadjustment to the Company’s financial position and the results of itsoperations could result.

 

*Certified class action:* A class action wasbrought August 9, 2004, under the Class Actions Act (Saskatchewan),against a number of past and present wireless service providers including theCompany. The claim alleges that each of the carriers is in breach of contractand has violated competition, trade practices and consumer protectionlegislation across Canada in connection with the collection of system accessfees, and seeks to recover direct and punitive damages in an unspecifiedamount. The class was certified on September 17, 2007, by the SaskatchewanCourt of Queen’s Bench. The Company has applied for leave to appeal thecertification decision.TheCompany believes that it has good defences to the action.

 

Similarproceedings have also been filed by, or on behalf of, plaintiffs’ counsel inother provincial jurisdictions.

 

Shouldthe ultimate resolution of this action differ from management’s assessments andassumptions, a material adjustment to the Company’s financial position and theresults of its operations could result; management’s assessments andassumptions include that a reliable estimate of the exposure cannot be made atthis preliminary stage of the lawsuit.

 

58

----

 

notesto consolidated financial statements

 

*Intellectual property claims:*The Company hasreceived or is aware of certain claims and potential claims of patentinfringement against the Company and, in some cases, numerous other wirelesscarriers and telecommunications service providers.  These matters are quite preliminary and theCompany does not have any basis to conclude that it has any liability for suchclaims.

 

*Emergis Inc.:* As set out in Note 15(b), on January 17,2008, the Company acquired all of the outstanding securities of Emergis Inc.

 

In April 2005, MultiPlan, Inc.filed in federal court in New York a complaint seeking, among other relief,compensation in excess of U.S.$64 million for damages allegedly incurredin connection with its purchase of the U.S. health subsidiary of EmergisInc.  The complaint alleges a variety ofclaims relating to the sales agreement. Part of the complaint related toan indemnification for alleged claims by hospitals amounting to U.S.$14million.  MultiPlan, Inc. has advisedEmergis Inc. that it has settled these hospital claims for an amount ofU.S.$750,000.

 

In July 2005, Emergis fileda motion to dismiss certain claims in the complaint. This motion wassubstantially granted by the court on June 11, 2007, and a number ofclaims were dismissed. However, the court granted MultiPlan, Inc. theright to file an amended complaint to correct, if possible, the deficiencieshighlighted in the court judgment regarding these claims.  An amended complaint was filed on July 20,2007.  No new facts have beenalleged.  On August 20, 2007,Emergis Inc. filed a motion to dismiss these claims that were modified inthe amended complaint.  In October 2007,this motion was fully briefed.  It isuncertain as to when the court will rule on this motion.

 

Although the outcome cannot bereasonably determined at this time, Emergis Inc. management remains of the viewthat the allegations are without merits.

 

## **20****         ****additional financial information**

##  

### **(a)**          Incomestatement

** **
| **Years ended December 31 (millions)** | ** ** | **2007**    | ** **  | **2006**                                       | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **  | ** **  | **(restated – Note 2(e))** | ** ** |
| Operations expense(1):                                     |       |        | ** **  |                                           |       |
| Cost of sales and service                                  | ** ** | **$**       | **3,048.5** | ** **                                     | $          | 2,742.0 |   |
| Selling, general and administrative                        | ** ** | **2,416.2** | ** **  | 2,256.2                                        |       |
| ** **                                                 |       | **$**       | **5,464.7** | ** **                                     | $          | 4,998.2 |   |
| Advertising expense                                        | ** ** | **$**       | **293.6**   | ** **                                     | $          | 276.6 |   |

 

----

| (1) |   | Cost of sales and service includes cost of goods sold  and costs to operate and maintain access to and usage of the Company’s  telecommunications infrastructure. Selling, general and administrative costs  include sales and marketing costs (including commissions), customer care, bad  debt expense, real estate costs and corporate overhead costs such as  information technology, finance (including billing services, credit and  collection), legal, human resources and external affairs.

Employee salaries, benefits and related costs are  included in one of the two components of operations expense to the extent  that the costs are related to the component functions. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

### **(b)**          Balancesheet

** **
| **As at December 31 ****(millions)** | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|----------------------------------------------------------|------------|-----------|------------|------------|------------|
| **Accounts receivable**                                  |       |      | ** ** |       |       |
| Customer accounts receivable                             | ** ** | **$**     | **591.2**  | ** ** | $          | 545.6 |   |
| Accrued receivables – customer                      | ** ** | **112.2** | ** ** | 83.2       |       |
| Allowance for doubtful accounts                          | ** ** | **(62.8** | **)**      | (54.8      | )          |
| ** **                                               |       | **640.6** | ** ** | 574.0      |       |
| Accrued receivables – other                         | ** ** | **66.7**  | ** ** | 125.4      |       |
| Other                                                    | ** ** | **3.6**   | ** ** | 7.8        |       |
| ** **                                               |       | **$**     | **710.9**  | ** ** | $          | 707.2 |   |
| **Inventories**                                          |       |      | ** ** |       |       |
| Wireless handsets, parts and accessories                 | ** ** | **$**     | **179.4**  | ** ** | $          | 176.8 |   |
| Other                                                    | ** ** | **63.9**  | ** ** | 19.6       |       |
| ** **                                               |       | **$**     | **243.3**  | ** ** | $          | 196.4 |   |

 

59

----

 

notes to consolidated financial statements

 
| **As at December 31 ****(millions)**                                                                               | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **Prepaid expense and other**                                                                                                          |       |        | ** **  |       |       |
| Prepaid expenses                                                                                                                       | ** ** | **$**       | **118.1**   | ** ** | $          | 109.9 |   |
| Deferred customer activation and connection costs                                                                                      | ** ** | **78.6**    | ** **  | 69.5       |       |
| Other                                                                                                                                  | ** ** | **2.8**     | ** **  | 15.9       |       |
| ** **                                                                                                                             |       | **$**       | **199.5**   | ** ** | ** ** | $ | 195.3 |   |
| **Deferred  charges**                                                                                                                  |       |        | ** **  |       |       |
| Recognized transitional pension assets and pension plan contributions  in excess of charges to income (restated – Note 2(e)) | ** ** | **$**       | **1,194.1** | ** ** | $          | 999.3 |   |
| Deferred customer activation and connection costs                                                                                      | ** ** | **109.2**   | ** **  | 115.4      |       |
| Other (restated – Note 2(b))                                                                                                      | ** ** | **14.7**    | ** **  | 15.0       |       |
| ** **                                                                                                                             |       | **$**       | **1,318.0** | ** ** | $          | 1,129.7 |   |
| **Accounts payable and accrued liabilities**                                                                                           |       |        | ** **  |       |       |
| Accrued liabilities                                                                                                                    | ** ** | **$**       | **447.6**   | ** ** | $          | 449.7 |   |
| Payroll and other employee-related liabilities                                                                                         | ** ** | **421.7**   | ** **  | 383.8      |       |
| Accrual for net-cash settlement feature for share option awards (Note  11(b))                                                          | ** ** | **81.9**    | ** **  | —     |       |
| Asset retirement obligations                                                                                                           | ** ** | **4.1**     | ** **  | 4.1        |       |
| ** **                                                                                                                             |       | **955.3**   | ** **  | 837.6      |       |
| Trade accounts payable                                                                                                                 | ** ** | **406.0**   | ** **  | 427.3      |       |
| Interest payable                                                                                                                       | ** ** | **51.5**    | ** **  | 47.7       |       |
| Other                                                                                                                                  | ** ** | **63.8**    | ** **  | 51.0       |       |
| ** **                                                                                                                             |       | **$**       | **1,476.6** | ** ** | $          | 1,363.6 |   |
| **Advance billings and customer deposits**                                                                                             |       |        | ** **  |       |       |
| Advance billings                                                                                                                       | ** ** | **$**       | **367.0**   | ** ** | $          | 348.8 |   |
| Regulatory deferral accounts (Note 19(a))                                                                                         | ** ** | **147.1**   | ** **  | 164.8      |       |
| Deferred customer activation and connection fees                                                                                       | ** ** | **81.2**    | ** **  | 72.3       |       |
| Customer deposits                                                                                                                      | ** ** | **36.3**    | ** **  | 20.4       |       |
| ** **                                                                                                                             |       | **$**       | **631.6**   | ** ** | $          | 606.3 |   |
| **Other long-term liabilities**                                                                                                        |       |        | ** **  |       |       |
| Derivative liabilities (Note 17(b))                                                                                               | ** ** | **$**       | **1,183.1** | ** ** | $          | 710.3 |   |
| Pension and other post-retirement liabilities                                                                                          | ** ** | **208.5**   | ** **  | 198.7      |       |
| Other                                                                                                                                  | ** ** | **115.7**   | ** **  | 128.2      |       |
| ** **                                                                                                                             |       | **1,507.3** | ** **  | 1,037.2    |       |
| Deferred customer activation and connection fees                                                                                       | ** ** | **109.2**   | ** **  | 115.4      |       |
| Deferred gain on sale-leaseback of buildings                                                                                           | ** ** | **61.9**    | ** **  | 71.6       |       |
| Asset retirement obligations                                                                                                           | ** ** | **39.5**    | ** **  | 33.1       |       |
| ** **                                                                                                                             |       | **$**       | **1,717.9** | ** ** | $          | 1,257.3 |   |
|                                                                                                                                        |            |             |             |            |            |  |  |  |  |  |

 

### **(c)**          Supplementarycash flow information

 
| **Years ended December 31 (millions)**                                          | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **Net change in non-cash working capital**                                                          |       |        | ** **  |       |       |
| Short-term investments                                                                              | ** ** | **$**       | **67.8**    | ** ** | $          | (110.2 | ) |
| Accounts receivable                                                                                 | ** ** | **(31.6**   | **)**       | (95.6      | )          |
| Inventories                                                                                         | ** ** | **(19.0**   | **)**       | (57.6      | )          |
| Prepaid expenses and other                                                                          | ** ** | **(4.2**    | **)**       | (27.4      | )          |
| Accounts payable and accrued liabilities                                                            | ** ** | **6.1**     | ** **  | (27.2      | )          |
| Income and other taxes receivable and payable, net                                                  | ** ** | **(19.3**   | **)**       | 35.8       |       |
| Advance billings and customer deposits                                                              | ** ** | **25.3**    | ** **  | 34.5       |       |
| ** **                                                                                          |       | **$**       | **25.1**    | ** ** | $          | (247.7 | ) |
| **Long-term debt issued**                                                                           |       |        | ** **  |       |       |
| TELUS Corporation Commercial Paper                                                                  | ** ** | **$**       | **5,961.8** | ** ** | $          | — |   |
| TELUS Corporation Credit Facility                                                                   | ** ** | **801.5**   | ** **  | 1,286.3    |       |
| Long-term debt other than TELUS Corporation Commercial Paper and TELUS  Corporation Credit Facility | ** ** | **1,000.0** | ** **  | 299.6      |       |
| ** **                                                                                          |       | **$**       | **7,763.3** | ** ** | $          | 1,585.9 |   |

 

60

----

 

notes to consolidated financial statements

 
| **Years ended December 31 (millions)**                                          | ** ** | **2007**     | ** **   | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|--------------|------------|------------|
| **Redemptions and repayment of long-term debt**                                                     | ** ** | ** **   | ** **   | ** ** | ** ** |
| TELUS Corporation Commercial Paper                                                                  | ** ** | **$**        | **(5,376.9** | **)**      | $          | — |   |
| TELUS Corporation Credit Facility                                                                   | ** ** | **(921.5**   | **)**        | (1,308.3   | )          |
| Long-term debt other than TELUS Corporation Commercial Paper and  TELUS Corporation Credit Facility | ** ** | **(1,558.6** | **)**        | (6.4       | )          |
| ** **                                                                                          |       | **$**        | **(7,857.0** | **)**      | $          | (1,314.7 | ) |
| **Interest (paid)**                                                                                 |       |         | ** **   |       |       |
| Amount paid in respect of interest expense                                                          | ** ** | **$**        | **(444.0**   | **)**      | $          | (484.9 | ) |
| Forward starting interest rate swap agreement termination payments                                  | ** ** | **(10.4**    | **)**        | —     |       |
| Interest related portion of cross currency interest rate swap agreement  termination payments       | ** ** | **—**   | ** **   | (31.2      | )          |
| ** **                                                                                          |       | **$**        | **(454.4**   | **)**      | $          | (516.1 | ) |

 

## **21****                     ****differences between Canadian and United States generallyaccepted accounting principles**

##  

The consolidated financial statements have been preparedin accordance with Canadian GAAP. The principles adopted in these financialstatements conform in all material respects to those generally accepted in theUnited States except as summarized below. Significant differences betweenCanadian GAAP and U.S. GAAP would have the following effect on reportednet income of the Company:

 
| **Years ended December 31 (millions except per share amounts)** | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| Net income in accordance with Canadian GAAP(1)                                                          | ** ** | **$**       | **1,257.9** | ** ** | $          | 1,145.0 |   |
| Adjustments:                                                                                            |       |        | ** **  |       |       |
| Operating expenses                                                                                      |       |        | ** **  |       |       |
| Operations(1) (b)                                                                                  | ** ** | **(23.2**   | **)**       | (41.6      | )          |
| Amortization of intangible assets (c)                                                                   | ** ** | **(50.1**   | **)**       | (50.7      | )          |
| Accounting for derivatives (e)                                                                          | ** ** | **—**  | ** **  | 6.0        |       |
| Taxes on the above adjustments and tax rate changes(1) (f)                                         | ** ** | **69.2**    | ** **  | 78.8       |       |
| Net income in accordance with U.S. GAAP                                                            | ** ** | **1,253.8** | ** **  | 1,137.5    |       |
| Other comprehensive income (loss), net of taxes (g)                                                     |       |        | ** **  |       |       |
| In accordance with Canadian GAAP                                                                        | ** ** | **74.2**    | ** **  | 5.8        |       |
| Change in pension related other comprehensive income accounts                                           | ** ** | **108.0**   | ** **  | 153.2      |       |
| Change in unrealized fair value of derivatives designated as cash  flow hedges                          | ** ** | **—**  | ** **  | 36.8       |       |
| In accordance with U.S. GAAP                                                                       | ** ** | **182.2**   | ** **  | 195.8      |       |
| Comprehensive income in accordance with U.S. GAAP                                                  | ** ** | **$**       | **1,436.0** | ** ** | $          | 1,333.3 |   |
| Net income in accordance with U.S. GAAP per Common Share and  Non-Voting Share                     |       |        | ** **  |       |       |
| – Basic                                                                                            | ** ** | **$**       | **3.78**    | ** ** | $          | 3.31 |   |
| – Diluted                                                                                          | ** ** | **$**       | **3.75**    | ** ** | $          | 3.27 |   |

 

----

| (1) |   | Operations and the related taxes for the year ended  December 31, 2006, have been adjusted for purposes of this  reconciliation to reverse the restatement of net income made in accordance  with Canadian GAAP and discussed further in Note 2(e). |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following is an analysis of retained earnings(deficit) reflecting the application of U.S. GAAP:

 
| **Years ended December 31 (millions)**                       | ** ** | **2007**    | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|
| Schedule of retained earnings (deficit) under U.S. GAAP                     |       |        |       |     |       |
| Balance at beginning of period                                                   | ** ** | **$**       | **(419.5** | **)**    | $          | (785.5 | ) |
| Net income in accordance with U.S. GAAP                                     | ** ** | **1,253.8** | ** ** | 1,137.5  |       |
| ** **                                                                       |       | **834.3**   | ** ** | 352.0    |       |
| Common Share and Non-Voting Share dividends paid, or payable, in cash            | ** ** | **(520.8**  | **)**      | (411.7   | )          |
| Purchase of Common Shares and Non-Voting Shares in excess of stated  capital     | ** ** | **(374.5**  | **)**      | (361.9   | )          |
| Adjustment to purchase of share option awards not in excess of their  fair value | ** ** | **—**  | ** ** | 2.1      |       |
| Balance at end of period                                                         | ** ** | **$**       | **(61.0**  | **)**    | $          | (419.5 | ) |

 

61

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notesto consolidated financial statements

 

The following is an analysis of major balance sheetcategories reflecting the application of U.S. GAAP:

 
| **As at December 31 ****(millions)** | ** ** | **2007**    | ** **   | **2006** | ** ** |
|----------------------------------------------------------|------------|-------------|--------------|----------|------------|
|                                                     |       |        |         |     |       |
| Current  Assets                                          | ** ** | **$**       | **1,340.7**  |     | $          | 1,344.9 |   |
| Capital  Assets                                          |       |        |         |     |       |
| Property, plant, equipment and other                     | ** ** | **7,177.3** |         | 7,117.7  |       |
| Intangible assets subject to amortization                | ** ** | **2,535.1** |         | 2,505.0  |       |
| Intangible assets with indefinite lives                  | ** ** | **2,966.5** |         | 2,966.4  |       |
| Goodwill                                                 | ** ** | **3,570.5** |         | 3,572.0  |       |
| Other Assets                                             | ** ** | **932.2**   |         | 675.7    |       |
| ** **                                               |       | **$**       | **18,522.3** |     | $          | 18,181.7 |   |
| Current Liabilities                                      | ** ** | **$**       | **2,686.0**  |     | $          | 3,782.2 |   |
| Long-Term Debt                                           | ** ** | **4,613.9** |         | 3,493.7  |       |
| Other Long-Term Liabilities                              | ** ** | **1,717.6** |         | 1,550.0  |       |
| Deferred Income Taxes                                    | ** ** | **1,349.4** |         | 1,319.7  |       |
| Non-Controlling Interest                                 | ** ** | **25.9**    |         | 23.6     |       |
| Shareholders’ Equity                                | ** ** | **8,129.5** |         | 8,012.5  |       |
| ** **                                               |       | **$**       | **18,522.3** |     | $          | 18,181.7 |   |

 

The following is a reconciliation of shareholders’equity incorporating the differences between Canadian and U.S. GAAP:

 
| ** **                                                      | ** ** | **Shareholders’ Equity** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|
| **As at December 31, 2007 (millions)** | ** ** | **Common  Shares**                 | ** ** | **Non-Voting  Shares** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Contributed  surplus** | ** ** | **Total** | ** ** |
| Under Canadian GAAP                                             |       | $                                  | 2,227.7    |   | $ | 3,192.0 |   | $ | 1,457.5 |   | $ | (103.5 | ) | $ | 152.5 |   | $ | 6,926.2 |   |
| Adjustments:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d)               |       | 1,741.2                            |       | 922.1 |   | (1,417.7 | ) | (165.8 | ) | — |   | 1,079.8 |   |
| Share-based compensation (b)                                    |       | 10.5                               |       | 54.9 |   | (97.0 | ) | — |   | 31.6 |   | — |   |
| Acquisition of Clearnet Communications Inc.                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                                    |       | —                             |       | 131.4 |   | (7.9 | ) | — |   | — |   | 123.5 |   |
| Convertible debentures                                          |       | —                             |       | (2.9 | ) | 4.1 |   | — |   | (1.2 | ) | — |   |
| Under U.S. GAAP                                            |       | $                                  | 3,979.4    |   | $ | 4,297.5 |   | $ | (61.0 | ) | $ | (269.3 | ) | $ | 182.9 |   | $ | 8,129.5 |   |

 
| ** **                                                      | ** ** | **Shareholders’ Equity** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|
| **As at December 31, 2006 (millions)** | ** ** | **Common  Shares**                 | ** ** | **Non-Voting  Shares** | ** ** | **Options** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Contributed  surplus** | ** ** | **Total** | ** ** |
| Under Canadian GAAP(1)                                          |       | $                                  | 2,264.4    |   | $ | 3,420.8 |   | $ | 0.8 |   | $ | 1,200.0 |   | $ | (1.5 | ) | $ | 163.5 |   | $ | 7,048.0 |   |
| Adjustments:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d)               |       | 1,770.1                            |       | 993.0 |   | — |   | (1,488.2 | ) | (437.6 | ) | — |   | 837.3 |   |
| Share-based compensation (b)                                    |       | 10.6                               |       | 63.3 |   | — |   | (131.2 | ) | — |   | 57.3 |   | — |   |
| Acquisition of Clearnet Communications Inc.                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                                    |       | —                             |       | 131.4 |   | — |   | (7.9 | ) | — |   | — |   | 123.5 |   |
| Convertible debentures                                          |       | —                             |       | (2.9 | ) | — |   | 4.1 |   | — |   | (1.2 | ) | — |   |
| Accounting for derivatives (e)                                  |       | —                             |       | — |   | — |   | 3.7 |   | — |   | — |   | 3.7 |   |
| Under U.S. GAAP                                            |       | $                                  | 4,045.1    |   | $ | 4,605.6 |   | $ | 0.8 |   | $ | (419.5 | ) | $ | (439.1 | ) | $ | 219.6 |   | $ | 8,012.5 |   |
|                                                                 |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          As restated – Note 2(e).

 

### **(a)**          Merger of BC TELECOM and TELUS

Thebusiness combination between BC TELECOM and TELUS Corporation (renamedTELUS Holdings Inc., which was wound up June 1, 2001) was accounted forusing the pooling of interests method under Canadian GAAP. Under Canadian GAAP,the application of the pooling of interests method of accounting for the mergerof BC TELECOM and TELUS Holdings Inc. resulted in a restatement of priorperiods as if the two companies had always been combined. Under U.S. GAAP,the merger is accounted for using the purchase method. Use of the purchasemethod resulted in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for$4,662.4 million (including merger related costs of $51.9 million)effective January 31, 1999.

 

62

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notesto consolidated financial statements

 

### **(b)**          Operating expenses – Operations

 

*Future employee benefits:* Under U.S. GAAP, TELUS’future employee benefit assets and obligations have been recorded at their fairvalues on acquisition. Accounting for future employee benefits under CanadianGAAP changed to become more consistent with U.S. GAAP effective January 1,2000. Canadian GAAP provides that the transitional balances can be accountedfor prospectively. Therefore, to conform to U.S. GAAP, the amortization ofthe transitional amount needs to be removed from the future employee benefitexpense.

 

Effectiveas of the end of the first year ending after December 15, 2006,U.S. GAAP requires the full recognition of obligations associated with itsemployee future benefit plans as prescribed by Financial Accounting StandardsBoard Statement of Financial Accounting Standard No. 158, *Employers’ Accounting for Defined Benefit Pension and otherPostretirement Plans*. Applying this standard, the funded status ofthe Company’s plans is shown gross on the consolidated balance sheets and thedifference between the net funded plan states and the net accrued benefit assetor liability is included as a component of accumulated other comprehensiveincome.

 

*Share-based compensation:* Effective January 1, 2004, Canadian GAAP required the adoption ofthe fair value method of accounting for share-based compensation for awardsmade after 2001. The Canadian GAAP disclosures for share-based compensationawards are set out in Note 11.

 

Effective January 1, 2006, U.S. GAAP requiredthe adoption of the fair value method of accounting for share-basedcompensation for awards made after 1994. Prior to the adoption of the fairvalue method of accounting, the intrinsic value based method was used toaccount for share option awards granted to employees.

 

On aprospective basis, commencing January 1, 2006, there is no longer adifference between Canadian GAAP and U.S. GAAP share-based compensationexpense recognized in the results of operations arising from currentshare-based compensation awards accounted for as equity instruments. As shareoption awards granted subsequent to 1994 and prior to 2002 are captured byU.S. GAAP, but are not captured by Canadian GAAP, differences inshareholders’ equity accounts arising from these awards will continue.

 

In2007, the Company amended substantially all of its share option awards thatwere granted prior to January 1, 2005, and which were outstanding on January 1,2007, by adding a net-cash settlement feature; the optionee has the choice ofexercising the net-cash settlement feature. The result of such amendment isthat the affected outstanding share option awards largely take on thecharacteristics of liability instruments rather than equity instruments; theminimum expense recognized for the affected share option awards will be theirgrant-date fair values. Under U.S. GAAP, the grant-date fair value ofaffected outstanding share option awards granted subsequent to 1994 affect thetransitional amount whereas Canadian GAAP only considers grant-date fair valuesfor affected outstanding share option awards granted subsequent to 2001; thisresulted in the U.S. GAAP expense being less than the Canadian GAAPexpense by $25.2 million for the year ended December 31, 2007.

 

### **(c)**          Operating expenses – Amortization of intangible assets

 

AsTELUS’ intangible assets on acquisition have been recorded at their fair value(see (a)), amortization of such assets, other than for those with indefinitelives, needs to be included under U.S. GAAP; consistent with prior years,amortization is calculated using the straight-line method.

 

The incremental amounts recorded as intangible assets arising from theTELUS acquisition above are as follows:

 
| ** **                                | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net book value** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|------------------------------|------------|
| **As at December 31****(millions)**  | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| Intangible assets subject to amortization |       |       |       |             |       |                         |       |   |   |
| Subscribers – wireline               |       | $          | 1,950.0    |             | $          | 393.1                        | ** ** | **$** | **1,556.9** |   | $ | 1,607.0 |   |
| Intangible assets with indefinite lives   |       |       |       |             |       |                         |       |   |   |
| Spectrum licences(1)                      |       | 1,833.3    |       | 1,833.3          | ** ** | **—**                   |       | — |   |
|                                      |       | $          | 3,783.3    |             | $          | 2,226.4                      | ** ** | **$** | **1,556.9** |   | $ | 1,607.0 |   |
|                                           |            |            |            |                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Accumulated amortization of spectrum licences is amortization recordedprior to 2002 and the transitional impairment amount.

 

63

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notesto consolidated financial statements

 

Estimatedaggregate amortization expense for intangible assets subject to amortization,calculated upon such assets held as at December 31, 2007, for each of the nextfive fiscal years is as follows:

 
| **Years ending December 31 (millions)** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
| 2008                                                        | ** ** | **$**      | **284.0**  | ** ** |
| 2009                                                        | ** ** | **227.7**  | ** ** |
| 2010                                                        | ** ** | **143.4**  | ** ** |
| 2011                                                        | ** ** | **100.2**  | ** ** |
| 2012                                                        | ** ** | **69.7**   | ** ** |
|                                                             |            |            |            |  |

 

### **(d)**          Goodwill

 

*Merger of BC TELECOM and TELUS:*Under the purchasemethod of accounting, TELUS’ assets and liabilities at acquisition (see (a))have been recorded at their fair values with the excess purchase price beingallocated to goodwill in the amount of $403.1 million. Commencing January 1,2002, rather than being systematically amortized, the carrying value ofgoodwill is periodically tested for impairment.

 

*Additional goodwill on Clearnet purchase:* UnderU.S. GAAP, shares issued by the acquirer to effect an acquisition aremeasured at the date the acquisition was announced; however, under Canadian GAAP,at the time the transaction took place, shares issued to effect an acquisitionwere measured at the transaction date. This results in the purchase price underU.S. GAAP being $131.4 million higher than under Canadian GAAP. Theresulting difference is assigned to goodwill. Commencing January 1, 2002,rather than being systematically amortized, the carrying value of goodwill isperiodically tested for impairment.

 

### **(e)**          Accountingfor derivatives

 

**Under U.S. GAAP, all derivatives need to be recognizedas either assets or liabilities and measured at fair value. Prior to January 1,2007, this was different from the Canadian GAAP treatment for financialinstruments as applied by the Company; see Note 2(b).**

** **

### ** **

### **(f)**            Incometaxes

 
| **Years ended December 31 (millions)** | ** ** | **2007**  | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Current                                                    | ** ** | **$**     | **(143.3** | **)**    | $          | (58.2 | ) |
| Deferred                                                   | ** ** | **307.8** | ** ** | 332.6    |       |
| ** **                                                 |       | **164.5** | ** ** | 274.4    |       |
| Investment Tax Credits                                     | ** ** | **(10.7** | **)**      | (18.5    | )          |
| ** **                                                 |       | **$**     | **153.8**  |     | $          | 255.9 |   |

 

TheCompany’s income tax expense, for U.S. GAAP purposes, differs from thatcalculated by applying statutory rates for the following reasons:

 
| **Years ended December 31 ($ in millions)**                            | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Basic blended federal and provincial tax at statutory income tax  rates                              | ** ** | **$**      | **474.9**  |       | **33.6**   | **%** | $ | 470.4 |   | 33.6 | % |
| Revaluation of deferred income tax liability to reflect future  statutory income tax rates           | ** ** | **(213.4** | **)**      |       |       | (162.9 | ) |   |   |
| Tax rate differential on, and consequential adjustments from,  reassessment of prior year tax issues | ** ** | **(79.2**  | **)**      |       |       | (40.3 | ) |   |   |
| Share option award compensation                                                                      | ** ** | **(12.1**  | **)**      |       |       | 6.4 |   |   |   |
| Investment Tax Credits, net of tax                                                                   | ** ** | **(7.1**   | **)**      |       |       | (12.3 | ) |   |   |
| Other                                                                                                | ** ** | **(9.3**   | **)**      |       |       | (5.4 | ) |   |   |
| U.S. GAAP income tax expense                                                                    | ** ** | **$**      | **153.8**  | ** ** | **10.9**   | **%** | $ | 255.9 |   | 18.3 | % |
|                                                                                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

64

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notesto consolidated financial statements

 

Asreferred to in Note 1(b), the Company must make significant estimates inrespect of the composition of its deferred income tax asset and deferred incometax liability. The operations of the Company are complex, and related taxinterpretations, regulations and legislation are continually changing. As aresult, there are usually some tax matters in question. Temporary differencescomprising the deferred income tax liability are estimated as follows:

 
| **As at December 31**** (millions)**                         | ** ** | **2007**     | ** **   | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|--------------|----------|------------|
| Capital assets                                                                   |       |         |         |     |       |
| Property, plant, equipment, other and intangible assets subject to  amortization | ** ** | **$**        | **(470.8**   | **)**    | $          | (481.0 | ) |
| Intangible assets with  indefinite lives                                         | ** ** | **(749.1**   | **)**        | (866.1   | )          |
| Partnership income  unallocated for income tax purposes                          | ** ** | **(630.5**   | **)**        | (550.1   | )          |
| Pension amounts                                                                  | ** ** | **(137.9**   | **)**        | (74.1    | )          |
| Reserves not currently  deductible                                               | ** ** | **71.1**     | ** **   | 97.7     |       |
| Losses available to be  carried forward                                          | ** ** | **17.8**     | ** **   | 315.4    |       |
| Other                                                                            | ** ** | **46.4**     | ** **   | 101.3    |       |
| ** **                                                                       |       | **$**        | **(1,853.0** | **)**    | $          | (1,456.9 | ) |
| Deferred income tax liability                                                    |       |         | ** **   |     |       |
| Current                                                                          | ** ** | **$**        | **(503.6**   | **)**    | $          | (137.2 | ) |
| Non-current                                                                      | ** ** | **(1,349.4** | **)**        | (1,319.7 | )          |
| Deferred income tax asset (liability)                                            | ** ** | **$**        | **(1,853.0** | **)**    | $          | (1,456.9 | ) |
|                                                                                  |            |              |              |          |            |  |  |  |  |

 

EffectiveJanuary 1, 2007 the Company adopted the method of accounting for uncertainincome tax positions prescribed by Financial Accounting Standards BoardFinancial Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes*.  ThisInterpretation is intended to standardize accounting practice for therecognition, derecognition and measurement of tax benefits to enableconsistency and comparability among reporting entities for the reporting ofincome tax assets and liabilities. No consequential adjustments were requiredin the Company’s financial statements as a result of that adoption.

 

Thetotal amount of unrecognized tax benefits, excluding net capital losses, that,if recognized, would affect the effective tax rate at December 31, 2007,is $196.3 million. Unrecognized tax benefits related to net capitallosses, if recognized, amount to $161.5 million. As net capital losses canonly be applied against taxable capital gains, no amount would have affectedthe effective tax rate for the year ended December 31, 2007.

 

Thegross amount of unrecognized tax benefits is calculated as the undiscountedcumulative impact of such positions on taxable income before timing-relatedreversals that have yet to be realized and before the application of lossescarried forward multiplied by the applicable tax rate for the estimated periodwhen such benefit will be realized.

 
| ** **                                                           | ** ** | **Unrecognized tax benefits** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Year ended December 31, 2007 (millions)** | ** ** | **Gross**                               | ** ** | **Component  sheltered by  losses carried  forward** | ** ** | **Component  comprised of  capital losses** | ** ** |
| Balance, beginning of period                                         |       | $848.4                                  |       | $368.1 |   | $185.6 |   |
| Tax positions related to prior years                                 |       |                                    |       |   |   |   |   |
| Additions for tax returns  filed during the year                     |       | 222.0                                   |       | 168.0 |   | — |   |
|                                                                 |       | 1,070.4                                 |       | 536.1 |   | 185.6 |   |
| Tax positions related to  prior years                                |       |                                    |       |   |   |   |   |
| Reduction for timing items  deductible in the year                   |       | (48.6                                   | )          | (48.6 | ) | — |   |
| Tax positions related to  current year                               |       |                                    |       |   |   |   |   |
| Estimated additions                                                  |       | 109.7                                   |       | 109.7 |   | — |   |
| Reductions                                                           |       | —                                  |       | — |   | — |   |
| Settlements                                                          |       | (135.4                                  | )          | 49.5 |   | — |   |
| Lapses in statutes of  limitations                                   |       | (4.0                                    | )          | — |   | — |   |
| Adjustments for future  year rate changes                            |       | (40.8                                   | )          | (16.7 | ) | (24.1 | ) |
| Balance, end of period                                               |       | $951.3                                  |       | $630.0 |   | $161.5 |   |

 

Includedin the balance at December 31, 2007, excluding net capital losses, are taxpositions for which the ultimate deductibility is highly certain but for whichthere is uncertainty about the timing of such deductibility. In addition, theCompany has losses carried forward that are available to be applied againstunrecognized tax benefits. As a result, the

 

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impacton the annual effective tax rate is significantly less than the gross amount ofgross unrecognized tax benefits noted above.

 

Thegross reserves are adjusted for future year tax rate changes based on theexpected timing of loss utilization.

 

Inthe application of both Canadian GAAP and U.S. GAAP, the Company accrues forinterest charges on current tax liabilities that have not been funded, whichwould include interest and penalties arising from uncertain tax positions. TheCompany includes such charges as a component of financing costs. As at January 1,2007, the Company had recorded accrued interest payable of $7.6 million inrespect of differences between the times tax-related exposures have been fundedcompared to the times the tax-related exposures may have come into existence aswell as interest receivable of $8.5 million. During the year, the Companyrecorded interest income of $26.3 million in respect of income taxes,reversed interest expense of $4.0 million and collected $34.2 millionof interest receivable.

 

Asat December 31, 2007, it is reasonably possible that the Company’s netunrecognized tax benefits will significantly increase and decrease in the nexttwelve months for the following items:

 

·                  It is expected that Notices ofReassessment will be issued and/or settlements will be reached with variousgovernment authorities over the next twelve months that are expected toeffectively settle a number of uncertain tax positions and result in adjustmentsto the effective tax rate and gross unrecognized tax benefits including theabandonment of any remaining unrecognized tax benefits.  Certain presently unrecognized tax benefitspertaining to a number of items involving uncertainty as to the exact taxationperiod tax deductions may be claimed among periods of changing statutory taxrates are expected to be resolved within an estimated range of $5 million to$15 million.  The gross amount of suchunrecognized tax benefits range from $25 million to $35 million.

·                  For those items that are timingin nature, it is reasonably possible that the gross unrecognized tax benefitswill decrease by $70 million to $80 million as temporary differencesare drawn down.

·                  It is reasonably possible thatthe Company’s net and gross unrecognized tax benefits will decrease due to theexpected lapse of the statute of limitations that would otherwise allowgovernmental authorities to challenge positions taken in tax returns forcertain prior taxation years.  Suchunrecognized tax benefits are reasonably estimated at $2 million.

·                  During the next twelve months,the Company will file tax returns covering the period ended December 31,2007, as required by statute. The returns are likely to contain unrecognizedtax benefits that have not been quantified above. As the positions will only bedetermined at the time the tax returns are prepared, the amount of such benefitscannot be quantified prior to that time.

 

Asat December 31, 2007, income tax returns, whether filed or not, pertainingto taxation years that remain open to examination by major jurisdictions are asfollows:

 
| ** **         | ** ** | **Restricted to  appeals** | ** ** | **Other**         | ** ** |
|--------------------|------------|---------------------------------|------------|-------------------|------------|
| Canada             |       | 1999  – 2000               |       | 2001  – 2007 |       |
| United States |       | N/A                             |       | 2004  – 2007 |       |

 

### **(g)**         Additionaldisclosures required under U.S. GAAP – Comprehensiveincome (loss)

 

U.S. GAAPrequires that a statement of comprehensive income be displayed with the sameprominence as other financial statements. Comprehensive income, whichincorporates net income, includes all changes in equity during a period exceptthose resulting from investments by and distributions to owners. There is norequirement to disclose comprehensive income under Canadian GAAP prior tofiscal periods beginning on or after January 1, 2007.

 

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| **Years ended December 31 (millions)**           | ** **                                                          | **2007**   | ** **                                     | **2006**   | ** **                                                     |
|----------------------------------------------------------------------|---------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|
| ** **                                                           | **Canadian  GAAP other  comprehensive  income (loss)(1)** | ** ** | **Pension  and other  benefit  plans(2)** | ** ** | **US GAAP other  comprehensive  income (loss)** | ** ** | **Canadian  GAAP other  comprehensive  income (loss)** | ** ** | **Pension  and other  benefit  plans** | ** ** | **Unrealized fair  value of  derivative cash  flow hedges** | ** ** | **US GAAP other  comprehensive  income (loss)** | ** ** |
|                                                                 |                                                                |       |                                           |       |                                                           |   |   |   |   |   |   |   |   |   |   |
| Amount arising                                                       | ** **                                                          | **$**      | **115.5**                                      | ** ** | **$**                                                          | **153.5** | ** ** | **$** | **269.0** |   | $ | 5.8 |   | $ | 232.9 |   | $ | 57.4 |   | $ | 296.1 |   |
| Income tax  expense (recovery)                                       | ** **                                                          | **41.3**   | ** **                                     | **45.5**   | ** **                                                     | **86.8** |   | — |   | 79.7 |   | 20.6 |   | 100.3 |   |
| Net                                                                  | ** **                                                          | **74.2**   | ** **                                     | **108.0**  | ** **                                                     | **182.2** |   | 5.8 |   | 153.2 |   | 36.8 |   | 195.8 |   |
| Accumulated other  comprehensive income (loss), beginning of period  | ** **                                                          | **(177.7** | **)**                                          | **(273.8** | **)**                                                          | **(451.5** | **)** | (7.3 | ) | (167.7 | ) | (200.6 | ) | (375.6 | ) |
| Adjustments to  reflect implementation of SFAS 158              |                                                                |       |                                           |       |                                                           |   |   |   |   |   |   |   |   |   |   |
| Reverse  accumulated amounts in respect of minimum pension liability | ** **                                                          | **—** | ** **                                     | **—** | ** **                                                     | **—** |   | — |   | 14.5 |   | — |   | 14.5 |   |
| Record net  periodic benefit costs not yet recognized                | ** **                                                          | **—** | ** **                                     | **—** | ** **                                                     | **—** |   | — |   | (273.8 | ) | — |   | (273.8 | ) |
| Accumulated other  comprehensive income (loss), end of period        | ** **                                                          | **$**      | **(103.5**                                     | **)**      | **$**                                                          | **(165.8** | **)** | **$** | **(269.3** | **)** | $ | (1.5 | ) | $ | (273.8 | ) | $ | (163.8 | ) | $ | (439.1 | ) |

 

----

| (1) |   | As the Canadian GAAP other comprehensive income amounts  at December 31, 2007, reflect total-to-date amounts for the unrealized  fair value of derivative cash flow hedges, the opening balance for  U.S. GAAP is no longer required to determine the total-to-date  accumulated other comprehensive income amount for U.S. GAAP purposes.                                                                                                                                         |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The amount arising in the current period  is comprised of: a net defined benefit  pension plan (gain) of $(172.9); a net defined benefit pension plan prior  service cost of $26.9; amortization of defined benefit pension plan actuarial  losses, past service costs and business combination difference of $(11.0),  $(0.8) and $2.6, respectively; and amortization of other defined benefit plan  actuarial gain and business combination difference of $2.5 and $(0.8),  respectively. |

 

Theclosing accumulated other comprehensive income amounts in respect of componentsof net periodic benefit costs not yet recognized, and the amounts expected tobe recognized in fiscal 2008, are as follows:

 
| ** **                                           | ** ** | **2007**                                                           | ** ** | **2006**              | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Accumulated other comprehensive  income amounts** | ** ** | **Amounts  expected** | ** ** | **Accumulated other comprehensive  income amounts** | ** ** |
| ** **                                           | ** ** | ** **                                                         | ** ** | **Tax**               | ** ** | ** ** | ** ** | **to be  recognized** | ** ** | ** ** | ** ** | **Tax** | ** ** | ** ** | ** ** |
| **As at December 31 (millions)** | ** ** | **Gross**                                                          | ** ** | **effect**            | ** ** | **Net** | ** ** | **in 2008** | ** ** | **Gross** | ** ** | **effect** | ** ** | **Net** | ** ** |
| **Pension benefit plans**                            |       |                                                               |       |                  |       |   | ** ** |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)                |       | $                                                                  | 628.6      |                  | $          | 197.6 | ** ** | **$** | **431.0** | ** ** | $ | 3.5 |   | $ | 812.5 |   | $ | 249.8 |   | $ | 562.7 |   |
| Unamortized past service costs                       |       | 31.4                                                               |       | 9.9                   | ** ** | **21.5** | ** ** | 3.7 |   | 5.3 |   | 1.6 |   | 3.7 |   |
| Unamortized business combination difference          |       | (409.5                                                             | )          | (128.8                | )          | **(280.7** | **)** | 4.7 |   | (412.1 | ) | (126.7 | ) | (285.4 | ) |
|                                                 |       | 250.5                                                              |       | 78.7                  |       | **171.8** | ** ** | 11.911.9 |   | 405.7 |   | 124.7 |   | 281.0 |   |
| **Other benefit plans**                              |       |                                                               |       |                  |       |   | ** ** |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)                |       | (10.3                                                              | )          | (3.2                  | )          | **(7.1** | **)** | (2.2 | ) | (12.8 | ) | (3.9 | ) | (8.9 | ) |
| Unamortized business combination difference          |       | 1.6                                                                |       | 0.5                   |       | **1.1** | ** ** | 0.8 |   | 2.4 |   | 0.7 |   | 1.7 |   |
|                                                 |       | (8.7                                                               | )          | (2.7                  | )          | **(6.0** | **)** | (1.4 | ) | (10.4 | ) | (3.2 | ) | (7.2 | ) |
|                                                 |       | $                                                                  | 241.8      |                  | $          | 76.0 | ** ** | **$** | **165.8** | ** ** | $ | 10.5 |   | $ | 395.3 |   | $ | 121.5 |   | $ | 273.8 |   |

 

### **(h)**         Recentlyissued accounting standards not yet implemented

### ** **

*Single definition of fair value.* Under U.S. GAAP, effectivefor its 2008 fiscal year, the Company will be required to prospectively complywith a unified approach to fair value measurement of assets and liabilities, asprescribed by Financial Accounting Standards Board Statement of FinancialAccounting Standards No. 157,*Fair Value Measurements*.The Company is not materially affected by this statement currently.

