uarterl y report 3 - residential | mts · project excellence (“cpex”) award in best practices...

Quarterl

y Reportfor the period ending September 30, 2008 3

Manitoba Telecom Services Inc.

Manitoba Telecom Services Inc. Reports Solid Third Quarter Results

Key overall financial metrics on track for 2008

• Solid growth in free cash flow, revenues, EBITDA, EPS and growth from growth services

• Consumer Markets division delivers another quarter of best-in-class incumbent performance

• Enterprise Solutions division increases value of new contracts won in 2008 to $247 million, exceeding year-end total for 2007

• Quarterly dividend of $0.65 per share declared, fully supported by operating cash flows WINNIPEG, Manitoba, November 6, 2008 – Manitoba Telecom Services Inc., and its principal operating subsidiary MTS Allstream Inc. (herein referred to as either the “Company” or “MTS Allstream”) (TSX: MBT), one of Canada’s leading national communications companies, today reported solid third quarter 2008 financial performance driven by continued strong growth in the Company’s growth services. “MTS Allstream delivered another quarter of solid growth despite challenging economic conditions,” said Pierre Blouin, Chief Executive Officer. “Overall we grew revenue, free cash flow1, EBITDA2 and EPS3 and continued to build our customer base, acquiring more than 19,000 new customers during the third quarter from our growth lines of business.” “Our Enterprise Solutions division, which won a record number of contracts for the period, has already surpassed last year’s total value of new contracts. In Manitoba, where we are benefiting from a strong provincial economy, our Consumer Markets division delivered best-in-class performance for an incumbent telco,” continued Mr. Blouin. “Taken as a whole, our performance for the quarter demonstrates our ability to deliver solid results and support our dividend.” Results for the third quarter of 2008 were solid, contributing to overall year to date growth of 2.0% in revenue, 1.0% in EBITDA and 5.3% in EPS from continuing operations4. Growth in the Company’s growth services portfolio, which includes wireless, converged Internet protocol, unified communications, digital television and high-speed Internet services, and the

Company’s success in adding new customers in both divisions were the principal drivers of this solid financial performance. In the third quarter, revenues from growth services increased by 9.5% or $18.4 million to $213.1 million. Revenues from growth services accounted for 44.4% of the Company’s overall revenues from continuing operations in the third quarter. “This continued growth in our growth services products, together with solid growth in new customers, demonstrates our long-standing ability to innovate, compete and respond to the changing needs of customers in all the markets we serve,” added Mr. Blouin. FINANCIAL HIGHLIGHTS *

three months ended September 30

nine months ended September 30 in millions of dollars,

except per share amounts 2008 2007

change

2008 2007

change

EPS 0.74 0.73 1.4% 2.39 2.27 5.3% EBITDA 165.1 164.8 0.2% 505.1 500.3 1.0% Free cash flow 70.8 65.3 8.4% 221.9 248.4 (10.7%)Growth services revenues 213.1 194.7 9.5% 632.9 554.8 14.1% Legacy services revenues 266.8 281.2 (5.1%) 812.2 862.6 (5.8%)Revenues 479.9 475.9 0.8% 1,445.1 1,417.4 2.0%

* From continuing operations. MTS Allstream provides financial information on continuing operations in order to assist investors in understanding its underlying financial performance. MTS Allstream’s definition of continuing operations excludes certain non-recurring items such as restructuring costs and the retroactive impact of regulatory decisions. For more information, please see MTS Allstream’s third quarter 2008 management’s discussion and analysis (“MD&A”) in the Investors section of www.mtsallstream.com.

In addition to solid overall business performance, MTS Allstream continued to achieve significant improvements in its cost structure with a reduction in annualized costs of $22.4 million thus far in 2008. “We continue to make significant gains in our overall cost structure and productivity,” said Wayne Demkey, Chief Financial Officer. “We expect to achieve our guidance in 2008, but at the same time we are carefully evaluating any impact that the current economic conditions may have in the context of our 2009 plan and will adjust our expense and investment levels accordingly. In particular, we are in the process of completing a thorough review of certain key internal business processes in our Enterprise Solutions division and expect the effort to deliver additional cost savings and productivity gains in 2009.” The Company’s Board of Directors declared a cash dividend of $0.65 per share for the fourth quarter of 2008, which is payable on January 15, 2009 to shareholders of record on December 15, 2008. DIVISIONAL HIGHLIGHTS Enterprise Solutions division The Company’s Enterprise Solutions division provided solid performance, delivering growth in revenues and winning a record number of new contracts, exceeding last year’s total. Growth services revenues once again delivered strong growth with revenues from the Company’s next generation

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services, which include converged IP and unified communications services, increasing by 14.6% for the third quarter. The division’s national sales team won $91 million in new contracts in the third quarter of 2008, including contracts with TD Waterhouse, WestJet, Prairie Rose School Division and Statistics Canada. Year to date, the Enterprise Solutions division has won $247 million in new contracts, surpassing the total value of new contracts won in all of 2007. Subsequent to the end of the quarter, the Company announced that Enterprise Solutions division president John A. MacDonald would retire from his position effective December 1, 2008. A formal executive search for a successor to Mr. MacDonald is ongoing and the Company expects to name a successor prior to Mr. MacDonald’s departure. “With John’s full support, we anticipate a seamless transition to his successor,” said Mr. Blouin. “I would like to once again thank John for his passion, his wisdom, and the tremendous contributions he has made to the success of our business. We wish him continued success and happiness upon his retirement.” Consumer Markets division MTS Allstream’s success in Manitoba was supported by the continued strong performance of its three major growth products. Wireless, television and high-speed Internet services customers delivered significant growth in revenues and subscribers for the third quarter. Specifically, the digital television services subscriber base increased by 10.5% and revenue grew by 16.8%, as compared to the third quarter of 2007. High-speed Internet services subscribers increased by 7.3% for the quarter and the associated revenue was 19.7% higher than the same period last year. The customer base for wireless services continued to deliver strong growth in new subscribers adding 11.4% year-over-year, while revenue from wireless services increased 7.3% over the same period last year. In addition to powering strong results, these products serve as the foundation to our successful bundling strategy, which reinforces customer loyalty, drives average revenue per subscriber, and has played a significant role in helping MTS Allstream achieve the lowest rate of residential line losses in the country. In addition to its success in bundling popular products and services for customers, MTS Allstream is benefiting from a robust provincial economy in Manitoba. As of October 20, 2008, the Manitoba Department of Finance reported that surveys of major forecasters indicate that the province will generate real gross domestic product (“GDP”) growth of 2.4% for 2008, which is above the national average of 0.8% GDP growth. In September, MTS Allstream was recognized for the performance of its consumer growth services products when it was named in an award ceremony in London, England as a winner of the Global Telecom Business Innovation Awards in the fixed and mobile communications category. The Company also received the prestigious 2008 Frost and Sullivan Competitive Strategy Leadership Award in the North American Consumer Communication and Entertainment Wallet Share Growth category earlier this year.

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2008 OUTLOOK As announced on December 7, 2007, the Company’s 2008 outlook for continuing operations is as follows:

2008 Financial Outlook – Continuing Operations

Revenues $1.920 B to $1.980 B

EBITDA $660 M to $680 M

EPS $2.95 to $3.15

Free cash flow $250 M to $280 M

Capital expenditures 14% to 15% of revenues

“While general economic trends and conditions remain difficult to predict, we expect to be within our financial outlook for 2008,” said Mr. Blouin. For assumptions underlying the Company’s 2008 outlook, refer to “Material Assumptions” in the Company’s release dated December 31, 2007 and its third quarter 2008 interim Management’s Discussion and Analysis (“MD&A”), which are filed on SEDAR and the Company’s Web site. OTHER DEVELOPMENTS The following are various announcements made recently by MTS Allstream. Enterprise Solutions division announcements

• On October 8, 2008, MTS Allstream announced that it had been awarded the Canadian Project Excellence (“CPEX”) award in Best Practices in partnership with the Ontario Association of Community Care Access Centres at the CPEX Awards Gala. The Best Practices award recognizes outstanding performance and achievement through the application of recognized project management best practices. MTS Allstream was recognized for its voice over IP implementation project to 14 Community Care Access Centres across Ontario.

• On August 19, 2008, MTS Allstream announced that it had achieved the Master Unified Communications Specialization from Cisco®. This specialization recognizes MTS Allstream as having fulfilled the training requirements and program prerequisites to sell, deploy and support highly sophisticated applications-based Cisco unified communications solutions.

Consumer Markets division announcements

• On October 31, 2008, MTS Allstream announced that HBO Canada was now available for its MTS TV customers.

• On September 10, 2008, MTS Allstream was proud to announce that it had received an award in the consumer fixed and mobile service innovations category at the 2008 Global Telecoms Business Innovation Awards in London, England. MTS Allstream was recognized

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for its digital television service, MTS TV, the most successfully deployed telephone line-based television service in North America based on technology and market share growth.

• On September 9, 2008, MTS Allstream announced an enhancement of its online protection with the launch of the award-winning ZoneAlarm® ForceField™, which is available free to the company’s Internet customers.

• On September 3, 2008, MTS Allstream announced a special offer for students who are 18 years or older and attending any educational institution in Manitoba. The MTS Mobility Student Deal costs $19.99 per month and includes 250 weekday minutes, unlimited text messaging and Mobile Web, as well as unlimited calling on evenings and weekends starting at 5:00 p.m. The MTS High-speed Internet Student Deal is $24.95 per month for 12 months, and students receive free installation when ordering MTS TV.

• On August 18, 2008, MTS Allstream announced that it had received approval from the Canadian Radio-television and Telecommunications Commission to offer television service in the community of Portage la Prairie, Manitoba.

Corporate announcements

• On October 29, 2008, MTS Allstream was pleased to announce that it was awarded the Manitoba Chambers of Commerce Lieutenant Governor’s Award for Outstanding Contribution to the Community at the Manitoba Business Awards Gala Dinner held on October 28 in Winnipeg.

• On October 20, 2008, MTS Allstream announced that it had been awarded The Winnipeg Chamber of Commerce’s Community Contribution Award. This award, which was received at the Chamber’s annual Red Carpet Gala held on October 17, 2008, recognizes the Company’s significant community contributions in Winnipeg.