 

*Fair value option.* Under U.S. GAAP, effectivefor its 2008 fiscal year, the Company will be able to choose to measureeligible items at fair value at specified election dates, as prescribed byFinancial Accounting Standards Board Statement of Financial Accounting StandardsNo. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities*. The Company is not materially affected bythis statement currently.

 

*Business combinations and non-controlling interests.* Under U.S. GAAP, effective for its 2009 fiscal year, the Companywill be required to comply with new standards in respect of businesscombinations and accounting for non-controlling interests, as prescribed by Financial AccountingStandards Board Statement of Financial Accounting Standards No. 141(R), *Business Combinations* and Financial Accounting StandardsBoard Statement of Financial Accounting

 

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StandardsNo. 160, *Accounting and Reporting of NoncontrollingInterest in Consolidated Financial Statements, an amendment of ARB No. 51*,respectively. The issuance of these standards is the culmination of the firstmajor collaborative convergence undertaking of the Financial AccountingStandards Board and the International Accounting Standards Board. Whether theCompany would be materially affected by the new standards would depend upon thespecific facts of the business combinations, if any, occurring on or after January 1,2009. Generally, the new standards will result in measuring businessacquisitions at the fair value of the acquired entities and a prospectivelyapplied shift from a parent company conceptual view of consolidation (whichresults in the parent company recording the book values attributable tonon-controlling interests) to an entity conceptual view (which results in the parentcompany recording the fair values attributable to non-controlling interests).Early adoption of these standards is prohibited.

 

*Other:*As would affect the Company,there are no other U.S. accounting standards currently issued and not yetimplemented that would differ from Canadian accounting standards currentlyissued and not yet implemented.

 

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**TELUSCORPORATION**

 

**Management’s discussion and analysis**

 

**2007**

 

1

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**Caution regarding forward-lookingstatements**

 

*This document and Management’sdiscussion and analysis contain statements about expected future events andfinancial and operating results of TELUS Corporation (TELUS or the Company)that are forward-looking. By their nature, forward-looking statements requirethe Company to make assumptions and are subject to inherent risks anduncertainties. There is significant risk that assumptions (see below),predictions and other forward-looking statements will not prove to be accurate.Readers are cautioned not to place undue reliance on forward-looking statementsas a number of factors could cause actual future results, conditions, actionsor events to differ materially from the targets, expectations, estimates orintentions expressed in the forward-looking statements.**TheCompany disclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, except as required by law. In the case of annual guidance,it is the current practice of the Company to evaluate and, where it deemsappropriate, provide updates. Subject to legal requirements, this practice maybe changed at any time at the Company’s sole discretion.*

 

*Assumptions for2008 targets include:**economic growth consistent with recent provincialand national estimates by the Conference Board of Canada, including gross domesticproduct (GDP) growth of 2.8% in Canada and above average growth in theprovinces of Alberta and British Columbia; forecast exchange rate between theCanadian dollar and U.S. dollar at or near parity; increased wirelinecompetition in both business and consumer markets, particularly from cable-TVand VoIP (voice over Internet protocol) companies; impact from the acquisitionof Emergis in mid-January; Canadian wireless industry market penetration gainof 4.5 to 5%; potential participation in advanced wireless services (AWS)spectrum auction is not reflected in capital expenditures; no new wirelesscompetitive entrant assumed for 2008; approximately $50 millionrestructuring expenses (up from $20.4 million in 2007); a blendedstatutory tax rate of approximately 31 to 32%; a discount rate of 5.5% (50basis points higher than 2007) and expected long-term return of 7.25% forpension accounting (unchanged from 2007); and average shares outstanding ofapproximately 320 million (down from 331.7 million in 2007). Earningsper share (EPS), cash balances, net debt and common equity may be affected bypurchases of up to 20 million TELUS shares over a 12-month period underthe normal course issuer bid that commenced December 20, 2007.*

 

*Factors thatcould cause actual results to differ materially include, but are not limitedto: competition (including more active price competition and the possibility ofnew wireless competition after the 2008 spectrum auction); economic growth andfluctuations (including pension performance, funding and expenses); capitalexpenditure levels (including possible wireless spectrum asset purchases);financing and debt requirements (including funding acquisition purchases, sharerepurchases and debt financings); tax matters (including acceleration ordeferral of required payments of significant amounts of cash taxes); humanresource developments;**business integrations and internal reorganizations(including post-acquisition integration of Emergis**);**technology(including reliance on systems and information technology,**evolving**wirelinebroadband and wireless next generation technology options and the possible needfor prospective wireless sharing arrangements to achieve cost efficiencies**and reducedeployment risks); regulatory approvals and developments (including the**essential services proceeding,spectrum auction, tower sharing and roaming**rules, the**new media proceeding**and possible changes to foreignownership restrictions); process risks (including conversion of legacy systemsand billing system integrations); health, safety and environmentaldevelopments; litigation and legal matters; business continuity events(including manmade and natural threats); any**prospective acquisitions ordivestitures;**and other risk factors discussedherein and listed from time to time in TELUS’ reports and public disclosuredocuments including its annual report, annual information form, and otherfilings with securities commissions in Canada (on www.sedar.com) and filings inthe United States including Form 40-F (on EDGAR at www.sec.gov).*

 

*For further information, see*Section 10: Risks and risk management*in this document.*

 

# **Management’s discussion and analysis**

# ** **

February 13,2008

 

The following is a discussion of the consolidated financialcondition and results of operations of TELUS Corporation for the years ended December 31, 2007and 2006, and should be read together with TELUS’ audited Consolidatedfinancial statements. This discussion contains forward-looking information thatis qualified by reference to, and should be read together with, the *Caution regarding forward-looking statements* above.

 

TELUS’ Consolidated financial statements have been preparedin accordance with Canadian generally accepted accounting principles (GAAP),which differ in certain respects from U.S. GAAP. See Note 21 to theConsolidated financial statements for a summary of the principal differencesbetween Canadian and U.S. GAAP as they relate to TELUS. The Consolidatedfinancial statements and Management’s discussion and analysis were reviewed byTELUS’ Audit Committee and approved by TELUS’ Board of Directors. All amountsare in Canadian dollars unless otherwise specified.

 

2

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TELUShas issued guidance on and reports on certain non-GAAP measures that are usedby management to evaluate performance of business units, segments and theCompany. In addition, non-GAAP measures are used in measuring compliance withdebt covenants and are used to manage the capital structure. Because non-GAAP measuresdo not have a standardized meaning, securities regulations require thatnon-GAAP measures be clearly defined and qualified, and reconciled with theirnearest GAAP measure. For the reader’s reference, the definition, calculationand reconciliation of consolidated non-GAAP measures are provided in *Section 11: Reconciliation of non-GAAP measures and definition ofkey operating indicators*.

 

**Management’sdiscussion and analysis contents**

 
| **Section** | ** **                                                                      | **Contents** |
|-------------|---------------------------------------------------------------------------------|--------------|
| 1.          | Introduction,  performance summary and targets                                  |         | A  summary of TELUS’ consolidated results for 2007, performance against 2007  targets, and presentation of targets for 2008 |
| 2.          | Core business, vision and strategy                                              |         | A discussion of TELUS’ core business, vision and strategy, including  examples of TELUS’ activities in support of its six strategic imperatives |
| 3.          | Key performance drivers                                                         |         | Corporate priorities in place for 2007 and planned for 2008 |
| 4.          | Capability to deliver results                                                   |         | A description of the factors that affect the capability to execute  strategies, manage key performance drivers and deliver results |
| 5.          | Results from operations                                                         |         | A detailed discussion of operating results for 2007 |
| 6.          | Financial condition                                                             |         | A discussion of significant changes in the balance sheets for the year  ending December 31, 2007 |
| 7.          | Liquidity and capital resources                                                 |         | A discussion of cash flow,  liquidity, credit facilities and other disclosures |
| 8.          | Critical accounting estimates and accounting policy developments                |         | A description of accounting estimates that are critical to determining  financial results, and changes to accounting policies |
| 9.          | General outlook                                                                 |         | The outlook for the telecommunications business in 2008 |
| 10.         | Risks and risk management                                                       |         | Risks and uncertainties facing TELUS and how the Company manages these  risks |
| 11.         | Reconciliation of non-GAAP measures and definition of key operating  indicators |         | A description, calculation and reconciliation of certain measures used  by management |

 

**1.****     Introduction, performancesummary and targets**

 

**1.1 Materiality for disclosures**

 

Management determines whether or not information ismaterial based on whether it believes a reasonable investor’s decision to buy,sell or hold securities in the Company would likely be influenced or changed ifthe information were omitted or misstated.

 

**1.2 Canadian telecommunications industry**

 

Economic and telecom industry growth

 

The Conference Board of Canada recently estimated Canadian real GDP growthfor 2007 and 2008 to be 2.6% and 2.8%, respectively. TELUS estimates thatrevenues for the Canadian telecom industry grew by approximately 5.5% to$40 billion in 2007 due to its continued robust wireless growth, whichmore than offset the declines of a mature wireline segment. In this context,TELUS’ revenues grew by 4.5% to $9.07 billion during 2007. Bell Canada(BCE) and its affiliates represented about 45% of the total industry revenue.

 

 

Key industry development

 

In April 2007,Canada’s largest telecommunications service provider, BCE Inc., entered into astrategic review process. Three consortia signed non-disclosure and standstillagreements to enable them to potentially prepare an offer to BCE shareholdersunder a competitive auction process. On June 21, 2007, TELUS announcedthat it had entered into a mutual non-disclosure and standstill agreement andwas pursuing non-exclusive discussions to acquire BCE. On June 26, thethree consortia submitted bids to acquire BCE, while TELUS announced thatinadequacies in BCE’s bid process did not make it 

 

3

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possible for TELUS tosubmit an offer. On June 30, BCE announced that it had entered into adefinitive agreement to be acquired by a consortium led by Teachers PrivateCapital, the private investment arm of the Ontario Teachers’ Pension Plan, andthe U.S.-based Providence Equity Partners and Madison Dearborn Partners, LLC.In early August, TELUS concluded its assessment of whether it shouldpotentially make a competing offer for BCE, and announced that it did notintend to submit a competing offer. The BCE Board recommended that their commonshareholders accept the consortium’s offer at an all-cash price of $42.75 percommon share or approximately $34 billion. On September 21, 2007, BCE shareholdersoverwhelmingly approved the acquisition. The closing of the transaction issubject to receipt of regulatory approvals including by the CRTC, which iscommencing a public hearing on February 25 to review the change in controlof BCE’s broadcasting licences. BCE recently indicated that it expected thetransaction to close in the second quarter of 2008.

 

Wireless developments

 

TELUS estimates that Canadian wireless revenues grew by 13% in 2007 asmarket penetration for the industry increased by an estimated 4.9 percentagepoints to approximately 61% of the population. TELUS’ wireless segment achieved10.5% revenue growth and 10.1% subscriber growth in 2007.

 

A key driver of wireless growth continues to be the increased adoption andusage of data services such as text messaging, mobile computing and personaldigital assistant (PDA) usage. Canadian wireless providers continue theroll-out of faster next generation high-speed wireless networks to capture thisgrowth opportunity. Competition remains intense due to a number of factorsincluding the presence of mobile virtual network operators (MVNOs) such asVirgin Mobile and Videotron Ltd.; discount brand offerings by Bell and Rogers;and the March 2007 introduction of wireless number portability, whichallows customers to move to a different provider while retaining their existingphone number.

 

OnNovember 28, 2007, the federal Industry Minister announced a policy andspectrum auction framework surrounding the introduction of advanced wirelessservices in Canada. A spectrum auction for 105 MHz is expected in May 2008that is expected to follow the same simultaneous, multiple round, highestbidder model as in the 2001 PCS spectrum auction. The Minister has chosen tointroduce measures intended to make it easier for new entrants to bid on andacquire spectrum. The principal policy tools adopted are (i) the set-asideof 40 MHz of spectrum for new entrants, including regional andmetropolitan blocks; and (ii) mandatory roaming and tower sharing (atcommercial rates). TELUS is participating in a round of public comments and thegovernment is expected to announce the final rules at the end of March 2008.See *Risks andrisk management – Section* *10.3 Regulatory.*

 

Wireline developments

 

TELUS estimates that industry wireline revenues were flat in 2007. Theindustry is continuing to focus its attention on broadband services to moderatethe losses in network access lines and as penetration in this area approaches asaturation point, telecom and cable-TV companies have started to compete onspeed, applications and price to differentiate their product offerings. Internettelephony is emerging to be a lucrative revenue stream for cable-TV companies.Telecom companies are strategically positioning themselves to encroach into theTV market with new IP TV offerings. Consumers continue to substitute wirelessand VoIP services for traditional wired telephony services. Competitive lossesand substitution have resulted in certain North American telecom companieshaving residential access line losses around 10%.

 

TELUS’ wireline segment external revenues decreased by 0.3% in 2007,similar to 2006, as growth in data services nearly offset losses in voiceservices. TELUS’ residential access lines decreased by 6.5% in 2007, comparedwith a 5.2% loss in 2006. TELUS continues to launch TELUS TV® services toselect neighbourhoods in its incumbent territories.

 

In 2007, the CRTC granted residential local exchange forbearance inmarkets where incumbents are facing increasing competitive pressure. TELUSreceived approval for deregulation of wireline residential phone service in 63communities (about 75% of residential lines in non-high cost serving areas) andbusiness service in 35 communities across B.C., Alberta and Quebec (abouttwo-thirds of business lines). This positively impacts TELUS’ competitivenessby providing improved pricing, marketing and bundling flexibility.

 

TELUS’ approach to the business market is through a focus on non-incumbentgrowth in Central Canada as well as, nationally, a focus on key verticalmarkets of healthcare, financial services, energy and the public sector. Forexample, in January 2008, TELUS completed its acquisition of Emergis Inc.,a business process outsourcer specializing in the healthcare and financialservices sectors, and a leader in the automation of electronic health records.See *Section 2.2 Vision and strategy –Partnering, acquiring and divesting.*

 

### **1.3 Consolidated highlights**

 

Comparativeresults for 2006 have been corrected for a change in employee future benefitstransitional pension asset accounting. In the adoption and implementation ofnew accounting recommendations for employee future benefits in the 2000 fiscalyear, various estimates, assumptions and determinations were made. The Companyrevisited the various 

 

4

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determinationsmade in 2000. See Note 2(e) of TELUS’ Consolidated financial statements.The correction had the effect of increasing previously reported Operatingincome, Income taxes and Net income on the Consolidated statements of income,as well as increasing Deferred charges, Total assets, Future income taxliabilities, Retained earnings and Total liabilities and shareholders’ equityon the Consolidated balance sheets. The Company has determined that thecorrection was not material to its previously filed financial statements.

 

TELUS’annual targets for 2007, as published in the annual 2006 Management’sdiscussion and analysis, excluded an estimated $150 to $200 millionincremental pre-tax charge, or 30 to 40 cents per share, for introducing anet-cash settlement feature for share option awards granted prior to 2005. Theactual incremental amount recorded in 2007, which did not result in animmediate cash outflow, was a pre-tax charge of $168.7 million, or32 cents per share. The Chief Executive Officer, who is the chief operatingdecision maker, regularly received 2007 reports on two bases: including andexcluding the charge for the net-cash settlement feature. The highlights tablebelow presents both views.

 
| **Consolidated highlights****($ millions, except  shares, per share amounts,** | ** ** | **Years ended  December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **subscribers  and ratios)**                                                             | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| **Consolidated statements of income**                                                    | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                                                                       | ** ** | **9,074.4**                       |       | 8,681.0 |   | 4.5 | % |
| Operating income                                                                         | ** ** | **1,974.3**                       |       | 2,039.4 |   | (3.2 | )% |
| Net-cash settlement feature  expense                                                     | ** ** | **168.7**                         |       | — |   | — |   |
| Operating income (as  adjusted)                                                          | ** ** | **2,143.0**                       |       | 2,039.4 |   | 5.1 | % |
| Income before income taxes                                                               | ** ** | **1,498.1**                       |       | 1,506.7 |   | (0.6 | )% |
| Net-cash settlement feature  expense                                                     | ** ** | **168.7**                         |       | — |   | — |   |
| Income before income taxes  (as adjusted)                                                | ** ** | **1,666.8**                       |       | 1,506.7 |   | 10.6 | % |
| Net income                                                                               | ** ** | **1,257.9**                       |       | 1,145.0 |   | 9.9 | % |
| Net-cash settlement feature  expense, after tax                                          | ** ** | **105.0**                         |       | — |   | — |   |
| Net income (as adjusted)                                                                 | ** ** | **1,362.9**                       |       | 1,145.0 |   | 19.0 | % |
| Earnings per share, basic ($)                                                            | ** ** | **3.79**                          |       | 3.33 |   | 13.8 | % |
| Net-cash settlement feature  per share                                                   | ** ** | **0.32**                          |       | — |   | — |   |
| Earnings per share, basic  (as adjusted) (1) ($)                                    | ** ** | **4.11**                          |       | 3.33 |   | 23.4 | % |
| Earnings per share, diluted ($)                                                          | ** ** | **3.76**                          |       | 3.30 |   | 13.9 | % |
| Cash dividends declared per share ($)                                                    | ** ** | **1.575**                         |       | 1.20 |   | 31.3 | % |
| **Consolidated statements of cash flows**                                                | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash provided by operating activities                                                    | ** ** | **3,171.7**                       |       | 2,803.7 |   | 13.1 | % |
| Cash used by investing  activities                                                       | ** ** | **1,771.6**                       |       | 1,675.2 |   | 5.8 | % |
| Capital expenditures                                                                     | ** ** | **1,770.3**                       |       | 1,618.4 |   | 9.4 | % |
| Cash used by financing  activities                                                       | ** ** | **1,368.7**                       |       | 1,148.6 |   | 19.2 | % |
| **Subscribers and other measures**                                                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Subscriber connections(2) (thousands) at December 31                           | ** ** | **11,147**                        |       | 10,715 |   | 4.0 | % |
| EBITDA (3)                                                                               | ** ** | **3,589.3**                       |       | 3,615.0 |   | (0.7 | )% |
| Net-cash settlement feature  expense                                                     | ** ** | **168.7**                         |       | — |   | — |   |
| EBITDA (as adjusted)  (1) (3)                                                       | ** ** | **3,758.0**                       |       | 3,615.0 |   | 4.0 | % |
| Free cash flow (4)                                                                       | ** ** | **1,573.2**                       |       | 1,596.0 |   | (1.4 | )% |
| **Debt and payout ratios (5)**                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net debt to EBITDA – excluding restructuring costs                                  | ** ** | **1.7**                           |       | 1.7 |   | — |   |
| Dividend payout ratio (%)                                                                | ** ** | **47**                            |       | 45 |   | 2 pts |   |

 

----

pts – percentage points

(1)   EPS- basic (as adjusted) and EBITDA (as adjusted) correspond to the definitionsused in setting TELUS’ 2007 annual targets and revised guidance.

(2)   The sum of wirelesssubscribers, network access lines and Internet access subscribers measured atthe end of the respective periods based on information in billing and other systems.

(3)   EBITDAis a non-GAAP measure. See *Section 11.1 Earnings before interest, taxes,depreciation and amortization (EBITDA).*EBITDA (as adjusted) is regularly reported to the chief operating decisionmaker and corresponds to the definition used in setting TELUS’ 2007 EBITDAtargets and revised guidance.

(4)   Freecash flow is a non-GAAP measure. See *Section 11.2Free cash flow.*

(5)   See*Section 11.4 Definition of liquidityand capital resource measures.*

 

5

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Highlightsfor 2007, as discussed in *Section 5: Resultsfrom operations*, include the following:

 

·      The Company met or exceeded three of the four original consolidatedtargets, and met or exceeded three of the eight original segmented targets for2007. See *Section 1.4 Performance scorecard for 2007results*.

 

·      Subscriberconnections increased by 432,000 during 2007. The number of wirelesssubscribers grew by 10% to 5.57 million, the number of Internetsubscribers grew by 6% to 1.18 million and the number of network accesslines decreased by 3% to 4.40 million. Notably, during the fourth quarterof 2007, high-speed Internet subscribers surpassed the one million mark,closing at 1,020,200.

 

·      Operating revenues increasedby $393.4 million in 2007, when compared to 2006, due primarily to growthin wireless network revenues and wireline data revenues, which more than offsetrevenue declines in wireline voice local and long distance.

 

·      Operating income decreasedby $65.1 million in 2007 when compared to 2006. Excluding the net-cashsettlement feature expense recorded in 2007, operating income (as adjusted)increased by $103.6 million primarily due to growth in wireless EBITDA,partly offset by higher depreciation and amortization expenses.

 

·      Income before income taxesdecreased by $8.6 million in 2007 when compared to 2006. Excluding theeffect of the net-cash settlement feature, Income before income taxes increasedby $160.1 million in 2007 due to lower financing costs and growth inoperating income (as adjusted).

 

·      In 2007, Net income and EPS- basic increased by $112.9 million and 46 cents, respectively, whencompared to the same period in 2006.

 
| **Net income continuity  ($ millions)**    | ** ** | **Years ended  December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| 2006 (restated)                                 |       | 1,145.0                           |       |
| Deduct  favourable 2006 tax-related adjustments |       | (171)                   |       |
| Add favourable  2007 tax-related adjustments    |       | 250                |       |
| Changes in:                                     |       |                              |       |
| EBITDA (as adjusted)                            |       | 95                 |       |
| Interest expenses                               |       | 31                 |       |
| Other                                           |       | 12.9                              |       |
| 2007 (as adjusted)                              |       | 1,362.9                           |       |
| Net-cash  settlement feature in 2007            |       | (105.0                            | )          |
| 2007 (reported)                                 |       | 1,257.9                           |       |

 

·      The average number of sharesoutstanding during 2007 was 3.5% lower than in 2006. The decrease in shares wasdue to $750 million of repurchases under the normal course issuer bid (NCIB)programs as well as far fewer shares being issued from treasury following theintroduction of the net-cash settlement feature for options.

 

·      The Company renewed its NCIBprogram for another year. Under Program 4, which will expire on December 19,2008, theCompany may purchase a maximum of eight million Common Shares and 12 millionNon-Voting Shares. See *Section 7.3 Cash used by financingactivities.*

 

Highlights for 2007, as discussed in *Section 7: Liquidity and capital resources,* include thefollowing:

 

·      Cash provided by operatingactivities increased by $368.0 million in 2007 when compared to 2006. Theincrease was mainly due to liquidation of certain short-term investments, lowerinterest paid and higher recoveries of taxes and related interest.

 

·      Cash used by investingactivities increased by $96.4 million in 2007 when compared to 2006 mainlydue to upfront capital investment to support new enterprise customers as wellas expenditures for digital wireless capacity and coverage.

 

**·**      Cash used by financing activities increased by$220.1 million in 2007 when compared to 2006, due primarily to increaseddividend payments. The dividend declared in the fourth quarter of 2007increased by 20% to 45 cents per share, up from 37.5 cents per share declaredin each of the four preceding quarters.

** **

**·**      Free cash flow of $1.57 billion decreased by1.4% from 2006 as increased capital expenditures and cash payments as a resultof introducing the net-cash settlement feature were nearly offset by lowerinterest paid and higher recoveries of taxes and related interest.

** **

·      Net debt to EBITDA of 1.7continued to be in the long-term target policy range of 1.5 to 2.0 times.

 

·      The dividend payout ratio,based on the annualized fourth quarter dividend and actual earnings for 2007,was 47% and the dividend payout ratio calculated to exclude the impacts oftax-related adjustments and the charge for introducing the net-cash settlementfeature was 54% — both within the target guideline of 45 to 55% of netsustainable earnings.

 

6

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### **1.4 Performance scorecard for2007 results**

 

Halfof the 12 original consolidated and segmented targets for 2007 were met orexceeded, while six were not achieved.

 

·      Three of the fourconsolidated targets were met or exceeded (EBITDA, capital expenditures andEPS), while the revenue target was not achieved;

 

·      Wireless revenueswere below target by 2% largely due to year-over-year growth in the averagerevenue per subscriber unit per month (ARPU) levelling off and decliningslightly in the second half of the year, and net subscriber additions being 6%below the annual target. Wireline revenue fell short of its original target byabout 1% due to a one-time negative adjustment to long distance revenues, aswell as lower equipment sales and lower than expected additions of high-speedInternet subscribers;

 

·      The consolidatedEBITDA (as adjusted) target was achieved and the wireline EBITDA (as adjusted)target was exceeded largely because total restructuring charges of$20.4 million were lower than the original expectation of$50 million. The wireless EBITDA target was not achieved as a result ofpricing pressures, and increased subscriber acquisition and retention costs;

 

·      EPS (as adjusted)exceeded its target by 23% due to favourable tax-related adjustments ofapproximately 75 cents per share. Excluding the tax-related adjustments, EPS(as adjusted) was $3.36, or in the middle of the target range; and

 

·      The consolidated,wireline and wireless capital expenditure levels were within 2% of therespective targets.

 

Duringthe year, management also provided revised annual guidance for 2007 with theannouncement of results for the second and third quarters and with the 2008targets news release and investor call on December 13, 2007. The December guidancefor 2007 met or exceeded on 10 indicators, but was short on the two subscriberamounts.

 

TELUS’results for 2007 are compared to original 2007 targets in the scorecard below.In addition, 2008 targets (published in the news release on December 13,2007) are presented and compared to results for 2007. For further informationon 2008 expectations, see *Section 9: Generaloutlook*.

 

7

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| **Scorecards**                                                            | ** **                                                | **Performance for 2007** | ** **         | **2008 targets** | ** **            |
|---------------------------------------------------------------------------|-----------------------------------------------------------|--------------------------|--------------------|------------------|-----------------------|
| **Legend**

üü

ü

**X**                                   | **Exceeded  target range  Met target  Missed target****** | ** **               | **Actual results** | ** **       | **Change  from 2006** | ** ** | **Original 2007  targets** | ** ** | **Target  result** | ** ** | **Targets** | ** ** | **Change from  2007 actual** | ** ** |
| **Consolidated**                                                          | ** **                                                | ** **               | ** **         | ** **       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                  | ** **                                                | **$9.074 billion**       |               | 4.5 %            |                  | $9.175 to  $9.275 billion |   | X | ** ** | **$9.6 to  $9.8 billion** |   | 6 to 8% |   |
| EBITDA (1) (2007 as  adjusted) (2)                                   | ** **                                                | **$3.758 billion**       |               | 4.0 %            |                  | $3.725 to  $3.825 billion |   | ü | ** ** | **$3.8 to  $3.95 billion** |   | 1 to 5% |   |
| EPS - basic (2007 as  adjusted) (3)                                       | ** **                                                | **$4.11**                |               | 23.4 %           |                  | $3.25 to $3.45 |   | üü | ** ** | **$3.50 to $3.80** |   | (8) to (15)% |   |
| EPS - basic (2007 as  adjusted), excluding favourable tax-related impacts | ** **                                                | **$3.36**                |               | 18.7 %           |                  | $3.25 to $3.45 |   | ü | ** ** | **$3.50 to $3.80** |   | 4 to 13% |   |
| Capital expenditures                                                      | ** **                                                | **$1.770 billion**       |               | 9.4 %            |                  | Approx. $1.75 billion |   | ü | ** ** | **Approx.  $1.9 billion** |   | 7% |   |
| **Wireline segment**                                                      | ** **                                                | ** **               | ** **         | ** **       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue (external)                                                        | ** **                                                | **$4.811 billion**       |               | (0.3)%           |                  | $4.85 to $4.9 billion |   | X | ** ** | **$4.975 to $5.075 billion** |   | 3 to 5% |   |
| EBITDA (2007 as adjusted)  (2)                                            | ** **                                                | **$1.829 billion**       |               | (1.8)%           |                  | $1.775 to $1.825 billion |   | üü | ** ** | **$1.725 to  $1.8 billion** |   | (6) to (2)% |   |
| Capital expenditures                                                      | ** **                                                | **$1.219 billion**       |               | 2.4 %            |                  | Approx. $1.2 billion |   | ü | ** ** | **No target** |   | — |   |
| High-speed Internet subscriber net additions                              | ** **                                                | **103,500**              |               | (32.7)%          |                  | More than 135,000 |   | X | ** ** | **No target** |   | — |   |
| **Wireless segment**                                                      | ** **                                                | ** **               | ** **         | ** **       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue (external)                                                        | ** **                                                | **$4.263 billion**       |               | 10.5 %           |                  | $4.325 to $4.375 billion |   | X | ** ** | **$4.625 to $4.725 billion** |   | 8 to 11% |   |
| EBITDA (2007 as adjusted)  (2)                                            | ** **                                                | **$1.929 billion**       |               | 10.1 %           |                  | $1.95 to $2.0 billion |   | X | ** ** | **$2.075 to  $2.15 billion** |   | 8 to 11% |   |
| Capital expenditures                                                      | ** **                                                | **$551 million**         |               | 29.0 %           |                  | Approx. $550 million |   | ü | ** ** | **No target** |   | — |   |
| Wireless subscriber net additions                                         | ** **                                                | **514,600**              |               | (3.9)%           |                  | More than 550,000 |   | X | ** ** | **No target** |   | — |   |
|                                                                           |                                                           |                          |                    |                  |                       |  |  |  |  |  |  |  |  |  |

 

----

(1)   See *Section 11.1 Earningsbefore interest, taxes, depreciation and amortization (EBITDA)* forthe definition.

(2)   Theactual result for 2007 EBITDA (as adjusted) excludes an incremental charge of$168.7 million relating to the introduction of a net-cash settlementfeature for share option awards granted prior to 2005, of which$145.1 million is in wireline and $23.6 million is in wireless. The target for 2007 EBITDA(as adjusted) excluded an estimated $150 to $200 million expense forintroducing this feature, of which $120 to $150 million was expectedin wireline and $30 to $50 million was expected in wireless.

(3)   Theactual result for 2007 EPS - basic (as adjusted) excludes an after-tax chargeper share of $0.32 relating to the introduction of a net-cash settlementfeature, while the 2007 target excluded an estimated $0.30 to $0.40 for introducing thisfeature.

 

Thefollowing key assumptions were made at the time the original targets for 2007were announced in December 2006.

 
| **Assumptions for 2007 original targets**                                                                             | ** ** | **Actual or estimated results for 2007**                                                                                                                                                                                                                                                                                  |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Canadian real GDP growth of 2.7%  (revised down during the year)                                                      |       | In its autumn and winter outlooks,  the Conference Board of Canada issued estimates for Canadian real GDP growth  of 2.6% for 2007 and 2.8% for 2008 with above average growth in Alberta and  B.C.                                                                                                                       |
| Increased wireline competition in  both business and consumer markets, particularly from cable-TV and VoIP  companies |       | Evidence of healthy competition  within TELUS’ incumbent business and consumer markets are forbearance  decisions from the CRTC. Cable-TV companies began to market basic telephony  services to home office and small businesses, and increased promotions of  lower-price “light” services to households |
| Forbearance for local retail  wireline services in major urban markets by the second half of 2007                     |       | Confirmed for residential markets  covering approximately 75% of TELUS’ residential lines, in non-high cost  serving areas, and about two-thirds of TELUS’ business lines                                                                                                                                       |
| No further price cap mandated  consumer price reductions                                                              |       | The CRTC decision on parameters  for the next price cap period, announced April 30, 2007, confirmed this  assumption                                                                                                                                                                                                 |
| Canadian wireless industry market  penetration gain estimate: 4.5 to five percentage points                           |       | Based on Company estimates and  reported Canadian industry net additions (excluding any impacts of  competitors’ subscriber writeoffs), the industry penetration gain for 2007 is  estimated to be at the upper end of this assumption range                                                                         |

 

8

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| **Assumptions for 2007 original targets**                                                      | ** ** | **Actual or estimated results for 2007**                                                                                                                                                                                                                                                      |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Restructuring expenses of  approximately $50 million                                      |       | Lower than expected at  $20.4 million in 2007                                                                                                                                                                                                                                            |
| A blended statutory income tax  rate of 33 to 34%                                              |       | Confirmed at 33.6% in 2007,  however, the effective tax rate was 15.6% in 2007 as a result of favourable  tax settlements and reassessments for prior years, and recent changes in  prospective federal tax rates that resulted in significant revaluations of  future income tax liabilities |
| A discount rate of 5.0% and  expected long-term average return of 7.25% for pension accounting |       | Confirmed for 2007                                                                                                                                                                                                                                                                            |
| Average TELUS shares outstanding  of 330 to 335 million for the full year                      |       | The average shares outstanding  during 2007 were 331.7 million                                                                                                                                                                                                                           |

 

### **1.5 Financial and operatingtargets for 2008**

 

The following discussion is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, as well as *Section 10: Risks and risk management*. TELUS’ 2008targets shown in the table in the previous section were originally announced onDecember 13, 2007.

 

The expectedearnings per share in 2008 reflects anticipated overall higher operatingprofitability, anticipated reduction in tax rates and an expected decrease intotal outstanding shares due to continued share repurchases. The 2008 EPSgrowth rate is expected to be offset by increased depreciation expense, andslightly higher financing costs related to the $743 million acquisition ofthe outstanding shares of Emergis, partially mitigated by lower interest ratesas a result of debt refinanced in 2007 at lower rates of interest.

 

Capital expendituresin 2008 are expected to be approximately $1.9 billion, an increase of$130 million. The higher level of capital expenditures reflectsanticipated significant investments in network infrastructure to improvebroadband capabilities, development of new applications, and high-speedwireless coverage and capacity. In addition, this spending supports continuedhousing growth in Alberta and British Columbia above the national average, andsuccess-based capital for new large contract wins in Central Canada. The 2008capital expenditures include continued phased investments to implement the newconverged order entry and billing system in B.C.

 
| **Assumptions for 2008 targets**                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Canadian real GDP growth estimate  of 2.8%                                                                                                                                                        |
| Canadian dollar at or near parity  with the U.S. dollar                                                                                                                                           |
| Increased wireline competition in  both business and consumer markets, particularly from cable-TV and VoIP  companies                                                                             |
| The impact from the acquisition  of Emergis was assumed to begin in March 2008; the transaction closed in  mid-January 2008 and is expected to have a minor impact on the 2008  targets |
| Canadian wireless industry market  penetration gain estimate is 4.5 to five percentage points for the year                                                                                        |
| The potential participation in  AWS spectrum auction is not reflected in capital expenditures                                                                                                     |
| No new wireless competitive  entrant assumed for 2008                                                                                                                                             |
| Restructuring expenses of  approximately $50 million, including approximately $10 million  related to the integration of Emergis                                                        |
| A blended statutory income tax  rate of 31 to 32%                                                                                                                                                 |
| A discount rate of 5.5% (50 basis  points higher than in 2007) and expected long-term average return of 7.25%  for pension accounting (unchanged from 2007)                                       |
| Average TELUS shares outstanding  of approximately 320 million for the full year, down from  331.7 million in 2007.                                                                     |

 

TELUS hasmaintained its long-term financial policy guidelines, including net debt toEBITDA of 1.5 to 2.0 times, and a dividend payout ratio guideline of 45 to 55per cent of sustainable net earnings. The 2008 targets are in compliance withthese policy guidelines. Based on an updated review of the Company’s taxposition, TELUS expects minimal cash tax payments in 2008, and significant cashtax payments commencing in 2009. Earnings per share, net debt and common equitymay be affected by purchases of up to 20 million TELUS shares over a 12-monthperiod under the normal course issuer bid that commenced December 20,2007.

 

9

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## ****

 

 

### **1.6 TELUS segments at a glance**

 

The Company has two reportable segments: wireline andwireless. Segmentation is based on similarities in technology, the technicalexpertise required to deliver the products and services, the distributionchannels used and regulatory treatment. Intersegment sales are recorded at theexchange value. Segmented information is regularly reported to the Company’sChief Executive Officer (the chief operating decision maker). Segmenteddisclosure is reported in Note 6 of the Consolidated financial statements.The following is a summary of key actual and target metrics for the twosegments.

 

*TELUS wireline segment*

 

Offersthe following solutions: **voice** – local,long distance, call management and the sale, rental and maintenance oftelephone equipment; **Internet** -high-speed or dial-up with security and entertainment features; **TELUS TV** – fully digital entertainment service available inselect neighbourhoods with Video on Demand and Pay Per View; **data** – IP networks, private line, switched services, networkwholesale, network management and hosting; **converged voice and datasolutions** – TELUS IP-One Innovation® and TELUS IP-One Evolution®; **hosting and infrastructure** – managed IT and infrastructuresolutions delivered through TELUS’ IP networks connected to TELUS’ InternetData Centres; **security solutions** – managed andnon-managed solutions to protect business networks, messaging and data, inaddition to security consulting services; and**customizedsolutions** – such as contact centre services including TELUSCallCentreAnywhere conferencing services (webcasting, audio, web and video) andhuman resource and health and safety outsourcing solutions.

 

10

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Wirelinesegment 2008 targets. See *Caution regardingforward-looking statements* at the beginning of Management’sdiscussion and analysis.

 

 

*TELUS wireless segment*

 

Offers the followingsolutions: **digital voice** – PCS (postpaid and Pay & Talk® prepaid)and Mike® all-in-one (iDEN); Push To TalkTM capability on both Mike (DirectConnect®) and PCS (Instant Talk®); **Internet** – TELUS SPARKTM services including TELUS Mobile Music®, TELUS Mobile Radio®,TELUS Mobile TVTM, Web browsing, Windows Live Messenger, text and picturemessaging and downloadable games, videos ringtones and images; and **data** – devices including PC cards and personal digital assistants (PDAs)available for use on wireless high-speed evolution data optimized (EVDO andEVDO Rev A), 1X and Mike packet data networks.

 

Wirelesssegment 2008 targets. See *Caution regardingforward-looking statements* at the beginning of Management’sdiscussion and analysis.

 

 

## **2.**     Core business, vision and strategy

 

The following discussion is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, and *Section 10: Risks and risk management*.

 

11

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### **2.1 Core business**

### ** **

TELUS Corporation is one of Canada’s largesttelecommunications companies, providing a full range of telecommunicationsproducts and services. The Company is the largest incumbent telecommunicationsprovider in Western Canada and also provides data, IP, voice and wirelessservices to Central and Eastern Canada. TELUS earns the majority of its revenuefrom access to, and the use of, the Company’s telecommunicationsinfrastructure, or from providing products and services that facilitate accessto and usage of this infrastructure.

 

At December 31, 2007,the Company’s principal subsidiary is wholly owned TELUS Communications Inc.(TCI).

 

### **2.2 Vision and strategy**

### ** **

TELUS’strategic intent, or vision, is to unleash the power of the Internet to deliverthe best solutions to Canadians at home, in the workplace and on the move.TELUS’ strategy for growth is to focus on its core telecommunications businessin Canada.

 

TELUScontinues to be guided by its six long-standing strategic imperatives thatguide the Company’s actions and contribute to the achievement of its financialgoals. Despite intense competition and a changing industry and regulatoryenvironment, TELUS generated good operational results and continued to advanceits national growth strategy, as highlighted below.

 

**Building national capabilitiesacross data, IP, voice and wireless**

 

In March 2007,as part of a nationwide initiative, the Company successfully implemented wireless telephone number portability (WNP), suchthat local telephone numbers are portable: wireless-to-wireless,wireless-to-wireline and wireline-to-wireless.

 

TELUSsuccessfully implemented a converged order entry and billing system for onemillion Alberta wireline consumer customers. The Company plans to continue thesystem roll-out for more than one million consumers across B.C. in 2008. See*Section 10.5 Process risks*. This new customer careplatform is expected to provide an array of benefits, including costefficiencies, differentiated customer service and improved customer retention.

 

**Focusing relentlessly on thegrowth markets of data, IP and wireless**

 

TELUS experiencedcontinued success in wireless and data growth, with wireless and data revenuesincreasing to 67% of total revenues, up from 63% in 2006.

 

In February 2007,the federal government, after a competitive bid process, awarded approximately60% of its wireless business to TELUS. A significant factor in this enterprisecontract win was the March implementation of WNP in Canada, enablinggovernment employees to retain and port their existing phone numbers.

 

TELUS was selected by the Department of PublicWorks and Government Services Canada through a competitive bid process toprovide and manage the telecommunications services for the Department ofNational Defence (DND), including its international locations. TELUS will provide managed telecommunicationsservices including voice, data, video and IP solutions. The advancedtelecommunications framework supports DND’s goals of accessing a cost-effectiveinfrastructure that supports their current requirements and, at the same time,provides a secure IP backbone for new services and solutions. This contractvalue is estimated at $200 million over five years.

 

In addition, TELUS is providing the Government ofAlberta with the latest multimedia technology for 73 courtrooms in the newCalgary Courts Centre. TELUS is designing, supplying, installing andmaintaining technology to provide digital recording, videoconferencing, remotewitness facilitation, electronic annotation and remote management, which is expectedto improve safety and efficiency in the justice system.

 

The Company was also selected to provide the TELUSCommunity Care Management Solution to Ontario-based Closing the Gap HealthcareGroup.

 

**Building integrated solutionsthat differentiate TELUS from its competitors**

 

TELUS has introduced a number of new services in2007. One is the TELUS Fleet Tracking Bundle for small businesses, which allowscompanies to efficiently track their mobile assets in real time using globalpositioning system (GPS) technology. The bundle includes a TELUS wireless dataplan, Fleet Complete GPS software from Complete Innovations and a GPS modemprofessionally installed by TELUS dealers or retailer Best Buy.

 

Another new wireless tool for Canadian financialinstitutions is TELUS Mobile Customer Self ServiceTM. The new service providestwo-way interaction between financial companies and their customers, enablingsecure banking transactions that include actionable alerts (such asquestionable account activity or transaction approvals), on-demand access toaccount information and no-hold customer service via text messaging.

 

12

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TELUS expanded and upgraded its wireless 1X digital network coverage in 30 additionalcommunities in Quebec, bringing access to the full suite of TELUS Spark mobileservices that includes entertainment, information, messaging and downloadablemusic, ringtones and games. In addition, the Company enhanced digital coveragein the greater Montreal and Quebec City areas, where TELUS’ wireless trafficcontinues to increase. TELUS TV was launched in several Quebec communities in September andthe staged roll-out of TELUS TV service continued in many neighbourhoods inB.C. and Alberta. TELUS TV is a 100% digital service, bringing customersexceptional sound, video quality and choice for hundreds of TV channels,video-on-demand and other services. Further investments in broadbandinfrastructure are expected to bring enhanced capabilities such as the phasedimplementation of high-definition TV in 2008.

 

TELUS’ high-speed wireless data network wasexpanded and upgraded to faster EVDO Rev A technology, helping deliver to 80%ofCanadians typical download speeds of 450 to 800 kilobits per second (with amaximum possible speed of 3.1 megabits per second) and typical upload speeds of300 to 400 kilobits per second (with a maximum possible speed of 1.8 megabitsper second). The speed increase helps improve the experience of video streamingservices and sharing of large data files such as pictures.When travelling in theUnited States, TELUS customers can roam onto EVDO Rev A networks in 242metropolitan areas. TELUS has a variety of EVDO Rev A-capable devicesavailable that operate throughout the full EVDO coverage area and are backwardcompatible with the 1X data network, which offers coverage to 96% of Canadians,when outside the EVDO coverage area.

 

The Company enhanced wireless internationalroaming for its business and consumer customers with the June launch ofthe BlackBerry 8830 World Edition smartphone. TELUS also expanded its globalroaming services so that users of the new BlackBerry can access voice and dataservices internationally using global system for mobile communication (GSM)based networks. In North America, coverage is provided on code divisionmultiple access (CDMA) based 1X and high-speed EVDO networks. In December, theCompany introduced four new handsets for TELUS’ Mike Push To Talk (PTT)service, including two models designed to meet strict military specificationsfor shock, dust and vibration, and for use in harsh outdoor conditions oftenfound in the energy, construction and transportation industries.

 

TELUS launched its first Ethernet to the suite(ETTS) buildings in Vancouver, including a 42-storey multi-dwelling unit tower,the Melville, and four others. ETTS leverages the latest technology to delivergreater bandwidth and higher speeds to customers. Residents will have access tohigh-speed Internet at up to 25 Mbps (five to seven times faster than average)and the opportunity to leverage the full suite of Future Friendly® Homeproducts and services.

 

**Partnering, acquiring anddivesting to accelerate the implementation of TELUS’ strategy and focus TELUS’resources on core business**

 

*EmergisInc.*

 

On November 29,2007, TELUS and Emergis Inc. announced that TELUS had agreed to make an offerto acquire all the outstanding common shares of Emergis for $8.25 cash percommon share by way of a takeover bid (the Offer). The Offer represented a 17%premium to Emergis’ average closing price on the Toronto Stock Exchange overthe previous 30-day period.

 

Emergis is abusiness process outsourcer that specializes in the healthcare and financialservices sectors and is a leader in the automation of electronic healthrecords. TELUS has targeted and invested in serving the healthcare andfinancial business sectors. Emergis’ complementary expertise, applications andcustomer base are expected to strengthen TELUS’ existing industry solutions andallow it to better compete in the growing and transforming healthcare industry.This acquisition is consistent with three of TELUS’ strategic imperatives:building national capabilities; focusing relentlessly on the growth markets ofdata, IP and wireless; and partnering, acquiring and divesting.

 

As at December 31,2007, TELUS had made market purchases of 1,017,000 Emergis Inc. common sharesfor $8.3 million. On January 8, 2008, TELUS announced that theCommissioner of Competition had advised that she did not intend to challengethe transaction under the merger provisions of the *CompetitionAct* (Canada). On January 17, TELUS announced that it wassuccessful in its bid, with approximately 94% of the outstanding common sharesof Emergis, on a fully diluted basis, having been tendered to the Offer. Theremaining shares were obtained through a compulsory acquisition processcompleted the next day.

 

On January 17,TELUS financed and paid $743.4 million for all of the then issued andoutstanding Emergis common shares by drawing down its syndicated creditfacility and utilizing available cash resources, primarily proceeds ofcommercial paper issuance. Emergis was de-listed from the Toronto StockExchange on January 21.

 

With respect toTELUS’ 2008 targets, the Company had assumed 10 months of expected Emergisoperating results, incremental financing costs and an estimated $10 million ofrestructuring costs. With the transaction closing in mid-January, TELUS’ 2008target results may be slightly affected by an additional 1.5 months of Emergis’operations. Withthe acquisition of Emergis, the *pro forma*Netdebt to EBITDA ratio measured for December 31, 2007, is 1.9. See the *Caution regarding forward-looking statements*.

 

13

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*AMP’D MobileCanada*

 

In the second quarter, the U.S.based parent company AMP’D Mobile, Inc. entered bankruptcy proceedings inthe U.S. As a result, AMP’D Mobile sales were discontinued in Canada. TELUSrecorded a pre-tax writeoff of its $11.8 million equity investment in AMP’DMobile, Inc. (in Other expense, net) along with pre-tax adjustments ofapproximately $5 million for accelerated depreciation and amortization andapproximately $5 million in Operations expense for a write-down ofsubscriber equipment and writeoff of prepaid marketing costs.

 

**Going to the market as one teamunder a common brand, executing a single strategy**

 

To drive marketing effectiveness and enhance the Company’sreputation, TELUS sponsored more than 180 events across the country, includingTELUS Worlds Skins Game, TELUS World Ski and Snowboard Festival and TELUS Spincelebrating spring skiing and snowboarding.

 

TELUS is the only telecom company to have won a goldlifetime achievement Cassie award in recognition of its brand. This awardrecognizes the iconic appeal and success of the future friendly message.

 

**Investing in internalcapabilities to build a high-performance culture and efficient operations**

 

A newleadership development program, *Leading at TELUS - SkillsEssentials*, was launched. The program is designed to develop keyleadership capabilities for new supervisory leaders. In addition, more than1,200 new management employees participated in two-day *Welcome toTELUS* sessions, which provide a comprehensive and effectiveintroduction to TELUS.

 

During2007, TELUS team members took 216,000 online courses and 62,000 classroomcourses as the Company continued to teach state-of-the-art skills. TELUS wasacknowledged worldwide for a third time with a BEST award by the AmericanSociety for Training and Development. The award was for implementing programsthat enable staff to develop professionally.

 

## **3.**     Key performance drivers

## ** **

The following discussion isqualified in its entirety by the *Caution regardingforward-looking statements* at the beginning of Management’sdiscussion and analysis. It is also qualified by *Section 10:Risks and risk management*.

 

Management sets new corporatepriorities each year to advance TELUS’ strategy, focus on the near-termopportunities and challenges and create value for shareholders.

 

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### **3.1 Corporate priorities for2007 – reporting back**

 

**2007 corporate priorities**

 

**AdvancingTELUS’ leadership position in the consumer market**

 

·      Combining TELUS’ suite of dataapplications with deregulated heritage services

 

TheCompany expanded and upgraded its high-speed wireless service network to EVDORev A, launched Ethernet to the suite (ETTS) in select Vancouver condominiumdevelopments, and provided bundles of services, such as voice, long distanceand high-speed Internet, through new Home Connection plans.

 

·      Attaining best-in-classcustomer loyalty and growth through unparalleled customer experiences

 

TELUSmaintained a relatively low wireless churn rate in 2007 and expanded TELUS TVin many neighbourhoods in Greater Vancouver, Whistler, Calgary, Edmonton, Rimouskiand several other communities. High-definition TV was introduced on a limitedbasis in Alberta and B.C.TELUS achieved its bestever customer service levels in the consumer market, completing 95.4% of allurban area orders by the installation due date – a 2.7 point year-over-yearincrease.

 

·      Achieving customer additiontargets by expanding distribution channels and addressing key market segmentswith new service offerings

 

TELUS’high-speed Internet subscriber base increased to more than one million withespecially strong subscriber growth in the Eastern Quebec market. Although theCompany came short of its wireless and Internet net addition targets by 6% and23%, respectively, the Company held successful TELUS TV promotional events inmulti-unit dwellings and expanded availability of mobile phones to more than100 Wal-mart stores in Canada. Unique advertising, marketing and sponsorshipinitiatives were targeted to South Asian and Chinese communities.

 

**AdvancingTELUS’ leadership position in the business market**

 

·      Progressing further in keyindustry verticals with specific applications that provide non-price-baseddifferentiation

TELUSadvanced its position in the public sector market with several new contracts,including the Department of National Defence and Western Canada LotteryCorporation.

 

Within theoil and gas sector, TELUS extended its footprint through significantinvestments in the growing northern Alberta communities of Fort McMurray andWood Buffalo, expanding wireline and wireless networks, including TELUS TV, andsecuring several contracts. TELUS International (TI) delivered solid revenuegrowth in contact centre services of large business customers. TI also adoptedTELUS branding to better leverage TELUS marketing, communications and humanresources (HR) programs.

 

·      Leveraging wireless numberportability to expand TELUS’ business market share in Central Canada

 

TELUS wonan intensely competitive bid for the Government of Canada’s wireless business,which will make TELUS the top provider of wireless devices as the Governmenttransitions in the next two years. TELUS launched a large-scale nationalpromotion for the BlackBerry 8830 World Edition handset.TELUS targeted exclusive Mike PTT mobility offerings tospecific industries, such as construction, oil and gas, transportation andmanufacturing, as well as various field service workers. TELUS increased itsintegrated digital enhanced network (iDEN) technology advantage by launchingfour new business data applications (focusing on global positioning fortracking and dispatch) and eight new handsets, resulting in the addition of asignificant number of new Mike service users, largely offsetting competitivelosses and TELUS’ own migration programs to PCS.

 

·      Focusing on small businesscustomer loyalty and growth with innovative solutions

 

TELUSlaunched a new Order Status Tool to provide customer-facing team members asingle view of voice and data order status from order creation to serviceinstallation, eliminating the need to access multiple legacy systems. TELUSachieved positive results with the TELUS Business One® portfolio of solutionstailored to the needs of the small business market.

 

**AdvancingTELUS’ leadership position in the wholesale market**

 

·      Growing in domestic andinternational markets through recognition that TELUS is Canada’s IP leader

 

TELUSsigned a $90 million contract with Yellow Pages Group to provide ITinfrastructure operations, IP applications development and a suite of services.The Company added several new Canadian and U.S. customers to its CompetitiveOperator Services and Call Centre portfolio.

 

·      Achieving excellence incustomer service to support local forbearance in key incumbent markets

 

CRTCcustomer quality-of-service criteria were maintained. As a result, TELUS wasable to apply and be approved for deregulation of local phone services in 63residential and 35 business markets. TELUS also improved on four out of fivecustomer service measures for wholesale and business markets.

 

TELUSbecame the first in Canada to offer Enhanced Directory Assistance, a highlypersonalized directory experience, enabling customers to conveniently searchfor movies, weather and business information on their wireline phones. TELUSwas named Best Directory Assistance Provider in Canada for the fifthconsecutive time and Number One for Customer Care among third-party directoryassistance providers in the U.S. by The Paisley Group Ltd.

 

·      Expanding the Company’smarkets, channels and products by focusing on strategic relationships withTELUS’ partners

 

TELUSopened two points of presence in New York City, enabling a seamless connectionfor Canadian and global customers to and from TELUS’ advanced IP network. TELUSalso introduced the TELUS IP Connect suite of services, a converged voice anddata solution set, to the Canadian and global service provider market, enablingPartner Solutions customers to offer their clients seamless IP access withsuperior levels of security, reliability, accessibility and reach.

 

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**Driving TELUS’technology evolution and improvements in productivity and service excellence**

 

·                  Implementing technologyroadmaps for Future Friendly Home and wireless service offerings that simplifyTELUS’ product portfolio and improve service development and execution

 

TheCompany introduced TELUS Premium Care service, providing 24-hour-a-day remotetechnical support, product and software installations, computer system tune-upsand e-mail account set-up.

 

TELUS isleveraging its CDMA wireless technology to deliver local telephone service inhigh cost rural communities. Using the Company’s patent-pending wirelessservice architecture, this year local service was delivered to customers inremote areas of Alberta, saving TELUS $450,000 in capital expenditures.

 

TELUSestablished a five-year integrated technology roadmap that addresses theconvergence of wireless and wireline. This roadmap is expected to enable theCompany to upgrade its network and systems to support future services anddevices. As part of the plan, development of the platforms to support the nextgeneration IP network and transition to new integrated technology has begun.TELUS seeks to advance its technology evolution through the establishment ofglobal standards for systems and networking technologies, through advisoryroles in organizations such as the TeleManagement Forum.

 

·                  Rolling out consolidatedcustomer care systems to replace multiple legacy systems in Alberta and B.C.

 

TELUSsuccessfully implemented its consolidation of multiple order entry and billingsystems into one unified customer care platform for one million Albertacustomers. While unplanned order entry issues had to be overcome, the criticalbilling function worked well.

 

·                  Accelerating customer service delivery dates

 

TELUS achievedits best ever customer service levels in the consumer market, completing 95.4%of all urban area orders by the installation due date – a 2.7% year-over-yearincrease. TELUS increased eight out of 10 performance indicators for theconsumer market, including consumer installation intervals met. TELUSestablished a cross-enterprise team to improve delivery of data services, inparticular for large customers, incorporating feedback from customers and teammembers.

 

**Strengtheningthe spirit of the TELUS team and brand, and developing the best talent in theglobal communications industry**

 

·                  Growing TELUS’ businessownership culture with a team philosophy of “our business, our customers, ourteam, my responsibility,” thereby attracting, developing and retaining greattalent

 

TELUSpartnered with Hewitt and Associates to better benchmark employee engagementlevels against other top employers in Canada. Participation in the springPulsepoint and fall Pulsecheck surveys was high, however, the results revealed thereis room for improvement in TELUS engagement levels. While TELUS is considered astrong Canadian company, engagement is not at a level that differentiates it.Management has launched various initiatives and is committed to improvingresults in the future.

 

·                  Leading the way incorporate social responsibility as TELUS strives to be Canada’s premiercorporate citizen

 

Among manyinitiatives, TELUS demonstrated to Canadians that Team TELUS Cares, supportingcommunities through financial and volunteer contributions. Through the 2007campaign of the TELUS Dollars for Dollars team member charitable givingprogram, team members and alumni will donate $5.3 million to more than 2,900charities across Canada in 2008. The second annual TELUS Day of Service was a success,as more than 6,000 team members, retirees, family and friends across Canadacontributed their time, expertise and resources to more than 175 groupactivities in 25 communities across the country. The program was expanded toTELUS’ overseas call centre operation in Manila, where 350 team membersvolunteered to build new homes in an impoverished village.

 

The eighthTELUS Community Board was launched in Victoria and annual funding to all theboards was increased. Through the Community Boards and Advisory Teams, TELUScontributed approximately $4.8 million to more than 400 local initiatives. Whencombined with corporate donations, TELUS contributed $15.6 million in 2007.

 

### **3.2 Corporate priorities for2008**

 
| **2008 corporate priorities**                                         |
|-----------------------------------------------------------------------|
| Drive  profit from strategic services with a focus on data            |
| Build  scale in vertical markets and leverage the Emergis acquisition |
| Exact  productivity gains from efficiency improvement initiatives     |
| Elevate  the client experience and build enhanced loyalty             |
| Execute  technology initiatives, including broadband and IT platforms |

 

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## **4.**              Capability to deliver results

## ** **

### **4.1 Principal marketsaddressed and competitors**

 

National wireless services for consumers and businesses

 

TELUS’ CDMA network and roaming/resale agreements provideaccess to more than 96% of the Canadian population, with a state-of-the-arthigh-speed EVDO (evolution data optimized) overlay that reaches 80% of theCanadian population, when roaming/resale agreements are included. TELUS alsooperates an iDEN-based Push To Talk service focused on the commercialmarketplace.

 

Existing competition includes: (i) facilities-basednational competitors such as Rogers Wireless (GSM network) and Bell Mobility(CDMA) as well as wireless offerings by various regional telecommunicationscompanies including SaskTel and MTS Mobility (both CDMA); and(ii) resellers of Bell and Rogers networks, such as the Virgin MobileGroup, 7-Eleven and certain cable-TV companies.

 

Emerging competition is possible with potential newnational and/or regional wireless competitor(s) following the 2008 AWSspectrum auction of 105 MHz, anticipated in May 2008, as the auctionhas 40 MHz set aside for new entrants. Foreign ownership restrictions continueto apply to facilities-based wireless service providers.

 

National wireline business services

 

TELUS has an IP-based national network overlaying anextensive switched network in incumbent territories in B.C., Alberta andEastern Quebec. Access services not forborne from rate regulation and certaincompetitive digital network access services are subject to rate regulation inthese incumbent territories. Operations in non-incumbent areas of Ontario andQuebec are not rate regulated. Managed solutions are offered nationally, suchas the provision of business process outsourcing services to the healthcare,human resources and financial services sectors. Wholesale services are providedto telecommunications carriers, resellers, Internet service providers (ISPs),wireless communications companies, competitive local access providers andcable-TV operators.

 

Competition for voice and data communications servicesincludes Bell Canada, Manitoba Tel (Allstream) and cable-TV companies competingwith their own national infrastructures, and others such as Navigata (owned bySaskTel), as well as substitution to wireless services including those offeredby TELUS. Competitors for managed solutions include system integrators CGI, EDSand IBM.

 

Wireline consumer services in incumbent territories ofBritish Columbia, Alberta and Eastern Quebec

 

TELUS has access to virtually every urban and rural home inits incumbent territories in B.C., Alberta and Eastern Quebec. Through anextensive switched network and significant investment in Internetinfrastructure, the Company provides local, long distance and Internetservices. The Company also has broadcasting distribution licences to offerdigital television services in select communities across its incumbentterritories, and licences to offer commercial video-on-demand services. Astaged neighbourhood-by-neighbourhood roll-out of TELUS TV services isunderway.

 

Competition includes: (i) substitution of wirelessservices, including TELUS’ own wireless offerings, for local and long distanceservices; (ii) cable-TV providers Shaw Communications Inc. in B.C. andAlberta, and Cogeco Cable Inc. in Eastern Quebec, which have access to mosturban and suburban homes, and provide Internet, entertainment and VoIP-basedtelephony services; (iii) Rogers Communications, Navigata, Primus, Vonage,Bell Canada and various others that collectively offer local service, Internetand long distance services; and (iv) satellite-based entertainment andInternet services.

 

### **4.2 Operational capabilities**

### ** **

*Regulation*

 

Lessthan one-quarter of the Company’s revenues are from Wireline segment regulatedservices and subject to CRTC price regulation; none of the Company’s Wirelesssegment revenues are currently subject to CRTC regulation. Wireline regulatedservices are offered in exchanges that have not been forborne within theincumbent local exchange carrier (ILEC) region. Competitor services andpayphone services are also regulated. As a result of regulatory forbearancedecisions in 2007, a significant number of previously regulated services wereforborne within 63 residential and 35 business exchanges in the Company’s ILECterritories. Non-incumbent local exchange carrier (non-ILEC) services, longdistance, Internet, international telecommunications, inter-exchange privateline and certain data services, as well as the sale of customer premisesequipment, continue to be forborne. See Note 4 of the Consolidated financialstatements.

 

Majorareas of regulatory review currently include the regulatory framework forwholesale services (services provided on a mandated basis to competitors) andthe utilization of the funds in the ILECs’ deferral accounts. For a fulldiscussion on regulatory developments, see *Section 10.3 Regulatory*.

 

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*Development of a new billing andclient care system in the wireline segment*

 

In late March 2007, the Company convertedmore than one million wireline customers in Alberta to a new billing and clientcare system. The expected customer service and cost benefits of this projectinclude streamlined and standardized processes and the elimination over time ofmultiple legacy information systems. During the second quarter of 2007, thetransition from pilot to full-scale implementation, while largely successful,resulted in initial system difficulties that reduced order processingcapability, which caused increased installation backlogs and higher thanexpected costs such as extra call centre resources to maintain service levels.However, the critical billing function performed as expected. At this time, thebacklogs and additional call centre resources have been significantly reduced.The transition to the new system in 2007 reduced Wireline EBITDA byapproximately $37 million, including incremental expenses totallingapproximately $24 million in the second and third quarter for additionaltemporary labour to perform system fixes and maintain service levels, as wellas a one-time $13 million reduction in long distance revenue recorded inthe second quarter of 2007. The one-time revenue reduction resulted from system enhancements, whichprovided better data for estimating earned, but unbilled revenue. See*Section 10.5 Process risks*.

 

### **4.3 Liquidity and capitalresources**

### ** **

The following discussion is qualified in its entiretyby the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, as well as *Section 10.6 Financing and debtrequirements*.

 

*Capital structure financialpolicies (Note 3 of the Consolidated financial statements)*

 

The Company’s objectives when managing capital are: (i) to maintain aflexible capital structure which optimizes the cost of capital at acceptablerisk; and (ii) to manage capital in a manner which balances the interestsof equity and debt holders.

 

In themanagement of capital, the Company includes shareholders’ equity (excludingaccumulated other comprehensive income), long-term debt (including anyassociated hedging assets or liabilities, net of amounts recognized inaccumulated other comprehensive income), cash and temporary investments andsecuritized accounts receivable in the definition of capital.

 

TheCompany manages the capital structure and makes adjustments to it in light ofchanges in economic conditions and the risk characteristics of the underlyingassets. In order to maintain or adjust the capital structure, the Company mayadjust the amount of dividends paid to shareholders, purchase shares forcancellation pursuant to normal course issuer bids, issue new shares, issue newdebt, issue new debt to replace existing debt with different characteristicsand/or increase or decrease the amount of sales of trade receivables to an arm’s-lengthsecuritization trust. The results of TELUS’ 2007 financing plan are presentedin the table below, followed by the Company’s 2008 financing plan.

 

The Company monitors capital utilizing a number ofmeasures, including: net debt to EBITDA – excluding restructuring costs;and dividend payout ratio of sustainable net earnings. For further discussionand specific guidelines, see *Section 7.4 Liquidityand capital resource measures*.

 

*Liquidity and financing*

 

At December 31, 2007, TELUS had access to undrawncredit facilities of more than $1.3 billion. The Company believes it hassufficient capability to fund its requirements from these facilities andexpected cash flow from operations. The following describes activitiessupporting the 2007 financing plan.

 

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**TELUS’2007 financing plan and results**

** **

**RepurchaseTELUS Common Shares and TELUS Non-Voting Shares under the normal course issuerbid (NCIB)**

 

During 2007, approximately2.9 million Common Shares and 10.7 million Non-Voting Shares wererepurchased for cancellation for an outlay totalling approximately$750 million.From December 20, 2004to December 31, 2007 under four NCIB programs, approximately19.3 million Common Shares and 33.7 million Non-Voting Shares wererepurchased for cancellation for an outlay totalling $2.52 billion. *See Section 7.3 Cash used by financing activities.*

 

**Paydividends**

 

The dividend declared for thefourth quarter of 2007 increased to 45 cents per share, up from 37.5 cents pershare in the same period in 2006. For the full year of 2007, dividends declaredtotalled $1.575 per share as compared to $1.20 per share in 2006.

 

**Useproceeds from securitized receivables and bank facilities, as needed, tosupplement free cash flow and meet other cash requirements**

 

The balance of proceeds fromsecuritized accounts receivable was $500 million at December 31,2007, unchanged from December 31, 2006. During the second quarter,proceeds increased from $150 million to $550 million at May 31and were used for general corporate purposes, including repayment of maturingdebt.

 

**Maintaina minimum $1 billion in unutilized liquidity**

 

TELUS had more than$1 billion of available liquidity from unutilized credit facilities ateach quarter end, including $1.3 billion at December 31, 2007. See *Section 7.5 Credit facilities*.

 

**Maintainposition of fully hedging foreign exchange exposure for indebtedness**

 

Maintained for the 8.00% U.S. dollar Notes due 2011, the oneremaining foreign currency-denominated debt issue.

 

**Giveconsideration to refinancing all or a portion of U.S. dollar Notes in advanceof their June 1, 2007 scheduled maturity**

 

In March 2007, theCompany publicly issued $300 million 4.50%, Series CC, 2012 Canadiandollar Notes and $700 million, 4.95%, Series CD, 2017 Canadian dollarNotes.Proceeds from these debt issues, combined with asecond quarter commercial paper issue of $663.5 million and the secondquarter increase in proceeds from securitized accounts receivable, were usedfor general corporate purposes and repayment of $1,483.3 million for theJune 1 maturity of US$1,166.5 million, 7.50% Notes.

 

**Preserveaccess to the capital markets at a reasonable cost by maintaining investmentgrade credit ratings and targeting improved credit ratings in the range of BBB+to A**–**, or the equivalent, in the future**

 

Three of four rating agenciesput their outlooks to under review in the second quarter due to TELUS being innon-exclusive discussions to acquire BCE. With TELUS’ announcement inAugust that it did not intend to submit a competing offer to acquire BCE,the rating agencies in the third quarter reinstated their stable trendoutlooks. On November 29, Dominion Bond Rating Service (DBRS) confirmedits ratings for TELUS and TCI, with a stable trend, after TELUS announced theacquisition of Emergis Inc. At February 13, 2008, investment grade creditratings from the four rating agencies that cover TELUS were in the desiredrange. See *Section 7.7 Credit ratings*.

 

**Financingplan for 2008**

 

TELUSexpects to generate free cash flow in 2008, which would be available to, amongother things, repurchase shares and pay dividends to shareholders. Whileanticipated cash flow is expected to be more than sufficient to meet currentoperating requirements, TELUS may seek additional financing for the Emergisacquisition and potential spectrum purchases. TELUS has accepted a committedterm sheet from a small group of Canadian banks to provide a new$700 million 364-day revolving credit facility. The provision of this newfacility provides incremental liquidity to TELUS and allows TELUS to continuemeeting one of its financial objectives, which is to maintain $1 billionin liquidity. TELUS may access the public debt markets in 2008 to refinanceshort-term financing sources with long-term financing.

 

In2008, TELUS plans to remain in compliance with its financial policies, andthese intentions could constrain TELUS’ ability to invest in its operations forfuture growth or to complete share repurchases. TELUS has set its financialpolicies with the expectation that taxable income will be generated in 2008 andthat substantial cash tax payments will commence in 2009 both in respect of2008 and on an instalment basis in respect of 2009. Payment of cash incometaxes in the future will reduce the after-tax cash flow otherwise available toreturn capital to shareholders. If actual results are different from TELUS’expectations, there can be no assurance that TELUS will not need to change itsfinancing plans, including its intention to repurchase a significant amount ofshares, or pay dividends according to the target payout guideline.

 

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**Debt maturities as atDecember 31, 2007**

 
| ** **            | ** ** | **Long-term debt maturities (1)** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| **($ millions)** | ** ** | **All except  capital leases**    | ** ** | **Capital leases** | ** ** |
| 2008                  |       | 2.0                               |       | 3.4 |   |
| 2009                  |       | 0.7                               |       | 0.8 |   |
| 2010                  |       | 80.0                              |       | 0.8 |   |
| 2011                  |       | 2,950.5                           |       | 0.9 |   |
| 2012                  |       | 887.2                             |       | 0.2 |   |
| Thereafter            |       | 1,749.1                           |       | — |   |
| Total                 |       | 5,669.5                           |       | 6.1 |   |

 

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(1) Where applicable, the long-term debt maturitiesreflect hedged foreign currency exchange rates.

 

TELUS expects to maintain its current position of fullyhedging its 

 

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foreignexchange exposure for indebtedness. At the end of 2007, 82% of TELUS’ totaldebt was on a fixed-rate basis, and the weighted average term to maturity wasapproximately 5.3 years.

 

TELUSalso has access to a shelf prospectus pursuant to which it can issue a further$3.0 billion of debt and equity. TELUS believes that its investment gradecredit ratings provide reasonable access to capital markets to facilitatefuture debt issuance. For the related risk discussion, see *Section 10.6Financing and debt requirements.*

 

### **4.4 Disclosure controls andprocedures and internal control over financial reporting**

### ** **

*Disclosure controls and procedures*

 

Disclosure controls and procedures are designed to providereasonable assurance that all relevant information is gathered and reported tosenior management, including the President and Chief Executive Officer (CEO)and the Executive Vice-President and Chief Financial Officer (CFO), on a timelybasis so that appropriate decisions can be made regarding public disclosure.

 

The CEO and the CFO have evaluated the effectiveness of theCompany’s disclosure controls and procedures related to the preparation of theManagement’s discussion and analysis and the Consolidated financial statements.They have concluded that the Company’s disclosure controls and procedures wereeffective, at a reasonable assurance level, to ensure that material informationrelating to the Company and its consolidated subsidiaries would be made knownto them by others within those entities, particularly during the period inwhich the Management’s discussion and analysis and the Consolidated financialstatements contained in this report were being prepared.

 

*Internal control over financialreporting*

 

Internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements in accordance with Canadian GAAPand the requirements of the Securities and Exchange Commission in the UnitedStates, as applicable. TELUS’ CEO and CFO have assessed the effectiveness ofthe Company’s internal control over financial reporting as at December 31,2007 in accordance with Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Basedon this assessment, TELUS’ CEO and CFO have determined that the Company’sinternal control over financial reporting is effective as at December 31,2007 and expect to certify TELUS’ annual filings with the U.S. Securities andExchange Commission on Form 40-F, as required by the United States *Sarbanes-Oxley Act*, and with Canadian securities regulatoryauthorities.

 

Deloitte & Touche LLP, the Company’s auditors,have audited internal controls over financial reporting of TELUS Corporation asat December 31, 2007.

 

*Changes in internal control overfinancial reporting*

 

There were no changes in internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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## **5.**              Results from operations

## ** **

### **5.1 Selected annualinformation**

### ** **

The following selected three-year consolidated financialinformation has been derived from and should be read in conjunction with theConsolidated financial statements of TELUS for the year ended December 31,2007, and its annual Consolidated financial statements for previous years.Certain comparative information has been restated. See Notes 2(b) and 2(e) ofthe Consolidated financial statements.

 
| **Years ended December 31****($ in  millions, except per share amounts)** | ** ** | **2007**     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Operating revenues                                                                  | ** ** | **9,074.4**  |       | 8,681.0  |       | 8,142.7  |       |
| Operations expense                                                                  | ** ** | **5,464.7**  |       | 4,998.2  |       | 4,768.7  |       |
| Restructuring and workforce  reduction costs                                        | ** ** | **20.4**     |       | 67.8     |       | 53.9     |       |
| Financing costs and  other expense                                                  | ** ** | **476.2**    |       | 532.7    |       | 641.5    |       |
| Income before income  taxes and non-controlling interest                            | ** ** | **1,498.1**  |       | 1,506.7  |       | 1,054.9  |       |
| Income taxes                                                                        | ** ** | **233.6**    |       | 353.2    |       | 330.2    |       |
| Net income and Common  Share and Non-Voting Share income                            | ** ** | **1,257.9**  |       | 1,145.0  |       | 716.9    |       |
| Earnings per  share(1) – basic                                            | ** ** | **3.79**     |       | 3.33     |       | 2.01     |       |
| Earnings per share(1) – diluted                                           | ** ** | **3.76**     |       | 3.30     |       | 1.99     |       |
| Cash dividends declared  per share(1)                                               | ** ** | **1.575**    |       | 1.20     |       | 0.875    |       |
| Total assets                                                                        | ** ** | **16,987.6** |       | 16,661.4 |       | 16,347.2 |       |
| Current maturities of  long-term debt                                               | ** ** | **5.4**      |       | 1,433.5  |       | 5.0      |       |
| Long-term debt                                                                      | ** ** | **4,583.5**  |       | 3,474.7  |       | 4,616.4  |       |
| Derivative and  other long-term financial liabilities                               | ** ** | **1,507.3**  |       | 1,037.2  |       | 1,420.9  |       |
| Total long-term  financial liabilities                                              | ** ** | **6,090.8**  |       | 4,511.9  |       | 6,037.3  |       |
| Future income taxes                                                                 | ** ** | **1,048.1**  |       | 1,076.5  |       | 1,074.9  |       |
| Non-controlling  interest                                                           | ** ** | **25.9**     |       | 23.6     |       | 25.6     |       |
| Common equity                                                                       | ** ** | **6,926.2**  |       | 7,048.0  |       | 6,967.4  |       |

 

----

(1)          Includes Common Shares and Non-Voting Shares.

 

Changes over the three years include:

 

·                  Wireless revenues and wireline data revenues represent about two-thirds ofthe consolidated total in 2007 (approximately 63% in 2006 and 59% in 2005);

 

·                  Operations expense in 2007 includes a charge of $168.7 millionrelating to the introduction of a net-cash settlement feature for share optionawards granted prior to 2005. Operations expense in 2005 included the effectsof a four-month labour disruption including incremental expenses ofapproximately $133 million net of cost savings. These incremental costsprimarily affected the wireline segment;

 

·                  Financing costs in 2005 included a $33.5 million loss on early redemptionof $1.578 billion of Canadian dollar Notes on December 1, 2005; and

 

·                  Net income included significantfavourable tax-related adjustments, including effects of reassessments of prioryears, interest and tax rate changes on future income tax liabilities andassets. The amounts were approximately $250 million (75 cents per share)in 2007, approximately $171 million (50 cents per share) in 2006 andapproximately $70 million (20 cents per share) in 2005.

 

 

22

----

 

### **5.2 Quarterly results summaryand fourth quarter recap**

### ** **

Certaincomparative information for 2006 was restated, as described in *Section 1.3*.

 
| **($ in millions, except per  share  amounts)**      | ** ** | **2007 Q4** | ** ** | **2007 Q3** | ** ** | **2007 Q2** | ** ** | **2007 Q1** | ** ** | **2006 Q4** | ** ** | **2006 Q3** | ** ** | **2006 Q2** | ** ** | **2006 Q1** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Segmented revenue  (external)                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Wireline segment                                          | ** ** | **1,220.3** |       | 1,204.6     |       | 1,180.1     |       | 1,205.6     |       | 1,234.3     |       | 1,200.3     |       | 1,189.9     |       | 1,198.6     |       |
| Wireless segment                                          | ** ** | **1,110.5** |       | 1,105.3     |       | 1,048.0     |       | 1,000.0     |       | 1,020.3     |       | 1,010.4     |       | 945.3       |       | 881.9       |       |
| Operating revenues  (consolidated)                        | ** ** | **2,330.8** |       | 2,309.9     |       | 2,228.1     |       | 2,205.6     |       | 2,254.6     |       | 2,210.7     |       | 2,135.2     |       | 2,080.5     |       |
| Operations  expense                                       | ** ** | **1,371.3** |       | 1,316.5     |       | 1,340.3     |       | 1,436.6     |       | 1,362.4     |       | 1,239.7     |       | 1,201.2     |       | 1,194.9     |       |
| Restructuring  and workforce reduction costs              | ** ** | **6.1**     |       | 6.4         |       | 3.2         |       | 4.7         |       | 7.9         |       | 12.5        |       | 30.7        |       | 16.7        |       |
| EBITDA (1)                                                | ** ** | **953.4**   |       | 987.0       |       | 884.6       |       | 764.3       |       | 884.3       |       | 958.5       |       | 903.3       |       | 868.9       |       |
| Depreciation                                              | ** ** | **386.2**   |       | 332.5       |       | 318.3       |       | 317.7       |       | 353.2       |       | 325.8       |       | 335.2       |       | 339.2       |       |
| Amortization of  intangible assets                        | ** ** | **68.1**    |       | 70.1        |       | 72.5        |       | 49.6        |       | 53.9        |       | 57.5        |       | 46.9        |       | 63.9        |       |
| Operating income                                          | ** ** | **499.1**   |       | 584.4       |       | 493.8       |       | 397.0       |       | 477.2       |       | 575.2       |       | 521.2       |       | 465.8       |       |
| Other expense  (income)                                   | ** ** | **5.8**     |       | 8.0         |       | 18.5        |       | 3.8         |       | 10.1        |       | 4.0         |       | 9.6         |       | 4.3         |       |
| Financing costs                                           | ** ** | **109.1**   |       | 86.2        |       | 127.2       |       | 117.6       |       | 133.6       |       | 116.6       |       | 127.5       |       | 127.0       |       |
| Income before  income taxes and non-controlling interest  | ** ** | **384.2**   |       | 490.2       |       | 348.1       |       | 275.6       |       | 333.5       |       | 454.6       |       | 384.1       |       | 334.5       |       |
| Income taxes                                              | ** ** | **(18.0**   | **)**      | 78.6        |       | 93.7        |       | 79.3        |       | 91.6        |       | 128.3       |       | 15.1        |       | 118.2       |       |
| Non-controlling  interests                                | ** ** | **2.1**     |       | 1.7         |       | 1.3         |       | 1.5         |       | 1.4         |       | 2.4         |       | 2.6         |       | 2.1         |       |
| Net income                                                | ** ** | **400.1**   |       | 409.9       |       | 253.1       |       | 194.8       |       | 240.5       |       | 323.9       |       | 366.4       |       | 214.2       |       |
| Income per  Common Share and Non-                         | ** ** | ** **  |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Voting Share                                              | - basic    | ** **  | **1.23**   |        | 1.24       |        | 0.76       |        | 0.58       |        | 0.71       |        | 0.95       |        | 1.06       |        | 0.61       |   |
|                                                      | - diluted  | ** **  | **1.22**   |        | 1.23       |        | 0.75       |        | 0.57       |        | 0.70       |        | 0.94       |        | 1.05       |        | 0.61       |   |
| Dividends  declared per Common Share and Non-Voting Share | ** ** | **0.45**    |       | 0.375       |       | 0.375       |       | 0.375       |       | 0.375       |       | 0.275       |       | 0.275       |       | 0.275       |       |

 

----

(1)          EBITDA is a non-GAAP measure. See *Section 11.1Earnings before interest, taxes, depreciation and amortization (EBITDA).*

 

**Trends**

 

The consolidated revenue trend continues toreflect strong growth in wireless network revenues generated from an increasingsubscriber base. Wireless ARPU (average revenue per subscriber unit per month)declined by $0.87 and $0.80, respectively, in the third and fourth quarters of2007 when compared to the same periods in 2006. Thisdecline in ARPU in thesecond half of the year followed 18 successive quarters of year-over-yearincreases, however, ARPU for the full year of 2007 increased by $0.10. Therecent quarterly year-over-year ARPU decreases result from strong data growthbeing offset by declining voice ARPU, due to a shifting product mix, pricingcompetition, and declining per-minute prices and roaming revenues.

 

The consolidated revenue trend also reflected goodgrowth in wireline segment data revenue. However, this is fully offset bydeclining wireline voice local and long distance revenues due to substitutionfor wireless and Internet services, as well as competition from VoIP serviceproviders, resellers and facilities-based competitors.

 

Historically, there is significant fourth quarterseasonality with higher wireless subscriber additions and related acquisitioncosts and equipment sales, resulting in lower wireless EBITDA. The seasonalityaffects, to a lesser extent, the wireline high-speed Internet subscriberadditions and related costs.

 

As described in *Section 1.3*,quarterly Operations expenses in 2007 include an expense for introducing a net-cash settlement feature for share optionawards. The net-cash settlement feature expense (recovery) for the first,second, third and fourth quarters of 2007 was $173.5 million,$1.8 million, $(7.2) million and $0.6 million, respectively. Thethird quarter credit was an adjustment to the initial estimate recorded. Restructuringcosts varied by quarter, depending on the progress of ongoing initiativesunderway.

 

The downward trend in depreciation expense endedin the second half of 2007 with areduction in estimated useful service lives for certain circuit switching and networkmanagement assets, resulting in write-downs of approximately $20 million and $47 million,respectively, in the third and fourth quarters of 2007. The previous downwardtrend was interrupted by a provision of approximately $17 millionin the fourth quarter of 2006 to align estimated useful lives for TELUS Québecassets, resulting from integration of financial systems. Depreciation isexpected to increase slightly for the full year of 2008 due to a plannedincrease in capital assets. See *Caution regardingforward-looking statements*.

 

23

----

 

With a major new wireline billing and client caresystem put into service in March 2007, $18 million of additionalamortization was recorded in each of the second, third and fourth quarters of2007, reversing the downward trend in Amortization of intangible assets. Inaddition, amortization expenses in the second and fourth quarters of 2006 andthe first quarter of 2007 were reduced by approximately $12 million, $5 millionand $5 million, respectively, for investment tax credits relating toassets capitalized in prior years that are now fully amortized, following adetermination of eligibility by a government tax authority.

 

Within Financing costs shown in the table above, interestexpenses trended lower except for interest expense in respect of a courtdecision in a lawsuit related to a 1997 BC TEL bond redemption matter(including $7.8 million in the fourth quarter of 2006). The sequential decline in financing costs in the third quarter of 2007was due to lower effective interest rates and debt balances plus increasedinterest income from tax refunds. Financing costs in the eight periods shown are netof varying amounts of interest income.

 

The generally upward trends in Net income andearnings per share reflect the items noted above, as well as adjustmentsarising from legislated income tax changes, settlements and tax reassessmentsfor prior years, including any related interest on reassessments.

 
| **Tax-related  adjustments********($ in millions, except  EPS amounts)** | ** ** | ******2007 Q4** | ** ** | ******2007 Q3** | ** ** | ******2007 Q2** | ** ** | ******2007 Q1** | ** ** | ******2006 Q4** | ** ** | ******2006 Q3** | ** ** | ******2006 Q2** | ** ** | ******2006 Q1** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| Approximate Net income impact                                                 |       | 143             |       | 93              |       | 10              |       | 4               |       | 20              |       | 30              |       | 124             |       | (3              | )          |
| Approximate EPS impact                                                        |       | 0.44            |       | 0.28            |       | 0.03            |       | 0.01            |       | 0.06            |       | 0.09            |       | 0.36            |       | (0.01           | )          |
| Approximate basic EPS excluding tax-related impacts                           |       | 0.79            |       | 0.96            |       | 0.73            |       | 0.57            |       | 0.65            |       | 0.86            |       | 0.70            |       | 0.62            |       |

 

**Fourth quarter**

 

Management’s review of operations contained in TELUS’ fourth quarternews release on February 15, 2008, discussed fourth quarter results inmore detail. The following summarizes changes in the fourth quarter operatingresults in 2007, as compared to 2006. 

 
| **Net income continuity  ($ millions)**    | ** ** | **Three-month  periods ended  December 31** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| 2006 (restated)                                 |       | 240.5                                            |       |
| Deduct  favourable 2006 tax-related adjustments |       | (20)                                   |       |
| Add favourable  2007 tax-related adjustments    |       | 143                               |       |
| Changes in:                                     |       |                                             |       |
| EBITDA (as adjusted)                            |       | 46                                |       |
| Interest expenses                               |       | 15                                |       |
| Depreciation and  other                         |       | (23.5                                            | )          |
| 2007 (as adjusted)                              |       | 401.0                                            |       |
| Net-cash  settlement feature in 2007            |       | (0.9                                             | )          |
| 2007 (reported)                                 |       | 400.1                                            |       |

 

24

----

 

### **5.3 Consolidated results fromoperations**

 
| **($ in millions except EBITDA margin in % and** | ** ** | **Years ended  December 31** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| **employees)**                                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Operating revenues                                    | ** ** | **9,074.4**                       |       | 8,681.0 |   | 4.5 | % |
| Operations expense                                    | ** ** | **5,464.7**                       |       | 4,998.2 |   | 9.3 | % |
| Restructuring costs                                   | ** ** | **20.4**                          |       | 67.8 |   | (69.9 | )% |
| EBITDA (1)                                            | ** ** | **3,589.3**                       |       | 3,615.0 |   | (0.7 | )% |
| Depreciation                                          | ** ** | **1,354.7**                       |       | 1,353.4 |   | 0.1 | % |
| Amortization of intangible  assets                    | ** ** | **260.3**                         |       | 222.2 |   | 17.1 | % |
| Operating income                                      | ** ** | **1,974.3**                       |       | 2,039.4 |   | (3.2 | )% |
| Operations expense (as adjusted) (2)                  | ** ** | **5,296.0**                       |       | 4,998.2 |   | 6.0 | % |
| EBITDA (as adjusted) (2)                              | ** ** | **3,758.0**                       |       | 3,615.0 |   | 4.0 | % |
| Operating income (as  adjusted) (2)                   | ** ** | **2,143.0**                       |       | 2,039.4 |   | 5.1 | % |
| EBITDA margin (3)                                     | ** ** | **39.6**                          |       | 41.6 |   | (2.0 | )pts |
| EBITDA margin (as adjusted)  (3)                      | ** ** | **41.4**                          |       | 41.6 |   | (0.2 | )pts |
|                                                  |       |                              |       |   |   |   |   |
| Full-time equivalent  employees at end of period      | ** ** | **33,374**                        |       | 31,094 |   | 7.3 | % |

 

----

(1)          EBITDAis a non-GAAP measure. See *Section 11.1 Earnings before interest, taxes,depreciation and amortization (EBITDA).*

(2)          Excludesan incremental charge of $168.7 million in 2007 for introducing a net-cashsettlement feature for share option awards granted prior to 2005. Operationsexpense (as adjusted) and EBITDA (as adjusted) are regularly reported to thechief operating decision maker. EBITDA (as adjusted) corresponds to thedefinition used in setting TELUS’ 2007 EBITDA target and revised guidance.