• On October 14, 2008, MTS Allstream announced that it had been named one of Manitoba’s Top 20 Employers for 2009. This special designation recognizes Manitoba employers that lead in their respective industries in offering exceptional places to work with the most progressive and forward-thinking programs.

• On October 1, 2008, MTS Allstream announced that Enterprise Solutions division president John A. MacDonald would retire from his position effective December 1, 2008, concluding a 30-year career as a senior executive and highly regarded leader in the telecommunications industry.

• On September 26, 2008, MTS Allstream announced that it had paid tribute to a select group of employees as part of its 100th anniversary celebrations. The MTS Allstream Luminaries, primarily current and former employees, were praised for distinction in their respective fields through outstanding achievements and dedication.

• On September 18, 2008, Pierre Blouin, Chief Executive Officer, presented the Friends of The Canadian Museum for Human Rights with a contribution plan of $1 million to equip the museum with state-of-the-art telecommunications technology.

• On September 5, 2008, MTS Allstream employees and retirees delivered backpacks filled with school supplies to 500 elementary school students across Manitoba. Part of the Company’s 100th anniversary celebrations, the employee-driven Centennial Packs School Supply Drive collected dozens of boxes of school supplies from MTS Allstream employees over the summer.

• On September 5, 2008, 60 MTS Allstream employees helped to restore a forested area near the community of Victoria Beach, Manitoba, by planting 100 trees as part of the celebration of the Company’s 100th anniversary.

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Summary of MTS Allstream recognition in 2008 • 2008 Manitoba Chambers of Commerce Lieutenant Governor’s Award for Outstanding

Contribution to the Community. • 2008 Community Contribution Award from The Winnipeg Chamber of Commerce. • Recognized as one of Manitoba’s Top 20 Employers for 2009. • Canadian Project Excellence award in Best Practices, in partnership with the Ontario

Association of Community Care Access Centres, recognizing outstanding performance and achievement through the application of recognized project management best practices.

• Digital television service recognized in the consumer fixed and mobile services innovations at the 2008 Global Telecoms Business Innovation Awards.

• 2008 Frost and Sullivan Competitive Strategy Leadership Award in the North American Consumer Communication and Entertainment Wallet Share Growth category.

• 2008 Microsoft Partner of the Year for Information Worker Solutions, Unified Communications.

• 2008 Special Recognition Award from Canada’s Telecommunications Hall of Fame. • 2008 Cisco Partner Regional Market Mover Award for Canada. • 2008 recipient of the Manitoba Historical Society Centennial Business Award.

Footnotes 1 Refer to MTS Allstream’s third quarter 2008 interim MD&A for the definition of free cash flow. 2 EBITDA is earnings before interest, taxes, amortization, other income and discontinued operations. EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with Canadian generally accepted accounting principles) as a measure of liquidity. 3 EPS is earnings per share. 4 Refer to MTS Allstream’s third quarter 2008 interim MD&A for the definition of continuing operations.

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Table of Contents Page

Non-GAAP Measures of Performance 7

Overview 8

Results of Operations 8 8 10 14

• Earnings Per Share • Revenues • Operating Expenses • Consolidated Quarterly Data 16

Liquidity and Capital Resources 17

Critical Accounting Estimates and Assumptions 19

Changes in Accounting Policies, including Initial Adoption 19

Risks and Uncertainties 19

2008 Outlook 22

Consolidated Financial Statements 25

Notes to Consolidated Financial Statements 29

Unless otherwise indicated, this Management’s Discussion and Analysis (“MD&A”) of our financial results for the interim period ended September 30, 2008 is as at November 6, 2008. In this MD&A, “we”, “our”, and “us” refer to Manitoba Telecom Services Inc. (“MTS”). This interim MD&A should be read in conjunction with our interim consolidated financial statements and the discussion and analysis that accompanies our audited consolidated financial statements for the year ended December 31, 2007. This interim MD&A for the three and nine months ended September 30, 2008 updates the information contained in our interim MD&A for the first and second quarters of 2008, and our 2007 annual MD&A. This interim MD&A includes forward-looking statements and information (collectively, the “statements”) about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking information. Examples of statements that constitute forward-looking information may be identified by words such as “believe”, “expect”, “project”, “anticipate”, “could”, “target”, “forecast”, “intend”, “plan”, “outlook”, and other similar terms. Factors that could cause anticipated opportunities and actual results to differ materially from those expected, and the material factors or

assumptions that were applied in drawing a conclusion or making a forecast or projection set out in such forward-looking statements, include, but are not limited to, the items identified in this interim MD&A under the “Risks and Uncertainties” and “Material Assumptions” sections, our interim MD&A for the first and second quarters of 2008, and our 2007 annual MD&A. Please note that forward-looking statements reflect our expectations as at November 6, 2008. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Additional information relating to our company, including our Annual Information Form, is available on SEDAR at www.sedar.com. Unless otherwise stated, all amounts are expressed in Canadian dollars.

MANAGEMENT’S DISCUSSION AND ANALYSIS

NNOONN--GGAAAAPP MMEEAASSUURREESS OOFF PPEERRFFOORRMMAANNCCEE In this MD&A, we provide information concerning continuing operations, EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by Canadian generally accepted accounting principles (“GAAP”), and are not necessarily comparable to similarly titled measures used by other companies. • Continuing Operations – We provide information that

refers to our performance from continuing operations to assist investors in understanding the performance of our company.

In the first nine months of 2008, continuing operations excludes restructuring costs; the impact of changes in income tax rates on our tax asset; the costs of transitioning certain wireless service requirements away from Bell Mobility to new suppliers and to our wireless platform as well as costs associated with the advanced wireless services (“AWS”) spectrum auction; and solvency funding to our pension plans.

In the first nine months of 2007, continuing operations excluded restructuring costs, certain tax recoveries, the retroactive adjustment related to Telecom Decision CRTC 2007-10 (“Decision 2007-10”) in which the Canadian Radio-television and Telecommunications Commission (“CRTC”) determined that we had been billed twice over the past several years for basic service extension features charges, the impact of changes in income tax rates on our tax asset, solvency funding to our pension plans, and a reduction to our tax asset valuation allowance and other adjustment.

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http://www.sedar.com/

• EBITDA – We define EBITDA as earnings before interest, taxes, amortization, other income and discontinued operations. EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with Canadian GAAP) as a measure of liquidity.

• Free Cash Flow – We define free cash flow as cash

flow from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares or retiring debt.

OOVVEERRVVIIEEWW MTS is a leading national communications provider in Canada. The company is organized into two reportable operating segments, the Enterprise Solutions division and the Consumer Markets division. The company, which operates under two principal brands, MTS Allstream and Allstream, builds upon its unique combination of market leadership in Manitoba and agile competitive presence in business markets across Canada to deliver innovative telecommunications solutions that bring value to customers. MTS employs approximately 6,000 people. MTS commenced its operations in the province of Manitoba in 1908, first as a department of the provincial government, and then as a Crown corporation that was incorporated in 1933. In 1997, the company was reorganized and continued as a publicly traded company. MTS’s common shares are listed on The Toronto Stock Exchange under the trading symbol MBT. Enterprise Solutions division The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS Allstream brand in Manitoba, is a leading competitor in the national business and wholesale markets. This division offers customers a portfolio of solutions tailored to the needs of medium and large businesses looking for success in a world of rapidly evolving technology – Internet protocol (“IP”)-based communications, unified communications, voice and data connectivity services. The Enterprise Solutions division operates an extensive national broadband fibre optic network that spans more than 24,300 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international service providers. The division’s advanced services, combined with the impressive reach of a state-of-the-art network and continued leadership in technological innovation, have allowed the company to forge strong relationships with top national business customers across the country.

Consumer Markets division The Consumer Markets division leads every telecommunications market segment in Manitoba, delivering a full suite of next generation wireless, high-speed Internet and data, digital television and wireline voice services under the MTS brand, as well as security and alarm monitoring services through AAA Alarm Systems Ltd., a subsidiary of MTS which also operates in other western provinces. This complete range of products is unmatched by any other provider in Manitoba, and the digital television service offered to customers in Winnipeg is recognized as one of the leading North American digital television services. With this innovative combination of products and services, the company connects people, homes and businesses everywhere in our markets. In addition, the Consumer Markets division is a major player in the national small business telecommunications market outside Manitoba, providing customers in targeted major Canadian centres with a range of innovative business Internet, data and voice services under the Allstream brand. RREESSUULLTTSS OOFF OOPPEERRAATTIIOONNSS Earnings Per Share (“EPS”)

(in $) Q3/08 Q3/07 % change

EPS (continuing operations) 0.74 0.73 1.4

Wireless transition and AWS spectrum auction costs

(0.08) -- n.m.

Restructuring costs (0.07) (0.03) n.m.

Basic EPS 0.59 0.70 (15.7) Note: EPS for the three months ended September 30 is based on weighted average shares outstanding of 64.6 million for 2008, and 64.6 million for 2007. The strength of our growth services portfolio drove the increases in EPS with double-digit increases in revenues from our growth services. Share purchases made in the first six months of 2007 under our normal course issuer bid (the “Issuer Bid”) positively impacted EPS from continuing operations on a year to date basis with lower shares outstanding for the nine months ended September 30, 2008. While the markets in which we do business remain highly competitive, we are confident in our management of customer migration to new generation IP-based technology services as well as the popularity of our bundling programs and the reinforcement of customer relationships that these programs provide. In addition, the successful execution of our ongoing cost control initiatives, along with targeted business strategies, contributed to our improved performance year-over-year. We are pleased with the continued growth in our EPS from continuing operations in the quarter and year to date ended

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September 30, 2008. As we disclosed last quarter, we are in the process of transitioning certain wireless service requirements away from Bell Mobility. The costs associated with this transition, in addition to the costs related to our participation in the AWS spectrum auction and certain restructuring costs impacted our basic EPS performance. Additionally, on a year to date basis, the decrease in basic EPS reflects the positive impacts of Decision 2007-10, and a reduction in our tax asset allowance, as well as negative impacts of a future tax rate adjustment and the costs associated with the AWS spectrum auction. The financial impact of each of these items is detailed in the following table:

EPS (Continuing Operations)

0.740.73

Q 3/07 Q 3/08

$

(in $) YTD/08 YTD/07 % change

EPS (continuing operations) 2.39 2.27 5.3


(0.18) -- n.m.