(3)          EBITDAor EBITDA (as adjusted) divided by Operating revenues.

 

The following discussion is for the consolidated results ofTELUS. Segmented discussion is provided in *Section 5.4Wireline segment results,**Section 5.5Wireless segment results*and*Section 7.2 Cash used by investingactivities – capital expenditures**.*

 

**Operating revenues**

 

Consolidated Operatingrevenues increased by $393.4 million in 2007 when compared to 2006.Growth in wireless network revenue andwireline data revenue continue to exceed erosion in wireline voice local andlong distance revenues. Consolidated operating revenues in 2007 includea one-time reduction of about$13 million in long distance revenues, recorded in the second quarter.This adjustment resulted from billing system enhancements, which providedbetter data for estimating earned, but unbilled revenue.

 

**Operations expense**

 

Consolidated Operationsexpense increased by $466.5 million in 2007 when compared to 2006. The increase includes an incremental chargefor introducing a net-cash settlement feature for share option awards grantedbefore 2005, as described in *Section 1.3*.Operations expense adjusted to exclude the incremental change increased by $297.8 million,primarily to support the 10% year-over-year growth in the wireless subscriberbase and growth in wireless network revenue. In addition, expenses in thewireline segment increased due to billing system conversion costs and externallabour costs to improve service levels, as well as increased staffing. TELUS’ net defined benefit pension planexpense decreased by approximately $63 million, due primarily tofavourable returns on plan assets in 2006.

 

The number of employeesincreased to support the wireline segment’s provision of outsourcing servicesto TELUS’ customers, including human resources outsourcing services andinternational call centre services, and to support the growing wireless customerbase. The number of full-time equivalent employees providing outsourcingservices to the Company’s customers increased by about 1,080 at December 31,2007 when compared to one year earlier, while elsewhere in the wireline segmentthe increase was 767 or 4%. In the wireless segment, the number of full-timeequivalent employees increased by 433 or 6% to support double-digit growth insubscriber base, revenue and EBITDA.

 

**Restructuring costs**

 

Restructuring costs decreased by$47.4 million in 2007 when compared to 2006. Restructuring expenses in 2007 were in respect of several smallerefficiency initiatives. An expense of approximately $50 million isexpected for efficiency initiatives in 2008.

 

**EBITDA**

 

Consolidated EBITDA decreased by$25.7 million in 2007 when compared to 2006, while EBITDA adjusted toexclude the net-cash settlement feature increasedby $143.0 million in 2007 when compared to 2006. Wireline EBITDA(as adjusted) decreased mainly due to implementation impacts of a new wirelinebilling and client care system (described in *Section 4.2)*.

 

25

----

 

Wireless segment EBITDA (as adjusted) increased asgrowth in the subscriber base increased network revenues, partially offset byhigher operations costs to support subscriber growth and higher retentionspending.

 

**Depreciation**

 

Depreciationincreased by $1.3 million in 2007 when compared to 2006. The increaseresulted from a reduction in estimated useful service lives for certain classesof circuit switching and network management assets, partly offset by a 2006 provision to align TELUS Québec assets uponintegration of financial systems and 2006 writeoffs of certain networkassets.

 

**Amortization****of intangible assets**

 

Amortization increased by $38.1 million in2007 when compared to 2006. A new wireline billing and client care system wasput into service in March 2007, increasing amortization by$54.0 million. Acceleratedamortization of $5 million was recorded in the second quarter of 2007 forassets related to the discontinuation of AMP’D Mobile Canada services. These increases were partly offset bylower amortization for other fully amortized software assets. In addition,amortization expenses were reduced by approximately $5 million in 2007 andreduced by approximately $17 million in 2006 to recognize investment taxcredits, now determined eligible by the tax authority, relating to assetscapitalized in prior years that are now fully amortized.

 

**Operating income**

 

Operating income decreased by $65.1 millionin 2007 when compared to 2006, due primarily to the charge in 2007 forintroducing the net-cash settlement feature. Operating income adjusted toexclude the charge for the net-cash settlement feature increased by$103.6 million in 2007 due to growth in EBITDA (as adjusted), partlyoffset by increased depreciation and amortization expenses.

 

**Other income statement items**

 
| **Other  expense, net** | ** ** | **Years ended  December 31** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| **($ millions)**   | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
|                    | ** ** | **36.1**                          |       | 28.0 |   | 28.9 | % |

 

Otherexpense includes accounts receivable securitization expense, charitabledonations, gains and losses on disposal of real estate, and income (loss) orimpairments in equity or portfolio investments. Accounts receivablesecuritization expenses were $20.7 million in 2007, which increased by$2.7 million from 2006 mainly due to higher average proceeds fromsecuritized receivables *(*see *Section 7.6Accounts receivable sale)*.Increased expenses in 2007 included an$11.8 million writeoff of the Company’s equity investment in AMP’D MobileInc. and approximately $4 million for various costs of assessing whetherto acquire BCE, which ultimately led to the decision in August to not bidfor BCE. The net gains on the sale of real estate and other investments,including valuation adjustments on investments held for trading, exceeded netgains recorded in 2006.

 
| **Financing  costs**                                              | ** ** | **Years ended  December 31** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                             | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Interest on long-term debt,  short-term obligations and other (1) | ** ** | **464.5**                         |       | 510.6 |   | (9.0 | )% |
| Foreign exchange losses  (gains)                                  | ** ** | **13.0**                          |       | 6.4 |   | 103.1 | % |
| Interest income                                                   | ** ** | **(37.4**                         | **)**      | (12.3 | ) | n.m. |   |
|                                                              | ** ** | **440.1**                         |       | 504.7 |   | (12.8 | )% |

 

----

n.m. – notmeaningful

(1)Includedan estimate in 2006 for settlement of a lawsuit.

 

Interest expenses decreased by $46.1 millionin 2007 when compared to 2006. The decrease was primarily due to financingactivities in the first half of 2007 (see *Section 7.3 Cash usedby financing activities*), which resulted in a lower effectiveinterest rate for the full year of 2007 as well as a lower average debt balancein the second half of 2007, when compared to the same periods in 2006. Partlyoffsetting the lower effective interest rate was a higher average debt balancein 2007, as debt issues were completed in March 2007 and commercial paperwas issued in May ahead of the June 1 maturity of $1,483.3 million(US$1,166.5 million) Notes. The Company’s closing net debt (calculated in *Section 11.4*), was $6,142 million at December 31,2007, down 2% from $6,278 million one year earlier.

 

The decrease in interest expenses in 2007 alsoincluded an adjustment for application of the effective rate method for issuecosts as required under Canadian Institute of Chartered Accountants (CICA)Handbook Section 3855 (recognition and measurement of financialinstruments). In March 2007, forward starting interest rate swaps wereterminated, resulting in prepaid interest of approximately $10 millionbeing deferred and amortized over 10 years, which is the term of the new debt.

 

26

----

 

Interest income increased by $25.1 million in2007 when compared to 2006, due primarily to recognition of increased intereston tax refunds and increased interest from investments.

 

 
| **Income  taxes**                                                                            | ** ** | **Years ended  December 31** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                                                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Blended federal and provincial statutory income tax based on net  income before tax          | ** ** | **503.0**                         |       | 505.6 |   | (0.5 | )% |
| Revaluation of future income  tax liability                                                  | ** ** | **(177.3**                        | **)**      | (113.1 | ) | — |   |
| Tax rate differential on, and consequential  adjustments from, reassessments for prior years | ** ** | **(79.2**                         | **)**      | (40.3 | ) | — |   |
| Share option award  compensation                                                             | ** ** | **(3.6**                          | **)**      | 6.4 |   | — |   |
| Other                                                                                        | ** ** | **(9.3**                          | **)**      | (5.4 | ) | — |   |
|                                                                                         | ** ** | **233.6**                         |       | 353.2 |   | (33.9 | )% |
| Blended federal and  provincial statutory tax rates (%)                                 | ** ** | **33.6**                          |       | 33.6 |   | — | pts |
| Effective tax rates (%)                                                                      | ** ** | **15.6**                          |       | 23.4 |   | (7.8) | pts |

 

The blended federal and provincial statutoryincome tax expense decreased in 2007 when compared to 2006, due primarily tothe comparable (0.6)% change in income before taxes. The effective tax rateswere lower than the statutory tax rates due to favourable reassessments andsettlements of prior years’ tax matters as well as revaluation of future incometax liabilities. Revaluations of future tax liabilities resulted from enactedreductions to future federal income tax rates as well as future tax rates beingapplied to temporary differences. Changes to future federal income tax rateswere enacted in December 2007, and previously during the second quartersof 2007 and 2006.

 

Based on the assumption of the continuation of the rate ofTELUS earnings, the existing legal entity structure, and no substantive changesto tax regulations, the Company currently expects cash income tax payments tobe relatively low in 2008 with expected cash collections exceeding expectedpayments. In 2009, income tax payments are expected to increase substantially.The blended statutory income tax rate is expected to be 31 to 32% in2008. See*Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis.

 
| **Non-controlling  interests** | ** ** | **Years ended  December 31** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| **($ millions)**          | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
|                           | ** ** | **6.6**                           |       | 8.5 |   | (22.4 | )% |

 

Non-controlling interests represents minority shareholders’interests in several small subsidiaries.

 

27

----

 

 

**Comprehensive income**

 

As discussed in *Section 8.2Accounting policy developments,*commencing with the 2007 fiscalyear, the Company adopted the recommendations of the CICA for accounting forcomprehensive income (CICA Handbook Section 1530). Currently, the conceptof comprehensive income for purposes of Canadian GAAP, in the Company’sspecific instance, is primarily to include changes in shareholders’ equityarising from unrealized changes in the fair values of financial instruments**(see *Section 7.8).*The calculation of earnings per share is based on Net income and Common Shareand Non-Voting Share income, as required by GAAP.

 

### **5.4 Wireline segment results**

 
| **Operating  revenues – wireline segment** | ** ** | **Years ended  December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Voice local (1)                                 | ** ** | **2,064.4**                       |       | 2,119.8 |   | (2.6 | )% |
| Voice long distance (2)                         | ** ** | **715.3**                         |       | 810.3 |   | (11.7 | )% |
| Data (3)                                        | ** ** | **1,771.9**                       |       | 1,642.5 |   | 7.9 | % |
| Other                                           | ** ** | **259.0**                         |       | 250.5 |   | 3.4 | % |
| External operating revenue                      | ** ** | **4,810.6**                       |       | 4,823.1 |   | (0.3 | )% |
| Intersegment revenue                            | ** ** | **114.2**                         |       | 98.3 |   | 16.2 | % |
| Total operating revenues                        | ** ** | **4,924.8**                       |       | 4,921.4 |   | 0.1 | % |

 

----

(1)         Voicelocal revenue decreased by approximately $70 million or 3.3% in 2007,excluding the impact of regulatory adjustments in the first quarter of 2007.

(2)         Voicelong distance revenue decreased by approximately $82 million or 10.1% in2007, excluding the impact from billing system conversion in the second quarterof 2007.

(3)         Datarevenue grew by approximately $140 million or 8.5% in 2007, excluding theimpact of two mandated retroactive competitor price reductions in the firstquarter of 2007.

 

Wireline segment revenues in 2007 were essentiallyunchanged from 2006, increasing by $3.4 million or 0.1%.

 

·                  Voice localrevenue decreased by $55.4 million in 2007 when compared with 2006. Thedecrease was due primarily to lower revenues from basic access and optionalenhanced service revenues arising from increased competition for residentialsubscribers, offset in part by growth in business local services and certainprice increases. Declining local revenues in 2007 were partly offset by firstquarter recoveries of approximately $14.5 million from the price capdeferral account. The recovery from the deferral account offset unfavourable mandated retroactive rateadjustments for basic data revenue pursuant to two recent CRTC (CanadianRadio-television and Telecommunications Commission) decisions and includedrecovery of previously incurred amounts associated with mandated local numberportability and start-up costs.

 

28

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| **Network  access lines**         | ** ** | **As at December 31** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **(000s)**                        | ** ** | **2007**                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Residential network access  lines | ** ** | **2,596**                  |       | 2,775 |   | (6.5 | )% |
| Business network access  lines    | ** ** | **1,808**                  |       | 1,773 |   | 2.0 | % |
| Total network access lines        | ** ** | **4,404**                  |       | 4,548 |   | (3.2 | )% |

 
| ** **                                  | ** ** | **Years ended  December 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| **(000s)**                                  | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Change in residential  network access lines | ** ** | **(179**                          | **)**      | (153 | ) | (17.0 | )% |
| Change in business network  access lines    | ** ** | **35**                            |       | 10 |   | n.m. |   |
| Change in total network  access lines       | ** ** | **(144**                          | **)**      | (143 | ) | (0.7 | )% |

 

Residential line losses include the effect ofincreased competition from resellers and VoIP competitors (including cable-TVcompanies, which have expanded their geographic coverage and introducedlower-priced telephony services), as well as technological substitution ascustomers utilize wireless services. To a lesser degree, residential secondlines decreased from migration of dial-up Internet subscribers to high-speedInternet service. The number of residential lines lost in each quarter of 2007exceeded the comparable losses in the same quarters of 2006. In contrast, thenumber of business lines gained each quarter in 2007 equalled or exceeded thecomparable net business line gains in 2006. The increase in business lines wasexperienced in Ontario and Quebec urban non-incumbent areas.

 

·                  Voice longdistance revenues decreased by $95.0 million in 2007 when compared with2006, due primarily to lower average per-minute rates, from industry-wide pricecompetition, and lower business minute volumes, partly offset by increasedconsumer minute volumes. In addition, a one-time reduction of about$13 million was recorded in the second quarter of 2007 as a result ofbilling systemenhancements, which provided better data for estimating earned, but unbilledrevenue.

 

·                  Wireline segmentdata revenues increased by $129.4 million in 2007 when compared with 2006.This growth was primarily due to increased Internet, enhanced data and hostingservice revenues from growth in business services and high-speed Internetsubscribers. Managed data revenues increased from the provision of businessprocess outsourcing services to customers as well as digital entertainmentservices to consumers in larger urban incumbent markets.

 

Pursuant to CRTC Decision 2007-6 (relating todigital network access link charges) and CRTC Decision 2007-10 (relating tobasic service extension feature charges), retroactive rate reductions totallingapproximately $11 million in basic data services revenues were recorded inthe first quarter of 2007.

 
| **Internet  subscribers**        | ** ** | **As at December 31** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| **(000s)**                       | ** ** | **2007**                   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                             |       |                       |       |   |   |   |   |
| High-speed Internet  subscribers | ** ** | **1,020.2**                |       | 916.7 |   | 11.3 | % |
| Dial-up Internet subscribers     | ** ** | **155.3**                  |       | 194.1 |   | (20.0 | )% |
| Total Internet subscribers       | ** ** | **1,175.5**                |       | 1,110.8 |   | 5.8 | % |

 
| ** **                               | ** ** | **Years ended  December 31** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| **(000s)**                               | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                     |       |                              |       |   |   |   |   |
| High-speed Internet net  additions       | ** ** | **103.5**                         |       | 153.7 |   | (32.7 | )% |
| Dial-up Internet net  reductions         | ** ** | **(38.8**                         | **)**      | (42.1 | ) | 7.8 | % |
| Total Internet subscriber  net additions | ** ** | **64.7**                          |       | 111.6 |   | (42.0 | )% |

 

High-speed Internet subscriber netadditions were lower than one year earlier, reflecting competitive markets andthe impact of the new billing and client care system, which temporarily reducedthe Company’s order processing capability in the second quarter and, to alesser degree, in the third quarter. Monthly rates for high-speed Internetservices were raised by $1 per month in the second quarter of 2006 for thosecustomers not on rate protection plans, which contributed to an overallincrease in average revenue per subscriber in 2007.

 

·                  Other revenueincreased by $8.5 million in 2007 when compared with 2006, due mainly to areduction in the provision for quality-of-service rate rebates, which resultedfrom improved service delivery, as measured by CRTC-defined quality-of-serviceindicators, and favourable decisions by the CRTC on exclusion applications forsevere weather and other extraordinary events*.*Voiceequipment sales decreased.

 

·                  Intersegment revenue represents services provided bythe wireline segment to the wireless segment. These revenues are eliminatedupon consolidation together with the associated expense in the wirelesssegment.

 

29

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| **Operating  expenses – wireline segment (1)**                                      | ** ** | **Years ended  December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions, except employees)**                                                  | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Salaries, benefits and other employee-related costs,  before net-cash settlement feature | ** ** | **1,729.1**                       |       | 1,665.9 |   | 3.8 | % |
| Net-cash settlement feature expense                                                      | ** ** | **145.1**                         |       | — |   | — |   |
| Other operations expenses                                                                | ** ** | **1,347.6**                       |       | 1,331.8 |   | 1.2 | % |
| Operations expense                                                                       | ** ** | **3,221.8**                       |       | 2,997.7 |   | 7.5 | % |
| Restructuring costs                                                                      | ** ** | **19.5**                          |       | 61.6 |   | (68.3 | )% |
| Total operating expenses                                                                 | ** ** | **3,241.3**                       |       | 3,059.3 |   | 5.9 | % |
| Operations expense (as adjusted) (2)                                                     | ** ** | **3,076.7**                       |       | 2,997.7 |   | 2.6 | % |
| Total operating expenses (as adjusted) (2)                                               | ** ** | **3,096.2**                       |       | 3,059.3 |   | 1.2 | % |
| Full-time equivalent employees at end of period (3)                                      | ** ** | **25,731**                        |       | 23,884 |   | 7.7 | % |

 

----

(1)          Salariesand benefits, Operations expense and total operating expenses for 2006 werereduced by $22.8 million from previously reported amounts, as a result ofthe correction described in*Section 1.3*.

(2)          Excludesan incremental charge for introducing a net-cash settlement feature for shareoption awards granted prior to 2005. Operations expense (as adjusted) and totaloperating expenses (as adjusted) are regularly reported to the chief operatingdecision maker.

(3)          The number of full-time equivalent employees providing outsourcingservices to the Company’s customers was approximately 5,747 onDecember 31, 2007 and approximately 4,667 on December 31, 2006.Full-time equivalent staff elsewhere increased by 767 or 4%.

 

Total Wireline operating expenses increased by$182.0 million in 2007 when compared with 2006, primarily due to the$145.1 million charge for introducing a net-cash settlement feature forshare option awards granted prior to 2005. Total operating expenses adjusted toexclude this charge increased by $36.9 million and included 2007 expensesof approximately $24 million related to the Alberta consumer billing andclient care system conversion (approximately $8 million in salaries andbenefits for customer contact centres and approximately $16 million inother operations expenses primarily for external labour costs). External labourin 2007 also included about $4 million to deal with backlogs caused bysevere weather events in late 2006 and early 2007, as well as preparation costsfor expected flooding in British Columbia in the second quarter of 2007.

 

·                  Salaries, benefitsand employee-related costs increased by $63.2 million in 2007 whencompared with 2006. The increase was mainly due to increased staffing,scheduled compensation increases and customer contact centre costs for thebilling conversion, partly offset by a lower defined benefit pension planexpense.

 

·                  Other operationsexpenses increased by $15.8 million in 2007 when compared with 2006. Theincrease included higher external labour costs for billing/client care systemsupport and installation/repair activity to improve and maintain service levelsand higher external labour costs for weather-related events, partly offset by: (i) lowercosts of sales associated with voice and data equipment sales, including lowerloadings of high-speed Internet subscribers; (ii) lower transit andtermination charges due to lower per-minute rates partly offset by higheroutbound minute volumes; (iii) lower expenses arising from CRTC decisionson basic service extension features and network access link charges; and (iv) increasedcapitalization of labour related to the higher capital expenditure activity in2007.

 

·                  Restructuring costs in 2007, whichwere for several small efficiency initiatives, decreased by $42.1 million in2007 when compared with 2006.

 
| **EBITDA  ($ millions) and EBITDA margin (%)** | ** ** | **Years ended  December 31** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| **wireline  segment**                               | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| EBITDA                                              | ** ** | **1,683.5**                       |       | 1,862.1 |   | (9.6 | )% |
| EBITDA (as adjusted) (1)                            | ** ** | **1,828.6**                       |       | 1,862.1 |   | (1.8 | )% |
| EBITDA margin                                       | ** ** | **34.2**                          |       | 37.8 |   | (3.6 | ) pts |
| EBITDA margin (as adjusted)                         | ** ** | **37.1**                          |       | 37.8 |   | (0.7 | ) pts |

 

----

(1)          Excludesan incremental charge of $145.1 million in 2007 for introducing a net-cashsettlement feature for share option awards granted prior to 2005. EBITDA (asadjusted) is regularly reported to the chief operating decision maker andcorresponds to the definition used in setting TELUS’ 2007 EBITDA targets andrevised guidance.

 

Wireline EBITDA decreased by $178.6 millionin 2007 when compared with 2006. Wireline EBITDA (as adjusted) decreased by$33.5 million in 2007 when compared with 2006, mainly due to billingsystem conversion impacts of approximately $37 million (including aone-time long distance revenue adjustment of $13 million) and increasedexternal labour costs of about $4 million to deal with weather-relatedbacklogs and emergency preparations.

 

30

----

 

### **5.5 Wireless segment results**

 
| **Operating  revenues — wireless segment** | ** ** | **Years ended  December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| Network revenue                                 | ** ** | **4,008.5**                       |       | 3,605.5 |   | 11.2 | % |
| Equipment revenue                               | ** ** | **255.3**                         |       | 252.4 |   | 1.1 | % |
| External operating revenue                      | ** ** | **4,263.8**                       |       | 3,857.9 |   | 10.5 | % |
| Intersegment revenue                            | ** ** | **26.9**                          |       | 23.4 |   | 15.0 | % |
| Total operating revenues                        | ** ** | **4,290.7**                       |       | 3,881.3 |   | 10.5 | % |

 
| **Key operating indicators  — wireless segment**               | ** ** | **As at December 31** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|
| **(000s)**                                                          | ** ** | **2007**                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Subscribers – postpaid (1)                                     |       | 4,440.5                    |       | 4,078.6 |   | 8.9 | % |
| Subscribers – prepaid                                          |       | 1,127.4                    |       | 977.3 |   | 15.4 | % |
| Subscribers – total                                            |       | 5,567.9                    |       | 5,055.9 |   | 10.1 | % |
| Digital POPs(2) covered including roaming/resale (millions)(3) |       | 31.6                       |       | 31.0 |   | 1.9 | % |

 
| ** **                                                     | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** | **Change** | ** ** |
| Subscriber gross additions – postpaid                     | ** ** | **850.0**                        |       | 837.5 |   | 1.5 | % |
| Subscriber gross additions –  prepaid                     | ** ** | **584.0**                        |       | 455.5 |   | 28.2 | % |
| Subscriber gross additions –  total                       | ** ** | **1,434.0**                      |       | 1,293.0 |   | 10.9 | % |
| Subscriber net additions – postpaid                       | ** ** | **364.6**                        |       | 411.8 |   | (11.5 | )% |
| Subscriber net additions –  prepaid (4)                   | ** ** | **150.0**                        |       | 123.4 |   | 21.6 | % |
| Subscriber net additions –  total                         | ** ** | **514.6**                        |       | 535.2 |   | (3.8 | )% |
| ARPU ($) (5)                                                   | ** ** | **63.56**                        |       | 63.46 |   | 0.2 | % |
| Churn, per month (%)(5)                                        | ** ** | **1.45**                         |       | 1.33 |   | 0.12 | pts |
| Lifetime revenue per  subscriber ($) (5)                       | ** ** | **4,373**                        |       | 4,771 |   | (8.3 | )% |
| COA (6) per gross subscriber addition ($) (5)             | ** ** | **395**                          |       | 412 |   | (4.1 | )% |
| COA per gross subscriber  addition to lifetime revenue (%) (5) | ** ** | **9.0**                          |       | 8.6 |   | 0.4 |  pts |
| Average minutes of use per  subscriber per month (MOU)         | ** ** | **404**                          |       | 403 |   | 0.2 | % |
| EBITDA ($ millions)                                       | ** ** | **1,905.8**                      |       | 1,752.9 |   | 8.7 | % |
| EBITDA (as adjusted)  (7) ($ millions)               | ** ** | **1,929.4**                      |       | 1,752.9 |   | 10.1 | % |
| EBITDA (as adjusted) to  network revenue (%)                   | ** ** | **48.1**                         |       | 48.6 |   | (0.5 | ) pts |
| Retention spend to network  revenue (5) (%)               | ** ** | **7.6**                          |       | 6.7 |   | 0.9 |  pts |
| EBITDA (as adjusted)  excluding COA (5) ($ millions) | ** ** | **2,495.1**                      |       | 2,285.5 |   | 9.2 | % |

 

----

pts - percentage points

(1)          A one-timeadjustment was made to the postpaid subscriber base. Cumulative subscriberswere reduced by approximately 2,600 to reflect the discontinuation of networkservice to cellular digital packet data (CDPD) subscribers effectiveJanuary 31, 2007.

(2)          POPs is anabbreviation for population. A POP refers to one person living in a populationarea, which in whole or substantial part is included in the coverage areas.

(3)          At December 31,2007, TELUS’ wireless PCS digital population coverage included expandedcoverage of approximately 7.5 million PCS POPs due to roaming/resaleagreements principally with Bell Mobility (Bell Canada).

(4)          Prepaid netsubscriber additions in 2007 include a one-time reduction in the subscriberbase of 5,124. The adjustment was for a clean-up of deactivation records.

(5)          See *Section 11.3 Definition of key operatingindicators.*These are industrymeasures useful in assessing operating performance of a wireless company, butare not defined under accounting principles generally accepted in Canada andthe U.S.

(6)          Cost ofacquisition.

(7)          Excludes an incremental charge of $23.6 million in 2007 forintroducing a net-cash settlement feature for share option awards granted priorto 2005. EBITDA (as adjusted) is regularly reported to the chief operatingdecision maker and corresponds to the definition used in setting TELUS’ 2007EBITDA targets and revised guidance.

 

Wireless segment revenues increased by$409.4 million in 2007 when compared with 2006, due to the following:

 

·                  Network revenueincreased by $403.0 million in 2007 when compared with 2006. The increasewas the result of a 10% expansion in the subscriber base during 2007. Datarevenues in 2007 increased to 11.1% of Network revenue, or $446.1 million,as compared with 7.7% of Network revenue, or $279.9 million, in 2006 —reflecting a growth rate of 59.4%. This growth, driven by continued migrationof existing subscribers to full function smartphones and EVDO-capable handsetsas well as increased EVDO coverage, was principally related to text messaging,mobile computing activities and RIM/BlackBerry service revenues.

 

Data ARPU increased by 44% to $7.02 in 2007 ascompared to 2006. Overall, ARPU increased by $0.10 to $63.56 in 2007 when comparedto 2006, as the $2.13 increase in data ARPU exceeded the $2.03 voice ARPUdecline. The change in total ARPU reflects the shifting product mix driven byhigher net prepaid loading and a slight impact from Mike service, combined withdeclining voice ARPU. The decline in voice ARPU wascaused mainly by lower per-

 

31

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minute rates, increased price competition in thebusiness and discount segments of the market, and a decrease in roaming.

 

At December 31, 2007, the mix of postpaidsubscribers declined slightly to 79.8% of the total cumulative subscriber base,as compared to 80.7% one year earlier. The 364,600 postpaid subscriber netadditions in 2007 represented 70.9% of all net additions as compared with411,800 of all net additions, or 76.9%, in 2006. Total net subscriber additionswere down slightly in 2007 as compared with 2006, mostly attributable toincreased churn rates, partly offset by higher prepaid loading.

 

The blended churn rate increased in 2007 whencompared with 2006 and total deactivations were 919,400 in 2007 as comparedwith 757,800 in 2006. Deactivations in 2007 included 5,124 for a clean-up ofprepaid subscriber deactivation records. The monthly blended churn rate of1.45% in 2007 increased from 2006 due to the product mix shifting towardsprepaid, combined with increased deactivations.WNP porting was a minor source of net positive subscriber loading forTELUS, but contributed to the higher churn level.

 

·                 Equipmentsales, rental and service revenue increased by $2.9 million in 2007 whencompared with 2006, due largely to the 10.9% increase in gross subscriberadditions.

 

·                 Intersegment revenues representservices provided by the wireless segment to the wireline segment and areeliminated upon consolidation along with the associated expense in the wirelinesegment.

 
| **Operating expenses – wireless segment (1)** | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions, except employees)**                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Equipment sales expenses                                                    | ** ** | **655.5**                                  |       | 574.9 |   | 14.0 | % |
| Network operating expenses                                                  | ** ** | **513.7**                                  |       | 451.2 |   | 13.9 | % |
| Marketing expenses                                                          | ** ** | **439.5**                                  |       | 422.5 |   | 4.0 | % |
| General and administration  expenses                                        | ** ** | **775.3**                                  |       | 673.6 |   | 15.1 | % |
| Operations expense                                                          | ** ** | **2,384.0**                                |       | 2,122.2 |   | 12.3 | % |
| Restructuring costs                                                         | ** ** | **0.9**                                    |       | 6.2 |   | (85.5 | )% |
| Total operating expenses                                                    | ** ** | **2,384.9**                                |       | 2,128.4 |   | 12.1 | % |
| Operations expense (as adjusted)  (2)                                       | ** ** | **2,360.4**                                |       | 2,122.2 |   | 11.2 | % |
| Total operating expenses (as  adjusted) (2)                                 | ** ** | **2,361.3**                                |       | 2,128.4 |   | 10.9 | % |
| Full-time equivalent employees at  end of period                            | ** ** | **7,643**                                  |       | 7,210 |   | 6.0 | % |

 

----

| (1) | General and administration expenses, Operations  expense and total operating expenses for 2006 were reduced by $1.9 million  from previously reported amounts, as a result of the correction described in *Section 1.3.*                                                                      |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes an incremental charge of  $23.6 million in 2007 for introducing a net-cash settlement feature for  share option awards granted prior to 2005. Operations expense (as adjusted)  and total operating expenses (as adjusted) are regularly reported to the  chief operating decision maker. |

 

Wireless segment total operating expensesincreased by $256.5 million in 2007 when compared with 2006. Totaloperating expenses as adjusted to exclude the 2007 net-cash settlement featureincreased by $232.9 million to promote, acquire, retain and support the10.1% annual growth in the subscriber base and the 11.2% growth in Networkrevenue during 2007.

 

·                 Equipmentsales expenses increased by $80.6 million in 2007 when compared with 2006,due primarily to an increase in the costs to support current and future datarevenue growth in upgrading subscribers to full function smartphones combinedwith an increase in gross subscriber additions.

 

·                 Networkoperating expenses increased by $62.5 million in 2007 when compared with2006. The increase was principally due to higher revenue share with third-partydata content providers, licensing costs on data services, higher Canadian andU.S. roaming costs due to in-bucket usage plans and site-related expenses tosupport cell sites. Expenses in 2007 were net of a reduction arising from CRTCDecision 2007-6 related to retail network access link charges.

 

·                 Marketingexpenses increased by $17.0 million or 4% when compared to 2006, dueprimarily to higher advertising and promotions costs, increased dealercompensation costs related to the 10.9% increase in gross subscriber additionsand increased retention activity. COA per gross subscriber addition decreasedby $17 or 4% in 2007, when compared to 2006, due primarily to a greaterweighting of prepaid gross subscriber additions. COA was $565.7 million in2007 as compared to $532.6 million in 2006.

 

Retention costs as a percentage of network revenueincreased to 7.6% in 2007, up from 6.7% in 2006, to support current and futureperiod data revenue growth, including the migration of voice-centric Mikesubscribers to PCS, and to a lesser extent, retain customers with the advent of wirelessnumber portability. Upgrades to full function 

 

31

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smartphones increased by 210% in the fourthquarter and more than doubled for the full year, as compared to the sameperiods in 2006, providing enhanced functionality for potential future revenuegrowth.

 

·                 Generaland administration expenses increased by $101.7 million in 2007 whencompared with 2006. Excluding non-cash charges for share option awards grantedbefore 2005, general and administration expenses grew by $78.1 million in2007. The increase was primarily due to a 6% increase in full-time equivalentemployees to support the growth in Network revenue, subscribers, and expansionof the client care and Company-owned retail stores teams to manage customerservice levels.

 

·                 Restructuring costs were related to staff reductionsassociated with the integration of the wireline and wireless operations.

 
| **Wireless segment**                                                   | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **EBITDA ($ millions) and EBITDA margin (%)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| EBITDA                                                                      | ** ** | **1,905.8**                                |       | 1,752.9 |   | 8.7 | % |
| EBITDA (as adjusted) (1)                                                    | ** ** | **1,929.4**                                |       | 1,752.9 |   | 10.1 | % |
| EBITDA margin                                                               | ** ** | **44.4**                                   |       | 45.2 |   | (0.8 | ) pts |
| EBITDA margin (as adjusted)                                                 | ** ** | **45.0**                                   |       | 45.2 |   | (0.2 | ) pts |

 

----

| (1) | Excludes  an incremental charge of $23.6 million in 2007 for introducing a  net-cash settlement feature for share option awards granted prior to 2005.  EBITDA (as adjusted) is regularly reported to the chief operating decision  maker and corresponds to the definition used in setting TELUS’ 2007 EBITDA  targets and revised guidance. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Wireless segment EBITDA increased by$152.9 million in 2007 when compared with 2006. EBITDA (as adjusted)increased by $176.5 million due to Network revenue growth, partiallyoffset by higher retention spend due to increased voice to data migrations, increasednetwork costs related to revenue share with third-party data content providers,and higher general and administration costs to support growth in the subscriberbase.

 

32

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## **6.**              Financialcondition

## ** **

Thefollowing are the significant changes in the Consolidated balance sheets duringthe year ended December 31, 2007.

 
| ** **                                              | ** ** | **At December 31,** | ** ** | ** **     | ** ** | ** **  | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|----------------|------------|-------------|------------|
| **($ millions)**                                   | ** ** | **2007**                      | ** ** | **2006**       | ** ** | **Changes** | ** ** | **Explanation of the change in balance** | ** ** |
|                                                    |       |                          |       | **(restated)** |       |        |       |   |   |   |   |
| **Current Assets**                                      |       |                          |       |           |       |        |       |   |   |   |   |
| Cash and temporary investments,  net                    | ** ** | **19.9**                      |       | (11.5          | )          | 31.4        |       | n.m. | * * | See*Section 7:  Liquidity and capital resources* | * * |
| Short-term investments                                  | ** ** | **42.4**                      |       | 110.2          |       | (67.8       | )          | (61.5 | )% | Liquidation of some investments of surplus cash |   |
| Accounts receivable                                     | ** ** | **710.9**                     |       | 707.2          |       | 3.7         |       | 0.5 | % | Primarily increased wireless receivables related  to growth in network revenue, net of the receipt of lease inducements for  renegotiated leases |   |
| Income and other taxes receivable                       | ** ** | **120.9**                     |       | 95.4           |       | 25.5        |       | 26.7 | % | Increased recovery and interest receivable for  favourable tax reassessments of prior years, net of refunds and interest  received |   |
| Inventories                                             | ** ** | **243.3**                     |       | 196.4          |       | 46.9        |       | 23.9 | % | Includes inventories for customer services  expected to be implemented in 2008 |   |
| Prepaid expenses and other                              | ** ** | **199.5**                     |       | 195.3          |       | 4.2         |       | 2.2 | % | — |   |
| Current portion of derivative  assets                   | ** ** | **3.8**                       |       | 40.4           |       | (36.6       | )          | (90.6 | )% | Primarily new net-cash settled equity swaps,  offset by the maturity of cross currency swaps related to the Notes that  matured June 1, 2007 |   |
| **Current Liabilities**                                 |       |                          |       |           |       |        |       |   |   |   |   |
| Accounts payable and accrued  liabilities               | ** ** | **1,476.6**                   |       | 1,363.6        |       | 113.0       |       | 8.3 | % | Primarily an increase in the liability for  net-cash settled share options net of payments, and an increased payroll  liability accrual for one additional day, net of reductions in  quality-of-service rate rebate accruals |   |
| Income and other taxes payable                          | ** ** | **7.3**                       |       | 10.3           |       | (3.0        | )          | (29.1 | )% | Periodic instalment payments made |   |
| Restructuring accounts payable  and accrued liabilities | ** ** | **34.9**                      |       | 53.1           |       | (18.2       | )          | (34.3 | )% | Payments under previous programs exceeded new  obligations |   |
| Advance billings and customer  deposits                 | ** ** | **631.6**                     |       | 606.3          |       | 25.3        |       | 4.2 | % | Primarily increased customer deposits and  wireless billings, net of draw-downs from price cap deferred revenue |   |
| Current maturities of long-term  debt                   | ** ** | **5.4**                       |       | 1,433.5        |       | (1,428.1    | )          | (99.6 | )% | Repayment of U.S. dollar Notes that matured  June 1 and TCI medium-term Notes that matured in February |   |
| Current portion of derivative  liabilities              | ** ** | **26.6**                      |       | 165.8          |       | (139.2      | )          | (84.0 | )% | Maturity of cross currency swaps related to the  Note maturing June 1, partly offset by fair value adjustments for share  option hedges |   |
| Current portion of future income  taxes                 | ** ** | **503.6**                     |       | 137.2          |       | 366.4       |       | n.m. |   | An increase in temporary differences for current  assets and liabilities as well as partnership taxable income that will be  allocated in the next 12 months |   |
| **Working capital (1)**                                 | ** ** | **(1,345.3**                  | **)**      | (2,436.4       | )          | 1,091.1     |       | 44.8 | *%* | Mainly the repayment of long-term debt that  matured June 1 with proceeds from new long-term debt. See *Section 7.3 Cash used by financing activities* | * * |

 

----

| (1) | Current  assets subtracting Current liabilities – an indicator of the ability to  finance current operations and meet obligations as they fall due. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

 

33

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**Financial Condition Table** continued from the previous page.

 
| ** **                      | ** ** | **As  at December 31,** | ** ** | ** **     | ** ** | ** **  | ** ** |
|---------------------------------|------------|-----------------------------------|------------|----------------|------------|-------------|------------|
| **($ millions)**           | ** ** | **2007**                          | ** ** | **2006**       | ** ** | **Changes** | ** ** | **Explanation of the change in balance** | ** ** |
|                            |       |                              |       | **(restated)** |       |        |       |   |   |   |   |
| **Capital Assets, Net**         | ** ** | **11,122.0**                      |       | 10,982.1       |       | 139.9       |       | 1.3 | *%* | See *Section 5.3  Consolidated results from operations – Depreciation, Amortization as well as  Section 7.2 Cash used by investing activities* |   |
| **Other Assets**                |       |                              |       |           |       |        |       |   |   |   | * * |
| Deferred charges                | ** ** | **1,318.0**                       |       | 1,129.7        |       | 188.3       |       | 16.7 | % | Primarily pension plan contributions and pension  recoveries resulting from favourable returns on plan assets |   |
| Investments                     | ** ** | **38.9**                          |       | 35.2           |       | 3.7         |       | 10.5 | % | Includes new investments and fair value  adjustments, net of an $11.8 million writeoff of an equity investment in  AMP’D Mobile, Inc. |   |
| Goodwill                        | ** ** | **3,168.0**                       |       | 3,169.5        |       | (1.5        | )          | 0.0 | % | — |   |
| **Long-Term Debt**              | ** ** | **4,583.5**                       |       | 3,474.7        |       | 1,108.8     |       | 31.9 | % | Includes $1 billion of Notes issued in  March and commercial paper issued under a program established in May,  partly offset by a decrease in utilized bank facilities and reduction in the  Canadian dollar value of 2011 U.S. dollar Notes |   |
| **Other Long-Term Liabilities** | ** ** | **1,717.9**                       |       | 1,257.3        |       | 460.6       |       | 36.6 | % | Primarily changes in U.S. dollar exchange rates  and a fair value adjustment of the derivative liabilities associated with  2011 U.S. dollar Notes |   |
| **Future Income Taxes**         | ** ** | **1,048.1**                       |       | 1,076.5        |       | (28.4       | )          | (2.6 | )% | Revaluation resulting from enacted reductions in  future federal income tax rates, partly offset by an increase in temporary  differences for long-term assets and liabilities |   |
| **Non-Controlling Interests**   | ** ** | **25.9**                          |       | 23.6           |       | 2.3         |       | 9.7 | % | — |   |
| **Shareholders’ Equity**   |       |                              |       |           |       |        |       |   |   |   |   |
| Common equity                   | ** ** | **6,926.2**                       |       | 7,048.0        |       | (121.8      | )          | (1.7 | )% | Decreased primarily due to NCIB expenditures of  $749.9 million, dividends of $520.8 million and transitional  amounts for accumulated other comprehensive income of $176.2 million;  partly offset by Net income of $1,257.9 million and Other comprehensive  income of $74.2 million |   |

 

## **7.**              Liquidityand capital resources

## ** **

### **7.1 Cash provided by operating activities**

 
| ** **            | ** ** | **Years ended December 31** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| **($ millions)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **            |       | **3,171.7**                                |       | 2,803.7 |   | 13.1 | % |

 

Cash provided by operating activities increased by$368.0 million in 2007 when compared with the same periods in 2006.Changes in cash provided by operating activities included:

 

·                 EBITDA decreased by $25.7 million in 2007 when compared to 2006 (asdescribed in *Section 5: Results from operations*);

 

·                 Share-based compensation expense in excess of payments in 2007 increasedby $70.7 million when compared with 2006, for a comparative increase incash flow;

 

·                 Employer contributions to employee defined benefit plans decreased by$30.5 million in 2007 when compared to 2006, mainly due to updatedactuarial valuations;

 

·                 Payments under restructuring plansdecreased by $33.2 million in 2007 when compared to 2006;

 

·                 Interest paid decreased by $61.7 million in 2007 when compared to2006. The decrease was due to lower effective interest rates in 2007, whileamounts paid in 2006 included $31.2 million for terminating cross currencyinterest rate swaps and partial payment of interest in respect of a courtdecision in a lawsuit regarding a 1997 BC TEL bond redemption matter, partlyoffset by repayment of forward starting interest rate swaps in the firstquarter of 2007;

 

34

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·                 Interestreceived increased by $17.4 million in 2007 when compared to 2006 duemainly to the receipt of interest on tax refunds in the fourth quarter of 2007;

 

·                 Incometaxes received net of instalment payments increased by $24.4 million in2007 when compared to 2006, due mainly to higher collections of income taxesreceivable in 2007 as compared to 2006;

 

·                 Cashprovided by a decrease in Short-term investments was $67.8 million in 2007as compared to an increase of $110.2 million in 2006, for a comparativeincrease in cash flow of $178.0 million; and

 

·                 Otherchanges in non-cash working capital for the respective periods.

 
|  |  |
|--|--|

 

### **7.2Cash used by investing activities**

 
| ** **            | ** ** | **Years ended December 31** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| **($ millions)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **            |       | **1,771.6**                                |       | 1,675.2 |   | 5.8 | % |

 

Cash used by investing activities increased by$96.4 million in 2007 when compared with 2006, due to increased capitalexpenditures and lower proceeds from the sale of property and other assets,partly offset by acquisitions in 2006 and changes in other investingactivities.