Future tax rate adjustment (0.12) (0.09) 33.3

Reduction in tax asset allowance and other adjustment

-- 0.15 n.m.

Decision 2007-10 -- 0.15 n.m.

Restructuring costs (0.07) (0.10) (30.0)

Basic EPS 2.02 2.38 (15.1) Note: EPS for the nine months ended September 30 is based on weighted average shares outstanding of 64.6 million for 2008, and 65.2 million for 2007.

EBITDA

(in millions $) Q3/08 Q3/07 % change

EBITDA (continuing operations) 165.1 164.8 0.2


(7.5) -- n.m.

Restructuring costs (7.1) (2.3) n.m.

EBITDA 150.5 162.5 (7.4)

(in millions $) YTD/08 YTD/07 % change

EBITDA (continuing operations) 505.1 500.3 1.0


(17.8) -- n.m.

Decision 2007-10 -- 13.5 n.m.

Restructuring costs (7.1) (8.9) (20.2)

EBITDA 480.2 504.9 (4.9)

Our growth services portfolio continued the strong performance we have seen throughout the year with revenues from our converged IP, unified communications, wireless, consumer Internet and digital television services contributing significant increases to our overall financial performance. In addition to the increases in revenues from our growth services offerings, our solid progression with ongoing cost control initiatives provided further support to solid year-over-year growth in EBITDA from continuing operations. Costs of transitioning certain wireless service requirements away from Bell Mobility to new suppliers and our wireless platform, the costs associated with our participation in the AWS spectrum auction, higher year-over-year restructuring costs as well as the positive one-time impact in 2007 of Decision 2007-10 are the primary drivers of these decreases in consolidated EBITDA on a year to date basis. We are disputing certain costs being charged by Bell Mobility associated with transitioning away from Bell Mobility and are of the opinion that such costs are recoverable from them. We have commenced formal proceedings in accordance with the dispute resolution mechanism in our agreement to recover such costs, however there is no certainty that such costs will be recovered. These wireless transition costs are a one-time charge and do not impact our continuing operations.

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EBITDA(Continuing Operations)

164.8 165.1

Q 3/07 Q 3/08

in m

illio

ns $

REVENUES Operating Revenues


Revenue (continuing operations) 479.9 475.9 0.8

Revenue 479.9 475.9 0.8

Growth Services Revenues

194.7

213.1

in m

illio

ns $

Q 3/07 Q 3/08


Revenue (continuing operations) 1,445.1 1,417.4 2.0

Decision 2007-10 -- (0.8) n.m.

Revenue 1,445.1 1,416.6 2.0

Significant year-over-year increases in revenues from our converged IP, unified communications, wireless, consumer Internet and digital television services, which are included in our growth services portfolio, drove the increases in our revenues from continuing operations. In addition, the strong revenues from our growth services more than offset the decline in revenues from our legacy services. Both of our operating divisions achieved overall growth in revenues from continuing operations in the quarter and year to date ended September 30, 2008. Our Consumer Markets division continued to provide “best in class” results against our competitors in all lines of business, and for the fourth consecutive quarter, we have continued to achieve overall revenue growth year-over-year in our Enterprise Solutions division with a slight increase this quarter and a 2.0% increase year to date. While Rogers Communications Inc. (“Rogers”) and AT&T Corp. (“AT&T”) have continued to transition their business to

their own networks, the impact of their reduced traffic on our network has been lessening due to the gains we are achieving in our growth services revenues. In the third quarter of 2008, revenues from Rogers and AT&T declined by $6.0 million as compared to the same period last year, and on a year to date basis, declined by $20.8 million. If these impacts were excluded, the revenues of our Enterprise Solutions division would have grown by 2.4% in the third quarter and by 4.6% in the first nine months of the year, as compared to last year. Solid demand for converged IP and unified communications services provided by our Enterprise Solutions division is demonstrated by this division’s improved performance. We continue to assess the current economic climate for signals of challenges to our solid financial performance and business environment. Segmented Revenues (Continuing Operations)

(in millions $) Q3/08 Q3/07 % change Growth services 213.1 194.7 9.5 Legacy services 266.8 281.2 (5.1) Total 479.9 475.9 0.8


Growth services 632.9 554.8 14.1 Legacy services 812.2 862.6 (5.8) Total 1,445.1 1,417.4 2.0

Growth Services Revenues The proportion of our total revenues from growth services has continued to increase, in keeping with our business strategy. Contributing 44.4% and 43.8% to our total revenues from continuing operations in the third quarter and year to date, respectively, these levels continue to grow above the 40.9% and 39.1% contributions from the same periods last year. The strength of the product offerings within our growth services portfolio continued to drive the gains in our growth services revenues with significant year-over-year increases in revenues from our converged IP, unified communications, wireless, consumer Internet and digital television services.

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Legacy Services Revenues Through our targeted marketing initiatives and popular service bundle packaging, we are successfully managing the influences of re-pricing and customer churn on our legacy services products. These strategies are intended to profitably manage our customer transition to growth services and products, as well as contributing to new and growing revenue streams. As expected, Rogers and AT&T have continued with the migration of communications traffic to their own networks, which contributed $6.0 million and $20.8 million to the decline in the three and nine months ending September 30, 2008, respectively. If these impacts were excluded, the decreases in our legacy services revenues would be 3.0% and 3.4%, respectively. Operating Revenues (Continuing Operations)

(in millions $) Q3/08 Q3/07 % change Wireless 75.1 71.3 5.3 Data 171.3 166.9 2.6 Local 132.6 133.7 (0.8) Long distance 80.2 84.9 (5.5) Other 20.7 19.1 8.4 Total 479.9 475.9 0.8

Wireless Services Revenues

71.3

75.1

Q 3/07 Q 3/08

in m

illio

ns $


Wireless 215.1 200.4 7.3 Data 523.8 491.0 6.7 Local 396.3 399.9 (0.9) Long distance 248.0 268.1 (7.5) Other 61.9 58.0 6.7 Total 1,445.1 1,417.4 2.0

Our operating revenues include those earned from the provision of wireless, data, local voice, long distance voice, and other services, which include our digital television service. Wireless Services

(in millions $) 2008 2007 % change Q3 75.1 71.3 5.3 YTD 215.1 200.4 7.3

Our wireless portfolio consists of cellular, wireless data, paging and group communications services that we offer in the Manitoba market. Our wireless subscriber base has continued to grow significantly year-over-year and is a primary driver to the increases in our wireless services revenues. As at September 30, 2008, our wireless subscriber base had grown by 11.4% to reach 420,612 subscribers, and we outperformed our peer group. We believe that part of our success is attributable to our strategy of offering high-value product bundles that cannot be duplicated by our principal

competitors and also, that we provide the largest wireless coverage in Manitoba. We continue to see strong potential for growth in our wireless services revenues in Manitoba. At the end of the third quarter for 2008, wireless penetration in Manitoba was approximately 59.5% as compared to our estimate of the Canadian penetration rate of approximately 66%. These penetration rates provide the right conditions for continued growth in the province as consumer adoption of wireless products continues to expand. Year-over-year, our revenues from wireless data services have increased significantly by $2.9 million or 48.3% and $9.5 million or 63.3%, respectively, in the third quarter and year to date as subscribers continue to increasingly utilize next generation wireless data services and service features, such as text messaging and Web browsing services. Although our average revenue per user (“ARPU”) decreased by 2.9% to $57.51 for the nine months ended September 30, 2008, we have one of the leading ARPUs among our principal competitors. Time limited promotional offers have increased our subscriber base substantially, however the resulting lower airtime usage and flat network access fees related to these plans, along with lower wholesale revenues, impacted wireless ARPU this quarter and year to date.

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Data Services (in millions $) 2008 2007 % change

Q3 171.3 166.9 2.6 YTD 523.8 491.0 6.7

Consumer Internet Services Revenues

Q 3/07 Q 3/08

Next Generation Data Services Revenues

Q 3/07 Q 3/08

19.7%

14.6

IP-VPN Customers

239

292

Q 3/07 Q 3/08

Our data line of business includes revenues earned from providing data, Internet and professional services. Data services connect data, video and voice networks to establish private connections across office locations and to integrate traffic over highly secure networks. We provide a wide range of Internet connectivity services to meet the needs of residential customers in Manitoba and business customers across the country. We also offer numerous hosting and security services to business customers across Canada. The increases in our data services revenues were driven by strong performance in our data growth services, which was offset partly by customers transitioning from legacy services to growth services, and by reduced traffic on our network from Rogers and AT&T. If the data services revenues of Rogers and AT&T were excluded from our performance, our data services revenues for the quarter would have shown an increase of 8.6% and an increase of 13.5% year to date, which reflect the growing attractiveness of our next generation products and services. We are achieving our desired results as customers are continuing to migrate to IP solutions that utilize our state-of-the-art IP multiprotocol label switching (“MPLS”) network and customer service capabilities. Strong growth in our next generation data services, which include converged IP and unified communications services, was demonstrated with increases of 14.6% this quarter and by 20.5% year to date, as compared to the same periods in 2007. New customer growth along with higher year-over-year volume usage from business IP domestic MPLS, network resident IP telephony, switched Ethernet, wavelength, IP trunking and consumer high-speed Internet services and higher unified communications sales drove these significant increases.

The capabilities of the suite of products offered by our Enterprise Solutions division continued to be demonstrated by strong growth in our IP-virtual private network (“IP-VPN”) customer base. As at September 30, 2008, we were supporting 292 IP-VPN customers, which is 22.2% more than last year. In the three and nine months ended September 30, 2008, our consumer Internet services revenue continued its strong growth, increasing year-over-year by 19.7% and 20.8%, respectively. Our consumer high-speed Internet customer base grew by 7.3% and reached 174,580 customers as at September 30, 2008. In addition, higher average revenue per customer also contributed to the increases in consumer Internet services with a 12.1% year-over-year increase.