 

Assets under construction were $559.0 millionat December 31, 2007, a decrease of $166.4 million from one yearearlier. The decrease primarily reflects a transfer of $342.1 million tointangible assets subject to amortization in the first quarter of 2007 foractivation of certain phases of the new consolidated wireline billing andclient care system, net of increases in other assets under construction during2007, including new phases of the consolidated wireline billing and client caresystem.

 
| **Capital expenditures**                             | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions, ratios in %)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Wireline segment                                          | ** ** | **1,219.0**                                |       | 1,191.0 |   | 2.4 | % |
| Wireless segment                                          | ** ** | **551.3**                                  |       | 427.4 |   | 29.0 | % |
| TELUS consolidated                                        | ** ** | **1,770.3**                                |       | 1,618.4 |   | 9.4 | % |
| Capital expenditure intensity  ratio (1)                  | ** ** | **19.5**                                   |       | 18.6 |   | 0.9 | pts |
| EBITDA less capital expenditures  (2)                     | ** ** | **1,819.0**                                |       | 1,996.6 |   | (8.9 | )% |
| EBITDA (as adjusted) less capital  expenditures(2)        | ** ** | **1,987.7**                                |       | 1,996.6 |   | (0.4 | )% |

 

----

| (1) | Capital  expenditure intensity is measured by dividing capital expenditures by  operating revenues. This measure provides a method of comparing the level of  capital expenditures to other companies of varying size within the same  industry. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | See *Section 11.1 EBITDA*  for the calculation and description.                                                                                                                                                                             |

 

Capital expenditures in 2007 were in line withTELUS target expenditures of approximately $1.75 billion, reflecting anincrease of $151.9 million when compared to 2006. Capital intensity in2007 increased from 2006 due to the planned increase in capital spending. In2007, TELUS’ EBITDA (as adjusted) less capital expenditures decreased by$8.9 million as a lower wireline EBITDA (as adjusted) and increased totalcapital expenditures more than offset growth in wireless EBITDA (as adjusted).

 

35

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·                 Wirelinesegment capital expenditures increased by $28.0 million in 2007 whencompared to the same periods in 2006, due primarily to upfront capitalinvestment to support new enterprise customers, partly offset by lowerexpenditures for billing and client care system development. Wireline capitalexpenditure intensity was 24.8% in 2007 as compared to 24.2% in 2006. Wirelinecash flow (EBITDA less capital expenditures) was $464.5 million in 2007, adecrease of 30.8% when compared to 2006. Wireline cash flow based on EBITDA (asadjusted) was $609.6 million in 2007, a decrease of 9.2% from 2006.

 

·                 Wirelesssegment capital expenditures increased by $123.9 million in 2007 whencompared to 2006. The increase was principally related to continued enhancementof digital wireless capacity and coverage. Wireless capital expenditureintensity was 12.8% in 2007 as compared to 11.0% in 2006. Wireless cash flow(EBITDA less capital expenditures) was $1,354.5 million in 2007,representing an increase of 2.2% when compared to 2006. Wireless cash flowbased on EBITDA (as adjusted) was $1,378.1 million in 2007, an increase of4.0% from 2006.

 

### **7.3Cash used by financing activities**

 
| ** **            | ** ** | **Years ended December 31** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| **($ millions)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **            |       | **1,368.7**                                |       | 1,148.6 |   | 19.2 | % |

 

Cash used by financing activities increased by$220.1 million in 2007 when compared with 2006.

 

·                 Proceeds from Common Shares and Non-Voting Shares issued were$0.9 million in 2007 as compared to $104.5 million in 2006. Thedecrease was due to implementation of the net-cash settlement feature for shareoption awards granted prior to 2005 and the introduction of the net equitysettlement feature in May 2006.

 

·                 Cash dividends paid to shareholders in 2007 were $520.8 million ascompared to $411.7 million in the same period of 2006 due to the increaseddividend rate in 2007, partly offset by lower shares outstanding.

 

·                 The Company repurchased57% of the maximum 24 million shares allowed under its third NCIB programin effect from December 20, 2006 to December 19, 2007. Consistentwith its intent to return surplus cash to shareholders, the Company renewed itsNCIB program, which has been in place since December 2004. The renewedprogram (Program 4) came into effect on December 20, 2007 and is setto expire on December 19, 2008. The maximum number of shares that may bepurchased under Program 4 is eight million Common Shares and12 million Non-Voting Shares. The shares are to be purchased on theToronto Stock Exchange (TSX) and all repurchased shares will be cancelled.Investors may obtain a copy of the notice filed with the TSX without charge bycontacting TELUS Investor Relations.

 

**Normal course issuer bid programs**

 
| ** **                                         | ** ** | **Shares repurchased** | ** ** | **Purchase cost ($ millions)** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|
| **By fiscal year and program** | ** ** | **Common  Shares**          | ** ** | **Non-Voting  Shares**                        | ** ** | **Total** | ** ** | **Charged to  Share capital  (1)** | ** ** | **Charged to  Retained  earnings(2)** | ** ** | **Paid** | ** ** |
| 2004 and 2005                                      |       |                        |       |                                          |       |   |   |   |   |   |   |   |   |
| Programs 1 and 2                              |       | 10,893,480                  |       | 12,107,700                                    |       | 23,001,180 |   | 390.4 |   | 579.7 |   | 970.1 |   |
| 2006                                               |       |                        |       |                                          |       |   |   |   |   |   |   |   |   |
| Program 2 ended Dec. 19                       |       | 5,490,600                   |       | 10,701,400                                    |       | 16,192,000 |   | 297.6 |   | 492.8 |   | 790.4 |   |
| Program 3 beginning Dec. 20                   |       | —                      |       | 186,723                                       |       | 186,723 |   | 4.0 |   | 5.8 |   | 9.8 |   |
|                                               |       | 5,490,600                   |       | 10,888,123                                    |       | 16,378,723 |   | 301.6 |   | 498.6 |   | 800.2 |   |
| **2007**                                           | ** ** | ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Program 3 ended Dec. 19**                   | ** ** | **2,904,900**               | ** ** | **10,571,800**                                | ** ** | **13,476,700** | ** ** | **263.7** | ** ** | **480.0** | ** ** | **743.7** | ** ** |
| **Program 4 beginning Dec. 20**               | ** ** | **—**                  | ** ** | **134,200**                                   | ** ** | **134,200** | ** ** | **2.9** | ** ** | **3.3** | ** ** | **6.2** | ** ** |
| ** **                                         | ** ** | **2,904,900**               | ** ** | **10,706,000**                                | ** ** | **13,610,900** | ** ** | **266.6** | ** ** | **483.3** | ** ** | **749.9** | ** ** |
| Cumulative total                                   |       | 19,288,980                  |       | 33,701,823                                    |       | 52,990,803 |   | 958.6 |   | 1,561.6 |   | 2,520.2 |   |

 

----

| (1) | Represents  the book value of shares repurchased.                       |
|-----|-------------------------------------------------------------------------|
| (2) | Represents  the cost in excess of the book value of shares repurchased. |

 

·                 A major debtissue was completed in March 2007 with five-year and 10-year maturities:

 

*2012 Canadiandollar Notes:* the Company publicly issued$300 million 4.50%, Series CC, Notes at a price of $999.91 per$1,000.00 of principal;

 

36

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*2017 Canadiandollar Notes:* the Company publicly issued$700 million 4.95%, Series CD, Notes at a price of $999.53 per$1,000.00 of principal;

 

The Notes are redeemable at the option of theCompany, in whole at any time, or in part from time to time, on not fewer than30 and not more than 60 days’ prior notice, at a redemption price equal to thegreater of (i) the present value of the Notes discounted at the Governmentof Canada yield plus 15 basis points for the 2012 Notes and24 basis points for the 2017 Notes, or (ii) 100% of theprincipal amount thereof. In addition, accrued and unpaid interest, if any,will be paid to the date fixed for redemption.

 

·                  On May 15,2007, TELUS entered into an unsecured commercial paper program, which isbackstopped by a portion of its credit facility, enabling it to issuecommercial paper up to a maximum aggregate of $800 million (or U.S. dollarequivalent), to be used for general corporate purposes. Commercial paper of$584.9 million was outstanding at December 31, 2007.

 

·                  Bank facilitieswere undrawn at December 31, 2007 as compared to $120 million at December 31,2006.

 

·                  Debt repaymentsin 2007 included $1,483.3 million to repay the US$1,166.5 million7.50% Notes that matured on June 1, and $70 million to repay TCI 7.10%Medium-term Notes that matured in February.

 

For the anticipated requirements tomeet long-term debt repayments, see the Contractual obligations table in *Section 7.8 – Commitments and contingent liabilities.*

 

 

37

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### **7.4**Liquidity and capital resource measures

 
| **Liquidity and capital resource measures**      | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|
| **As at, or years ended, December 31** | ** ** | **2007**     | ** ** | **2006**   | ** ** | **Change** | ** ** |
| **Components of debt and coverage ratios  (1) ($millions)**     |       |         |       |       |       |       |       |
| Net debt                                                             | ** ** | **6,141.6**  |       | 6,278.1    |       | (136.5     | )          |
| Total capitalization – book value                               | ** ** | **13,197.2** |       | 13,349.7   |       | (152.5     | )          |
| EBITDA - excluding restructuring costs                               | ** ** | **3,609.7**  |       | 3,682.8    |       | (73.1      | )          |
| Net interest cost                                                    | ** ** | **440.1**    |       | 504.7      |       | (64.6      | )          |
| **Debt ratios**                                                      |       |         |       |       |       |       |       |
| Fixed-rate debt as a proportion of total indebtedness  (%)           | ** ** | **82.4**     |       | 90.6       |       | (8.2       | )pts       |
| Average term to maturity of debt (years)                             | ** ** | **5.3**      |       | 4.5        |       | 0.8        |       |
| Net debt to total capitalization (%) (1)                             | ** ** | **46.5**     |       | 47.0       |       | (0.5       | )pts       |
| Net debt to EBITDA - excluding restructuring  costs(1)               | ** ** | **1.7**      |       | 1.7        |       | —     |       |
| **Coverage ratios (1)**                                              |       |         |       |       |       |       |       |
| Interest coverage on long-term debt                                  | ** ** | **4.2**      |       | 3.9        |       | 0.3        |       |
| EBITDA - excluding restructuring costs interest  coverage            | ** ** | **8.2**      |       | 7.3        |       | 0.9        |       |
| **Other measures**                                                   |       |         |       |       |       |       |       |
| Free cash flow ($millions) (2)                                       | ** ** | **1,573.2**  |       | 1,596.0    |       | (22.8      | )          |
| Dividend payout ratio (%) (1)                                        | ** ** | **47**       |       | 45         |       | 2          | pts        |

 

----

| (1) | See  *Section 11.4 Definition of liquidity  and capital resource measures.* |
|-----|----------------------------------------------------------------------------------|
| (2) | See  *Section 11.2 Free cash flow* for the definition.                      |

 

Totalcapitalization decreased because of lower share capital and lower net debt,partly offset by higher retained earnings. Changes in Net debt and 12-monthtrailing EBITDA did not have a significant impact on the net debt to EBITDAratio at December 31, 2007 when compared to one year earlier. The averageterm to maturity of debt of 5.3 years at December 31, 2007 represents anincrease from 4.5 years at December 31, 2006 due to repayment of maturingNotes on June 1 and the March debt issue, net of commercial paperissues beginning in May. The proportion of debt on a fixed-rate basis decreasedfrom one year earlier with the issue of commercial paper.

 

Interest coverageon long-term debt improved by 0.3 because of lower interest expenses. TheEBITDA interest coverage ratio improved by 1.0 due to lower net interest costsand decreased by 0.1 due to lower EBITDA excluding restructuring costs. Thedecrease in free cash flow resulted from higher capital expenditures and cashpayments as a result of introducing the net-cash settlement feature, net ofhigher recoveries of income tax and related interest and lower interest paid.The dividend payout ratio based on actual earnings at December 31, 2007was 47% and the ratio calculated to exclude the impacts of tax-relatedadjustments and the charge for introducing the net-cash settlement feature was54%.

 

The Company’sstrategy is to maintain the financial policies and guidelines set out below.The Company believes that these measures are currently at the optimal level andprovide access to capital at a reasonable cost by maintaining credit ratings inthe range of BBB+ to A-, or the equivalent.

 

TELUS’long-term financial policies and guidelines are:

 

·                 Netdebt to EBITDA – excluding restructuring costs of 1.5 to 2.0 times; and

·                 Dividendpayout ratio of 45 to 55% of sustainable net earnings.

 

Managementexpects to maintain its policy guidelines following the acquisition of Emergisin mid-January 2008. The *pro forma* Netdebt to EBITDA *–*excluding restructuring costs for December 31, 2007 was 1.9 times.

 

TheCompany no longer considers the ratio Net debt to total capitalization to be along-term policy measure. The measure is based on book values of net debt andequity, however, the book value of equity has been reduced significantly by thecumulative effect of normal course issuer bids, which include the market valueof equity in excess of book value.

 

38

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### **7.5Credit facilities**

### ** **

On March 2,2007, TELUS closed a new five-year $2 billion credit facility with asyndicate of 18 financial institutions. The new facility replaced$1.6 billion of existing credit facilities, of which $800 millionwould have expired in 2008 and $800 million would have expired in 2010.The new facility may be used for general corporate purposes including thebackstop of commercial paper. The new facility has no substantial changes interms and conditions other than reduced pricing and extended term, whichreflects favourable market conditions and TELUS’ financial position. Notably,the May 2012 maturity date of the new credit facility extends beyond thematurity date of TELUS’ June 2011 Notes.

 

At December 31,2007, TELUS had available liquidity exceeding $1.3 billion from unutilizedcredit facilities, consistent with the Company’s objective of maintaining atleast $1 billion of unutilized liquidity.

 

**TELUS Credit Facilities at December 31,2007**

 
| **($ in millions)**    | ** ** | **Expiry**       | ** ** | **Size** | ** ** | **Drawn** | ** ** | **Outstanding  undrawn  letters of  credit** | ** ** | **Backstop for  commercial  paper  program** | ** ** | **Available  liquidity** | ** ** |
|----------------------------------|------------|------------------|------------|----------|------------|-----------|------------|----------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|
| Five-year revolving facility (1) |       | May 1, 2012 |       | 2,000.0  |       | —    |       | (103.7                                       | )          | (587.2                                            | )          | 1,309.1                  |       |
| Other bank facilities            |       | —           |       | 77.3     |       | —    |       | (2.9                                         | )          | —                                            |       | 74.4                     |       |
| Total                            |       | —           |       | 2,077.3  |       | —    |       | (106.6                                       | )          | (587.2                                            | )          | 1,383.5                  |       |

 

----

| (1) | Canadian dollars or U.S. dollar equivalent. |
|-----|---------------------------------------------|

 

TELUS’ revolvingcredit facility contains customary covenants, including a requirement thatTELUS not permit its consolidated Leverage Ratio (debt to trailing 12-monthEBITDA) to exceed 4.0:1 (approximately 1.7:1 at December 31,2007) and not permit its consolidated Coverage Ratio (EBITDA to InterestExpense on a trailing 12-month basis) to be less than 2.0:1(approximately 8.4:1 at December 31, 2007) at the end of anyfinancial quarter. There are certain minor differences in the calculation ofthe Leverage Ratio and Coverage Ratio under the credit agreement as comparedwith the calculation of Net debt to EBITDA and EBITDA interest coverage.Historically, the calculations have not been materially different. Thecovenants are not impacted by revaluation of capital assets, intangible assetsand goodwill for accounting purposes. Continued access to TELUS’ creditfacility is not contingent on the maintenance by TELUS of a specific creditrating.

 

On February 12,2008, TELUS Corporation accepted a committed term sheet from a select group ofCanadian banks to provide a new $700 million 364-day revolving creditfacility. The provision of this new facility provides incremental liquidity toTELUS and allows TELUS to continue to meet one of its financial objectives,which is to maintain $1 billion in liquidity at all times. TELUS expectsto fully document the new facility by the end of the first quarter of 2008.Availability of the new facility is conditional on entering into the finaldefinitive documentation, including customary representations and warrantiesand no existing default or events of default.

 

Thenew credit facility is unsecured and bears interest at Canadian prime andCanadian bankers’ acceptance rates, plus applicable margins. The financialratio tests in the new facility will be substantially the same as those in theexisting $2 billion syndicated facility, which states that the borrower willnot permit its net debt to operating cash flow ratio to exceed 4.0:1 and maynot permit its operating cash flow to interest expense ratio to be less than2.0:1, each as defined.

 

39

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### **7.6Accounts receivable sale**

### ** **

On July 26, 2002,TCI, a wholly owned subsidiary of TELUS, entered into an agreement, which wasamended September 30, 2002, March 1, 2006, and November 30,2006, with an arm’s-length securitization trust associated with a majorSchedule I bank, under which TCI is able to sell an interest in certain ofits trade receivables up to a maximum of $650 million. As a result ofselling the interest in certain of the trade receivables on a fully servicedbasis, a servicing liability is recognized on the date of sale and is, in turn,amortized to earnings over the expected life of the trade receivables. Thisrevolving-period securitization agreement had an initial term ending July 18,2007; the November 30, 2006 amendment resulted in the term being extendedto July 18, 2008.

 

TCIis required to maintain at least a BBB (low) credit rating by Dominion BondRating Service (DBRS) or the securitization trust may require the sale programto be wound down. The necessary credit rating was exceeded by three levels at A(low) as of February 13, 2008.

 
| **Balance of proceeds from  securitized receivables********($ millions)** | ** ** | **2007  Dec. 31** | ** ** | **2007  Sept. 30** | ** ** | **2007  June 30** | ** ** | **2007  Mar. 31** | ** ** | **2006  Dec. 31** | ** ** | **2006  Sept. 30** | ** ** | **2006  June 30** | ** ** | **2006  Mar. 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|------------|
|                                                                                               |       | 500.0                  |       | 550.0                   |       | 500.0                  |       | 150.0                  |       | 500.0                  |       | 350.0                   |       | 535.0                  |       | 400.0                  |       |

### ** **

### **7.7Credit ratings**

### ** **

On February 26,2007, Moody’s Investors Service upgraded its rating for TELUS by one level toBaa1 (equivalent to BBB+) and assigned an outlook of stable. On March 5,2007, DBRS upgraded its rating of TELUS Notes to A (low) from BBB (high) andconfirmed its A (low) ratings for TCI, all with a stable trend. In addition,DBRS confirmed its preliminary rating of R-1 (low) for TELUS’ commercial paperprogram.

 

On June 21,2007, TELUS announced that it was in non-exclusive discussions to acquire BCE.This was followed by a second announcement by TELUS on June 26 thatinadequacies in BCE’s bid process did not make it possible for TELUS to submitan offer as part of the strategic review process announced by BCE. Followingthe June 21 announcement, DBRS placed its credit ratings for TELUSCorporation and TCI “under review with developing implications.” Similarly,Moody’s affirmed its Baa1 rating for TELUS and changed its outlook to “developing”and Standard and Poors (S&P) placed its credit ratings of TELUS Corporationand TCI on “credit watch with negative implications.”

 

FollowingTELUS’ earnings announcement on August 3, 2007, in which management indicatedthat TELUS did not intend to make a competing offer for BCE, DBRS affirmed itsratings and restored its trend to stable. On August 7, Moody’s affirmedits ratings and restored its outlook to stable. On September 26, S&Premoved TELUS and TCI from credit watch, affirmed its ratings for TELUS and TCIand changed its outlook to stable.

 

Inlate November, after TELUS’ announced offer for Emergis Inc. and the FederalIndustry Minister’s announcement of an AWS spectrum auction framework, DBRS,FitchRatings and S&P confirmed their respective ratings for TELUS and TCI,with stable outlooks or trends.

 
| **Credit rating summary** | ** ** | **DBRS**   | ** ** | **S&P** | ** ** | **Moody’s** | ** ** | **Fitch**  | ** ** |
|-------------------------------------|------------|------------|------------|-------------|------------|------------------|------------|------------|------------|
| **Trend or outlook**                | ** ** | **Stable** | ** ** | **Stable**  | ** ** | **Stable**       | ** ** | **Stable** | ** ** |
| **TELUS Corporation**               | ** ** | ** ** | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** |
| Senior bank debt                    |       | —     |       | —      |       | —           |       | BBB+       |       |
| Notes                               |       | A (low)    |       | BBB+        |       | Baa1             |       | BBB+       |       |
| Commercial paper                    |       | R-1 (low)  |       | —      |       | —           |       | —     |       |
| **TELUS Communications Inc. (TCI)** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** |
| Debentures                          |       | A (low)    |       | BBB+        |       | —           |       | BBB+       |       |
| Medium-term notes                   |       | A (low)    |       | BBB+        |       | —           |       | BBB+       |       |
| First mortgage bonds                |       | A (low)    |       | A–     |       | —           |       | —     |       |

 

40

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### **7.8Financial instruments, commitments and contingent liabilities**

### ** **

*Financial instruments (Note 5 of the Consolidatedfinancial statements)*

 

The Company’s financial instruments and the nature of therisks which they are, or may be, subject to are as set out in the followingtable:

 
| ** **                                        | ** ** | **Risks**  | ** ** |
|---------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** | ** ** | ** ** |
| **Financial instrument**                     | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured  at amortized cost**                   |       |       |       |   |   |   |   |   |   |   |   |
| Cash and temporary  investments                   |       | X          |       |   |   |   |   | X |   |   |   |
| Accounts  receivable                              |       | X          |       |   |   |   |   |   |   |   |   |
| Accounts payable                                  |       |       |       | X |   |   |   |   |   |   |   |
| Restructuring  accounts payable                   |       |       |       | X |   |   |   |   |   |   |   |
| Short-term  obligations                           |       |       |       | X |   |   |   | X |   |   |   |
| Long-term debt                                    |       |       |       | X |   | X |   | X |   |   |   |
| **Measured  at fair value**                       |       |       |       |   |   |   |   |   |   |   |   |
| Short-term investments                            |       |       |       |   |   |   |   | X |   | X |   |
| Long-term  investments                            |       |       |       |   |   |   |   |   |   | X |   |
| Cross currency  interest rate swap derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |
| Share-based  compensation derivatives(1)          |       | X          |       | X |   |   |   |   |   | X |   |
| Foreign exchange  derivatives(1)                  |       | X          |       | X |   | X |   |   |   |   |   |

 

----

| (1) | Use of derivative financial  instruments is subject to a policy that requires that no derivative  transaction be entered into for the purpose of establishing a speculative or  leveraged position and sets criteria for the credit-worthiness of the  transaction counterparties. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Credit risk

 

Credit riskassociated with Cash and temporary investments is minimized substantially byensuring that these financial assets are placed with governments,well-capitalized financial institutions and other creditworthy counterparties.An ongoing review is performed to evaluate changes in the status ofcounterparties.

 

Credit riskassociated with Accounts receivable is minimized by the Company’s largecustomer base, which covers substantially all consumer and business sectors inCanada. The Company follows a program of credit evaluations of customers andlimits the amount of credit extended when deemed necessary. The Companymaintains provisions for potential credit losses, and any such losses to datehave been within management’s expectations.

 

No interest ischarged on customer accounts which are current. Thereafter, interest is chargedat a regulatory-based rate on Wireline segment outstanding balances and amarket rate on Wireless segment outstanding balances.

 

The Company mustmake significant estimates in respect of the allowance for doubtful accounts.Current economic conditions, historical information, why the accounts arepast-due and line of business from which the accounts receivable arose are allconsidered when determining whether past-due accounts should be allowed for.The provision for doubtful accounts is calculated on a specific-identificationbasis for accounts over a specific balance threshold and on a non-specificbasis for the remainder.

 

Counterparties tothe Company’s cross currency interest rate swap agreements, share-basedcompensation cash-settled equity forward agreements and foreign exchangederivatives are major financial institutions that have all been accordedinvestment grade ratings by a primary rating agency. The dollar amount ofcredit exposure under contracts with any one financial institution is limitedand counterparties’ credit ratings are monitored. The Company does not give orreceive collateral on swap agreements and hedges due to its credit rating andthose of its counterparties. While the Company is exposed to credit losses dueto the non-performance of its counterparties, the Company considers the risk ofthis remote.

 

Liquidity risk

 

The Companymanages liquidity risk by maintaining bilateral bank facilities and a creditfacility, and by continuously monitoring forecast and actual cash flows andmanaging maturity profiles of financial assets and financial liabilities. TheCompany has significant debt maturities in future years. The Company has accessto a shelf prospectus, in effect until September 2009, pursuant to whichit can issue $3 billion of debt or equity securities. The Company believes thatits investment grade credit ratings provide reasonable access to capitalmarkets to facilitate future debt issuance. The Company does not currentlybelieve that it will encounter difficulty in meeting its obligations associatedwith financial liabilities.

 

41

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Currency risk

 

The Company’sfunctional currency is the Canadian dollar, but it regularly transacts in U.S.dollars due to certain routine revenues and operating costs being denominatedin U.S. dollars, as well as sourcing some inventory purchases and capital assetacquisitions internationally. The U.S. dollar is the only foreign currency towhich the Company has a significant exposure.

 

The Company’sforeign exchange risk management includes the use of foreign currency forwardcontracts and currency options to fix the exchange rates on short-term U.S.dollar denominated transactions and commitments. Hedge accounting is applied tothese short-term foreign currency forward contracts on an exception basis only.

 

The Company isalso exposed to currency risks in that the fair value or future cash flows ofits U.S. dollar denominated long-term debt will fluctuate because of changes inforeign exchange rates. Currency hedging relationships have been establishedfor the related semi-annual interest payments and principal payments atmaturity.

 

Interest rate risk

 

The Company isexposed to interest rate risk in that changes in market interest rates willcause fluctuations in the fair value or future cash flows of its temporaryinvestments (if any), Short-term investments (if any), short-term obligations(if any), long-term debt and cross currency interest rate swap derivatives.

 

When the Companyhas temporary investments, they have short maturities and fixed rates, thustheir fair value will fluctuate with changes in market interest rates; absentmonetization prior to maturity, future cash flows do not change due to changesin market interest rates.

 

If the balance ofShort-term investments included debt instruments and/or dividend-paying equityinstruments, the Company could be exposed to interest rate risks.

 

As short-termobligations, which typically have variable interest rates, are rarelyoutstanding for periods that exceed one calendar week, interest rate riskassociated with this item is immaterial.

 

In respect of theCompany’s outstanding Long-term debt, other than for commercial paper andamounts drawn on its credit facility, it is all effectively fixed-rate debt.The fair value of fixed-rate debt fluctuates with changes in market interestrates, but, absent early redemption and/or foreign exchange rate fluctuations,future cash flows do not. Due to the short maturities of commercial paper, itsfair values are not materially affected by changes in market interest rates,but cash flows representing interest payments may be if the commercial paper isrolled over. Amounts drawn on the Company’s credit facility will be affected bychanges in market interest rates in a manner similar to commercial paper.

 

Similar tofixed-rate debt, the fair value of the Company’s cross currency interest rateswap derivatives fluctuates with changes in market interest rates as theinterest rate swapped to is fixed; absent early redemption, future cash flowsdo not change due to changes in market interest rates.

 

Other price risk

 

If the balance ofShort-term investments included equity instruments, the Company would beexposed to equity price risks. On Long-term investments, the Company is exposedto equity price risks arising from investments accounted for using the costmethod. Such investments are held for strategic rather than trading purposes.

 

The Company isexposed to other price risk arising from cash-settled share-based compensation(an appreciating share price increases both the expense and the potential cashoutflow). Cash-settled equity swap agreements have been entered into thatestablish a cap on the Company’s cost associated with its net-cash settledshare options and fix the Company’s cost associated with its restricted stockunits.

 

Market risk

 

Hadthe Canadian dollar/U.S. dollar foreign exchange rates, market interest ratesand the Company’s Non-Voting Share prices varied by reasonably possible amountsfrom their actual fiscal year values, and had these variances been recognized,Net income and Other comprehensive income for the year ended December 31,2007, could have varied. The Company is exposed to other price risks in respectof its financial instruments, as discussed further in Fair value (following).Changes in the Company’s Common Share price would not have materially affectedthe Company’s Net income or its Other comprehensive income.

 

Fair value

 

Thecarrying value of cash and temporary investments, accounts receivable, accountspayable, restructuring accounts payable and short-term obligations approximatestheir fair values due to the immediate or short-term maturity of thesefinancial instruments. The carrying values of the Company’s investmentsaccounted for using the cost method would not exceed their fair values.

 

42

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Thecarrying value of short-term investments equals their fair value as they areclassified as held for trading. The fair value is determined directly byreference to quoted market prices.

 

Thefair values of the Company’s long-term debt are estimated based on quotedmarket prices for the same or similar issues or on the current rates offered tothe Company for debt of the same maturity, as well as the use of discountedfuture cash flows using current rates for similar financial instruments subjectto similar risks and maturities. The fair values of the Company’s derivativefinancial instruments used to manage exposure to interest rate and currencyrisks are estimated similarly.

 

Thefair values of the Company’s derivative financial instruments used to manageexposure to increases in compensation costs arising from certain forms ofshare-based compensation are estimated based upon fair value estimates of therelated cash-settled equity forward agreements provided by the counterparty tothe transactions.

 

The effect in 2007 of the adoption ofcomprehensive income on the Company’s derivatives was to record them at theirfair values rather than at their carrying amounts. The primary change was inderivatives classified as held for hedging and used to manage interest rate andcurrency risks associated with U.S. dollar denominated debt, as shown in thetable below.

 
| ** **                                                                                                                                                 | ** **         | **2007**                                           | ** ** | **2006**             | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|----------------------------------------------------|------------|----------------------|-------------|
| **As at December 31 ($ millions)**                                                                                                | ** **         | **Hedging item  maximum  maturity date** | ** ** | **Notional  amount** | ** **  | **Carrying amount** | ** ** | **Fair value** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| **Liabilities**                                                                                                                                            |               |                                               |       |                 |        |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                                                                                                                             |               |                                               |       |                 |        |   |   |   |   |   |   |   |   |   |   |
| Principal                                                                                                                                                  | ** **         | ** **                                         | ** ** | ** **           |        | **4,588.9** | ** ** | **4,960.3** |   |   |   | 4,908.2 |   | 5,535.9 |   |
| Derivatives(1) classified  as held for hedging and used to manage interest rate and currency risks  associated with U.S. dollar denominated debt |               |                                               |       |                 |        |   |   |   |   |   |   |   |   |   |   |
| · Derivative asset                                                                                                                                    |               | 2007                                               | ** ** | **—**           | ** **  | **—** |   |   |   | 809.9 |   | (40.4 | ) |   |   |
| · Derivative liability                                                                                                                                | – Current     |                                               | 2007       | ** **           | **—**  | ** ** | **—** |   |   |   | 673.4 |   | 165.8 |   |   |   |
|                                                                                                                                                       | – Non-current |                                               | 2011       | ** **           | **2,950.5** | ** ** | **1,179.5** |   |   |   | 2,950.5 |   | 710.3 |   |   |   |
| ** **                                                                                                                                                 |               |                                               |       |                 |        | **1,179.5** |   |   |   |   |   | 835.7 |   |   |   |
| · Interest payable                                                                                                                                    | ** **         | ** **                                         |       |                 |        | **8.2** |   |   |   |   |   | 6.3 |   |   |   |
| Net                                                                                                                                                        | ** **         | ** **                                         | ** ** | ** **           |        | **1,187.7** |   | **1,187.7** |   |   |   | 842.0 |   | 1,090.6 |   |
| Derivatives(1) used  to manage interest rate risk associated with planned refinancing of debt  maturing June 1, 2007                             |               | 2007                                               | ** ** | **—**           | ** **  | **—** | ** ** | **—** |   | 500.0 |   | — |   | 6.5 |   |
| ** **                                                                                                                                                 | ** **         | ** **                                         |       |                 |        | **5,776.6** | ** ** | **6,148.0** |   |   |   | 5,750.2 |   | 6,633.0 |   |

 

----

| (1) | Designated as cash flow hedging items. |
|-----|----------------------------------------|

 

*Commitments and contingent liabilities (Note 19 ofthe Consolidated financial statements)*

 

Price cap deferral accounts

 

On May 30,2002, and on July 31, 2002, the CRTC issued Decisions 2002-34 and2002-43, respectively, and introduced the concept of a deferral account. TheCompany must make significant estimates and assumptions in respect of thedeferral accounts given the complexity and interpretation required of Decisions 2002-34and 2002-43. Accordingly, the Company estimates, and records, an aggregateliability of $147.1 million as at December 31, 2007 (2006 –$164.8 million), to the extent that activities it has undertaken, otherqualifying events and realized rate reductions for Competitor Services do notextinguish it; management is required to make estimates and assumptions inrespect of the offsetting nature of these items. If the CRTC, upon its periodicreview of the Company’s deferral account, disagrees with management’s estimatesand assumptions, the CRTC may adjust the deferral account balance and suchadjustment may be material. Ultimately, this process results in the CRTCdetermining if, and when, the deferral account liability is settled.

 

On February 16,2006, the CRTC issued Decision CRTC 2006-9, Disposition of funds in thedeferral account. In its decision the CRTC determined that the majority of theaccumulated liability within the respective incumbent local exchange carrier’sdeferral account was to be made available for initiatives to expand broadbandservices within their incumbent local exchange carrier operating territories torural and remote communities where service is currently not available. Inaddition, a minimum of five per cent of the accumulated deferral accountbalance must be used for initiatives that enhance accessibility totelecommunications services for individuals with disabilities. To the extentthat the deferral account balance exceeds the approved initiatives, theremaining balance will be distributed in the form of a one-time rebate to localresidential service customers in non-high cost serving areas. Finally, the CRTCindicated that subsequent to May 31, 2006, 

 

43

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noadditional amounts are to be added to the deferral account and, instead, are tobe dealt with via prospective rate reductions.

 

In September 2006,the Federal Court of Appeal granted the Consumers Association of Canada, theNational Anti-Poverty Organization and also Bell Canada leave to appeal CRTCTelecom Decision 2006-9. The consumer groups have filed their appealasking the Court to direct rebates to local telephone subscribers, rather thanhave the accumulated deferral account funds used for purposes determined by theCRTC, as noted above. Bell Canada has also filed its appeal of Decision 2006-9on the grounds that the CRTC exceeded its jurisdiction to the extent itapproves rebates from the deferral account. These two appeals have beenconsolidated and were heard by the Federal Court of Appeal in January 2008with a judgment expected to be issued by the Federal Court of Appeal within thefirst quarter of 2008. Within that hearing the Federal Court of Appeal furthergranted Bell Canada a motion for a stay of CRTC Telecom Decision 2006-9 in sofar as it requires the disposition of funds in the deferral accounts for anyactivities other than the improvement of accessibility to communicationsservices for persons with disabilities. See Note 19(a) of theConsolidated financial statements for additional information regarding theDeferral account.

 

Contractual obligations

 

The Company’sknown contractual obligations at December 31, 2007, are quantified in thefollowing table. Interest obligations are not included. Where applicable, long-termdebt maturities reflect hedged foreign exchange rates. Uncertain income taxpositions that could result in current income taxes being payable have beensubstantially funded.

 
| ** **            | ** ** | **Long-term debt maturities** | ** ** | ** **              | ** ** | ** **               | ** ** | ** **    | ** ** | ** **      | ** ** |
|-----------------------|------------|-----------------------------------------|------------|-------------------------|------------|--------------------------|------------|---------------|------------|-----------------|------------|
| ** **            | ** ** | **All except**                     | ** ** | ** **              | ** ** | **Other long-term** | ** ** | **Operating** | ** ** | **Purchase**    | ** ** | ** ** | ** ** |
| **($ millions)** | ** ** | **capital leases**                 | ** ** | **Capital leases** | ** ** | **liabilities**          | ** ** | **leases**    | ** ** | **obligations** | ** ** | **Total** | ** ** |
| 2008                  |       | 2.0                                     |       | 3.4                     |       | 16.8                     |       | 230.5         |       | 415.5           |       | 668.2 |   |
| 2009                  |       | 0.7                                     |       | 0.8                     |       | 27.6                     |       | 224.5         |       | 97.0            |       | 350.6 |   |
| 2010                  |       | 80.0                                    |       | 0.8                     |       | 18.3                     |       | 223.3         |       | 35.5            |       | 357.9 |   |
| 2011                  |       | 2,950.5                                 |       | 0.9                     |       | 18.4                     |       | 209.6         |       | 24.6            |       | 3,204.0 |   |
| 2012                  |       | 887.2                                   |       | 0.2                     |       | 18.6                     |       | 195.9         |       | 17.4            |       | 1,119.3 |   |
| Thereafter            |       | 1,749.1                                 |       | —                  |       | 166.6                    |       | 1,366.6       |       | 49.7            |       | 3,332.0 |   |
| Total                 |       | 5,669.5                                 |       | 6.1                     |       | 266.3                    |       | 2,450.4       |       | 639.7           |       | 9,032.0 |   |

 

Guarantees

 

Canadian GAAP requires the disclosure of certain types ofguarantees and their maximum, undiscounted amounts. The maximum potentialpayments represent a worst-case scenario and do not necessarily reflect resultsexpected by the Company. Guarantees requiring disclosure are those obligationsthat require payments contingent on specified types of future events. In thenormal course of its operations, the Company enters into obligations that GAAPmay consider to be guarantees. As defined by Canadian GAAP, guarantees subjectto these disclosure guidelines do not include guarantees that relate to thefuture performance of the Company. As at December 31, 2007, the Company’smaximum undiscounted guarantee amounts, without regard for the likelihood ofhaving to make such payment, were not material.

 

In the normal course of operations, the Company may provideindemnification in conjunction with certain transactions. The term of theseindemnification obligations range in duration and often are not explicitlydefined. Where appropriate, an indemnification obligation is recorded as aliability. In many cases, there is no maximum limit on these indemnificationobligations and the overall maximum amount of the obligations under suchindemnification obligations cannot be reasonably estimated. Other thanobligations recorded as liabilities at the time of the transaction,historically the Company has not made significant payments under theseindemnifications.

 

In connection with its 2001 disposition of TELUS’ directorybusiness, the Company agreed to bear a proportionate share of the new owner’sincreased directory publication costs if the increased costs were to arise froma change in the applicable CRTC regulatory requirements. The Company’sproportionate share would have been 80% through May 2006, declining to 40%in the next five-year period and then to 15% in the final five years. As well,should the CRTC take any action that would result in the owner being preventedfrom carrying on the directory business as specified in the agreement, TELUSwould indemnify the owner in respect of any losses that the owner incurred.

 

As at December 31, 2007, the Company has no liabilityrecorded in respect of indemnification obligations.

 

Claimsand lawsuits

 

A number of claims and lawsuits seeking damages and otherrelief are pending against the Company. It is impossible at this time for theCompany to predict with any certainty the outcome of such litigation. However,management is of the opinion, based upon legal assessment and informationpresently available, that it is unlikely that any liability, to the extent notprovided for through insurance or otherwise, would be material in relation tothe Company’s consolidated financial position, other than as disclosed in Note19(e) of the Consolidated financial statements and*Section 10.9 Litigationand legal matters*.

 

44

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### **7.9Outstanding share information**

### ** **

Thefollowing is a summary of the outstanding shares for each class of equity at December 31,2007 and January 31, 2008. In addition, for January 31, 2008, thetotal number of outstanding and issuable shares is presented assuming fullconversion of outstanding options as well as options not yet granted, but forwhich shares have been reserved.

 
| **Outstanding shares  (millions of shares)**             | ** ** | **Common  Shares** | ** ** | **Non-Voting**

**Shares** | ** ** | **Total**

**shares** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-----------------------|------------|
| Common equity                                                           |       |               |       |                       |       |                  |       |
| Outstanding  shares at December 31, 2007 and January 31, 2008 |       | 175.7              |       | 148.6                      |       | 324.3                 | (1)        |
| Options  outstanding and issuable(2) at January 31, 2008      |       | 0.5                |       | 15.6                       |       | 16.1                  |       |
|                                                                    |       | 176.2              |       | 164.2                      |       | 340.4                 |       |

 

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| (1) | For the purposes of calculating diluted earnings  per share, the number of shares was 334.2 million for the year ended  December 31, 2007. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Assuming full conversion and  ignoring exercise prices.                                                                                              |

 

## **8.**              Critical accountingestimates and accounting policy developments

## ** **

### **8.1 Critical accounting estimates**

### ** **

TELUS’ significant accountingpolicies are described in Note 1 of the Consolidated financial statements. Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions.Management’s estimates and assumptions affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates. The Company’s critical accounting estimates are described below andare generally discussed with the Audit Committee each quarter.

 

General

 

·                 Unlessotherwise specified in the discussion of the specific critical accountingestimates, the Company is not aware of trends, commitments, events oruncertainties that it reasonably expects to materially affect the methodologyor assumptions associated with the critical accounting estimates, subject tothe items identified in the *Caution regardingforward-looking statements* section of this Management’s discussionand analysis.