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Local Voice Services Revenues

133.7 132.6

Q 3/07 Q 3/08

in m

illio

ns $

Long Distance Services Revenues

84.9 80.2

Q 3/07 Q 3/08

in m

illio

ns $

Consumer High-Speed Internet Services Customers

162,640

174,580

Q 3/07 Q 3/08

Local Services

(in millions $) 2008 2007 % change Q3 132.6 133.7 (0.8) YTD 396.3 399.9 (0.9)

Local services revenues include basic voice connections for residential customers, including enhanced calling features (such as Call Answer, Call Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale revenues from services provided to third parties, as well as a full range of local services to business customers. These services allow customers to complete calls in their local calling areas and to access long distance, cellular networks and the Internet. We have positioned ourselves for long-term success by packaging our residential service offerings such as wireless, Internet, digital television and alarm services into bundles to create a unique value proposition for our customers. In the third quarter of 2008, customers utilizing our bundled service packages increased by 7.9% as compared to the same period last year. With these popular programs well in place, we continued to deliver best in class performance against cable company competitors, minimizing the reduction in our local services revenues. In the third quarter of 2008, our residential line loss was less than 5,000, after adjusting for cottage-country seasonality and customers in transit. The level of line loss we are experiencing demonstrates the success of our service bundle and consumer marketing strategies in this market. We are confident in our ability to compete across Manitoba and win in this highly competitive local services environment. Our customer connections, which include network access services, high-speed Internet, wireless and digital television subscribers, increased by 3.6% as compared to the third quarter of 2007.

Long Distance Services


Long distance services enable residential customers in Manitoba and business customers across Canada to communicate with destinations outside the local exchange. Our long distance voice service portfolio includes basic, domestic, cross-border and international outbound long distance, basic and enhanced toll-free services, calling cards and audio conferencing, as well as a variety of enhanced long distance services and features. More customers are choosing the long distance services that our Consumer Markets division provides over dial-around competitor services and this impact is partly offsetting the effects of competitive pricing and customer losses. In addition, higher cross-border volumes and international rates in our Enterprise Solutions division partially offset the lower rates in domestic and cross-border markets and lower domestic volumes, contributed to the decreases in our revenues from long distance services.

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Digital Television Services Customers

74,453

82,278

Q 3/07 Q 3/08

Other Revenues (in millions $) 2008 2007 % change

Q3 20.7 19.1 8.4 YTD 61.9 58.0 6.7

Digital Television Services Revenues

10.7

12.5

Q 3/07 Q 3/08

in m

illio

ns $

Other revenues consist of revenues earned from our digital television and home security services, and miscellaneous items. Our digital television service is offered across our broadband network platform and is targeted at residential customers in Winnipeg. Miscellaneous revenues primarily consist of the sale and maintenance of terminal equipment. Strong revenues and subscriber growth from our digital television services continued to drive increases in our other revenues. Revenues from our digital television services increased by 16.8% or $1.8 million to $12.5 million in the third quarter, and by 20.0% or $6.2 million to $37.2 million year to date. In addition to strong subscriber growth driving this year-over-year increase in revenues, we also experienced a 6.9% increase in average revenue per subscriber (“ARPS”) to $50.35. This strong increase in ARPS was driven by increased usage of video-on-demand, pay-per-view and high-definition services, as well as price increases and a decrease in the number of subscribers on promotional pricing plans. As at September 30, 2008, our digital television subscriber base increased by 10.5% to reach 82,278, representing a 3% increase in market share over last year. Our current share of the market is approximately 33%.

OPERATING EXPENSES Operations Expense


We continue to focus on our cost reduction initiatives. Our 2008 efficiency program achieved $22.4 million in annualized savings as at September 30, 2008, which is in line with our 2008 objective for annualized expense savings of $20 million to $30 million with this program. Partly offsetting these savings were higher expenses from our growth operations. In addition, the year to date increase on our operations expense was impacted by a one-time net positive adjustment in 2007 of $14.3 million related to Decision 2007-10, which reflects the retroactive impact of a competitor service for which we had been double-billed by incumbent carriers and resulted in a positive one-time impact of $13.5 million to consolidated operating expenses and a $0.8 million negative impact to consolidated revenues. If this amount and the costs associated with the wireless transition and our participation in the AWS spectrum auction are excluded, expenses from continuing operations were up by 2.5%, due to increases in revenue and timing differences between quarters. We have been very effective at achieving cost efficiencies over the last two years and expect to continue to find cost savings going forward. To assist with our ongoing cost reduction initiatives, we have begun further review of certain major processes with a focus on the rebuilding of processes in our Enterprise Solutions division. Through this analysis, a number of process improvement opportunities have been identified, which could significantly enhance the way products and solutions are delivered to customers and contribute to our cost reduction initiatives. Our Enterprise Solutions division is on track for solid revenue growth and stable profitability for the first time in several years, and we plan to maintain and build on this momentum throughout the remainder of 2008 and 2009 by making our internal

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processes more efficient and cost effective, assuming that the current projected economic conditions are sustained. In the three and nine months ended September 30, 2008, we incurred one-time costs in the amounts of $7.5 million and $17.8 million, respectively, relating to the costs of transitioning certain wireless service requirements away from Bell Mobility to new suppliers and to our wireless platform as well as costs associated with the AWS spectrum auction. We expect these one-time costs to be $40 million to $50 million in aggregate over the next two years, including the amount we have incurred year to date this year. These costs are non-recurring, will be recorded as a one-time cost and will not impact our continuing operations. We are disputing certain costs being charged by Bell Mobility associated with transitioning away from Bell Mobility and are of the opinion that such costs are recoverable from them. We have commenced formal proceedings in accordance with the dispute resolution mechanism in such agreements to recover the disputed costs. This transition away from Bell Mobility to other suppliers and/or to our own wireless platform is not expected to impact our wireless operating cost structure and will give us additional flexibility to succeed in a rapidly changing telecommunications landscape. Restructuring Expenses

(in millions $) 2008 2007 % change Q3 7.1 2.3 n.m. YTD 7.1 8.9 (20.2)

We have incurred costs of $7.1 million under our 2008 efficiency program. These costs primarily relate to the process improvement assessment and implementation initiative that we commenced in the second quarter, and one-time costs that were incurred for facilities consolidation of select real estate. In addition, we applied payments to prior years’ workforce reduction program liabilities in the amounts of $0.6 million and $6.5 million for the three and nine months ended September 30, 2008, respectively. This is outlined in Note 2 to our interim consolidated financial statements. Amortization Expense


The year-over-year increases in our amortization expenses are due to increases in property, plant and equipment, as well as the intangible asset additions from our acquisitions of Multinet Communications Services Inc. and ICU Technologies Inc. (“ICU Technologies”).

Other Income (in millions $) 2008 2007 % change

Q3 2.5 1.1 n.m. YTD 7.6 7.2 5.6

Year-over-year, other income was higher primarily due to foreign exchange gains which were offset partly by a decrease in interest income. Debt Charges


The decreases in debt charges resulted from lower year-over-year long-term debt levels that were refinanced with short-term debt at a lower interest rate and temporary cash on hand, which were offset partially by higher costs related to our accounts receivable securitization program. Our debt to total capitalization ratio as at September 30, 2008 was 39.0%, and continues to provide us with financial strength and flexibility going forward. Income Tax Expense


We are able to reduce our taxable income to zero without utilizing our substantial and growing capital cost allowance (“CCA”) pools as a result of our acquisition of Allstream Inc. in 2004 along with its income tax loss carryforwards. Through the utilization of these loss carryforwards, followed by the utilization of our deferred CCA deduction, we project that we will not pay cash taxes before 2014. The decreases in our income tax expense were primarily driven by lower income before tax and lower statutory tax rates this year. Further impacting income tax expense on a year to date basis is a favourable adjustment in our tax asset valuation allowance by $12.8 million which occurred in the second quarter of 2007 resulting from higher forecasted taxable income. In addition, a $7.5 million charge related to changes in provincial tax rates was required in the second quarter of 2008, as compared to a similar $6.0 million adjustment in 2007.

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CONSOLIDATED QUARTERLY DATA Unaudited quarterly financial data for our eight most recently completed quarters is presented below:

(in millions $, except earnings per share)

Q3 2008

Q2 2008

Q1 2008

Q4 2007

Operating revenues 479.9 486.4 478.8 489.2

Operating income 66.6 78.8 88.2 72.1

Net income before discontinued operations

38.1 38.0 54.2 14.3

Net income and comprehensive income

38.1 38.0 54.2 14.3

Earnings per share before discontinued operations

0.59 0.59 0.84 0.22

Diluted earnings per share before discontinued operations

0.59 0.58 0.83 0.22

Earnings per share 0.59 0.59 0.84 0.22

Diluted earnings per share 0.59 0.58 0.83 0.22

(in millions $, except earnings per share)

Q3 2007

Q2 2007

Q1 2007

Q4 2006

Operating revenues 475.9 474.1 466.6 479.1


Net income before discontinued operations

45.5 57.0 52.9 26.8


45.5 57.0 52.9 216.1

Earnings per share before discontinued operations

0.70 0.88 0.80 0.39

Diluted earnings per share before discontinued operations

0.70 0.88 0.80 0.39

Earnings per share 0.70 0.88 0.80 3.18

Diluted earnings per share 0.70 0.88 0.80 3.17

Our consolidated financial results for the eight most recently completed quarters reflect the ongoing performance of our business in the marketplace, as well as the following: • The recording of amounts in relation to the transitioning

of certain wireless service requirements away from Bell Mobility to new suppliers and to our wireless platform, as well as costs associated with the AWS spectrum auction, consisting of $10.3 million and $7.5 million in the second and third quarters of 2008, respectively.

• The recognition of restructuring expenses for our 2008

efficiency program in the amount of $7.1 million in the third quarter of 2008; restructuring expenses for our 2007 efficiency program in each of the four quarters of 2007 in the amounts of $3.9 million, $2.7 million, $2.3 million and $3.0 million, listed chronologically; and the related workforce reduction initiative that we undertook in the fourth quarter of 2006 in the amount of $8.5 million.

• The recording of amounts respecting a number of

regulatory decisions: a $5.0 million positive impact in the second quarter of 2007 and a $9.9 million positive impact in the first quarter of 2007, which are related to Decision 2007-10.

• Adjustments in the amounts of $12.8 million and

$25.7 million for reductions to our tax asset valuation allowance in the second and fourth quarters of 2007, respectively, and $11.8 million for reductions to our tax asset valuation allowance in the fourth quarter of 2006.

• Effective October 2, 2006, we sold our

directories business and recorded a net gain on the sale of discontinued operations of $189.3 million in the fourth quarter of 2006.

• The recording of charges to reflect decreases in the

value of our income tax asset as a result of reductions in future income tax rates, consisting of $7.5 million in the second quarter of 2008, and $6.0 million and $49.6 million in the second and fourth quarters of 2007, respectively.

• The recognition of restructuring costs for our

Transition Phase II cost reduction program in the amount of $28.3 million in the fourth quarter of 2006. Included in this amount are costs associated with a workforce reduction initiative that was announced on October 2, 2006, which resulted in restructuring charges of $19.0 million.

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LLIIQQUUIIDDIITTYY AANNDD CCAAPPIITTAALL RREESSOOUURRCCEESS Cash Flows from Operating Activities

(in millions $) 2008 2007 $ change Q3 124.9 195.0 (70.1) YTD 359.7 415.9 (56.2)

Cash flows from operating activities refer to cash we generate from our normal business activities. The decrease in cash flows from operating activities in the third quarter resulted primarily from a decrease in cash from working capital related to a decrease in funds from our accounts receivable securitization program, decreased consolidated EBITDA, and increased pension funding. Year to date, the decrease in our cash flows from operating activities is mainly due to increased pension funding and lower consolidated EBITDA, which were offset partially by increased cash from working capital due to utilization of our accounts receivable securitization program and decreased debt charges. Cash Flows used in Investing Activities

(in millions $) 2008 2007 $ change Q3 120.1 79.5 40.6 YTD 249.3 187.4 61.9

Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments. The increases in cash flows used in investing activities are due to our purchase of 35 MHz of wireless spectrum during the AWS spectrum auction earlier this year. In the third quarter, we incurred $48.6 million in license costs for this spectrum, which will cover 1.2 million people in Manitoba and strengthens our already leading position in this market. Our capital expenditures from continuing operations in the third quarter of 2008 were $69.1 million as compared to $73.2 million in the same period in 2007. In addition, an amount of $4.0 million for the purchase of ICU Technologies earlier this year is included in the year to date change.

Free Cash Flow


Free cash flow (continuing operations) 70.8 65.3 8.4

Spectrum licence costs (48.6) -- n.m.

Pension solvency funding (10.7) (1.3) n.m.

Wireless transition and AWS spectrum auction costs (7.5) -- n.m.

Restructuring expense (7.1) (2.3) n.m.

Wireless transition capital expenditures (2.4) -- n.m.

Restructuring capital expenditures -- (6.4) n.m.

Tax recoveries -- 4.1 n.m.

Consolidated free cash flow (5.5) 59.4 n.m.


Free cash flow (continuing operations) 221.9 248.4 (10.7)

Spectrum licence costs (48.6) -- n.m.

Pension solvency funding (22.1) (2.3) n.m.

Wireless transition and AWS spectrum auction costs (17.8) -- n.m.

Restructuring expense (7.1) (8.9) (20.2)

Wireless transition capital expenditures (2.4) -- n.m.

Restructuring capital expenditures -- (12.8) n.m.

Decision 2007-10 -- 14.9 n.m.

Tax recoveries -- 13.4 n.m.

Consolidated free cash flow 123.9 252.7 (51.0)

Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. The in quarter increase year-over-year in our free cash flow from continuing operations is primarily due to the timing of capital expenditures. The year to date decrease year-over-year is primarily due to the timing of capital expenditures and increased normal pension funding, which were offset by higher EBITDA from continuing operations. We are confident in our prudent approach toward the disciplined use of free cash flow and the support it provides to our high-yield dividend. The in quarter and year to date decreases year-over-year in our consolidated free cash flow are primarily due to decreases in cash from one-time items as listed above, the

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timing of capital expenditures, decreased consolidated EBITDA, increased pension funding and decreased current tax recoveries in 2008. Cash Flows (used in) from Financing Activities

(in millions $) 2008 2007 $ change Q3 3.3 (133.2) 136.5 YTD (103.8) (340.7) 236.9

Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings. The increase in the third quarter is primarily due to the repayment of long-term debt and the issuance of notes payable. The year to date increase in our cash flows from financing activities is primarily due to the issuance of notes payable and to our purchase for cancellation of 2,377,500 common shares for $111.0 million in the first half of 2007. In the third quarter of 2008, we paid cash dividends of $42.0 million and issued net notes payable in the amount of $45.0 million. In the third quarter of 2007, we paid cash dividends of $42.0 million, and repaid long-term debt in the amount of $91.9 million. Year to date in 2008, we paid cash dividends of $126.0 million, issued net notes payable in the amount of $115.0 million and repaid long-term debt in the amount of $89.7 million. Year to date in 2007, we paid cash dividends of $128.6 million, and repaid long-term debt in the amount of $106.5 million. Credit Facilities

(in millions $) capacity utilized at September 30/08

Medium term note program 350.0 -- Commercial paper 150.0 20.0 Accounts receivable securitization 150.0 115.5 Revolving credit facility 200.0 169.5

Total 850.0 305.0

We have arrangements in place that allow us to access the debt and commercial paper markets for funding when required. Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations. We established our $350 million medium term note program on January 18, 2008. In addition to this program, we have credit facilities available in the amount of $500.0 million, which consist of a fully back-stopped commercial paper program of $150.0 million, an accounts receivable securitization program of $150.0 million, and a $200.0 million revolving credit facility. As at September 30, 2008, we utilized $20.0 million of our commercial paper program via the back-stop facility,

$115.5 million of our accounts receivable securitization program, and $169.5 million of our revolving credit facility, which includes $74.5 million in undrawn letters of credit. Of this amount, $52.5 million represents letters of credit issued under the new Solvency Funding Relief Regulations enacted under the Pension Benefits Standards Act, 1985 (Canada), which permit the extension of pension solvency payments from a five-year amortization period to a 10-year amortization period for our defined benefit pension plans. Capital Structure

(in millions $) September 30/08 December 31/07

Bank indebtedness 3.5 10.1 Proceeds from accounts receivable securitization

115.5 43.0

Notes payable 115.0 -- Capital lease obligations, including current portion

19.0 22.5

Long-term debt, including current portion

650.1 739.5

Total debt 903.1 815.1 Shareholders’ equity 1,409.8 1,404.0 Total capitalization 2,312.9 2,219.1

Debt to capitalization 39.0% 36.7%

Our capital structure illustrates the amount of our assets that are financed by debt versus equity. In the first nine months of 2008, our debt level increased approximately $85 million. The increase is due primarily to the costs that we incurred related to our purchase of 35 MHz of spectrum in the AWS spectrum auction and a seasonally high working capital level, which is expected to decrease in the fourth quarter of 2008 causing a corresponding reduction in debt levels by year-end. Our debt to total capitalization ratio of 39.0% as at September 30, 2008 continues to represent excellent financial strength and flexibility. Credit Ratings

S&P – Senior debentures BBB+

S&P – Commercial paper A-2

DBRS – Senior debentures BBB

DBRS – Commercial paper R-2 (high)

Two leading rating agencies, Standard & Poor’s (“S&P”) and DBRS Limited (“DBRS”), analyze us and assign ratings based on their assessments. We consistently have been assigned solid investment grade credit ratings. DBRS confirmed our credit ratings on December 20, 2007 at “BBB” on our senior debentures and “R-2 (high)” on our

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commercial paper, and maintained its stable outlook. On December 17, 2007, S&P confirmed our credit ratings on our long-term corporate credit and senior unsecured debt of “BBB+”, and our commercial paper of “A-2”. The outlook remained unchanged at negative. Outstanding Share Data as at October 28, 2008 Authorized: • Unlimited number of Preference Shares of two classes

issuable in one or more series • Unlimited number of Common Shares of a single class

Issued:

Shares Number Book Value (in millions $)

Common 64,635,967 1,265.7

Stock options:

Options Number Weighted Average

Exercise Price Per Share

Outstanding 2,287,890 $42.07

Exercisable 949,410 $40.49

Contractual Obligations, Financial Instruments, Off-Balance Sheet Arrangements, and Other Financial Arrangements Our contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements remain substantially unchanged from those that were disclosed in our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. CCRRIITTIICCAALL AACCCCOOUUNNTTIINNGG EESSTTIIMMAATTEESS AANNDD AASSSSUUMMPPTTIIOONNSS Our critical accounting estimates and assumptions remain substantially unchanged from those that were disclosed in our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com.

CCHHAANNGGEESS IINN AACCCCOOUUNNTTIINNGG PPOOLLIICCIIEESS,, IINNCCLLUUDDIINNGG IINNIITTIIAALL AADDOOPPTTIIOONN Our accounting policies, including initial adoption, remain substantially unchanged from those that were disclosed in our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. RRIISSKKSS AANNDD UUNNCCEERRTTAAIINNTTIIEESS Our risks and uncertainties remain substantially unchanged from those that were disclosed in our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A, except as noted below. For additional details, please consult our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. Bell Mobility Agreement We and Bell Mobility have been parties to a wireless alliance that addresses competition and reciprocal services in our respective territories and provides us with access to various wireless-related platforms and products. On March 5, 2008, we provided notice of termination to Bell Mobility of certain of these wireless agreements relating to the framework underpinning this wireless alliance. These agreements provide for the continuation of services following such notice during a notice period and, thereafter, during a transition period. Bell Mobility disputes that it has any remaining obligations under these agreements. We have commenced formal proceedings to resolve this disagreement. Notwithstanding this dispute, we have entered into a transition agreement with Bell Mobility which will ensure continuity of services to our customers, while reserving all rights to our respective entitlements under these agreements. Although we still have to finalize our transition plan, we have begun implementation, and effective September 29, 2008, we started activating new wireless customer additions and handset upgrades on new service platforms independent of Bell Mobility. We anticipate that the one-time costs of transitioning certain wireless services requirements away from Bell Mobility to new suppliers and to our wireless platform, as well as the costs associated with the AWS spectrum auction, to be an aggregate of $40 million to $50 million over the next two years, which includes the amount we have incurred year to date this year. As noted above, we are disputing certain costs being charged by Bell Mobility in relation to the transition away from Bell Mobility, and we are of the opinion that such costs are recoverable from Bell Mobility, however, there is no certainty that such costs will be recovered.