 

·                 In thenormal course, changes are made to assumptions underlying all criticalaccounting estimates to reflect current economic conditions, updating ofhistorical information used to develop the assumptions and changes in theCompany’s debt ratings, where applicable. Unless otherwise specified in thediscussion of the specific critical accounting estimates, it is expected thatno material changes in overall financial performance and financial statementline items would arise either from reasonably likely changes in materialassumptions underlying the estimate or from selection of a different estimatefrom within a valid range of estimates.

 

·                 Allcritical accounting estimates are uncertain at the time of making the estimateand affect the following Consolidated statements of income line items: incometaxes (except for estimates about goodwill) and Net income. Similarly, allcritical accounting estimates affect the following Consolidated balance sheetline items: current assets (income and other taxes receivable); currentliabilities (income and other taxes payable); future income tax liabilities;and shareholders’ equity (retained earnings). Generally, the discussion of eachcritical accounting estimate does not differ between the Company’s twosegments: wireline and wireless.

 

·                 Thecritical accounting estimates affect the Consolidated statements of income andConsolidated balance sheet line items as follows:

 

45

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| ** **                               | ** ** | **Consolidated statements of income ** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                 | ** ** | **Operating expenses** | ** ** | ** ** | ** ** |
| **Consolidated balance sheet** | ** ** | **Operating  revenues**                                    | ** ** | **Operations** | ** ** | **Depreciation** | ** ** | **Amortization  of intangible  assets** | ** ** | **Other  expense,  net** | ** ** |
| Accounts receivable                      |       |                                                       |       | X |   |   |   |   |   |   |   |
| Inventories                              |       |                                                       |       | X |   |   |   |   |   |   |   |
| Capital assets and goodwill(1)           |       |                                                       |       |   |   | X |   | X |   |   |   |
| Investments                              |       |                                                       |       |   |   |   |   |   |   | X |   |
| Advance billings and customer deposits   |       | X                                                          |       | X |   | X |   | X |   |   |   |
| Employee defined benefit pension plans   |       |                                                       |       | X |   | X | (2) | X | (2) |   |   |

 

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| (1) | Accounting estimate, as  applicable to intangible assets with indefinite lives and goodwill, primarily  affects the Company’s wireless segment. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Accounting  estimate impact due to internal labour capitalization rates.                                                                             |

 

Accounts receivable

 

*General*

 

·                 The Company considers the business area that gave rise to the accountsreceivable, performs statistical analysis of portfolio delinquency trends andperforms specific account identification when determining its allowance fordoubtful accounts. This information is also used in conjunction with currentmarket-based rates of borrowing to determine the fair value of its residualcash flows arising from accounts receivable securitization. The fair value ofthe Company’s residual cash flows arising from the accounts receivablesecuritization is also referred to as its retained interest.

 

·                 Assumptions underlying the allowance for doubtful accounts includeportfolio delinquency trends and specific account assessments made whenperforming specific account identification. Assumptions underlying thedetermination of the fair value of residual cash flows arising from accountsreceivable securitization include those developed when determining theallowance for doubtful accounts as well as the effective annual discount rate.

 

·                 These accounting estimates are in respect of the Accounts receivable lineitem on the Company’s Consolidated balance sheet comprising approximately 4% oftotal assets as at December 31, 2007. If the future were to adverselydiffer from management’s best estimates of the fair value of the residual cashflows and the allowance for doubtful accounts, the Company could experience abad debt charge in the future. Such a bad debt charge does not result in a cashoutflow.

 

*Key economic assumptions used todetermine the fair value of residual cash flows arising from accountsreceivable securitization*

 

·                 Theestimate of the Company’s fair value of its retained interest could materiallychange from period to period due to the fair value estimate being a function ofthe amount of accounts receivable sold, which can vary on a monthly basis. SeeNote 13 of the Consolidated financial statements for further analysis.

 

*The allowance for doubtful accounts*

 

·                 Theestimate of the Company’s allowance for doubtful accounts could materiallychange from period to period due to the allowance being a function of thebalance and composition of accounts receivable, which can vary on amonth-to-month basis. The variance in the balance of accounts receivable canarise from a variance in the amount and composition of operating revenues, froma variance in the amount of accounts receivable sold to the securitizationtrust and from variances in accounts receivable collection performance.

 

Inventories

 

*The allowancefor inventory obsolescence*

 

·                 The Company determines its allowance for inventory obsolescence based uponexpected inventory turnover, inventory aging, and current and futureexpectations with respect to product offerings.

 

·                 Assumptions underlying the allowance for inventory obsolescence includefuture sales trends and offerings and the expected inventory requirements andinventory composition necessary to support these future sales offerings. Theestimate of the Company’s allowance for inventory obsolescence could materiallychange from period to period due to changes in product offerings and consumeracceptance of those products.

 

·                 This accounting estimate is in respect of the Inventory line item on theCompany’s Consolidated balance sheet, which comprises approximately 1% of totalassets as at December 31, 2007. If the allowance for inventoryobsolescence was inadequate, the Company could experience a charge tooperations expense in the future. Such an inventory obsolescence charge doesnot result in a cash outflow.

 

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Capital assets and Goodwill

 

*General*

 

·                 The accounting estimates for Capital assets and Goodwill representapproximately 65% and 19%, respectively, of TELUS’ Consolidated balance sheet,as at December 31, 2007. If TELUS’ estimated useful lives of assetswere incorrect, it could experience increased or decreased charges foramortization of intangible assets or depreciation in the future. If the futurewere to adversely differ from management’s best estimate of key economicassumptions and associated cash flows were to materially decrease, the Companycould potentially experience future material impairment charges in respect ofits capital assets, including intangible assets with indefinite lives andgoodwill. If intangible assets with indefinite lives were determined to havefinite lives at some point in the future, the Company could experienceincreased charges for amortization of intangible assets. Such charges do notresult in a cash outflow and of themselves would not affect the Company’simmediate liquidity.

 

*The estimateduseful lives of assets; the recoverability of tangible assets*

 

·                 The estimated useful lives of assets are determined by a continuingprogram of asset life studies. The recoverability of tangible assets issignificantly impacted by the estimated useful lives of assets.

 

·                 Assumptions underlying the estimated useful lives of assets include timingof technological obsolescence, competitive pressures and future infrastructureutilization plans.

 

*Therecoverability of intangible assets with indefinite lives*;*therecoverability of goodwill*

 

·                 Consistentwith current industry-specific valuation methods, the Company uses adiscounted cash flow model combined with a market-based approach in determiningthe fair value of its spectrum licences and goodwill. See Note 14(c) ofthe Consolidated financial statements for further discussion of methodology.

 

·                 The mostsignificant assumptions underlying the recoverability of intangible assets withindefinite lives and goodwill include: future cash flow and growth projections,including economic risk assumptions and estimates of achieving desired keyoperating metrics and drivers; future weighted average cost of capital; andannual earnings multiples. Significant factors impacting these assumptionsinclude estimates of future market share, key operating metrics such as churnand ARPU, level of competition, technological developments, interest rates,market economic trends, debt levels and the cost of debt. Sensitivity testingis discussed in Note 14(c) of the Consolidated financial statements.

 

Investments

 

*Therecoverability of long-term investments*

 

·                 The Company assesses the recoverability of its long-term investments on aregular, recurring basis. The recoverability of investments is assessed on aspecific identification basis taking into consideration expectations aboutfuture performance of the investments and comparison of historical results topast expectations.

 

·                 The most significant assumptions underlying the recoverability oflong-term investments are the achievement of future cash flow and operatingexpectations. The estimate of the Company’s recoverability of long-terminvestments could change from period to period due to the recurring nature ofthe recoverability assessment and due to the nature of long-term investments(the Company does not control the investees).

 

·                 If the allowance for recoverability of long-term investments wereinadequate, the Company could experience an increased charge to Other expensein the future. Such a provision for recoverability of long-term investmentsdoes not result in a cash outflow.

 

Income tax assets and liabilities

 

*The amount andcomposition of income tax assets and income tax liabilities, including theamount of unrecognized tax benefits*

 

·                 Assumptions underlying the composition of income tax assets andliabilities, including the amount of unrecognized tax benefits, are based uponan assessment of tax positions as to whether, on their technical merit, theyare more likely than not of being sustained upon examination, and then anestimate of the amount of tax benefit that is greater than 50% likely of beingrealized upon ultimate settlement with taxing authorities. Such assessments arebased upon the applicable income tax legislation, regulations andinterpretations, all of which in turn are subject to interpretation.

 

·                 Current income tax assets and liabilities are estimated based upon theamount of tax that is calculated as being owed to taxing authorities, net ofperiodic instalment payments. Future income tax liabilities are comprised ofthe tax effect of temporary differences between the carrying amount and taxbasis of assets and liabilities as well as the tax effect of undeducted taxlosses. The timing of the reversal of the temporary differences is estimatedand the tax rate substantively enacted for the periods of reversal is appliedto the temporary differences. The carrying amounts of assets and liabilitiesare based upon the amounts recorded in the financial statements and aretherefore subject to accounting estimates that are inherent in those balances.The tax basis of assets and liabilities as well as the amount 

 

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of undeducted taxlosses are based upon the assessment of tax positions and measurement of taxbenefits as noted above. Assumptions as to the timing of reversal of temporarydifferences include expectations about the future results of operations andcash flows. The composition of income tax liabilities is reasonably likely tochange from period to period because of changes in the estimation of thesesignificant uncertainties.

 

·                 This accounting estimate is in respect of material asset and liabilityline items on the Company’s Consolidated balance sheet comprising less than 1% oftotal assets and approximately 9% of total liabilities and shareholders’ equityas at December 31, 2007. If the future were to adversely differ frommanagement’s best estimate of the likelihood of tax positions being sustained,the amount of tax benefit that is greater than 50% likely of being realized,the future results of operations, the timing of reversal of deductibletemporary differences and taxable temporary differences, and the tax ratesapplicable to future years, the Company could experience material future incometax adjustments. Such future income tax adjustments could result in anacceleration of cash outflows at an earlier time than might otherwise beexpected.

 

Advance billings and customer deposits

 

*The accruals for CRTC deferral accountliabilities*

 

·                 The deferral account arose from theCRTC requiring the Company to defer the income statement recognition of aportion of the monies received in respect of residential basic servicesprovided to non-high cost serving areas; such deferral requirement ended on May 31, 2006.The revenue deferral was based on the rate of inflation, less a productivityoffset of 3.5%, and an exogenous factor that was associated with allowedrecoveries in previous price cap regimes that have now expired. The criticalestimate arises from the Company’s recognition of the deferred amounts. TheCompany may recognize the deferred amounts upon the undertaking of qualifyingactions, such as Service Improvement Programs in qualifying non-high costserving areas, rate reductions (including those already mandated by the CRTC inrespect of discounts on Competitor Digital Network services) and/or rebates tocustomers. As described in Note 19(a) of the Consolidated financialstatements and *Section 10.3 Regulatory — Pricecap regulation*, amounts in the deferral account are currently thesubject of appeals to the Federal Court of Appeal by certain consumer groupsand Bell Canada.

 

·                 Assumptions underlying the accrualsfor the CRTC deferral account that were uncertain at the time of making theestimate include what actions will ultimately qualify for recognition ofdeferred amounts and over what period of time qualifying deferred amounts areto be recognized in the Company’s Consolidated statements of income. The mannerin which deferred amounts are recognized, and the amounts thereof, arereasonably likely to change as such recognition is ultimately dependent uponfuture decisions made by the CRTC, and resolution of appeals to the courts.

 

·                 This accounting estimate is inrespect of an item within the advance billings and customer deposits line itemon TELUS’ Consolidated balance sheet and which, itself, comprises approximately4% of total liabilities and shareholders’ equity. If the Company’s estimate ofdeferred amounts recognized, and the timing of the recognition thereof, were todiffer materially from what the CRTC ultimately decides is allowable, revenuescould possibly be materially impacted. Such a revenue impact would not beexpected to be accompanied by a corresponding impact in net cash inflows.Should the consumer groups be successful in their appeal of the use of deferralaccount amounts, the Company may be required to remit a one-time refund to itsentire local residential subscriber base. As the deferral account balance wasfully provided for in previous financial statements, the potential refund willnot impact TELUS’ subsequent income from operations. Such a refund would resultin a net cash outflow, potentially offset by reduced capital investment as theCompany re-addresses its intent to extend broadband services to uneconomicremote and rural communities. In the event that Bell Canada is successful inits appeal, TELUS may realize additional revenue equal to the amount of thedeferral account that would otherwise have been rebated by the CRTC. Such arevenue impact would not be expected to be accompanied by a correspondingimpact in net cash inflows.

 

Employee defined benefit pension plans

 

*Certainactuarial and economic assumptions used in determining defined benefit pensioncosts, accrued pension benefit obligations and pension plan assets*

 

·                 The Company reviews industry practices, trends, economic conditions anddata provided by actuaries when developing assumptions used in thedetermination of defined benefit pension costs and accrued pension benefitobligations. Pension plan assets are generally valued using market prices,however, some assets are valued using market estimates when market prices arenot readily available. Defined benefit pension costs are also affected by thequantitative methods used to determine estimated returns on pension planassets. Actuarial support is obtained for interpolations of experience gainsand losses that affect the defined benefit pension costs and accrued benefitobligations. The discount rate, which is used to determine the accrued benefitobligation, is based upon the yield on long-term, high-quality fixed terminvestments, and is set annually. The expected long-term rate of return isbased upon forecasted returns of the major asset categories and weighted byplans’ target asset allocations. Future increases in compensation are basedupon the current benefits policies and economic forecasts.

 

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·                  Assumptions used in determining defined benefit pension costs, accruedpension benefit obligations and pension plan assets include: discount rates,long-term rates of return for plan assets, market estimates and rates of futurecompensation increases. Material changes in overall financial performance andfinancial statement line items would arise from reasonably likely changes,because of revised assumptions to reflect updated historical information andupdated economic conditions, in the material assumptions underlying thisestimate. See Note 12(i) of the Consolidated financial statements forfurther analysis.

 

·                  This accounting estimate is in respect of a component of the largestoperating expense line item on the Company’s Consolidated statements of income.If the future were to adversely differ from management’s best estimate ofassumptions used in determining defined benefit pension costs, accrued benefitobligations and pension plan assets, the Company could experience futureincreased defined benefit pension expense. The magnitude of the immediateimpact is lessened, as the excess of net actuarial gains and losses in excessof 10% of the greater of the benefit obligation and the fair value of the planassets is amortized over the average remaining service period of activeemployees of the plan.

 

### **8.2 Accounting policy developments**(Note 2 of the Consolidated financial statements)

### ** **

*Convergencewith International Financial Reporting Standards*

 

In 2006, Canada’s Accounting Standards Boardratified a strategic plan that will result in Canadian GAAP, as used by publiccompanies, being evolved and converged with International Financial ReportingStandards (IFRS) over a transitional period to be complete by 2011. The Companywill be required to report using the converged standards effective for interimand annual financial statements relating to fiscal years beginning on or after January 1,2011.

 

CanadianGAAP will be converged with IFRS through a combination of two methods: ascurrent joint-convergence projects of the United States’ Financial AccountingStandards Board and the International Accounting Standards Board are agreedupon, they will be adopted by Canada’s Accounting Standards Board and may beintroduced in Canada before the complete changeover to IFRS; and standards notsubject to a joint-convergence project will be exposed in an omnibus manner forintroduction at the time of the complete changeover to IFRS. The United States’Financial Accounting Standards Board and the International Accounting StandardsBoard have completed a joint-project on business combinations andnon-controlling interests.

 

As theInternational Accounting Standards Board currently, and expectedly, hasprojects underway that should result in new pronouncements that continue toevolve IFRS, and that this Canadian convergence initiative is in an early stageas of the date of these consolidated financial statements, it is premature tocurrently assess the impact of the Canadian initiative on the Company.

 

*Comprehensiveincome; recognition and measurement of financial instruments*

 

*Overview:*Commencing with theCompany’s 2007 fiscal year, the recommendations of the CICA for accounting forcomprehensive income (CICA Handbook Section 1530), for the recognition andmeasurement of financial instruments (CICA Handbook Section 3855) and forhedges (CICA Handbook Section 3865) apply to the Company. Currently, theconcept of comprehensive income for purposes of Canadian GAAP, in the Company’sspecific instance, is primarily to include changes in shareholders’ equityarising from unrealized changes in the fair values of certain financialinstruments.

 

The majority of the impact on the Company of adopting theother comprehensive income and related standards currently arises from theCompany’s cross currency interest rate swap agreements and, to a lesser extent,the cash-settled equity forward agreements that the Company entered into inrespect of share-based compensation.

 

In theapplication of hedge accounting to U.S. dollar denominated long-term debtfuture cash outflows, an amount (the hedge value) is recorded in theConsolidated balance sheets in respect of the value of the hedging items. Inrespect of these future cash flows, the difference arising from the adoption ofthe newly applied CICA recommendations is the difference between: (a) thehedging asset or liability necessary to recognize the Canadian dollarequivalent of the value of the hedged items at the rate of exchange in thehedging items; and (b) the fair value of the hedging items. This isillustrated in the following table:

 

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| ** **                                                                      | ** ** | **2007**            | ** ** | **2006**            | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **As at December 31 ($ millions)**                     | ** ** | **2011 Notes** | ** ** | **2007 Notes** | ** ** | **2011 Notes** | ** ** | **Total** | ** ** |
| Canadian dollar equivalent of principal at rates of exchange in hedging  items  |       | 2,950.5             |       | 1,483.3             |       | 2,950.5 |   | 4,433.8 |   |
| Canadian dollar equivalent of principal at balance sheet date rate of  exchange |       | 1,908.3             |       | 1,357.9             |       | 2,240.2 |   | 3,598.1 |   |
| Hedge value necessary to reflect rates of exchange in hedging items             |       | 1,042.2             |       | 125.4               |       | 710.3 |   | 835.7 |   |
| Difference arising from newly applied CICA recommendations(1)                   |       | 137.3               |       | 14.2                |       | 250.8 |   | 265.0 |   |
| Fair value of hedging items                                                     |       | 1,179.5             |       | 139.6               |       | 961.1 |   | 1,100.7 |   |

 

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| (1) | The  amounts as at December 31, 2006, are included in the transitional  adjustments |
|-----|------------------------------------------------------------------------------------------|

 

Comprehensiveincome as prescribed by U.S. GAAP is largely aligned with comprehensiveincome as prescribed by Canadian GAAP, other than for pension accountingimpacts. In the Company’s specific instance, U.S. GAAP includes, inrespect of pension and other defined benefit plans, the difference between thenet funded states of the plans and the net accrued benefit asset or liability.

 

*Implementationand application:* In the Company’s specific instance, the transitional rules forthese sections generally require prospective implementation at the beginning ofa fiscal year (the exception being in respect of the cumulative foreigncurrency translation adjustment, which is retrospectively adjusted for at thebeginning of the fiscal year of adoption).

 

Costsof issuing debt securities, less amortization, are now netted against the debtsecurity from which they arose. This resulted in a consolidated balance sheetreclassification from deferred charges to long-term debt of $19.9 millionas at December 31, 2006. Prior to 2007, costs of issuing debt securitieswere amortized on a straight-line basis. Such costs are now required to beamortized using the effective interest method. The Company was not materiallyaffected by the change in amortization method, which was prospectively applied.

 

In the ongoing application of these recommendations, theCompany was required to select from a number of pertinent alternativeacceptable accounting principles and methods and the Company has made thefollowing selections:

 
| **Financial instrument**                                                                                           | ** ** | **Classified as  available-for-sale  or held as part of  a cash flow  hedging  relationship(1)** | ** ** | **Classified as  held for  trading(1) (2)** | ** ** | **Company’s reason for classification selection**                                                                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ·  Short-term  marketable security investments(3)                                                             |       |                                                                                                                                |       | X                                                          |       | This  method better reflects management’s investment intentions                                                                       |       |
| ·  Long-term  investments(3)                                                                                  |       | X                                                                                                                                   |       |                                                       |       | The  classification as available-for-sale better reflects management’s investment  intentions                                         |       |
| ·  Stand-alone  derivatives which are a part of an established and documented cash flow  hedging relationship |       | X                                                                                                                                   |       |                                                       |       | This  classification as held for hedging results in a better matching of the change  in the fair value with the risk exposure being hedged |       |

 

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| (1) | The  distinction between classification as available-for-sale (or held as part of  a cash flow hedging relationship) or held for trading is that *unrealized* changes in the fair values of financial  instruments classified as available-for-sale, or the effective portion of *unrealized*changes in the fair value of financial  instruments held for hedging, are included in other comprehensive income and *unrealized* changes in the fair values of financial  instruments classified as held for trading are included in net income. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Certain  financial instruments that are not required to be classified as held for  trading may be classified as held for trading if the Company so chooses.                                                                                                                                                                                                                                                                                                                                                                                    |
| (3) | In  respect of investments in securities for which the fair values can be  reliably measured, the Company determines the classification on an  instrument-by-instrument basis at the time of initial recognition.                                                                                                                                                                                                                                                                                                                              |

 

·                 Accounts receivable that areavailable-for-sale to an arm’s-length securitization trust are accounted for asloans and receivables. The Company has selected this method as the benefitsthat would have been expected to arise from using the available-for-sale methodwere not expected to exceed the costs of selecting and implementing thatmethod.

 

·                 Regular-way purchases or sales(those which require actual delivery of financial assets or financialliabilities) are recognized on the trade date. The Company has selected thismethod as it is consistent with the mandatory trade-date accounting requiredfor derivative instruments.

 

·                 Transaction costs, other than inrespect of held for trading items, are added to the initial fair value of theacquired financial asset or financial liability. The Company has selected thismethod as it believes that this results in a better matching of the transactioncosts with the periods benefiting from the transaction costs.

 

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·                 In respect of hedges of anticipatedtransactions, which in the Company’s specific instance currently relates toinventory purchase commitments, hedge gains/losses which will be included inthe cost of the inventory and will be expensed when the inventory is sold. TheCompany has selected this method as it believes that a better matching with therisk exposure being hedged is achieved.

 

*Effectsdisclosure:* The effects of the application of CICA HandbookSections 1530, 3855 and 3865 on the Company’s results of operations andretained earnings for the year ended December 31, 2007 and financialposition at December 31, 2007 are enumerated in Note 2(b) of theConsolidated financial statements.

 

*Financialinstruments – disclosure; presentation*

 

Inrespect of its 2007 fiscal year, the Company had to comply with therecommendations of the CICA for financial instrument disclosure andpresentation (CICA Handbook Section 3861). As an activity consistent withCanadian GAAP being evolved and converged with IFRS, the existingrecommendations for financial instrument *disclosure* willbe replaced with new recommendations (CICA Handbook Section 3862); theexisting recommendations for financial instrument *presentation*will be carried forward, unchanged (CICA Handbook Section 3863).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA forfinancial instrument disclosures will apply to the Company. The newrecommendations will result in incremental disclosures, relative to thosecurrently, with an emphasis on risks associated with both recognized andunrecognized financial instruments to which an entity is exposed during theperiod and at the balance sheet date, and how an entity manages those risks.The Company does not expect to be materially affected by the newrecommendations.

 

*Inventories*

 

Commencing with the Company’s 2008 fiscal year, the new,IFRS-converged recommendations of the CICA for accounting for inventories (CICAHandbook Section 3031) will apply to the Company. The new recommendations providemore guidance on the measurement and disclosure requirements for inventories;significantly, the new recommendations allow the reversals of previouswrite-downs to net realizable value where there is a subsequent increase in thevalue of inventories. The Company does not expect to be materially affected bythe new recommendations.

 

*Employeefuture benefits transitional pension asset accounting*

 

In the adoption and implementation of new accountingrecommendations for employee future benefits (CICA Handbook Section 3461)in the 2000 fiscal year, various estimates and determinations were made. At thetime of implementation, the Company concluded that one defined benefit pensionplan had certain unique features and, to account for these features, the Companyrecognized one-half of the associated transitional asset through amortizationover the associated expected average remaining service life of the employeegroup at the time of implementing the then new recommendations. During theyear, the Company revisited the various determinations made in 2000 andconcluded that it should have recognized the entire associated transitionalasset. See Note 2(e) of the Consolidated financial statements.

 

## **9.**              General outlook

## ** **

The following discussion is qualified in its entiretyby the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, and *Section 10: Risks and risk management*.

 

In2007, the Canadian telecom industry generated estimated revenues ofapproximately $40 billion, with Bell Canada and affiliated companiesrepresenting about 45% of the total. As the second largest telecommunicationsprovider in Canada, TELUS generated almost $9.1 billion in revenues in2007, or approximately 23% of the total.

 

Revenuein the Canadian telecom market grew an estimated 5.5% in 2007, consistent withthe high end of the 3.5 to 6% growth experienced in recent years and betterthan overall GDP growth. Wireless and enhanced data continue to be the focus ofincreased investment and act as growth engines for the sector. Offsetting thisgrowth was continued wireline industry weakness in voice service revenue, withdeclining long distance and legacy data revenues, partially offset by growth inenhanced data services.

 

TELUS’continued focus on national growth in wireless, data and IP, and the impact ofa strong Western economy, were partially offset by wireline losses to cabletelephony, resulting in 4.5% consolidated revenue growth. TELUS expects highergrowth in 2008 due to a continued focus on data, IP and wireless, including theFuture Friendly Home strategy that leverages investments in wireless, broadbandfacilities and TELUS TV, as well as the acquisition of Emergis.

 

Thetelecom landscape is expected to remain competitive in 2008. On the wirelinefront, traditional services remain under pressure. Local and long distancerevenues are expected to continue to be impacted by consumer migration fromwireline to wireless and VoIP services. With basic cable-TV subscriberadditions flat and high-speed Internet subscriber growth slowing, cable-TVcompanies have increased certain pricing, and are continuing to roll outhigher-speed Internet services, Internet telephony and digital cable-TVservices to fuel growth. At the end of 2007, Shaw Communications had more than 

 

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400,000residential telephone subscribers, and Rogers Communications and Videotroncontinue to add Internet telephony customers in their service areas in CentralCanada.

 

Thefederal government moved the telecommunications industry towards a more openand deregulated wireline environment, based on increased reliance on marketforces, with an April 2007 Order in Council. This directed the CRTC togrant residential local exchange forbearance in markets with three independentfacilities-based competitors each capable of serving at least 75% ofresidential lines, and business forbearance in markets with twofacilities-based competitors each capable of serving at least 75% of businesslines. It also reduced the number of quality-of-service indicators to be metand removed restrictions on winbacks and promotions by incumbent telecoms.Forbearance provides TELUS and other incumbent telecom companies withsignificantly enhanced flexibility in pricing, promotions and bundling tocompete on a go-forward basis in an increasingly competitive market.

 

Thewireless market in Canada is expected to continue to be very competitive andgenerate continued growth as penetration rates (wireless subscribers as a percent of population) increase. In 2007, communications companies with greaterwireless exposure generally benefited from higher revenue and cash flow growth.Rogers and TELUS, both with high exposure to wireless, announced dividendincreases and share buyback programs.

 

On theother hand, low exposure to wireless and low growth were likely contributingfactors leading to a strategic review process at BCE Inc., parent company ofBell Canada. As a result of this strategic review, in June 2007 BCE announcedthat it had entered into a definitive agreement to be acquired by a group ofprivate equity investors. (See *Section 1.2.*)There may be a change in BCE’s strategy as well as its operational andinvestment priorities after the completion of the privatization.

 

Wireless

 

Thewireless industry continues to experience robust growth with estimatedyear-over-year industry revenue and EBITDA growth of approximately 13% and 19%,respectively.

 

Thefact that Canada’s penetration rate lags those of other developed countries,due to structural and timing differences, continues to represent a considerablegrowth opportunity. Penetration rates in many Western European countries havesurpassed 100%. Asian countries, such as Korea, are approaching 90%penetration. These rates are not exactly comparable or achievable in NorthAmerica due to higher-quality, lower-cost, fixed-rate local service, multiplesubscriptions being possible on one GSM handset in Europe and differences inpostpaid and prepaid mix. The U.S. wireless industry is more comparable toCanada, with a penetration rate of more than 80%, resulting in part from atwo-year head start in the U.S. Canada continues to grow strongly withapproximately 1.7 million new subscribers in 2007, an estimated 4.9 pointincrease in penetration to approximately 61%, with similar growth expected in2008.

 

A keydriver of wireless growth continues to be the increased adoption and usage ofdata services such as text messaging, mobile computing, gaming, ringtones,music, mobile TV and PDAs. To capture this opportunity, Canadian wirelessproviders continue the roll-out of faster, next generation high-speed wirelessnetworks, with TELUS currently benefiting from the fastest coast-to-coasthigh-speed wireless network in Canada. In 2007, wireless data in Canadarepresented an estimated 13% of industry ARPU. This compares to approximately30% in Asia, 20% in Europe and 20% in the U.S., indicating an ongoing growthopportunity.

 

Competitionin the wireless market is anticipated to remain intense due to a number offactors. While TELUS, Rogers and Bell account for the majority of market share,MVNOs such as Virgin Mobile, Videotron Ltd., and President’s Choice remainactive. In the price-sensitive market, Bell and Rogers continue to aggressivelypromote their respective Solo and Fido discount brand offerings.

 

In March 2007,industry-wide wireless number portability was successfully implemented inCanada, which allowed customers to move to a different provider while retainingtheir existing phone number. Canada was the first country to simultaneouslyimplement full number portability: wireless to wireless, wireless to wireline,and wireline to wireless. The removal of this key switching barrier initiallyresulted in increased industry churn rates, gross additions, and customeracquisition and retention expenditures.

 

In2007, the federal government released its*Policy Framework for theAuction for Spectrum Licences for Advanced Wireless Services*. Thisset the stage for an auction in May 2008 and made provisions favourable topotential new entrants such as: spectrum set-asides, including regional andmetropolitan blocks; mandated roaming; and tower sharing. While a new entrantwill face hurdles, such as high penetration rates, large capital commitmentsfor network investment and startup costs, and restrictions on foreigninvestment, the introduction of a new competitor will likely increasecompetitive intensity, at least regionally. Videotron, which currently offerswireless services in areas of Quebec through a resale agreement with Rogers,lobbied extensively for favourable new-entrant conditions and is expected toparticipate in the auction. Manitoba Telecom Services Inc. also lobbied forfavourable conditions and have indicated that it is contemplating participationin the auction. However, the number and viability of new entrants remainunknown until the auction is completed.

 

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GivenTELUS’ high proportion of wireless (47% of consolidated revenue), strong brandand consistent focus on profitable subscriber growth, TELUS is well positionedto benefit from continued growth in the Canadian wireless market.

 

Wireline

 

Incontrast to wireless, expectations for the mature wireline segment are more modest.Residential access lines continue to be negatively impacted by migration towireless, reduction in second lines and substitution to VoIP services,particularly those offered by cable-TV companies. Canada’s four major cable-TVcompanies had more than 1.9 million telephony subscribers at the end of2007, up more than 800,000 from 2006, or an estimated 14% market sharenationally. However, TELUS posted moderate line losses of 3.2% in 2007, whichcompared favourably to many North American peers that have experienced lossesat two or three times this rate. The long distance market is expected todeteriorate further, due to continued aggressive pricing and promotion of voicepackages by VoIP providers, and migration to other technologies such as e-mail.

 

The consumermarket is expected to remain highly competitive as technological advancementsblur boundaries between telecom, video, broadcast and entertainment. With itsFuture Friendly Home strategy, TELUS is positioned to grow wallet share withconsumers, while enhancing retention and loyalty through multiple serviceofferings. TELUS is poised to accelerate the roll-out of TELUS TV, includingnew products such as high-definition TV (HDTV), to markets in B.C., Alberta andEastern Quebec. Combined with wireline local and long distance, wireless andhigh-speed Internet services, TELUS’ goal is to use a quadruple play productoffering to achieve competitive differentiation by offering a premium,integrated set of services that provides customers more freedom, flexibilityand choice.

 

TELUS’ability to compete effectively in wireline was enhanced in 2007 by changes inCanada’s regulatory environment. In the second half of 2007, the CRTC beganapproving applications for forbearance, approving those covering approximately75% of TELUS’ residential lines, in non-high cost serving areas, and for abouttwo-thirds of TELUS’ business lines. This increases TELUS’ pricing and bundlingflexibility, allowing the Company to be more competitive. In addition, the CRTC’sdecision on the next price cap regime, which took effect on June 1, 2007,confirmed no further mandated consumer local price reductions and allows forgreater consumer price flexibility.

 

Totake advantage of opportunities presented by forbearance and to facilitate bundledproduct offerings, TELUS continues to implement a new integrated billing andclient care system that consolidates multiple legacy systems. Anticipatedbenefits include increased customer service efficiencies — greater flexibility,differentiation, enhanced marketing opportunities and accuracy — as well ascertain expense savings. TELUS successfully converted all wireline consumers inAlberta to the new system, with a similar conversion planned for BritishColumbia in 2008.

 

Certainelements of the business market, such as IP and data, continue to show signs ofstrength. However, the frontier between telecom and IT remains competitive,with IT service providers moving down the value chain into the communicationsmarket space, and telcos looking to push beyond their traditional niche.Network equipment manufacturers are also moving up the value chain into themanaged network space. Legacy voice and data services are expected to continueto decline due to accelerated adoption of IP services as businesses and largeenterprises upgrade legacy networks and equipment. Telcos are expected tocontinue developing single IP-based platforms to provide combined IP voice,data and video solutions, thereby creating cost efficiencies to in partcompensate for margin pressures from the migration from legacy to IP-basedservices. TELUS expects to achieve continued success by offering enterpriseclients differentiated, integrated, leading-edge managed solutions focused onkey verticals including the public sector, financial services, energy andhealthcare, which should be enhanced by the acquisition of Emergis in January 2008.

 

TELUS’strategic focus on delivering differentiated, premium national businessservices in data and IP, exposure to growth services such as high-speedInternet and TELUS TV, and high exposure to the national wireless market,solidly position the Company for continued growth in 2008 and beyond.

 

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## **10.**       Risks and riskmanagement

## ** **

TELUS’ risk and control assessment process

 

 

TELUS uses a three-level enterprise risk and controlassessment process that solicits and incorporates the expertise and insight ofteam members from all areas of the Company.

 

Level one is the annual risk and controlassessment. Key inputs into this process include interviews with seniormanagers, data and updates from TELUS’ ongoing strategic planning process andthe results of an annual web-enabled risk and control assessment survey. Thesurvey is based on the COSO (Committee of Sponsoring Organizations of theTreadway Commission) enterprise risk management and internal control frameworksand is widely distributed to TELUS’ management leadership team (all EVP, VP andDirector level team members and a random sample of management). Surveyresponses were received from 1,720 individuals in 2007.

 

Additionally, TELUS’ assessment processincorporates input from recent internal and external audits, as well as inputfrom management’s SOX 404 (*Sarbanes Oxley Act*of 2002) internal control over financial reporting compliance activities. Keyenterprise risks are identified, defined and prioritized, and risks areclassified into one of seven risk categories.

 

Results of the annual risk and control assessmentdrive the development of TELUS’ internal audit program and are presented tosenior management and the Audit Committee. Risk assessments are alsoincorporated back into the Company’s strategic planning processes.

 

In level two, TELUS conducts a quarterly riskassessment review with key internal stakeholders to capture dynamically thechanging business risks, monitor key risk mitigation activities and provideongoing updates and assurance to the Audit Committee.

 

In level three, TELUS conducts granular riskassessments for specific audit engagements and various risk managementinitiatives (e.g. environmental management system, safety audits, businesscontinuity planning, network and IT vulnerability, and fraud and ethicsassessments). The results of the multiple risk assessments are evaluated, prioritized,updated and integrated into the key risk profile throughout the year. TELUSinitially implemented its three-level risk and control assessment process in2002 and tracks multi-year trends for various key risks and control environmentperceptions across the organization.

 

TELUS’ definition of business risk

 

TELUS defines business risk as the degree ofexposure associated with the achievement of key strategic, financial,organizational and process objectives in relation to the effectiveness andefficiency of operations, the reliability of financial reporting, compliancewith laws and regulations, and the safeguarding of assets within an ethicalorganizational culture.

 

TELUS’ enterprise risks are largely derived fromthe Company’s business environment and are fundamentally linked to TELUS’strategies and business objectives. TELUS strives to proactively mitigate itsrisk exposures through rigorous performance planning and effective andefficient business operational management. Residual exposure for certain risksis mitigated through appropriate insurance coverage where this is judged to beefficient and commercially viable. TELUS strives to avoid taking on undue riskexposures whenever possible and ensure alignment with business strategies,objectives, values and risk tolerances.

 

The following sections summarize the principalrisks and uncertainties that could affect TELUS’ future business results goingforward, and TELUS’ associated risk mitigation activities.

 

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### **10.1 Competition**

### ** **

*Aggressive competition may adversely affect market shares, volumes andpricing*

 

TELUSfaces intense competition across all key market segments including the smalland medium-sized business (SMB) market, the large enterprise market, wheretraditionally a small number of major customers deliver a significant amount ofrevenue, and the consumer market.

 

Technologicaladvances have blurred the traditional boundaries between broadcasting, Internetand telecommunications. Cable-TV companies now offer voice phone services,intensifying competition in the residential local, high-speed Internet access(HSIA) and long distance markets. New access technologies have also enablednumerous companies to offer competitive substitute services. Overall, industrypricing and customer acquisition efforts have intensified across most productand service categories and market segments.

 

*Riskmitigation:*Recent CRTC decisions approving wireline deregulation haveprovided TELUS with an improved ability to go to market as one national team,under a common brand, offering a full suite of integrated solutions. (See *Section 10.3 Regulatory.*) With the operationalintegration of wireless and wireline, TELUS is able to better align acrossdistribution channels and product and service roadmaps, and provide integratedofferings and joint account planning, which are designed to differentiate TELUSfrom its competitors. TELUS is also generating continued growth innon-incumbent markets in Central Canada to offset competitive losses in itstraditional incumbent markets.

 

*Wireline voice and data*

 

Competitionis expected to remain intense from traditional telephony, data, IP and ITservice providers, and from new entrants providing alternatives to traditionalwireline local access and long distance through the use of voice over Internetprotocol (VoIP) telephony. Competitors are focusing on both business andresidential markets.

 

Theindustry transition from legacy voice infrastructure to IP telephony, and fromlegacy data platforms to multi-protocol label switching (MPLS) IP platforms andIP-based service delivery models, continues at a strong pace. Legacy datarevenues and margins have declined and are expected to be only partially offsetby increased demand and/or increased migration of customers to IP-basedplatforms, which is also subject to intense pricing pressure and lower margins.

 

Inaddition to bundling price-discounted local access, wireless and advanced dataand IP services, business market competitors are also bundling web-based ande-commerce services, and other IT services and support. Non-traditionalcompetitors such as Microsoft are beginning to enter the telecom space throughnew products such as Unified Communications, which provides the ability toredirect and deliver, in real time, e-mail, voice or text messages from avariety of telecom and IT systems to the device nearest to the intendedrecipient. With this broader bundling of traditional telecom services with ITservices, TELUS increasingly faces competition from pure Internet andinformation technology hardware, software and business process/consultingrelated companies. Cable-TV companies have begun to target the SMB market withtheir VoIP services. The result is that traditional and non-traditional competitorsare now focused on providing a broad and varying range of telecommunicationsservices to the business market, particularly in the major urban areas.

 

*Riskmitigation in the business market:*TELUS continues to increase itscapabilities in the overall business market through a combination ofacquisitions and partnerships, a focus on priority vertical markets (publicsector, energy, healthcare and financial services), expansion of strategicsolution sets in the enterprise market, and a mass modular approach in the SMBmarket, with such services as TELUS Business One.

 

In theconsumer residential market, cable-TV companies and other competitors continueto combine a mix of residential local VoIP, long distance, HSIA and, in somecases, wireless services into one bundled or discounted monthly rate, alongwith their traditional broadcast or satellite-based TV services. In addition,cable-TV companies have been increasing the speed of their HSIA offerings.Other non-facilities based competitors are offering local and long distanceVoIP services over the Internet, and reselling HSIA solutions. Thiscompetition, as well as increased technological and wireless substitution, isexpected to continue to contribute to declines in residential network accesslines (NALs). The decline of access line associated revenues, including longdistance, can be expected to continue as VoIP providers gain local marketshare. Although the HSIA market is maturing, subscriber growth is stillexpected and overall pricing is anticipated to remain stable. With a moremature HSIA market, and the potential for higher speed Internet offerings fromcompetitors, TELUS may be constrained in its ability to increase market sharein its territories.

* *

*Riskmitigation in the consumer market:*TELUS continues to expand its ownbroadband infrastructure, both in coverage area and in increased speed ofservice, to enhance current services and enter new market segments such asvideo. TELUS TV is available in select areas in Edmonton, Calgary, Vancouverand Eastern Quebec. This helps TELUS counter the threat from the cable-TVcompetition in its incumbent markets, and to retain and grow revenues with aquadruple offering of local and long distance telephony, HSIA, wireless and TVentertainment services.

 

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*Broadcasting*

 

TELUS has initiated a targetedneighbourhood commercial launch of TELUS TV in Edmonton, Calgary, Vancouver andRimouski area markets in order to generate new revenuesand gain the ability to create new service bundles for enhanced competitivenessand customer retention. TELUS TV is an IP-based, fully digital TV service offeringbroadcast TV channels, Pay-per-View and Video-on-Demand services similar tothose offered by Shaw and Bell ExpressVu. Though still at an early stage ofroll-out, TELUS expects the service to increase penetration in 2008 asadditional ADSL2+ build-outs expand the addressable market covered and allowhigh-definition capability to be integrated into the TELUS TV offering.

 

*Risk mitigation:***IP TV affords TELUS uniquecompetitive advantages relative to cable-TV, such as time shifted programmingflexibility, on-screen caller ID, limited web-surfing and an all-digital, broadselection of channels. TELUS TV also provides the Company with the ability tooffer customers a quadruple play product, incorporating local, long distance,high-speed Internet, TV and wireless services in one bundle. However, IP TV isstill at a relatively early stage of development. Although per unit capital andoperating costs are high, the unit costs are expected to decline withtechnology advances and as TELUS continues to build scale. While IP TV providessignificant interactivity and customization advantages relative to both cableand satellite, there can be no assurance that TELUS TV will be successful inachieving its plans and obtaining a significant share of the TV servicesmarket.

 

*Wireless*

 

Competitionin the Canadian wireless market has intensified. The launch of WNP in March 2007removed a barrier to switching for many wireless subscribers. As a result ofWNP, all carriers launched price promotions to attract new customers from othercarriers and retain their customer base. TELUS has experienced higher churnrates since the introduction of WNP. While the initial post-WNP phase ofpent-up demand to switch has subsided, there is a risk that permanently higherchurn rates will be experienced in the future.

 

In October 2007,Rogers Wireless launched its high-speed packet access (HSPA) 3G high-speed datanetwork in 25 markets across Canada. Rogers’ new data network could result inlower TELUS ARPU and/or higher churn in the wireless data segment.