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http://www.mts.ca/

http://www.mtsallstream.com/



While there is always a risk associated with any transition, we have plans to execute our transition of wireless services in a manner that will be seamless to our customers. Changes in Telecommunications Policy and CRTC Regulation The telecommunications and broadcast industries in which we operate are federally regulated. We operate as both an incumbent local exchange carrier in Manitoba and as a competitive local exchange carrier nationally. In addition, pursuant to Broadcasting Decision CRTC 2002-235, the CRTC granted us a Class 1 regional broadcasting distribution licence to operate as a broadcasting distribution undertaking serving Winnipeg and the surrounding areas. Current regulatory proceedings and policy issues, which present significant risk and uncertainty on our business, are described below. Essential Facilities On March 3, 2008, the CRTC issued Revised regulatory framework for wholesale services and definition of essential service, Telecom Decision CRTC 2008-17, in which it adopted a new broadened definition of an essential service or facility as one that (i) is required by competitors to provide a retail telecommunications service; (ii) is controlled by a company that could use its market power to lessen or prevent competition; and (iii) provides a functionality that would not be practical or feasible for competitors to duplicate. In addition, the CRTC adopted six categories of mandated competitor services, with differing approaches as to when and how mandated access could or, in the case of one category of services will, be phased out. This decision ensures that pricing for competitor services will remain, for the most part, unchanged for a period of five years. On April 2, 2008, Bell Canada and other carriers applied for leave to appeal the decision to the Federal Court of Appeal. We successfully opposed this application, which was dismissed by the Federal Court of Appeal on June 20, 2008. On May 15, 2008, Bell Canada filed four separate applications asking the CRTC to review and vary elements of its decision. We have opposed those applications, and have applied separately to have the decision reviewed and varied with respect to the treatment of Ethernet and asymmetric digital subscriber line. We expect the CRTC to rule on these review and vary applications by the end of 2008 or early in 2009. Deferral Account On February 16, 2006, the CRTC issued Disposition of funds in the deferral accounts, Telecom Decision CRTC 2006-9 (“Decision 2006-9”). In this decision, the CRTC determined that the funds accumulated in our deferral account should be used for certain reductions in rates for basic local residential services and for certain optional features; for the expansion of broadband services; and for initiatives to improve accessibility to telecommunications services for persons with disabilities. After using approximately $5 million to fund the required rate reductions which came into effect on June 1, 2006, the estimate of the balance to be cleared

from our deferral account for the remaining initiatives is approximately $24 million. The final calculation of the balance to be cleared is dependent upon certain other CRTC proceedings. In two subsequent decisions relating to the use of deferral account funds, Telecom Decision CRTC 2007-50 dated July 6, 2007 and Telecom Decision CRTC 2008-1 dated January 17, 2008 (“Decision 2008-1”), the CRTC approved various proposals submitted for the expansion of broadband services in certain rural and remote communities, and for improved access to telecommunications services for persons with disabilities. In Decision 2008-1, the CRTC directed that the remaining balance of the deferral accounts of the incumbent local exchange carriers be rebated to residential customers in non-high-cost serving areas. Bell Canada and certain consumer groups have been granted leave to appeal Decision 2006-9 to the Supreme Court of Canada. Bell Canada also has sought leave from the Federal Court of Appeal to appeal Decision 2008-1. TELUS Communications Inc. has appealed Decision 2008-1 by way of a petition to Cabinet, and has filed an application with the CRTC to review and vary this decision. On October 17, 2008 the CRTC dismissed this review and vary application. The final disposition of deferral account balances will be dependent upon the outcome of these appeals. In the interim, Decision 2006-9 and Decision 2008-1 have been stayed by order of the Supreme Court of Canada. AWS Spectrum Consultation and Auction In February 2007, the federal government initiated a consultation on a framework to auction spectrum in the 2 GHz range, including AWS spectrum. We submitted comments in that consultation on May 25, 2007, and on June 27, 2007, we submitted reply comments. Our submissions identified the need for the federal government to adopt rules for the AWS spectrum auction that will allow the competitive entry of new national and regional wireless providers in Canada. In particular, we asked the federal government to designate two blocks of spectrum for new entrant bidding only, and to mandate commercially reasonable roaming and tower sharing on a non-discriminatory basis. In November 2007, the federal government issued its Policy Framework for the Auction for Spectrum Licenses for Advanced Wireless Services and other Spectrum in the 2 GHz Range (the “Policy Framework”) which was followed by the release of the Licensing Framework for the Auction for Spectrum Licenses for Advanced Wireless Services and other Spectrum in the 2 GHz Range (the “Licensing Framework”) in late December 2007. In both the Policy Framework and the Licensing Framework, the federal government clearly expressed the importance that it places on encouraging new wireless entry, and specifically decided to set aside 40 MHz of spectrum for new entrant bidding only, and to

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mandate both in-region and out-of-region roaming as well as tower sharing, all on commercially reasonable terms. The AWS spectrum auction commenced on May 27, 2008, and we participated as a qualified new entrant through our wholly owned subsidiary 6934242 Canada Limited. The auction concluded on July 21, 2008. We successfully bid for, and are the provisional licensees with respect to, licenses representing 35 MHz of spectrum in the province of Manitoba, at an auction price of approximately $41 million. We now have tendered payment and filed documentation demonstrating compliance with the foreign investment restrictions applicable to prospective licensees as required by the federal government, and we are waiting for the response and issuance of the relevant licenses. As a result of the AWS spectrum auction, two new entrants became the provisional licensees for sufficient spectrum in Manitoba to enable them to offer wireless services in competition with us. These new entrants have indicated publicly that they will initially focus their efforts on more densely populated areas of Canada where they also acquired spectrum, and one announced they would delay entry into our market in Manitoba. We are well-positioned to face these new competitors and there is no certainty that these new entrants will create a more competitive environment in Manitoba at some point in the future. Competition Policy Review On October 30, 2007, the Competition Policy Review Panel (the “Panel”) appointed by the federal government to review competition and investment policy in Canada released a consultation paper entitled Sharpening Canada’s Competitive Edge. This consultation paper asks for submissions dealing with a range of issues concerning competition and investment policy, including the continued utility of foreign investment restrictions in the telecommunications industry and the state of competition policy in Canada. On January 11, 2008, we filed our submission and argued in favour of the removal of the sector-specific foreign investment restrictions applicable to the telecommunications industry, as well as for updates to competition policy to deal with an increasingly deregulated telecommunications industry. In response to our submission, the Panel requested that we appear before them to comment further, which we did on January 24, 2008. On June 26, 2008, the Panel submitted its report, entitled Compete to Win, to the Minister of Industry. In its report, the Panel recommended the immediate removal of foreign investment restrictions applicable to new entrant telecommunications companies, including existing companies having less than a 10% market share in Canada, and broader liberalization for all broadcasting and telecommunications companies subsequent to further review of broadcasting and cultural policies. The Panel noted that its recommendations are consistent with those of the Telecommunications Policy Review Panel that had been

established by the federal government in 2005. We support the Panel’s recommendations. The Minister of Industry has indicated that the federal government will review the Panel’s recommendations. Pension Solvency Funding We have defined benefit pension plans which provide retirement benefits to our employees. These plans are funded as determined through periodic actuarial valuations. We have filed January 1, 2008 actuarial valuations for our defined benefit pension plans in accordance with federal pension legislation under the Pension Benefits Standards Act, 1985 (Canada). As one of our defined benefit pension plans is in a surplus position, solvency funding is not required for this plan. We have two defined benefit pension plans with solvency deficiencies for which a total of $30.8 million in solvency and special funding payments are required in 2008. In 2006, we elected to extend the amortization period of our solvency funding payments from five years to 10 years based on the Solvency Funding Relief Regulations. In accordance with the requirements of these regulations, we have obtained letters of credit, which are amended annually, to guarantee future funding of our registered pension plans. Future solvency funding requirements will depend on the results of annual actuarial funding valuations which are affected by various factors, such as return on plan assets, changes in solvency liability discount rates, and government regulations regarding the requirements associated with solvency valuations. In the third quarter, worldwide equity markets began to experience unprecedented volatility and losses in value. Our pension plans are invested in a well-diversified portfolio of assets, which has demonstrated over the long-term to provide a return on plan assets that meets or exceeds the long-term assumptions used by our actuaries to value these plans. However, if these market conditions persist to the end of 2008, depending on the severity, it could result in an increased solvency funding requirement for us. DDIISSCCLLOOSSUURREE CCOONNTTRROOLLSS AANNDD PPRROOCCEEDDUURREESS AANNDD IINNTTEERRNNAALL CCOONNTTRROOLL OOVVEERR FFIINNAANNCCIIAALL RREEPPOORRTTIINNGG Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during our most recent interim period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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22000088 OOUUTTLLOOOOKK Forward-looking statements disclaimer This outlook includes forward-looking statements and information (collectively, the “statements”) about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives, and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking information. Forward-looking statements reflect our expectations as at November 6, 2008. Examples of statements that constitute forward-looking information may be identified by words such as “believe”, “expect”, “project”, “anticipate”, “could”, “target”, “forecast”, “intend”, “plan”, “outlook”, “pending”, and other similar terms. Factors that could cause actual results to differ materially from those expected, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in such forward-looking statements, include, but are not limited to, the items identified in this interim MD&A, our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A. Please note that forward-looking statements reflect our expectations as at November 6, 2008. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information relating to our company, including our Annual Information Form, is available on SEDAR at www.sedar.com. This outlook and the financial information contained herein have been reviewed by our Audit Committee. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, the intensity of competitive activity from both traditional and new competitors (competitive conditions); the ability to retain major customers (customer relationships); decisions by the federal regulator that affect our ability to compete effectively or to enter into new business opportunities (developments in federal regulation); general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services (market conditions and economic fluctuations); the ability to manage labour relations effectively (collective agreements); the ability to anticipate, and respond to, changes in technology (technology); and other risk factors listed from time to time in our comprehensive public disclosure documents, including our 2007 Annual Report and in other filings with the Canadian securities regulatory authorities. For further information, refer to the “Risks and Uncertainties” sections in this interim MD&A, our interim MD&As for the first and second quarters of 2008, and our 2007 annual MD&A.