 

Wirelesscompetition also intensified in 2007 due to an increased emphasis onmulti-product bundles that include wireless service. A greater emphasis onbundle competition could reduce TELUS’ ARPU and increase its churn and cost ofacquisition. TELUS’ Mike Push To Talk (PTT) service also faces increasingcompetition due primarily to the emergence of e-mail and wireless data productsas a substitute for the dispatch and fleet management applications of Mike PTT.

 

Twonational wireless competitors are marketing value-oriented brands in additionto their flagship brands to attract new subscribers. These and other competitorscontinue to offer highly subsidized handsets, lowered airtime and wireless dataprices and other incentives in order to attract new customers and obtainenhanced channels of distribution to market. As Canadian wireless industrypenetration increases, industry net loading is expected to shift towards valuebrands and prepaid products.

 

TELUSoperates CDMA and iDEN wireless networks. Those technologies likely representless than 20% of global wireless subscribers. TELUS’ GSM competitor, Rogers,enjoys advantages in breadth of handset selection, earlier availability ofcertain devices and lower handset costs. These advantages may persist orincrease in the future, weakening TELUS’ competitive position.

 

TheAWS spectrum auction in May 2008 has the potential to create one or morenew regional or national wireless competitors. The government has set aside 40MHz of spectrum for new entrants. Strategies of potential competitors areuncertain, but could include price discounting relative to incumbents to winmarket share and increased competition in distribution. New entrants couldpotentially launch services by late-2008, but more likely in 2009. (See *Section 10.3 Regulatory.*)

 

*Competition from adjunct wireless technologies may increase*

 

Whileadjunct wireless technologies, like fixed WiMAX and WiFi (wireless fidelity),are maturing and their associated economic viability remains unproven,increased competition is expected through the use of licensed and/or unlicensedspectrum to deliver higher-speed data services. These technologies offerportable data capabilities that can overlap in some instances with mobile 3Gsuch as EVDO. (See *Section 10.2Technology.*) Although adjunct wireless services do not competedirectly with mobility services from TELUS, some market erosion may take place,triggered by niche market wireless substitutes.

 

Inaddition, certain non-traditional telecom players, such as municipalities, maycontemplate launching fixed wireless ventures in urban and suburban locations,as has been the case in the U.S. or in Toronto with Toronto Hydro Telecom’s OneZone service. The build-out and availability of such meshed networks based on802.11g standards may lead to a reduction of traffic on TELUS’ existingwireless mobile networks and/or increased competition for TELUS’ wireline HSIA 

 

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service.There can be no assurance that new or existing services offered by TELUS willbe competitive with such fixed wireless services, or will be available on time,or that TELUS will be able to charge incrementally for the services.

 

*Riskmitigation in wireless markets:*TELUS has a strong brand andintends to continue the marketing and distribution of innovative anddifferentiated wireless services; investing in its extensive network; evolvingtechnologies when deemed prudent; and acquiring spectrum as appropriate tofacilitate service development and profitable expansion of the Company’ssubscriber base. TELUS continues to monitor wireless technology developments andtakes a proactive approach to product testing and development. The expected AWSauction also provides an alternative path to mobile broadband.

 

### **10.2 Technology**

### ** **

****Technology is akey enabler for TELUS and its customers, however, technology evolution bringsrisks, uncertainties and opportunities. TELUS is vigorous in maintaining itsshort-term and long-term technology strategy to optimize the Company’sselection and timely use of technology, while minimizing the associated costs,risks and uncertainties. The following identifies the main technology risks anduncertainties and how TELUS is proactively addressing them.****

 

*Evolving wired broadband access technology standards may outpaceprojected access infrastructure investment lifetimes*

 

Thetechnology standards for broadband access over copper loops to customerpremises are evolving rapidly. This evolution enables higher broadband accessspeeds and is fuelled by user appetite for faster connectivity, the threat ofincreasing competitor capabilities and offerings, and the desire of serviceproviders like TELUS to offer new services, such as IP TV, that require greaterbandwidth. In general, the evolution to higher broadband access speeds isachieved by deploying fibre further out from the central office, thus shorteningthe copper loop portion of the access network and using faster modemtechnologies on the shortened copper loop.

 

*Riskmitigation:*In 2005, TELUS began deploying ADSL2+, a generation of ADSLtechnology that enables link rates at up to 24 megabits per second (Mbps) tothe customer premises, compared with up to 8 Mbps for ADSL. ADSL2+technology is compatible with ADSL and takes advantage of TELUS’ investments inextended reach access (ERA) copper/fibre access infrastructure improvementprograms and in the installed base of ADSL modems. In 2008, TELUS anticipatesit will begin utilizing very high bit rate digital subscriber line (VDSL2) andVDSL2 bonding technologies in certain urban areas to extend the capabilities ofthe copper loops to at least double previous speeds, up to 80 Mbps.

 

In2008, TELUS expects to continue field trials of fibre to the home (FTTH)technologies utilizing standards-based gigabit passive optical network (GPON)technology. FTTH is one of several competing proposed FTTx standards (wherex  represents home, curb, pedestalor neighbourhood) in development that TELUS is actively monitoring. Oneor more of these fibre-based solutions may be a more practical technology todeploy in new green field neighbourhoods or multiple-dwelling units than thecurrent copper loops. In addition, TELUS is exploring business models for theeconomical deployment of fibre-based technologies in areas currently connectedby copper.

 

Theseevolving standards, enabled with QoS standards and network traffic engineering,all support the TELUS Future Friendly Home strategy to deliver IP-basedInternet, voice and video services over a common broadband accessinfrastructure. However, these technologies are evolving faster than thetraditional investment cycle for access infrastructure. The introduction ofthese new technologies and the pace of adoption could result in increasedrequirements for capital funding not currently planned.

 

*IP-based telephony as areplacement for legacy analog telephony is evolving and cost savings areuncertain*

 

TELUScontinues to monitor the evolution of IP-based telephony technologies andservice offerings and is developing and testing a consumer solution forIP-based telephony over broadband access in accordance with TELUS’ strategy andstandards. This solution could provide additional telephone services over thesame line as legacy analog telephone service or could replace the legacy analogtelephone service. One of the realities of VoIP in the consumer space is thatthe actual state of technology developed to inter-work telephony, video andInternet access on the same broadband infrastructure is in its infancy andthere are risks and uncertainties to be addressed, such as ensuring allservices can be delivered simultaneously to the home (and to different deviceswithin the home) with uncompromised quality. These issues are exacerbated whenthe exchange of information is between service providers with differentbroadband infrastructures.

 

Along-term technology strategy is to move all services to IP to simplify thenetwork, reduce costs and enable advanced Future Friendly Home services.Pursuing this strategy to its full extent would involve transitioning TELUS’standard telephone service offering to IP-based telephony and phasing out legacyanalog-based telephone service. To this point, TELUS’ legacy voice networkinfrastructure could be simplified if regular analog telephone lines werediscontinued in favour of digital-only broadband access lines supporting allservices including telephony, Internet and video. This would, for example,allow inexpensive high-bandwidth conventional Ethernet to be used as thebroadband access technology in the multiple-dwelling unit model. However,digital-only broadband access may not be feasible or economical in many areasfor 

 

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sometime, particularly in rural and remote areas. TELUS needs to support bothlegacy and broadband voice systems for some time and, therefore, is expected tocontinue to incur costs to maintain both systems. There is a risk thatinvestments in broadband voice may not be accompanied by decreased costs ofmaintaining legacy voice systems. There is also the risk that broadband accessinfrastructure and corresponding IP-telephony platforms may not be in place intime to avoid some re-investment in traditional switching platforms to supportthe legacy public switched telephone network access base in certain areas,resulting in some investment in line adaptation in non-broadband centraloffices.

 

*Riskmitigation:*TELUS continues to monitor and conduct trials of IP-basedvoice technologies to better assess their technical applicability and evolvingcost profiles, as well as to determine the appropriate timing forimplementation by service area in line with TELUS’ commitments to the CRTC andits customers. TELUS is making investments in FTTN technologies and accesstechnologies that consider the future evolution of IP-based telephony. TELUS isalso working with manufacturers to optimize the operations and cost structureof analog systems.

 

*Theconvergence in a common IP-based application environment for telephony,Internet and video is complex*

 

Traditionallythe technology and systems associated with telephony, Internet and video weredifferent from each other and provided little opportunity for common platformsfor cost savings and little flexibility to integrate media, services andservice development environments. The convergence in a common IP-basedapplication environment, carried over a common IP-based network, providesopportunity for cost savings and for the rapid development of more advancedservices that are more flexible and easier to use. Further, the globalstandards for drawing together classic wireline and wireless services into acombined architecture using an IP multimedia subsystem are being activelyratified. However, the transformation from individual traditional silo systemsand architectures to a common environment is very complex.

 

TELUShas commercially launched one of the world’s first IP TV systems, called TELUSTV, which utilizes middleware designed specifically for video delivery. Themiddleware is designed to allow complex signalling communication betweenapplication software and system hardware in the network, and in the set-top boxin the home. Given that IP TV is in an early stage of development, there isrisk of obsolescence with middleware technology.

 

*Riskmitigation*: TELUS is mitigating this risk through modulararchitectures, lab investments, partnering with system integrators whereappropriate, and using hardware that is common to most other North American IPTV deployments. TELUS is striving to ensure that its IP TV deployment is partof an open framework that will fit into the overall transformation strategyonce standards are ratified and the actual implementations have stabilized,particularly with the set-top box.

 

*Supportsystems will increasingly be critical to operational efficiency*

 

TELUScurrently has a very large number of interconnected operational and businesssupport systems, and the complexity is increasing. This is typical of incumbenttelecommunications providers that support a wide variety of legacy and emergingtelephony, mobility, data and video services. The development and launch of anew service typically requires significant systems development and integration.The associated developmental and ongoing operational costs are a significantfactor in maintaining competitive position and profit margins. TELUS isproactive in evolving to next generation support systems. As next generationservices are introduced, they should be designed to work with both legacy andnext generation support systems, which introduces uncertainty with respect tothe costs and effectiveness of the solutions and the evolution.

 

*Riskmitigation:*In line with industry best practice, TELUS’ approach is toseparate the business support systems from the operational support systems andunderlying network technology. The aim is to decouple the introduction of newnetwork technologies from the services sold to customers. This should allowTELUS to optimize network costs, while limiting the impact on customerservices, and to facilitate the introduction of new services by removing, wherepossible, any development dependency on the operational support systems. Inaddition, TELUS is an active participant in the TeleManagement Forum that isworking to develop standard industry-defined modules in order to reduce costthrough scale and increase adoption through scope.

 

*The CDMA and iDEN technologiessupporting TELUS’ digital cellular/wireless services may become inferior*

 

Thewireless industry continues to expand the deployment of second generation (2G),third generation (3G) and emerging 4G technologies to deliver increased dataspeeds required for many new wireless, IP and data services. TELUS’ evolutionto deploying 3G technologies involves technology paths for both CDMAtechnology-based services and iDEN technology-based services.

 

TELUScontinues to support and market CDMA2000 3G wireless services on its digitalCDMA PCS (personal communication services) and cellular networks. TELUS hasdeployed technology enabling EVDO revision A (DOrA) services that were turnedup in most markets in 2007. DOrA is expected to allow for a more symmetricaluplink speed to be achieved, as well as ultimately allowing QoS services to beenjoyed on the data link.

 

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Rogerslaunched its universal mobile telephone service or UMTS-based HSPA (high-speedpacket access) network in the Golden Horseshoe area of Ontario in 2006, and hadexpanded it to 25 markets by October 2007. While the underlyingtechnologies of CDMA2000 and UMTS are very similar, they are implemented indiffering standards with no current opportunity for synergy between thetechnologies. HSPA provides downlink speeds similar to EVDO. Further UMTSstandard capabilities have been announced that are expected to increasedownlink speeds as well as introduce improvements to uplink speeds.

 

SomeCDMA2000-based international carriers have decided to overlay UMTS-basednetworks on their CDMA2000 networks, particularly for roaming considerationsor, in some cases, have announced an intention to convert the CDMA2000subscriber base to UMTS once their networks are completed. Telstra (Australia)expect to migrate its CDMA2000 subscribers to UMTS by 2008. Vivo (Brazil) hasannounced that it intends to operate both a CDMA2000 and a GSM service.

 

WhileTELUS has enjoyed commercial success with EVDO, and the CDMA2000-basedtechnologies continue to enjoy scale economies particularly in North America(vis-a-vis handsets shipped that conform to the CDMA2000 standard versus UMTS),there can be no assurance that these economies of scale will continue. Further,there can be no assurance that the CDMA2000 path will continue to mature beyondDOrA into capabilities that will effectively compete with the emergingUMTS/HSPA path in terms of speeds and device types. In this regard, TELUS willbe influenced by the technology decisions made by large North American CDMAcarriers as they historically have driven industry-wide economies of scale thatTELUS cannot generate independently. The economics and attractiveness ofefficiently deploying new network technology may also be influenced by theprospect for viable network sharing arrangements with one or more carriers.Accordingly, there is risk that TELUS’ future capital expenditures may behigher depending on the evolution of technology choices made by other largewireless operators, particularly in North America, and there is no assurancethat acceptable network sharing arrangements for new technology deployment willbe obtained.

 

TELUS’Mike service is differentiated against current CDMA-based PTT services inCanada in that Mike’s Direct Connect (iDEN PTT) has superior call set-up timeand inter-call latency. With its Mike service and CDMA-based Instant Talkservice, TELUS remains the Canadian leader with the largest number ofsubscribers using PTT. Notably, there is currently no GSM-based PTT service inthe Canadian market, but there is risk that one could be introduced in thefuture. In addition, Mike service data access is based upon narrowband TDMAtechnologies that are inadequate for delivering high-speed wireless broadbandservices and TELUS is unable to introduce services onto the Mike platform thatcan take advantage of the high-speed EVDO network.

 

Sprint-Nextel,the largest single operator of the iDEN technology, has publicly committed toimprove and market the iDEN network for PTT-centric customers in the UnitedStates to 2012 and beyond. Sprint-Nextel announced that it will utilize Q-Chattechnology, developed by Qualcomm, to provide future PTT services on its EVDOrevision A (DOrA) CDMA network in addition to its PTT services on the iDENnetwork. Sprint-Nextel is expected to promote interoperability between its iDENPTT base and Q-Chat PTT service through a gateway technology once the Q-Chatservice is launched, which is anticipated in 2008. As TELUS has both iDEN andCDMA-based networks, it could benefit from these technological advancements,however, there can be no assurance that these technologies will be commerciallysuccessful or economic for TELUS.

 

Networkconversions or overlays are complex undertakings that require significantresources to deploy new technology and convert existing subscribers.Accordingly, network conversions or overlays may constrain the operationalcapacity of a network provider to concurrently pursue other importantinitiatives, and may cause unintended increases in operational and capitalcosts.

 

*Riskmitigation*: As common and continual practice, TELUS optimizes capitalinvestments to enable positive payback periods and strong flexibility toconsider future technology evolutions. Certain capital investments, such astowers, leasehold improvements and power systems, are technology agnostic.TELUS actively maintains leading performance indicators for its wirelessnetworks in terms of network performance (such as dropped and blocked calls)and client management (such as churn indicators). TELUS maintains a closeliaison with its network technology suppliers to influence and benefit fromdevelopments in iDEN and CDMA technology, including the promotion ofconvergence of the two technologies in order to maximize synergies fromoperating both. TELUS also has a migration initiative under way tostrategically move certain Mike subscribers to high-speed data capable PCSservices, thereby providing the potential to increase utilization of dataservices. In addition, TELUS’ roaming/resale agreements in Canada, which reducecapital expenditures and speed up new service deployment, are possible becauseBell Mobility and TELUS have similar CDMA technologies. With Canada’s largegeographic area and relatively small population of 33 million, thedeployment of emerging wireless technologies may require two or more Canadianwireless carriers to deploy the same future technology choices and sign newnetwork sharing agreements to reduce costs and speed up deployment.

 

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*Emergingwireless technologies represent both an opportunity and a competitive threat*

 

Wirelesstechnologies and protocols continue to be developed and extended for a varietyof applications and circumstances, such as the Institute of Electrical andElectronics Engineers (IEEE) 802.xx suite of standards. A number of wirelesstechnologies are capable of exploiting both licensed and unlicensed spectrumfor fixed and future mobile applications. While TELUS constantly reviews andexamines such developments, and may from time to time choose to utilize anumber of these technologies, there can be no assurance that these developmentsmay not adversely impact TELUS in the future.

 

Inparticular, the emergence of new Wi-Fi and WiMAX networks may have asignificant impact on traditional wireless services. Further, this may alsotrigger an accelerated incremental investment in next generation wirelessinfrastructures.

 

Inrecent years, TELUS and certain of its current and potential competitors haveacquired, through auction, regional radio spectrum licences in the 3.5 GHzand 2.3 GHz frequency bands. This spectrum can be used for the deploymentof wireless services utilizing WiMax (802.16) wireless technology. WiMax is anemerging wide area wireless technology standard that will allow high bandwidthservices that could compete with 3G wireless services. Future mobile WiMAX(802.16e) service could operate in 3.5 GHz and 2.3 GHz bands,although there is no guarantee that these technologies will be commerciallysuccessful using these bands.

 

U.S.operators Sprint and Clearwire are deploying both mobile and fixed WiMAX(802.16e) in the 2.5 GHz spectrum band, largely marketed to date as analternative connectivity service, although their rollout plans have beendelayed compared to previously announced intentions. In Canada, the same2.5 GHz spectrum band is restricted to fixed and portable services only.There is no assurance that Canadian carriers with spectrum in this band cannotuse 2.5 GHz for mobility services through Industry Canada provisions orthat Canadian carriers will not deploy and market WiMax wireless services moreaggressively. In 2006, Industry Canada issued a policy that provides for a clawback of a portion of the 2.5 GHz band for auction when mobile service isimplemented in the band. *(See Section 10.3Regulatory.)* Inukshuk, a joint venture of Bell and Rogers withspectrum in this band, could upgrade to mobile WiMAX (802.16e) once it maturesto offer similar capabilities similar to existing 3G networks. There can be noassurance that these emerging wireless technologies will represent a greateropportunity than threat for TELUS.

 

*Riskmitigation:*TELUS proactively analyzes and tests emerging andalternative wireless access technologies. The Company has categorized whatcould be considered evolutions of 3G and emerging 4G technologies for the purposesof determining technology maturity, deployment suitability and marketreadiness. In parallel, TELUS continues to invest in network upgrades that aretechnology agnostic and can be levered across various access technologies.

 

### **10.3 Regulatory**

### ** **

*Regulatorydevelopments could have an adverse impact on TELUS’ operating procedures, costsand revenues*

 

TELUS’ telecommunications andbroadcasting services are regulated under federal legislation by the CanadianRadio-television and Telecommunications Commission (CRTC), Industry Canada andCanadian Heritage. The CRTC has taken steps to forbear from regulating pricesfor services offered in competitive markets, such as local residential andbusiness services in selected exchanges, long distance and some data services,and does not regulate the pricing of wireless services. Localtelecommunications services that have not been forborne are regulated by theCRTC using a price cap mechanism. Major areas of regulatory review currentlyinclude the regulatory framework for wholesale services (services provided on amandated basis to competitors) and the utilization of the funds in theincumbent local exchange carriers’ (ILEC) deferral accounts.

 

The outcome of the regulatoryreviews, proceedings and appeals discussed below and other regulatorydevelopments could have a material impact on TELUS’ operating procedures, costsand revenues.

 

*Future availability of wireless spectrum*

 

Industry Canada signalledintentions to auction spectrum for mobile wireless services at 1.7/2.1 GHz(AWS), 2.5/2.6 GHz and 700 MHz, in the 2008 to 2011 timeframe. Therecent *2007 Policy Framework for the Auction for SpectrumLicences for Advanced Wireless Services* suggests an AWS auction of105 MHz in May 2008 and conditions favourable to entrants such as spectrumset-asides (40 MHz) and mandated roaming and mandated tower and site sharingunder terms and conditions that could be unfavourable to TELUS. While this isexpected to potentially increase competitive intensity, the number andviability of new entrants in the market remain uncertain because of build-outcosts, capital market conditions and restrictions on foreign investment. Thepresence of new regional or national entrants in the marketplace may negativelyaffect the future market share of wireless incumbents. TELUS is participatingin a round of public comments and the government is expected to announce thefinal rules for the spectrum auction at the end of March 2008.

 

**The release of future wirelessspectrum in 700 MHz and 2.5 GHz could facilitate expansion forincumbents and provide additional opportunities for new entrants to offerwireless broadband services. There is uncertainty regarding the government’stiming and position in regulating these potential spectrum bands. In the U.S.,part of the 700 MHz band will**

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**be auctionedsubject to open access provisions. However, it is possible that most newspectrum will not be available for mobile purposes prior to 2011 or 2012.**Currently spectrum at 2.5 GHz hasbeen used for wireless and wireless broadcast applications. However,2.5 GHz has been given a primary mobile designation by Industry Canada andis anticipated to become a common global band for mobile services. In 2006,Industry Canada issued a policy that provides for a claw back of a portion ofthe band for auction when mobile service is implemented in the band, and hasannounced it intends to auction unassigned portions of the multipointdistribution service portion of the band. TELUS expects a 2.5 GHz spectrumauction discussion paper to be announced in late 2008 and an auction scheduledsometime in 2009 or later.

 

Competitors Bell and Rogers holdsignificant amounts of spectrum at 2.5 GHz through their Inukshukpartnership, have deployed a fixed wireless solution in major cities includingToronto, Montreal, Calgary, Edmonton and Vancouver, and are marketing portableDSL service with moderate print and billboard campaigns. Although TELUS hasexperienced only limited competition from this and similar services to date,there can be no assurance that future marketing of these services will notnegatively impact TELUS’ wireless or wireline services.

 

*Local forbearance*

 

On December 14,2006, the Governor in Council issued a direction to the CRTC to rely on marketforces to the maximum extent feasible; to ensure technological and competitiveneutrality and enable competition from new technologies; to use tariff approvalmechanisms that are as minimally intrusive as possible; to complete a review ofthe framework for mandated access to wholesale services; to publish and maintainperformance standards for its various processes; and to continue to explore newways of streamlining its processes.

 

On April 4, 2007, the Governorin Council issued Order in Council P.C. 2007-532 and varied Decision 2006-15 bychanging the criteria for local forbearance for residential and business localexchange services. Instead of requiring at least 25% market share loss in largelocal forbearance regions (Decision 2006-15), the Order in Council requires twoindependent facilities-based competitors (of which one can be a wirelessservice provider) capable of serving at least 75% of the residential lines forforbearance based on local exchange areas. For business local exchange service,forbearance is granted when one facilities-based competitor is able to serve atleast 75% of the business lines.

 

TheOrder in Council reduced the number of quality-of-service indicators that mustbe met for the six-month period prior to the forbearance application. The Orderin Council also removed restrictions on winbacks (i.e. delays on actions toregain customers who have changed to a competing service provider) andpromotions by the incumbent telephone companies.

 

Sincethe Order in Council was issued, TELUS has obtained forbearance for localresidential service in 63 exchanges in B.C., Alberta and Quebec (about 75% ofresidential lines in non-high cost serving areas). TELUS has also obtainedforbearance for local business service in 35 exchanges in B.C., Alberta andQuebec (about two-thirds of business lines).

 

As aresult of the forbearance granted for local residential and business services,TELUS believes it has significantly enhanced flexibility in pricing, promotionsand bundling to compete with other providers of theseservices. However, TELUS has no assurance that it will be able to preventfurther market share loss in these markets or that it will be able to obtainforbearance in other exchanges where it is facing competition for residentialand business customers.

 

*Price cap regulation*

 

Price cap regulation continues toapply to a basket of local services provided by ILECs. TELUS is subject toprice cap regulation as an ILEC in Alberta, B.C. and Eastern Quebec. On April 30,2007, the CRTC issued Decision 2007-27 (third price cap period) and establishedan open-ended price cap regime.

 

The CRTC removed the productivityadjustment from the Residential Services in non-high cost serving areas(non-HCSA or urban) price cap basket and the Other Capped Services price capbasket. For the Competitor Services price cap basket, the CRTC reduced theproductivity adjustment from inflation minus 3.5% to inflation minus 3.2%. TheCommission moved residential optional local services and service bundlescontaining residential local exchange service to the Uncapped Services basket(no upward pricing constraints).

 

The CRTC capped residential servicerates in urban areas at existing levels and limited annual rate increases inrural areas to the rate of inflation (to a maximum of 5%). However, the CRTCremoved restrictions on rate de-averaging for residential local service andoptional local services. Subsequent to the price cap decision (Decision2007-106), the CRTC also removed restrictions on rate de-averaging for businessand pay telephone services.

 

The CRTC incorporated a deferralaccount into the second price cap period to which an amount equivalent to thecumulative annual productivity adjustments for residential services in non-highcost serving areas was added. Since the CRTC removed these productivityadjustments in Decision 2007-27, the CRTC also determined that the deferralaccount was no longer required.

 

There can be no assurance that theprice regulation regime for TELUS beginning in June 2007 will be morefavourable for TELUS than the previous regime.

 

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In February 2006, the CRTCdetermined in Decision 2006-9 that the funds accumulated in the ILEC deferralaccounts would be used to expand broadband services to rural and remotecommunities and to improve accessibility to telecommunications services forindividuals with disabilities. After receiving proposals from the ILECs inresponse to Decision 2006-9, the CRTC launched a further proceeding in November 2006(Public Notice 2006-15) to further explore the ILECs’ proposals.

 

On July 6, 2007, the CRTCissued Decision 2007-50, which partially approved TELUS’ broadband expansionproposal for locations in B.C. and Quebec. TELUS is still waiting for the CRTC’sfinal decision in this proceeding on the balance of its broadband expansionproposal and its proposals to improve accessibility to telecommunicationsservices for individuals with disabilities.

 

On January 17, 2008, the Commission issued Decision 2008-1 andapproved an additional 119 communities in B.C., Alberta and Quebec forbroadband expansion. The Commission also approved TELUS’ proposed initiativesto enhance accessibility to telecommunications services for the disabled. TheCommission requested that TELUS provide a proposal for review for futureservices to enhance accessibility, which was not set out in its initialproposal.

 

TELUS is also waiting for decisionson two appeals filed with the Federal Court on how the funds in the ILECs’deferral accounts should be treated. There is no guarantee that the ILECs will beable to proceed with their proposals for the use of deferral account fundspending the outcome of the CRTC proceeding initiated by Public Notice 2006-15and the appeals to the Federal Court, as described in *Section 7.8*under *Commitments and contingent liabilities*.

 

*Reviewof certain Phase II costing issues*

 

In November 2007, theCRTC completed the proceeding to review cost calculation methods, referred toas Phase II costs, for regulated telecommunications services provided by ILECsand cable companies (under Public Notice 2007-4). The decision is expected in thefirst quarter of 2008. TELUS has proposed that Phase II costs continue tofollow general principles of causality, that all forward-looking costs need tobe categorized appropriately, and that costs should be based on individualcompany measurements. Unless the CRTC determines otherwise on all theseproposals, the outcome of this proceeding would not be expected to have amaterial adverse impact on TELUS in the near term.

 

*Essential services*

 

In December 2007, the CRTCcompleted an extensive review of the regulatory framework for essentialservices (wholesale services) initiated by Public Notice 2006-14. In thisproceeding, the CRTC reviewed the current definition of an essential serviceand the classifications and pricing principles for these services andnon-essential services made available by the ILECs to their competitors. A CRTCdecision in this proceeding is expected by May 2008. TELUS has noassurance that the regulatory regime for the provision of essential andnon-essential services to competitors will not be more onerous than the currentregime.

 

*Quality-of-service rebate program*

 

As part of the current price capregime, the CRTC established a rate adjustment plan and associated rate rebatesfor ILECs that do not meet approved quality-of-service standards. Whenquality-of-service standards are not met because of circumstances beyond theILEC’s control, an exclusion application may be filed.

 

In 2007, in response to severalexclusion applications filed by TELUS, the CRTC excluded the impact of a numberof events that were beyond TELUS’ control, including various severe weatherevents, the 2005 labour disruption and a major cable cut in downtown Vancouver.As a result, the impact of these events was removed from the applicable retailand competitor quality-of-service measures and the correspondingquality-of-service rebates were reduced.However, futurerevenues, earnings and operating cash flows could be affectedif TELUS’ retail and competitor quality-of-service measures were belowstandard.

 

*TELUS’ broadcasting distributionundertakings*

 

The CRTC has approved applicationsby TELUS to operate terrestrial broadcasting distribution undertakings to servevarious communities in Alberta and B.C. (August 2003) and Eastern Quebec (July 2005).In September 2003, the CRTC approved TELUS’ application for avideo-on-demand undertaking licence with the same terms and conditions aspreviously licensed undertakings in Canada. The licence is national in scope andextends for a seven-year term. There can be no assurance that implementationcosts or projected revenues and expenses for TELUS’ television service will beas planned.

 

*Implementation of wireless numberportability*

 

In Decision 2005-72, the CRTCdirected Bell Mobility, Rogers Wireless Inc. and the wireless division of TELUSto fully implement WNP by  September 2007. TELUS has successfully completed thisimplementation. Canada is the second country in the world after the UnitedStates to offer complete local number portability: wireless-to-wireless,wireless-to-wireline, wireline-to-wireline and wireline-to-wireless. In 2007,WNP porting was a minor source of net positive subscriber

 

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loading for TELUS, but contributed to a higher churn level and greater wireless customer retention costs. WNP could lead to an increase in migration ofnetwork access lines to wireless services, increased wireless subscriber churnand/or additional customer retention costs for the Company, as well as presentopportunities to TELUS to market more effectively in the business/enterprisemarket in Central Canada where TELUS has traditionally had a lower market sharethan its competitors. However, there can be no assurance that this will be thecase.

 

*Radiocommunication licencesregulated by Industry Canada*

 

All wireless communications dependon the use of radio transmissions and, therefore, require access to radiospectrum. Under the *Radiocommunication Act*,Industry Canada regulates, manages and controls the allocation of spectrum inCanada and licenses frequency bands and/or radio channels within variousfrequency bands to service providers and private users. Voice and data wirelesscommunications via cellular, specialized mobile radio (SMR), enhancedspecialized mobile radio and PCS systems, among others, require such licences.TELUS’ PCS and cellular licences include various terms and conditions, such as:meeting certain performance levels, meeting Canadian ownership requirements, meetingobligations regarding coverage and build-out, spending at least 2% of certainPCS and cellular revenues on research and development, annual reporting andresale to competitors. While TELUS believes that it is substantially incompliance with its licence conditions, there can be no assurance that it willbe found to comply with all licence conditions, or if found not to be compliantthat a waiver will be granted, or that the costs to be incurred to achievecompliance will not be significant. Initial licence fees and annual renewalfees are payable for licences that have not been obtained via spectrum auction.There can be no assurance that Industry Canada will not seek to increase thesefees in the future.

 

On November 28,2007, Industry Canada released its decision for the upcoming auction for AWSspectrum in various spectrum bands totalling 105 MHz. The major elementsof the decision include a set-aside for new entrants of 40 MHz of the availableAWS spectrum, mandated roaming, and tower and site sharing requirements withrates subject to binding arbitration. The AWS spectrum auction is scheduled forMay 27, 2008.

 

Whilethe spectrum auction may provide opportunities for TELUS to increase capacityfor 3G and other services, given the size of the set-aside, the spectrumauction may result in the establishment of increased entry and competition on anational or regional basis. (See *Section 10.1Competition*.)

 

Thereis also speculation that Industry Canada may initiate an auction consultationprocess for spectrum that has not been assigned in the 2500 and 2600 MHzranges, particularly in Alberta and Atlantic Canada. While spectrum in the 2500and 2600 MHz ranges can be used for both fixed and mobile purposes (seeemerging technologies above), it remains uncertain whether a claw back forone-third of the currently licensed spectrum across Canada, in order to move tomobile use, will occur prior to the end of licence periods for Inukshuk andothers in 2011. Moreover there is no guarantee that government will not reservespectrum for new entrants.

 

*700 MHzspectrum:* The U.S. had a spectrum auction for the 700 MHz spectrumin January 2008. There is speculation that Industry Canada may alsoinitiate an auction consultation process for spectrum at 700 MHz. There is noguarantee that the Canadian government will not reserve spectrum for newentrants or that it will not adopt some open access provisions for some of thisspectrum as was done in the U.S.

 

*800 MHzre-banding:* In 2004, the U.S. Federal Communications Commission (FCC)released a Report and Order adopting a plan to resolve interference to publicsafety radio systems in the 800 MHz band. Sprint-Nextel’s iDEN system wasidentified as the primary contributor of this interference. The U.S. isplanning to realign the band so that public safety systems would be relocatedto the bottom of the 800 MHz band and Sprint-Nextel’s iDEN system would operatein the upper part of the band.

 

InCanada, the TELUS Mike (iDEN) network also uses this same frequency spectrum.Because of the way licensing is carried out for the Mike network (i.e. eachsite is analyzed and licensed individually), TELUS and Industry Canada havebeen able to minimize the number of public safety interference issues to a fewacross the country versus more than 1,500 in the U.S.

 

However,TELUS has an existing special co-ordination procedure (SCP), endorsed by bothIndustry Canada and the FCC, wherein TELUS and Sprint-Nextel utilize each other’schannels within their respective iDEN networks at specific border areas acrossthe country. These channels serve to increase the number of available channelsavailable to both networks to better serve the area. The re-alignment threatensthe continued use of the channels specified in the SCP.

 

Whilediscussions with both the Canadian and U.S. regulators indicate that TELUSshould be able to continue to have access to a certain number of SCP channelsin the border areas, until such time as the U.S. announces its final decision,there is no assurance that TELUS will be able to continue to use thesechannels.

 

*CRTC wireless interconnection:* The CRTC has listed WirelessInterconnection/Bill and Keep on its agenda of possible regulatory activitiesfor 2008. Wireless carriers currently interconnect under a wireless serviceprovider (WSP) tariff and pay the telephone company for origination andtermination of traffic. The CRTC may implement a bill and keep alternative

 

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similar to theinterconnection regime for competitive local exchange carriers (CLECs), whichcould reduce future revenue. CLEC bill and keep status also entails obligationsunder the Commission’s rules for local exchange carriers. While there isno guarantee that the CRTC will initiate this proceeding in 2008, or implementa bill and keep regime for WSPs, there is a risk that this will occur.

 

*Foreign ownership restrictions*

 

TELUS and its subsidiaries aresubject to the foreign ownership restrictions imposed by the *Telecommunications Act*, the *RadiocommunicationAct* and the *Broadcasting Act*.Although TELUS believes that TELUS Corporation and its subsidiaries are incompliance with the relevant legislation, there can be no assurance that afuture CRTC, Industry Canada or Heritage Canada determination, or events beyondTELUS’ control, will not result in TELUS ceasing to comply with the relevantlegislation. If such a development were to occur, the ability of TELUS’subsidiaries to operate as Canadian carriers under the *TelecommunicationsAct* or to maintain, renew or secure licences under the *Radiocommunication Act* and *BroadcastingAct*could be jeopardized and TELUS’ business could be materiallyadversely affected.

 

InJuly 2007, the Minister of Industry and the Minister of Finance announcedthe creation of a Competition Review Panel to review Canadian competition andinvestment legislation: the *Competition Act*and the *Investment Canada Act*. As the Panel willreport to the Minister of Industry by June 30, 2008, it is expected thatany subsequent legislation changes would not be effective until late 2008 or2009. TELUS anticipates that the chances for removal of foreign ownershiprestrictions under a minority government are low. If foreign ownershiprestrictions were reduced or eliminated, the risk of entry of a new wirelesscarrier that is foreign-owned or financed by way of the anticipated upcomingwireless spectrum auction would be heightened.

 

*Riskmitigation for regulatory matters:*TELUS advocates a regulatory environment thatrelies, to the greatest extent possible, on market competition rather thanregulatory intervention. TELUS believes this is in the best interest ofcustomers.TELUS has also supported the relaxation of foreign ownershiprestrictions in the past, but believes that any such relaxation must be on anequal basis for broadcasting and telecommunications companies.

 

### **10.4 Human resources**

### ** **

*Collective bargaining at TELUS Québec*

 

Twocollective agreements between TELUS Québec and the Syndicat des agents demaîtrise de TELUS covering professional and supervisory team members in Quebecexpired on March 31, 2007 and the parties continue to meet to concludenegotiations. The two contracts cover approximately 500 team members. In anyset of labour negotiations, there can be no assurance that the negotiatedcompensation expenses or changes to operating efficiency will be as planned orthat reduced productivity and work disruptions will not occur during the courseof collective bargaining prior to settlement.

 

*Riskmitigation:*A governance model is in place to ensure the financial andoperating impact of any proposed terms of settlement are assessed anddetermined to be aligned with TELUS’ strategic direction. As is prudent in anyround of collective bargaining, while negotiations proceed, any potential needto continue operations in response to work disruptions will be addressedthrough contingency planning.

 

*Reliance on key personnel*

 

Thesuccess of TELUS is largely dependent on the abilities and experience of itskey employees. Competition for highly skilled and entrepreneurial managementand other key employees is intense in the communications industry. The loss ofcertain key employees, or deterioration in employee morale resulting fromorganizational changes, unresolved collective agreements or ongoing cost reductions,could have an adverse impact upon TELUS’ growth, business and profitability.The largest external contributor to this risk, namely the forthcomingretirement of Canada’s largest generation, will continue to increase inmagnitude over the next several years.

 

*Riskmitigation:*Compensation at TELUS is designed to support itshigh-performance culture and is both market-driven and performance-based. Thisincludes medium-term and long-term performance incentives including variableincentive pay based on performance at an individual, business unit andorganizational level; share options, restricted stock units (RSUs) and theTELUS Employee Share Purchase Plan; as well as a benefits program that allowsthe tailoring of personal benefits plans to suit individual needs. Long-termperformance incentives for certain key personnel include primarily three-yearvesting periods for share options and RSUs. By striving to ensure TELUS’compensation remains competitive, the Company seeks to maintain the ability toattract and retain key personnel. Recently, the Company has directed moreeffort to enhancing employee engagement and morale, examining methods foremployee retention, and implementing targeted retention solutions for employeeswith talents that are scarce in the marketplace.

 

### **10.5 Process risks**

### ** **

TELUS systems, processes, internal reorganizations andintegration of acquisitions could negatively impact financial results andcustomer service.

 

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*Systems and processes*

 

TELUS has numerous complex systemsand process change initiatives underway including a multi-year, multi-phasedevelopment of a new billing system for the wireline segment, which includes re-engineering processes for order entry, pre-qualification, servicefulfillment and assurance, customer care, collections/credit, customer contractand information management.

 

In 2007,TELUS converted all of its wireline consumer customers in Alberta to the newintegrated billing and client care system. Initial system difficulties wereexperienced, which temporarily reduced order processing capability and causedincreased installation backlogs and higher costs, such as extra call centreresources to maintain service levels. The temporary additional costs, incurredin the second and third quarters of 2007, totalled approximately$24 million. The critical billing function performed as expected and orderprocessing returned to business-as-usual levels by year-end.

 

Additionalrelated development and conversions are planned over the next several years,including a similar system conversion for more than one million B.C. consumersplanned for the first half of 2008. Although the Company expects to benefitfrom lessons learned from the Alberta conversion, the legacy systems in B.C.are sufficiently different, such that there is no assurance that the B.C.conversion will be successfully implemented on time, on budget and with desiredfunctionality.

 

There can be no assurance that thefull complement of the Company’s various systems and process change initiativeswill be successfully implemented, or that sufficiently skilled resources willbe available to complete all key initiatives planned for 2008. There can be noassurance that some projects will not be deferred or cancelled, which couldnegatively impact TELUS’ processes and ability to effectively launch newproducts and services; achieve and maintain a competitive cost structure; anddeliver better information and analytics to management.

 

*Risk mitigation:* For the planned billingsystem conversion in B.C. in the first half of 2008, TELUS plans to conduct alarger pilot than the one used in Alberta, with a larger number of customersfor a longer duration and a wider range of customer profiles, prior tocompleting the full conversion.

 

In general, TELUS strives to ensurethat system development priorities are selected in an optimal manner.TELUS’project management approach includes extensive risk identification andcontingency planning, scope and change control, resource and qualitymanagement. The quality assurance of the solutions includes extensivefunctional, performance and revenue assurance testing, as well as the capturingand utilization of lessons learned. In addition, TELUS strives to ensure thatits business continuity planning and emergency management operations centre aremoved to heightened states of readiness in advance of major systemsconversions.

 

*Reorganizations*

 

Arising from its competitiveefficiency program, the Company carries out a number of operational consolidation,rationalization and integration initiatives each year. The initiatives areaimed to improve the Company’s operating productivity and competitiveness.TELUS’ estimate of restructuring costs in 2008 is approximately$50 million, up from $20.4 million in 2007. There can be no assurancethat all planned efficiency initiatives will be completed, or that suchinitiatives will provide the expected benefits or not have a negative impact onoperating and financial results.

 

*Risk mitigation:* TELUS closely managesorganizational changes by leveraging the expertise, key learnings and bestpractices gained from mergers, business integrations and efficiency-relatedreorganizations in recent years.

 

*Foreign operations*

 

The increase of resources in TELUS’international operations (particularly in TELUS International Philippines Inc.call centres in Manila) presents unique risks, including country-specific risks(such as different political, legal and regulatory regimes and culturalvalues), lack of diversity in geographical locations, concentration ofcustomers, different infrastructure and security challenges, different exposureto and frequency of natural disasters and the requirement for system processesthat work across multiple time zones, cultures and countries. The Philippinesoperating costs are in pesos, while the revenues are generally in U.S. dollars,exposing TELUS to certain foreign currency risks. There is no assurance thatinternational initiatives and risk mitigation efforts will provide the benefitsand efficiencies expected, or that there will not be significant difficultiesin combining the different cultures, which could result in a negative impact onoperating and financial results.

 

*Risk mitigation:* TELUS’ strategy is toimprove the diversity and geography of its operations, its customers and thenature of business processing outsourcing activities conducted. TELUS has alsoimplemented a currency hedging program to reduce foreign currency exposure. Inaddition, the Company continues to work with its international operations toextend operational best practices, to further integrate or align internationaland domestic Canadian operations, as appropriate, and to strive to ensure thatinternal controls are implemented, tested, monitored and maintained.

 

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*Integration of acquisitions*

 

Post-merger and post-acquisitionactivities, including reviewing and aligning accounting policies, employeetransfers/moves, information systems integration, optimizing service offeringsand establishing control over new operations may not be handled efficiently andeffectively. This could negatively impact service levels, competitive positionand financial results. There can be no assurance that the expected revenue, operatingexpenses, restructuring charges, savings, capital expenditure levels and incometaxes from the January 2008 acquisition of Emergis will be as anticipatedby management and as reflected in the Company’s 2008 financial targets.