2008 Financial Outlook - Continuing Operations

Revenues $1.920 billion to $1.980 billion

EBITDA $660 million to $680 million

EPS $2.95 to $3.15

Free cash flow $250 million to $280 million

Capital expenditures 14% to 15% of revenues

Looking beyond 2008, we expect consolidated revenues and EBITDA growth in the range of 1% to 3% for 2009 and into the near future. A Sharpened Strategic Focus We have a unique position in the Canadian communications services industry. We are the leading full-service communications provider in Manitoba, and have a leading presence in national enterprise markets. We are building on our unique combination of market leadership in Manitoba and agile competitive presence in business markets across Canada to deliver innovative telecommunications solutions that bring value to our customers. Following a thorough strategic business review in 2006, we have been pursuing opportunities to increase our focus on serving the national mid-market and small business segments. Our mid-market strategy is centred on the availability of our market-leading IP network in major urban centres in specific markets in the country. Together, our new initiatives are forecasted to achieve $200 million of incremental revenues by 2010. In our Consumer Markets division, where local competition has intensified, our emphasis will be on growth products and bundles in areas such as high-speed Internet, wireless and digital television services. Our goal is to maintain our position as the one-stop provider of clear choice to Manitoba households and consumers by delivering double-digit growth in our Internet, digital television and wireless services in 2008 in a more competitive and deregulated market. We have been forborne in a few markets, including the local market in Winnipeg, which has enhanced our ability to compete against new market entrants. In our Enterprise Solutions division, we will build on our established leadership in advanced IP, MPLS solutions and unified communications services. As part of this new strategy, we will strive to reduce our direct costs through the migration of customers to our network, and we will continue to improve our productivity and cost structure. From a growth perspective, revenues from our IP connectivity and unified communications product lines are forecasted to grow at double-digit rates.

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http://www.sedar.com/

Material Assumptions We have made a number of assumptions in preparing our outlook and making certain other forward-looking statements, which include, but are not limited to, the following assumptions: Economic Assumptions The general economic activity in the national and regional markets in which we operate influences our performance. Consistent with the Manitoba Finance Survey of forecasts, which includes the Conference Board of Canada, as of November 2007, we assumed a growth rate of approximately 3% for gross domestic product for the Manitoba and national markets. The economic assumptions, as well as other factors that have an impact on our business, may be challenged by current economic and market conditions which could have an adverse effect upon our financial outlook. Market Assumptions As competition in the overall marketplace escalates, the broad market segment trends that have taken shape in recent years also will persist in 2008. Growth in service areas such as wireless, Internet, digital television, converged IP and unified communications for business customers is expected to continue at similar levels in 2008. The competitive pressure experienced in traditional legacy services, which include data connectivity, and local and long distance services, will continue in similar trends as it did in 2007. Likewise, we anticipate that customer demand will continue to migrate to next generation services. To face continued strong competition in business markets, we are refining our market focus, creating innovative IP solutions, reducing our cost structure, and investing selectively in high-margin opportunities. Although competition from an incumbent cable operator is expected to continue in the Manitoba residential market, we are confident that we have prepared our operations and strategies prudently to counter these threats. Through our broadband network initiative and our residential service offerings, which include local and long distance, wireless, Internet, digital television and alarm services, we believe that we are well-positioned to compete successfully. Financial and Operational Assumptions We have made the following financial and operating assumptions with respect to the forward-looking information in this outlook: • double-digit growth for growth services, to represent

approximately 45% of total revenue in 2008 as compared to 40% in 2007; and

• overall revenue growth of 1% to 3%. We have future tax assets resulting from net operating loss carryforwards, which, to the extent utilized, will reduce future taxable income. As such, we do not expect to pay any cash taxes on earnings from operations in 2008.

Cost Reduction Assumptions Key to our operating and financial progress will be our restructuring activities. We expect to achieve further cost reductions in 2008 of between $20 million and $30 million in 2008. To capture these additional savings, we expect to incur further restructuring costs of approximately $10 million in 2008. These costs are not included in our 2008 outlook from continuing operations. Liquidity and Capital Resources Assumptions Our operations historically have delivered strong cash flows, and we expect this positive trend to continue in 2008. We will continue to invest in our core operations with a focus on our growth products and services to ensure success in the markets in which we operate. Significant investments have been made in modernizing our network infrastructure, both in Manitoba and nationally. In 2005, we saw the completion of a five-year, $300 million broadband expansion program in Manitoba, which has positioned our network capabilities second to none in Canada. These investments, in addition to the investment choices we are making nationally, are placing us in a favourable position in terms of capital requirements going forward. In 2008, our capital program is expected to comprise 14% to 15% of our revenues. Our cash requirements for 2008 include a non-recurring obligation of approximately $10 million for restructuring programs and, based on January 1, 2007 actuarial valuations, approximately $30 million for pension solvency funding. NOTICE OF DIVIDEND RECORD DATE Notice is hereby given that the close of business on December 15, 2008 has been fixed as the record date for the purpose of determining those shareholders entitled to receive payment of MTS’s fourth quarter dividend. The dividend, in the amount of $0.65 per Canadian per Common Share, has been declared payable January 15, 2009 to shareholders of record at the close of business on December 15, 2008. This notice is provided in accordance with section 128(4) of The Corporations Act (Manitoba). The fourth quarter dividend is designated as an “eligible” dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits which reduce income tax otherwise payable. This report and interim MD&A contain forward-looking statements and there are risks that actual results may differ materially from those contemplated by these forward-looking statements. Forward-looking statements reflect our expectations as at November 6, 2008. Additional information on these risks can be found in our filings with the Canadian securities regulatory authorities. We disclaim any intention or obligation to update or revise any

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forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This report, interim MD&A, and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.

In addition, investors should read the forward-looking statements disclaimer in the “2008 Outlook” section for the various factors, including economic, competitive, regulatory and company-specific, that could cause actual future financial and operating results to differ materially from the forward-looking information in this interim MD&A.

About Manitoba Telecom Services Inc. Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS Allstream Inc., is one of Canada’s leading national communication solutions providers, delivering innovative products and services through its Enterprise Solutions and Consumer Markets divisions. The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS Allstream brand in Manitoba, is a leading competitor in the national business and wholesale markets. This division offers customers a portfolio of solutions tailored to the needs of medium and large businesses looking for success in a world of rapidly evolving technology – Internet protocol connectivity, unified communications, IT consulting and security services, and voice and data connectivity services. The Consumer Markets division leads every telecommunications market segment in Manitoba, delivering a full suite of next generation wireless, high-speed Internet and data, digital television and wireline voice services under the MTS brand, as well as small business services in select markets across Canada under the Allstream brand, and security and alarm monitoring services through the company’s subsidiary AAA Alarm Systems Ltd., which also operates in other western provinces. The company’s extensive national broadband fibre optic network spans more than 24,300 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international service providers. Manitoba Telecom Services Inc.’s common shares are listed on The Toronto Stock Exchange (trading symbol: MBT). For more information, please visit: www.mtsallstream.com.

Note: Supplementary financial information is available in the Investors section of the MTS Web site at www.mtsallstream.com. MANITOBA TELECOM SERVICES INC. P.O. Box 6666 333 Main Street Winnipeg, Manitoba, Canada R3C 3V6 1-888-544-5554

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MANITOBA TELECOM SERVICES INC.CONSOLIDATED STATEMENTS OF NET INCOME ANDCOMPREHENSIVE INCOME(unaudited)

For the periods ended September 30 (in millions, except earnings per share) 2008 2007 2008 2007

Operating revenues $ 479.9 $ 475.9 $ 1,445.1 $ 1,416.6

Operating expenses Operations 322.3 311.1 957.8 902.8 Restructuring (Note 2) 7.1 2.3 7.1 8.9 Amortization 83.9 80.0 246.6 239.0 413.3 393.4 1,211.5 1,150.7


Other income 2.5 1.1 7.6 7.2 Debt charges (12.1) (12.8) (36.7) (39.4)

Income before income taxes 57.0 70.8 204.5 233.7

Income tax expense (recovery) (Note 4) Current 0.2 (4.1) 0.3 (13.2) Future 18.7 29.4 73.9 91.5

18.9 25.3 74.2 78.3

Net income and comprehensive income for the period $ 38.1 $ 45.5 $ 130.3 $ 155.4

Basic earnings per share (Note 8) $ 0.59 $ 0.70 $ 2.02 $ 2.3

Diluted earnings per share (Note 8) $ 0.59 $ 0.70 $ 2.02 $ 2.3

Three months ended Nine months ended

8

8

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MANITOBA TELECOM SERVICES INC.CONSOLIDATED STATEMENTS OF RETAINED EARNINGS(unaudited)

For the periods ended September 30 (in millions) 2008 2007 2008 2007

Retained earnings, beginning of period $ 129.0 $ 145.0 $ 120.8 $ 183.9

Net income 38.1 45.5 130.3 155.4

Dividends declared (42.0) (42.0) (126.0) (126.3)

Purchase of outstanding shares - - - (64.5)

Retained earnings, end of period $ 125.1 $ 148.5 $ 125.1 $ 148.5


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MANITOBA TELECOM SERVICES INC.CONSOLIDATED BALANCE SHEETS(unaudited)

(in millions) September 30, 2008

Assets

Current assets Accounts receivable (Notes 3 and 5) $ 72.5 $ 176.1 Future income taxes (Note 4) 103.9 109.1 Other current assets (Note 6) 71.6 55.8

248.0 341.0

Property, plant and equipment 3,824.0 3,751.5Accumulated amortization 2,304.1 2,264.4

1,519.9 1,487.1

Other assets 380.7 334.8Future income taxes (Note 4) 447.3 517.9Goodwill and other intangible assets 59.5 58.5