 

*Riskmitigation:* TELUS has a team that performs a post-merger integration(PMI) function. The PMI team applies an integration model, based on learningsfrom numerous previous post-acquisition integrations, which enhances TELUS’ability to accelerate the standardization of business processes and preservethe unique qualities of acquired operations. It begins with rigorous strategic,pre-closing analysis and planning, and continues after closing with a focused,simultaneous execution of this plan against competing critical imperatives.Initial plans are re-evaluated and assessed regularly, based on direct andtimely feedback received from the integration teams. For example, anintegration team and a governance structure have been established with seniorteam members from both TELUS and Emergis Inc. to oversee and execute theintegration plan with a view to minimizing negative impacts on theiroperations. Functional integration teams have been established with membersfrom both companies to deliver interlocking charters and objectives.

 

### **10.6 Financing and debtrequirements**

### ** **

*TELUS’ business plans and growthcould be negatively affected if existing financing is not sufficient to coverfunding requirements*

 

Risk factors such as disruptions in the capital markets,increased bank capitalization regulations, reduced lending to the telecomsector, or a reduced number of active Canadian chartered banks as a result ofreduced activity or consolidation, could reduce capital available, or increasethe cost of such capital,  for investmentgrade corporate credits such as TELUS.

 

*Riskmitigation:* TELUS may finance future capital requirements withinternally generated funds as well as, from time to time, borrowings under theunutilized portion of its bank credit facility, use of securitized accounts receivable,use of commercial paper or the issuance of debt or equity securities. TELUS hasaccess to a shelf prospectus pursuant to which it can issue a further$3.0 billion of debt and equity. TELUS believes that its investment gradecredit ratings provide reasonable access to capital markets to facilitatefuture debt issuance at a reasonable cost. Furthermore, TELUS has no exposureto asset-backed commercial paper, either corporately or in its defined benefitpension plans.

 

During 2007, TELUS established a new $2 billion creditfacility, of which $800 million backstops a new commercial paper programof the same amount. TELUS has more than $1.3 billion of availableliquidity from unutilized credit facilities at December 31, 2007. Asdescribed in *Section 7.6 Accounts receivablesecuritization,* TCI entered into an agreement with an arm’s-lengthsecuritization trust under which it is able to sell an interest in certain ofits trade receivables up to a maximum of $650 million. At December 31,2007, TCI had received aggregate cash proceeds of $500 million. TCI isrequired to maintain at least a BBB(low) credit rating by Dominion Bond RatingService – currently A(low) – failing which, the Company may be required to winddown the program prior to the July 2008 termination date of the agreement.

 

*Ability to refinance short-termand maturing debt*

 

At December 31,2007, TELUS had $584.9 million of commercial paper issued, which will needto be refinanced on an ongoing basis. Capital market conditions may prohibitthe rolling of commercial paper at reasonable rates.

 

*Riskmitigation*: During 2007, refinancing risk with respect to maturingdebt was reduced when TELUS repaid US$1.17 billion, or approximately$1.5 billion of TELUS 7.5% Notes that matured in June 2007. (See *Section 7.3 Cash used by financing activities.*) At December 31,2007, TELUS has no significant amounts of debt maturing until 2011 and 2012.TELUS may refinance short-term debt with longer-term maturities. Consistentwith past practice, TELUS may also pre-fund or refinance long-term debt priorto maturity. TELUS could also reduce repurchase activity under its NCIB toconserve funds for operations or servicing debt.

 

*A reduction in TELUS credit ratings could impact TELUS’ cost of capitaland access to capital*

 

TELUS’ cost of capital could increase and access to capitalmight be affected by a reduction in TELUS’ and/or TCI’s credit ratings. Therecan be no assurance that TELUS can maintain or improve current credit ratings.

 

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*Riskmitigation:*TELUS seeks to achieve, over time, debt credit ratings inthe range of BBB+ to A-, or equivalent. The four credit rating agencies thatrate TELUS currently have ratings that are in line with this target. TELUS hasfinancial policies in place that were established to help maintain or improveexisting credit ratings. (See *Section 7.4 Liquidityand capital resource measures.*)

 

*Lower than expected free cash flow could constrain ability to invest inoperations or make purchases under NCIB programs*

 

TELUS expects to generate free cash flow in 2008, whichwould be available to, among other things, repurchase shares and pay dividendsto shareholders. While anticipated cash flow is expected to be more thansufficient to meet current requirements and remain in compliance with TELUS’financial policies, these intentions could constrain TELUS’ ability to investin its operations for future growth or to complete share repurchases. TELUS hasset its financial policies with the expectation that taxable income will begenerated in 2008 and that substantial cash tax payments will commence in 2009both in respect of 2008 and on an instalment basis in respect of 2009, as notedin *Section 10.7 Tax matters*. Paymentof cash income taxes in the future will reduce the after-tax cash flowotherwise available to return capital to shareholders. If actual results aredifferent from TELUS’ expectations, there can be no assurance that TELUS willnot need to change its financing plans, including its intention to repurchase asignificant amount of shares, or pay dividends according to the target payoutguideline.

 

*Riskmitigation:* In recent years, TELUS had sufficient cash flow torepurchase shares under four NCIB programs. (See *Section 7.3Cash used by financing activities.)* As the Company begins payingcash income taxes, it may choose to not renew or to reduce the size of the NCIBprogram, as warranted.

 

Quarterly, the TELUS Board reviews the dividend based on anumber of factors including a target dividend payout ratio guideline of 45 to55% of sustainable net earnings. This review prompted a 7.5 cent or 20%increase in the quarterly dividend payout rate effective with the dividend paidon January 1, 2008. At the January 1, 2008 level of dividend andshares outstanding, this would total approximately $584 million individends in 2008.

 

### **10.7 Tax matters**

### ** **

*Income and commodity tax amounts, including tax expense,may be materially different than expected*

 

The operations of TELUS are complexand related tax interpretations, regulations and legislation that pertain toTELUS’ activities are subject to continual change. The Company collects andpays significant amounts of commodity taxes to various taxation authorities andit also has significant amounts of income taxes receivable and payable, futureincome tax liabilities and income tax expense. Income tax amounts are based onTELUS management estimates using accounting principles that recognize thebenefit of income tax positions that are more likely than not of being sustainedupon examination on an issue by issue basis. The benefit is measured at thelargest amount with greater than 50% probability of being realized. Theassessment of the likelihood and amount of income tax benefits and the timingof realizing such amounts can materially affect the determination of net incomeor cash flows in future periods. As noted in *Section 5.3:Results of operations – Income taxes*, TELUS currently expects cashincome tax payments to be relatively low in 2008, with expected cash collectionsexceeding expected payments. In 2009, income tax payments are expected toincrease substantially. The blended statutory income tax rate is expected to be31 to 32% in 2008. These expectations can change as a result ofchanges in interpretations, regulations, legislation or jurisprudence.

 

The timing concerning themonetization or realization of future income tax accounts is uncertain, as itis dependent on future earnings of TELUS and other events. The amounts offuture income tax liabilities are also uncertain, as the amounts are based uponsubstantively enacted future income tax rates in effect at the time, which canbe changed by governments. The amount of future income tax liabilities is alsobased upon the Company’s anticipated mix of revenues among the jurisdictions inwhich it operates, which is also subject to change.

 

The review activities of the CanadaRevenue Agency and other jurisdictions’ tax authorities affect the ultimatedetermination of the actual amounts of commodity taxes payable or receivable,income taxes payable or receivable, future income tax liabilities and incometax expense. Therefore, there can be no assurance that taxes will be payable asanticipated and/or the amount and timing of receipt or use of the tax-relatedassets will be as currently expected. Management’s experience indicates thetaxation authorities are more aggressively pursuing perceived tax issues andhave increased the resources they put to these efforts.

 

In order to provide comprehensivesolutions to primarily Canadian-based customers operating in foreignjurisdictions, the Company has entered into further arrangements for the supplyof services in such foreign jurisdictions, thus exposing itself to multipleforms of tax.

 

In 2007, the Company continued to furtherexpand its activities into the United States and other foreign jurisdictions.In the U.S., federal, state and local jurisdictions have created varyingregimes for income, revenue, sales and use, and property

 

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taxes. In addition to such regimesbeing complex, the sheer number and variation of such regimes in the U.S.jurisdictions in which the Company has entered into transactions are causes foradditional financial risk to the Company.

 

Not only does each foreignjurisdiction have complexities with language and currency differences, each hasits own taxation peculiarities in the forms of taxation imposed, such asvalue-added tax, gross receipts tax or income tax, as well as its legislationand tax treaties with Canada. Furthermore, the telecommunications industry hasunique issues that lead to uncertainty in the application or division of taxbetween domestic and foreign jurisdictions. Accordingly, TELUS’ foreignexpansions during 2007 have increased the Company’s exposure to tax risks, fromboth financial and reputation perspectives.

 

*Risk mitigation:*The Company maintainsan internal Taxation department composed of professionals who are trained andeducated in taxation administration and who maintain an up-to-date knowledgebase of new developments in the underlying Canadian law, its interpretationsand jurisprudence. This team is also responsible for the specialized accountingrequired for income taxes and accordingly this group is charged with maintainingstate-of-the-art knowledge of tax accounting developments and theimplementation of such relevant measures as are required from time to time.

 

The transactions of the Company areunder continual review by the Company’s Taxation department whereby transactionsof an unusual or non-recurring nature, in particular, are assessed frommultiple risk-based perspectives. Tax-related transaction risks are regularlycommunicated to and reassessed by external tax counsel as a check to initialexposure assessment. As a matter of regular practice, large transactions arereviewed by external tax counsel, while other third-party advisors may also beengaged to express their view as to the potential for tax exigibility.

 

The Company has engaged externalcounsel and advisors as appropriate to provide advice and to comply with taxlaws in the jurisdictions outside of Canada in which it has operations of anysignificance. The advice and returns provided by such advisors and counsel arereviewed for reasonableness by TELUS’ Taxation team.

 

### **10.8 Health, safety andenvironment**

### ** **

*Team member health, wellness and safety*

 

Lost work time, resulting from theillness or injury of TELUS team members, can negatively impact organizationalproductivity and employee benefit healthcare costs.

 

*Riskmitigation:* Tominimize absence in the workplace, TELUS supports a holistic and proactiveapproach to team member health by providing comprehensive wellness, disability,ergonomic and employee assistance programs. To promote safe work practices, theCompany has long-standing training and orientation programs for team members,contractors and suppliers who access TELUS facilities. However, there can be noassurance that these health and safety programs and practices will be effectivein all situations.

 

*Radio frequency emission concerns*

 

Some studies have asserted that radio frequency emissionsfrom wireless handsets may be linked to certain adverse health effects. Therecan be no assurance that future health studies, government regulations or publicconcerns about the health effects of radio frequency emissions would not havean adverse effect on the business and prospects for TELUS. For example, publicconcerns could reduce customer growth and usage or increase costs as a resultof modifying handsets, relocating wireless towers, incremental legalrequirements and product liability lawsuits. TELUS continues to monitordevelopments in this area.

 

*Riskmitigation:*Evidencein the scientific community, as determined and published in numerous studies worldwide,supports the conclusion that there is no demonstrated public health riskassociated with the use of wireless phones. These include a study published inthe Journal of the National Cancer Institute in 2006, involving 420,000 cellphone users in Denmark. This study found that cell phone users are no morelikely than anyone else to suffer a range of cancer types. Government agenciesin Canada responsible for establishing safe limits for signal levels of radiodevices also support the conclusion that wireless telephones are not a healthrisk. TELUS believes that the handsets it sells comply with all applicableCanadian and U.S. government safety standards.

 

*Responsibledriving*

 

Researchhas shown an increase in distraction levels for drivers using wireless phoneswhile driving. Newfoundland and Labrador is currently the only Canadianprovince to ban drivers’ use of handheld wireless phones, however, as withsimilar bans on handheld phone use while driving, the province allows the useof hands-free wireless kits. Quebec tabled similar new legislation in November 2007and other provinces are considering such legislation. Similar bans exist inparts of the United States, including New Jersey, New York, District ofColumbia, Connecticut and California. There can be no assurance that additionallaws against using wireless phones while driving will not be passed and that,if passed, such laws will not have a negative effect on subscriber growthrates, usage levels or wireless revenues.

 

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*Riskmitigation:*TELUS promotes responsible driving and recommends thatdriving safely should be every wireless customer’s first responsibility. TELUSbelieves that current laws adequately address the matter, and laws that are specificto mobile phones are unnecessary and counterproductive.

 

*Concerns aboutenvironmental issues, particularly related to contaminated property and theassociated risk to human health or wildlife*

 

To conduct business operations,TELUS owns or leases a large number of properties. The presence of fuel systemsfor back-up power generation enables the provision of reliable service, butalso poses the most significant environmental risk to the Company. Spills orreleases of fuel from these systems have occurred occasionally in the past,with the maximum cost incurred at any site of approximately $1 million.Small volumes of hazardous chemicals are commonly used at many sites and withinthe telecommunications industry in general. As well, certain hazardous materialsare found only at some locations. Based on the volume and the nature of some ofthe specific chemicals handled, there is a risk posed to the Company, itsdirectors and its officers by the liability from potential spills and releasesof hazardous chemicals into the environment. A significant portion of this riskis associated with the clean-up of sites contaminated by historic TELUSpractices or by previous owners. There were no significant changes to TELUS’environmental risks during 2007. Although TELUS takes proactive measures toidentify and mitigate environmental exposures and employs an environmentalmanagement system (EMS) based on ISO14001:2004, there can be no assurance thatspecific environmental incidents will not impact TELUS operations in thefuture.

 

*Riskmitigation:*While TELUS’ environmental risks are considered immaterialto the Company’s financial results, they are very important from theperspective of corporate social responsibility, which TELUS takes veryseriously. Poorly executed environmental performance or risk mitigation couldhave negative legal, brand or community relations impacts. The Company’s EMS isdesigned to identify and prioritize these risks. The specific risk posed byfuel systems is being addressed through a program to install containment andmonitoring equipment at sites with systems of qualifying size. Further detailedassessment of environmental risks can be found in the TELUS corporate socialresponsibility report on the Company’s website.

 

### **10.9 Litigation and legalmatters**

### ** **

*Investigations,claims and lawsuits*

 

Given the size of TELUS,investigations, claims and lawsuits seeking damages and other relief areregularly threatened or pending against the Company and its subsidiaries. TELUScannot predict with any certainty the outcome of such investigations, claimsand lawsuits and as such, there can be no assurance that results will not benegatively impacted.

 

*TELUS CorporationPension Plan and TELUS Edmonton Pension Plan*

 

Two lawsuits were commenced inAlberta in 2001 and 2002, respectively, by plaintiffs alleging to be eithermembers or business agents of the Telecommunications Workers Union (TWU), andsuing allegedly on behalf of all current or future beneficiaries of the TELUSCorporation Pension Plan and the TELUS Edmonton Pension Plan, respectively. TheTELUS Corporation Pension Plan related action named the Company, certain of itsaffiliates and certain present and former trustees of the TELUS CorporationPension Plan as defendants, and claims damages in the sum of $445 million.The TELUS Edmonton Pension Plan related action named the Company, certain ofits affiliates and certain individuals who are alleged to be trustees of theTELUS Edmonton Pension Plan as defendants, and claims damages in the sum of $15.5 million.The statements of claim were subsequently amended in 2002 by the plaintiffs toinclude allegations, *inter alia*,that benefits provided under the two pension plans are less advantageous thanthose provided under their respective former pension plans, contrary toapplicable legislation, that insufficient contributions were made to the plansand contribution holidays were taken and that the defendants wrongfully usedthe diverted funds, and that administration fees and expenses were improperlydeducted.

 

The Company believes that it hasgood defences to the actions. Should the ultimate resolution of these lawsuitsdiffer from management’s assessment and assumptions, a material adjustment tothe Company’s financial position and the results of its operations couldresult.

 

*Risk mitigation:*As a term of the 2005settlement reached between TELUS Communications Inc. and the TWU that resultedin a collective agreement, the TWU has agreed to not provide any direct orindirect financial or other assistance to the plaintiffs in these actions, andto communicate to the plaintiffs the TWU’s desire and recommendation that theseproceedings be dismissed or discontinued. However, the Company has been advisedby the TWU that the plaintiffs have not agreed to dismiss or discontinue theseactions, and the Company has not been informed of any change in this regard.

 

*Certified class action*

 

A class action was brought in 2004under class action legislation in Saskatchewan against a number of past andpresent wireless service providers including the Company. The claim allegesthat each of the carrier defendants is in breach of contract and has violatedcompetition, trade practices and consumer protection legislation across Canadain connection

 

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with the collection of systemaccess fees, and seeks to recover direct and punitive damages in an unspecifiedamount. Similar proceedings were commenced in other provinces. The class wascertified on September 17, 2007 by the Saskatchewan Court of Queen’sBench. The Company has applied for leave to appeal that decision. Certificationis a procedural step. If the Company is unsuccessful on appeal of thecertification decision, the plaintiff would still be required to prove themerits of the claim.

 

*Risk Mitigation:* The Company believesthat it has good defences to the action. Should the ultimate resolution of theaction differ from management’s assessments and assumptions, a materialadjustment to the Company’s financial position and the results of itsoperations could result. Management’s assessments and assumptions include thata reliable estimate of the exposure cannot be made at this preliminary stage ofthe lawsuit.

 

*Civil liabilityin the secondary market*

 

On December 31, 2005, Bill 198came into force in Ontario, creating liability for misrepresentations by publiccompanies in written disclosure and oral statements. These amendments alsocreated liability for fraud and market manipulation. Since then, otherprovinces and territiories have adopted or are expected to adopt similarlegislation.

 

The legislation creates a right ofaction for damages against TELUS, its directors and certain of its officers inthe event that TELUS or a person with actual, implied or apparent authority toact or speak on behalf of TELUS releases a document or makes a public oralstatement that contains a misrepresentation or TELUS fails to make timelydisclosure of a material change.

 

The legislation permits action tobe taken by any person or company that acquires or disposes of TELUS securitiesin the secondary market during the period of time that the misrepresentationremains uncorrected in the public or, in the case of an omission, until suchtime as the material change has been disclosed. It is not necessary for theperson or company to establish that they relied on the misrepresentation inmaking the acquisition or disposition.

 

*Risk mitigation:*In 2005, TELUSconducted a review of its disclosure practices and procedures and the extent towhich they are documented. As part of that review, TELUS consulted externaladvisors. This review indicated that TELUS has well-documented and fulsomeprocesses in place, including a corporate disclosure policy that restrictsspokespersons to specifically designated senior management, provides a protocolfor dealing with analysts and oral presentations, outlines the communicationapproach to issues, and has a disclosure committee to review and determinedisclosure of material information. TELUS monitors legal developments andre-evaluates annually its disclosure practices and procedures, including in2007, and believes that they continue to be appropriate and prudent and thatits risk exposure is reasonable and has not changed significantly over the past12 months. However, there can be no assurance that TELUS’ processes will befollowed by all team members at all times.

 

*Legal and regulatory compliance*

 

TELUS relies on its employees,officers, Board of Directors, key suppliers and partners to demonstratereasonable legal and ethical standards. Situations might occur whereindividuals do not adhere to TELUS policies, or where personal information of aTELUS customer or employee is inadvertently collected, used or disclosed in amanner that is not fully compliant with legislation, thereby exposing TELUS tothe possibility of damages, sanctions and fines, or negatively affectingfinancial or operating results.

 

In 2007, the Company continued toexpand its activities into the United States and other foreign jurisdictions.Its subsidiaries that operate in foreign jurisdictions are required to complywith local laws and regulations, which may differ substantially from Canadianlaws and add to the legal exposure the Company faces.

 

*Risk mitigation:*Although managementcannot predict outcomes with certainty, management believes it has reasonablepolicies, processes and awareness in place for proper compliance and that theseprograms are having a positive effect on reducing risks. Since 2002, TELUS hasinstituted for its employees, officers and directors an ethics policy and in2003, established a toll-free EthicsLine for anonymous reporting by anyone whohas issues or complaints. Since 2003, TELUS has a designated complianceofficer, whose role is to work across the enterprise to ensure that thebusiness has the appropriate controls and measurements in place to facilitatelegal and regulatory compliance, including compliance under privacylegislation. For example, as a proactive measure on privacy compliance, TELUSplaces a control in the project development stage of major projects byrequiring a privacy impact assessment to be performed for all major projectsinvolving the use of customer or team member personal information.

 

The compliance officer reportsjointly to the Audit Committee and the Executive Vice-President of CorporateAffairs. This dual reporting status provides a direct line-of-sight reportingto the Audit Committee to address identified risks. In addition, legal counselsqualified in the relevant foreign jurisdictions are engaged by TELUS’subsidiaries to provide legal advice as appropriate.

 

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*Intellectual property andproprietary rights*

 

Technology evolution also bringsadditional legal risks and uncertainties. The intellectual property andproprietary rights of owners and developers of hardware, software, businessprocesses and other technologies may be protected under statute, such aspatent, copyright and industrial design legislation, or under common law, suchas trade secrets. With the growth and development of technology-basedindustries, the value of these intellectual property and proprietary rights hasincreased. Significant damages may be awarded in intellectual propertyinfringement claims advanced by rights holders. In addition, defendants mayincur significant costs to defend such claims and that possibility may promptdefendants to settle claims more readily, in part to mitigate those costs. Bothof these factors may incent intellectual property rights holders to moreaggressively pursue infringement claims.

 

Given the vast array oftechnologies and systems used by TELUS or its affiliates to deliver theirproducts and services, and with the rapid change and complexity of suchtechnologies, disputes over intellectual property and proprietary rights canreasonably be expected to increase. As a user of technology, TELUS and itsaffiliates receive from time to time communications, ranging from solicitationsto demands and legal actions, from third parties claiming ownership rights overintellectual property used by TELUS and its affiliates and asking them to pay asettlement or licensing fees for the continued use of such intellectualproperty. There can be no assurance that TELUS and its affiliates will not befaced with significant claims based on the alleged infringement of intellectualproperty rights, whether such claims are based on a legitimate dispute over thevalidity of the intellectual property rights or their infringement, or whethersuch claims are advanced against TELUS or its affiliates for the primarypurpose of extracting a settlement. TELUS and its affiliates may incursignificant costs in defending infringement claims, and may suffer significantdamages and lose the right to use technologies that are essential to theiroperations should any infringement claim prove successful.

 

*Risk mitigation:* While TELUS and itsaffiliates incorporate many technologies into their products and services, theyare not primarily in the business of creating or inventing technology. Inacquiring products and services from suppliers, it is the practice of TELUS andits affiliates to seek and obtain contractual protections consistent withindustry practices, to help mitigate the risks of intellectual propertyinfringements.

 

### **10.10 Manmade and naturalthreats**

### ** **

*Concerns about natural disastersand intentional threats to TELUS’ infrastructure, Canadian and internationalbusiness operations*

 

TELUS is a key provider of criticalcommunications infrastructure in Canada and has certain supporting businessfunctions located internationally in several countries (including thePhilippines). The Company’s network, information technology, physical assets,team members and business results may be materially impacted by exogenousthreats, including: natural disasters such as severe weather (ice, snow andwind storms), flooding, wildfires, earthquakes, typhoons/hurricanes, tornadoesand tsunamis; intentional threats such as sabotage, terrorism, labour disputesand political and civil unrest; dependence on the provision of service to theCompany by other infrastructure providers (e.g. power); and public healththreats such as pandemics.

 

TELUS continues to recognize thatglobal climate change may exacerbate certain of these threats, including the frequencyand severity of weather-related events.

 

*Risk mitigation:* TELUS has anextensive ongoing enterprise-wide business continuity program (BCP) withresources dedicated to design, exercise, maintain, execute and monitor businesscontinuity/disaster recovery policies, plans and processes that address a rangeof scenarios. This approach is focused on supporting TELUS’ continued abilityto serve customers, protect corporate assets, and strive to ensure employeeprotection and safety by instituting resiliency planning in the Company’sday-to-day business operations.

 

Although TELUS has businesscontinuity planning processes, there can be no assurance that specific eventswill not materially impact TELUS operations and results.

 

*Security - Electronic attack*

 

Electronic attacks are intentionalacts by people to gain unauthorized access to TELUS information or to preventlegitimate users from gaining access. Such attacks may use a range oftechniques, from social engineering (non-technical intrusion relying heavily onhuman interaction and trickery to break normal security procedures) to the useof sophisticated software/hardware.

 

*Risk mitigation:*Using a layeredsecurity approach, TELUS has implemented a number of proactive, reactive andcontainment processes and systems to safeguard its information technology (IT)infrastructure, information repositories and information distribution. Securitypolicies and procedures are in place to govern the duties of those responsiblefor information confidentiality and integrity. Intrusion detection systems,access controls and incident response procedures are in place to providecontinuous monitoring of TELUS’ IT infrastructure.

 

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*Security – Vandalism and theft*

 

TELUS has a number of publiclysituated physical assets that are subject to vandalism and/or theft, includingpublic payphones, copper cable, and network and telephone switch centres.

 

*Risk mitigation:* The Company hasimplemented an array of physical and electronic barriers, controls andmonitoring systems to protect its assets, considering such factors as assetimportance, exposure risks and potential costs incurred should a particularasset be damaged or stolen. As an additional level of risk management, TELUShas a corporate security group that continually investigates and evaluates therisks and, in co-operation with law enforcement and other external agencies,adjusts its protection to meet changing risks.

 

AlthoughTELUS has IT and network security planning processes and thorough physicalasset security planning processes, there can be no assurance that specificevents will not materially impact TELUS operations and results.

 

### **10.11 Economic growth andfluctuations**

### ** **

Growthin the Canadian economy was stronger than expected during the first half of2007, driven by domestic demand, continued global economic expansion and strongcommodity prices. It is expected that Canadian economic growth moderated duringthe latter half of 2007 and may weaken further in the first half of 2008,reflecting a much weaker U.S. economy, a continued high Canadian dollarexchange rate impact on net exports, and tighter credit conditions. The U.S.housing sector continues to deteriorate, with rising new and existing homeinventories, and continued decreases in house prices. In addition, the lossesfrom the U.S. sub-prime mortgages have significantly affected the valuation ofstructured financial products, thus yielding a significant increase in creditspreads. This credit situation continues to be volatile with possibleresolution and stability not expected in the near term. The relatively strongglobal economic expansion and domestic demand, as well as high commodityprices, are expected to provide the underlying support to the Canadian economyin 2008. The principal risks to the current view of the Canadian economy are amore pronounced U.S. economic slowdown or recession, a significant strongCanadian dollar exchange rate and tighter credit conditions spreading into boththe domestic consumer and business sectors.

 

*Significant economic downturns orrecessions may adversely impact TELUS*

 

In theevent of an uncertain economy or an economic downturn, residential and businesstelecommunications customers may delay new service purchases, reduce volumes ofuse, discontinue use of services or seek lower-priced alternatives. Significanteconomic downturns or recessions could adversely impact TELUS’ profitability,free cash flow and bad debt expense, and potentially require the Company torecord impairments to the carrying value of its assets including, but notlimited to, its intangible assets with indefinite lives (spectrum licences) andits goodwill. Impairments to the carrying value of assets would result in acharge to earnings and a reduction in shareholders’ equity, but would notaffect cash flow.

 

*Riskmitigation:*The Company cannot completely mitigate economic risks. Byexpanding nationally since 2000, TELUS has increased its exposure to Centraland Eastern Canadian economies, while retaining its Western Canadian-basedoperations. TELUS is currently benefiting from strong growth in the cyclicalresource economies in B.C. and Alberta. Conversely, TELUS’ non-ILEC wirelineoperations are facing lower growth in the manufacturing economies of Ontario andQuebec.

 

*Pension funding*

 

Economic fluctuations could alsoadversely impact the funding and expense associated with the defined benefitpension plans that TELUS sponsors. There can be no assurance that TELUS pensionexpense and funding of its defined benefit pension plans will not increase inthe future and thereby negatively impact earnings and/or cash flow. Definedbenefit funding risks may occur if total pension liabilities exceed the totalvalue of the respective trust funds. Unfunded differences may arise from lowerthan expected investment returns, reductions in the discount rate used to valuepension liabilities, and actuarial loss experiences.

 

*Risk mitigation:*TELUS seeks tomitigate this risk through the implementation of policies and proceduresdesigned to control investment risk and ongoing monitoring of its fundingposition. In 2007, TELUS made cash contributions of $91.6 million to itsdefined benefit plans and slightly reduced levels are expected in 2008. Whilethe Company cannot apply the surplus in one defined benefit pension plan to adeficit in another plan, at December 31, 2007, TELUS’ defined benefitpension plans in aggregate were in a surplus position by $566.3 million,as plan assets exceeded accrued benefit obligations.

 

## **11. Reconciliation ofnon-GAAP measures and definition of key operating indicators**

## ** **

### **11.1 Earnings beforeinterest, taxes, depreciation and amortization (EBITDA)**

### ** **

TELUS has issuedguidance on and reports EBITDA because it is a key measure used by managementto evaluate performance of business units, segments and the Company. EBITDA isalso utilized in measuring compliance with debt

 

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covenants – see *Section 11.4 EBITDA excluding restructuring costs*.EBITDA is a measure commonly reported and widely used by investors as anindicator of a company’s operating performance and ability to incur and servicedebt, and as a valuation metric. The Company believes EBITDA assists investorsin comparing a company’s performance on a consistent basis without regard todepreciation and amortization, which are non-cash in nature and can varysignificantly depending upon accounting methods or non-operating factors suchas historical cost.

 

EBITDA is not acalculation based on Canadian or U.S. GAAP and should not be considered analternative to Operating income or Net income in measuring the Company’sperformance, nor should it be used as an exclusive measure of cash flow,because it does not consider the impact of working capital growth, capitalexpenditures, debt principal reductions and other sources and uses of cash,which are disclosed in the Consolidated statements of cash flows. Investorsshould carefully consider the specific items included in TELUS’ computation ofEBITDA. While EBITDA has been disclosed herein to permit a more completecomparative analysis of the Company’s operating performance and debt servicingability relative to other companies, investors should be cautioned that EBITDAas reported by TELUS may not be comparable in all instances to EBITDA asreported by other companies.

 

Thefollowing is a reconciliation of EBITDA with Net income and Operating income.EBITDA (as adjusted) excludes a charge for introducing a net-cash settlementfeature for share option awards granted prior to 2005. EBITDA (as adjusted) isregularly reported to the chief operating decision maker and corresponds to thedefinition used in setting TELUS’ 2007 EBITDA targets and revised guidance.

 

| ** **                                                                                      | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                                                      | ** ** | ** **                                 | ** ** | **(restated)** | ** ** |
| **Net income**                                                                                  | ** ** | **1,257.9**                                |       | 1,145.0 |   |
| Other expense (income)                                                                          | ** ** | **36.1**                                   |       | 28.0 |   |
| Financing costs                                                                                 | ** ** | **440.1**                                  |       | 504.7 |   |
| Income taxes                                                                                    | ** ** | **233.6**                                  |       | 353.2 |   |
| Non-controlling interest                                                                        | ** ** | **6.6**                                    |       | 8.5 |   |
| **Operating income**                                                                            | ** ** | **1,974.3**                                |       | 2,039.4 |   |
| Depreciation                                                                                    | ** ** | **1,354.7**                                |       | 1,353.4 |   |
| Amortization of intangible assets                                                               | ** ** | **260.3**                                  |       | 222.2 |   |
| **EBITDA**                                                                                      | ** ** | **3,589.3**                                |       | 3,615.0 |   |
| Charge in 2007 for introducing a net-cash settlement  feature for options granted prior to 2005 | ** ** | **168.7**                                  |       | — |   |
| **EBITDA (as adjusted)**                                                                        | ** ** | **3,758.0**                                |       | 3,615.0 |   |

 

In additionto EBITDA, TELUS calculates EBITDA less capital expenditures as a simple proxyfor cash flowat a consolidatedlevel and in its two reportable segments. EBITDA less capital expenditures maybe used for comparison to the reported results for other telecommunicationscompanies over time and is subject to the potential comparability issues ofEBITDA described above.

 

| ** **                                                                                      | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                                                      | ** ** | ** **                                 | ** ** | **(restated)** | ** ** |
| **EBITDA**                                                                                      | ** ** | **3,589.3**                                |       | 3,615.0 |   |
| Capital expenditures                                                                            | ** ** | **(1,770.3**                               | **)**      | (1,618.4 | ) |
| **EBITDA less capital expenditures**                                                            | ** ** | **1,819.0**                                |       | 1,996.6 |   |
| Charge in 2007 for introducing a net-cash settlement  feature for options granted prior to 2005 | ** ** | **168.7**                                  |       | — |   |
| **EBITDA (as adjusted) less capital expenditures**                                              | ** ** | **1,987.7**                                |       | 1,996.6 |   |

### ** **

### **11.2 Free cash flow**

### ** **

The Companyreports free cash flow because it is a key measure used by management toevaluate its performance. Free cash flow excludes certain working capitalchanges and other sources and uses of cash, which are disclosed in theConsolidated statements of cash flows. Free cash flow is not a calculationbased on Canadian or U.S. GAAP and should not be considered an alternative tothe Consolidated statements of cash flows. Free cash flow is a measure that canbe used to gauge TELUS’ performance over time. Investors should be cautionedthat free cash flow as reported by TELUS may not be comparable in all instancesto free cash flow as reported by other companies. While the closest GAAPmeasure is Cash provided by operating activities less Cash used by investing activities,free cash flow is considered relevant because it provides an indication of howmuch cash generated by operations is available after capital expenditures, butbefore proceeds from divested assets and changes in certain working capitalitems (such as trade receivables, which can be significantly distorted bysecuritization changes that do not reflect operating results, and tradepayables).

 

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The following reconciles free cash flow with Cashprovided by operating activities less Cash used by investing activities:

 

| ** **                                                                                                                                                         | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                                                                                              | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                         | ** ** | ** **                                 | ** ** | **(restated)** | ** ** |
| **Cash provided by operating activities**                                                                                                                          | ** ** | **3,171.7**                                | ** ** | 2,803.7 |   |
| **Cash (used) by investing activities**                                                                                                                            | ** ** | **(1,771.6**                               | **)**      | (1,675.2 | ) |
| ** **                                                                                                                                                         |       | **1,400.1**                                | ** ** | 1,128.5 |   |
| Net employee defined benefit plans expense                                                                                                                         | ** ** | **92.1**                                   | ** ** | 30.1 |   |
| Employer contributions to employee defined benefit  plans                                                                                                          | ** ** | **92.8**                                   | ** ** | 123.3 |   |
| Amortization of deferred gains on sale-leaseback of  buildings, amortization of deferred charges and other, net                                                    | ** ** | **(4.2**                                   | **)**      | (51.7 | ) |
| Reduction (increase) in securitized accounts  receivable                                                                                                           | ** ** | **—**                                 | ** ** | — |   |
| Non-cash working capital changes except changes from  income tax payments (receipts), interest payments (receipts) and securitized  accounts receivable, and other | ** ** | **(8.9**                                   | **)**      | 309.0 |   |
| Acquisitions                                                                                                                                                       | ** ** | **—**                                 | ** ** | 49.0 |   |
| Proceeds from the sale of property and other assets                                                                                                                | ** ** | **(7.5**                                   | **)**      | (14.9 | ) |
| Other investing activities                                                                                                                                         | ** ** | **8.8**                                    | ** ** | 22.7 |   |
| **Free cash flow**                                                                                                                                                 | ** ** | **1,573.2**                                | ** ** | 1,596.0 |   |

 

The following shows management’s calculation offree cash flow.

 

| ** **                                                                                                                                               | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                                                                                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                                                                                                               | ** ** | ** **                                 | ** ** | **(restated)** | ** ** |
| **EBITDA**                                                                                                                                               | ** ** | **3,589.3**                                | ** ** | 3,615.0 |   |
| Restructuring costs net of cash payments                                                                                                                 | ** ** | **(18.2**                                  | **)**      | (4.0 | ) |
| Share-based compensation                                                                                                                                 | ** ** | **95.8**                                   | ** ** | 25.1 |   |
| Donations and securitization fees included in Other  expense                                                                                             | ** ** | **(36.7**                                  | **)**      | (29.1 | ) |
| Cash interest paid                                                                                                                                       | ** ** | **(454.4**                                 | **)**      | (516.1 | ) |
| Cash interest received                                                                                                                                   | ** ** | **41.6**                                   | ** ** | 24.2 |   |
| Income taxes received (paid), less investment tax  credits received that were previously recognized in either EBITDA or capital  expenditures, and other | ** ** | **126.1**                                  | ** ** | 99.3 |   |
| Capital expenditures                                                                                                                                     | ** ** | **(1,770.3**                               | **)**      | (1,618.4 | ) |
| **Free cash flow**                                                                                                                                       | ** ** | **1,573.2**                                | ** ** | 1,596.0 |   |

### ** **

### **11.3 Definition of keywireless operating indicators**

### ** **

These measuresare industry metrics and are useful in assessing the operating performance of awireless company.

 

Average revenueper subscriber unit per month (ARPU) is calculated asNetwork revenue divided by the average number of subscriber units on thenetwork during the period and expressed as a rate per month. Data ARPU is acomponent of ARPU, calculated on the same basis for revenues derived fromservices such as text messaging, mobile computing, personal digital assistancedevices, Internet browser activity and pay-per-use downloads.

 

Churnper month is calculated as the number of subscriber unitsdisconnected during a given period divided by the average number of subscriberunits on the network during the period, and expressed as a rate per month. Aprepaid subscriber is disconnected when the subscriber has no usage for 90 daysfollowing expiry of the prepaid card.

 

Cost ofacquisition (COA) consists of the total of handset subsidies,commissions, and advertising and promotion expenses related to the initialsubscriber acquisition during a given period. As defined, COA excludes costs toretain existing subscribers (retention spend).

 

COA per grosssubscriber addition is calculated as cost of acquisition divided bygross subscriber activations during the period.

 

COA per grosssubscriber addition to lifetime revenue is calculated ascost of acquisition for new subscribers divided by expected lifetime revenue ofthe subscriber base, expressed as a percentage.

 

EBITDAexcluding COA is a measure of operational profitabilitynormalized for the period costs of adding new customers.

 

Lifetime revenueper subscriber is calculated as ARPU divided by the churn permonth. The metric provides a means of estimating the average total revenueexpected from existing subscribers.

 

Retention spendto Network revenue represents direct costs associated with marketingand promotional efforts aimed at the retention of the existing subscriber basedivided by Network revenue.

 

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### **11.4Definition of liquidity and capital resource measures**

### ** **

Dividend payoutratio is defined as the most recent quarterly dividenddeclared per share multiplied by four and divided by basic earnings per sharefor the 12-month trailing period. The target guideline forthe annual dividend payout ratio is on a prospective basis, rather than on atrailing basis, and is 45 to 55% of sustainable net earnings.

 

EBITDA –excluding restructuring costs is used in thecalculation of Net debt to EBITDA and EBITDA interest coverage, consistent withthe calculation of the Leverage Ratio and the Coverage Ratio in credit facilitycovenants. Restructuring costs were $20.4 million and $67.8 million,respectively, for the years ended December 31, 2007 and 2006.

 

EBITDA –excluding restructuring costs interest coverage is defined asEBITDA excluding restructuring costs divided by Net interest cost.Historically, this measure is substantially the same as the Coverage Ratiocovenant in TELUS’ credit facilities.

 

Interest coverageon long-term debt is calculated on a 12-month trailing basis as Netincome before interest expense on long-term debt and income tax expense,divided by interest expense on long-term debt. The 12-month period ended December 31,2006 includes an accrual for estimated costs to settle a lawsuit.

 

Net debt is anon-GAAP measure whose nearest GAAP measure is Long-term debt, includingCurrent maturities of long-term debt, as reconciled below. Net debt is onecomponent of a ratio used to determine compliance with debt covenants (refer tothe description of Net debt to EBITDA below).

 

| ** **                                                                                                                                                                       | ** ** | **As at December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **($ millions)**                                                                                                                                                            | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** **                           | ** ** | **(restated)** | ** ** |
| Long-term debt including current portion                                                                                                                                         | ** ** | **4,588.9**                          | ** ** | 4,908.2 |   |
| Debt issuance costs netted against long-term debt                                                                                                                                | ** ** | **30.4**                             | ** ** | 19.9 |   |
| Derivative liability                                                                                                                                                             | ** ** | **1,179.5**                          | ** ** | 838.5 |   |
| Accumulated other comprehensive income amounts arising  from financial instruments used to manage interest rate and currency risks  associated with U.S. dollar denominated debt | ** ** | **(137.3**                           | **)**      | — |   |
| Cash and temporary investments                                                                                                                                                   | ** ** | **(19.9**                            | **)**      | 11.5 |   |
| Proceeds from securitized accounts receivable                                                                                                                                    | ** ** | **500.0**                            | ** ** | 500.0 |   |
| **Net debt**                                                                                                                                                                     | ** ** | **6,141.6**                          | ** ** | 6,278.1 |   |

 

Thederivative liability in the table above relates to cross currency interest rateswaps that effectively convert principal repayments and interest obligations toCanadian dollar obligations, which at December 31, 2007, is in respect ofthe US$1,925.0 million debenture maturing June 1, 2011. At December 31,2006, the derivative liability was in respect of the 2011 debenture and theUS$1,166.5 million debenture that matured June 1, 2007. Managementbelieves that Net debt is a useful measure because it incorporates theexchange rate impact of cross currency swaps put into place that fixthe value of U.S. dollar denominated debt, and because it represents the amountof long-term debt obligations that are not covered by available cash andtemporary investments.

 

Net debt toEBITDA – excluding restructuring costs is defined asNet debt as at the end of the period divided by the 12-month trailing EBITDAexcluding restructuring costs. TELUS’ guideline range for Net debt to EBITDA isfrom 1.5 to 2.0 times. Historically, Net debt to EBITDA excluding restructuringcosts is substantially the same as the Leverage Ratio covenant in TELUS’ creditfacilities.

 

Net debt to totalcapitalization provides a measure of the proportion of debt usedin the Company’s capital structure.

 

Net interest cost isdefined as Financing costs before gains on redemption and repayment of debt,calculated on a 12-month trailing basis. No gains on redemption and repaymentof debt were recorded in the respective periods. Losses recorded on theredemption of long-term debt are included in net interest cost. Net interestcosts for the years ended December 31, 2007 and 2006 are equivalent toreported quarterly financing costs over those periods.

 

Totalcapitalization – book value excludes accumulated other comprehensive incomeor loss and is calculated as follows:

 

| ** **                                 | ** ** | **As at December 31** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| **($ millions)**                      | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | ** **                           | ** ** | **(restated)** | ** ** |
| Net debt                                   | ** ** | **6,141.6**                          |       | 6,278.1 |   |
| Non-controlling interests                  | ** ** | **25.9**                             |       | 23.6 |   |
| Shareholders equity                        | ** ** | **6,926.2**                          |       | 7,048.0 |   |
| Accumulated other comprehensive loss       | ** ** | **103.5**                            |       | — |   |
| **Total capitalization – book value** | ** ** | **13,197.2**                         |       | 13,349.7 |   |

 

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