$ 2,655.4 $ 2,739.3

Liabilities and shareholders' equity

Current liabilities Bank indebtedness (Note 5) $ 3.5 $ 10.1 Accounts payable and accrued liabilities (Note 5) 303.8 404.2 Advance billings and payments 48.8 49.2 Current portion of long-term debt (Note 5) 220.0 89.7 Notes payable (Notes 5 and 7) 115.0 - Current portion of capital lease obligations 3.3 6.1

694.4 559.3

Long-term debt (Note 5) 430.1 649.8 Long-term portion of capital lease obligations 15.7 16.4Deferred employee benefits 43.6 45.0Other long-term liabilities (Note 5) 60.1 62.1 Future income taxes (Note 4) 1.7 2.7

1,245.6 1,335.3 Shareholders' equity Share capital (Note 9) 1,265.7 1,265.5 Contributed surplus 19.0 17.7 Retained earnings 125.1 120.8 1,409.8 1,404.0

$ 2,655.4 $ 2,739.3

December 31, 2007

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MANITOBA TELECOM SERVICES INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)

For the periods ended September 30 (in millions) 2008 2007 2008 2007

Cash flows from operating activities Net income $ 38.1 $ 45.5 $ 130.3 $ 155.4 Add items not affecting cash Amortization 83.9 80.0 246.6 239.0 Future income taxes (Note 4) 18.7 29.4 73.9 91.5 Deferred wireless costs (9.3) (8.9) (28.8) (26.3) Pension funding and net pension credit (17.5) (7.4) (42.4) (16.2) Other, net 0.7 0.4 (10.7) (3.3) Changes in non-cash working capital 10.3 56.0 (9.2) (24.2) Cash flows from operating activities 124.9 195.0 359.7 415.9

Cash flows from investing activities Capital expenditures, net (120.1) (79.6) (245.0) (187.4) Acquisition (Note 13) - - (4.0) - Other, net - 0.1 (0.3) - Cash flows used in investing activities (120.1) (79.5) (249.3) (187.4)

Cash flows from financing activities Dividends paid (42.0) (42.0) (126.0) (128.6) Repayment of long-term debt - (91.9) (89.7) (106.5) Issuance of notes payable, net 45.0 - 115.0 - Issuance of share capital (Note 9) - 0.5 0.2 5.9 Purchase of outstanding shares - - - (111.0) Other, net 0.3 0.2 (3.3) (0.5) Cash flows (used in) from financing activities 3.3 (133.2) (103.8) (340.7)

Change in bank indebtedness 8.1 (17.7) 6.6 (112.2)

(Bank indebtedness) cash and cash equivalents, beginning of period (11.6) 12.2 (10.1) 106.7

Bank indebtedness, end of period $ (3.5) $ (5.5) $ (3.5) $ (5.5)


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MANITOBA TELECOM SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) For the nine months ended September 30, 2008 and 2007 (All financial amounts are in $ millions, except where noted.)

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements of Manitoba Telecom Services Inc. (the “Company”) have been prepared in accordance with

Canadian generally accepted accounting principles. These interim consolidated financial statements have been prepared using the same

accounting policies and methods of their application as the Company’s audited consolidated financial statements for the year ended

December 31, 2007.

These interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for

the year ended December 31, 2007.

Accounting policy developments Commencing with the Company’s 2009 fiscal year, the recommendations of the Canadian Institute of Chartered Accountants (“CICA”) for

“goodwill and intangible assets” (CICA Handbook section 3064) will apply to the Company. This guidance establishes updated standards for the

recognition, measurement, presentation and disclosure of intangible assets. The Company does not expect to be materially affected by the new

recommendations.

2. RESTRUCTURING

The efficiency program in 2008 is aimed at achieving process improvements and implementing further cost reduction initiatives. During the three

and nine months ended September 30, 2008, the Company recorded restructuring expenses of $7.1 million related to this efficiency program.

The restructuring activity in 2007 was a continuation of a restructuring program which commenced in the fourth quarter of 2006 and was aimed

at improving efficiencies and reducing operating costs. During the three and nine months ended September 30, 2007, the Company recorded

restructuring expenses of $2.3 million and $8.9 million, respectively.

The Company has outstanding liabilities related to workforce reduction programs that were initiated in prior years. The total of these outstanding

liabilities as at December 31, 2007 was $7.9 million. During the three and nine months ended September 30, 2008 payments of $0.6 million and

$6.5 million, respectively, were applied against these liabilities, leaving a total outstanding liability of $1.4 million as at September 30, 2008.

3. ACCOUNTS RECEIVABLE SECURITIZATION

Under the terms of the Company’s accounts receivable securitization program, the Company has the ability to sell, on a revolving basis, an

undivided ownership interest in its accounts receivable to a securitization trust, up to a maximum of $150.0 million. As a result of selling the

interest in certain of the trade receivables on a fully serviced basis, a service liability of $0.2 million has been recognized by the Company as at

September 30, 2008.

The terms of the Company’s accounts receivable securitization program also require the Company to maintain reserve accounts, the fair value of

which approximates carrying value. As at September 30, 2008, the Company had received $115.5 million on the sale of its accounts receivable

to the trust, which is comprised of the outstanding undivided ownership interest held by the trust of $149.2 million and the reserve accounts of

$33.7 million.

As at September 30, 2008, the Company recognized a pre-tax loss of $0.2 million on the sale of accounts receivable, which is recorded in other

income.

During the three and nine months ended September 30, 2008, cash flows received and paid to the trust in revolving period securitizations were

$608.0 million and $2,106.5 million, respectively.


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3. ACCOUNTS RECEIVABLE SECURITIZATION (continued)

The key assumptions used to determine the loss on sale of receivables and the fair values attributed to the retained interest as at

September 30, 2008 are as follows:

Annual discount rate 3.39% Weighted average life of receivables sold (days) 39 Credit loss ratio 0.51% Servicing fee liability 1.0%

4. INCOME TAXES

A reconciliation of the statutory income tax rate to the effective income tax rate is as follows:

2008 2007

Combined basic federal and provincial statutory income tax rate 32.9% 35.7% Change in substantively enacted tax rates 3.7 2.6 Reduction of valuation allowance - (5.5) Other items (0.3) 0.7

Effective tax rate 36.3% 33.5%

The balances of future income taxes as at September 30, 2008 and December 31, 2007 represent the future benefit of unused tax losses, and

temporary differences between the tax and accounting bases of assets and liabilities. The major items giving rise to future income tax assets

and liabilities are presented below:

2008 2007

Non-capital loss carryforwards 241.2 360.6 Property, plant and equipment 436.5 374.6 Other (64.2) (46.5)

Total future income tax asset 613.5 688.7 Valuation allowance (64.0) (64.4)

Net future income tax asset 549.5 624.3

Future income taxes are comprised of:

2008 2007

Current future income tax asset 103.9 109.1

Long-term future income tax asset 447.3 517.9 Long-term future income tax liability (1.7) (2.7)

Net future income tax asset 549.5 624.3

During the nine months ended September 30, 2008, the Company paid $0.1 million in cash income taxes (2007 – recovered $3.8 million).

As at September 30, 2008, the Company had non-capital loss carryforwards available to reduce future years’ taxable income, which expire as

follows:

2009 686.9

2014 and beyond 73.3

760.2


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5. FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company adopted CICA Handbook sections 3862 “financial instruments – disclosures” and 3863 “financial

instruments – presentation”. These standards outline the presentation requirements for financial instruments and require the Company to

disclose information that enable users to evaluate the significance of financial instruments for the Company’s financial position and performance,

the nature and extent of risks arising from those financial instruments to which the Company is exposed and how the Company manages those

risks.

Fair value The Company’s financial assets and liabilities are recorded initially at the related transaction amount, which is normally the historical cost. When

the carrying value of a financial asset exceeds its fair value on a basis that is other than temporary, the carrying value is reduced to the fair

value. With the exception of long-term debt, the carrying value of the Company’s financial assets and liabilities, which are subject to normal

trade terms, approximates the fair value. The fair value of long-term debt, including the current portion, is $640.2 million as at

September 30, 2008. The fair value of long-term debt, which has fixed interest rates, is estimated by discounting the expected future cash flows

using the relevant risk-free interest rate adjusted for an appropriate risk premium for the Company’s credit profile.

Credit Risk The Company is exposed to credit risk from its customers. This risk is minimized by the Company’s large and diverse customer base. The

following table provides an aging analysis of the Company’s accounts receivables as at September 30, 2008:

0-30 days 125.5 31-60 days 42.3 61-90 days 8.4 Past 90 days 12.2

Total 188.4 Less: accounts receivable securitization (115.9)

Accounts receivable outstanding 72.5

The Company maintains an allowance for doubtful accounts for potential credit losses. This allowance is based on management’s estimates

and assumptions regarding current market conditions, customer analysis and historical payment trends. These factors are considered when

determining whether past due accounts are allowed for or written-off.

The Company’s allowance for doubtful accounts for non-large business accounts receivable represents all non-large business accounts over

90 days past due. For large business accounts receivable, the allowance is calculated as a specific percentage of total large business accounts

outstanding plus an additional provision for certain high risk large business accounts.

The following table provides a continuity of the Company’s accounts receivable allowance for doubtful accounts:

Nine months ended September 30, 2008

Twelve months ended December 31, 2007

Balance, beginning of the period 13.3 10.8 (Decrease) increase in allowance (net of recoveries and accounts written-off) (0.9) 2.5

Balance, end of the period 12.4 13.3


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5. FINANCIAL INSTRUMENTS (continued)

Liquidity Risk The Company is exposed to liquidity risk from its debt. This risk is minimized by the Company’s capital structure management policies, and by

maintaining bank credit facilities. The following table provides a summary of the maturity dates for various financial liabilities:

Less than 1 year 1 - 2 years 2 - 3 years 3+ years Bank indebtedness 3.5 - - - Accounts payable and accrued liabilities 303.8 - - - Notes payable 115.0 - - - Long-term debt, including current portion 220.0 11.0 219.6 199.5 Other long-term liabilities - 10.2 8.4 41.5

642.3 21.2 228.0 241.0

Market Risk The Company is exposed to market risk from interest rates related to its debt, and from foreign exchange rates related to normal business

operations in foreign currencies.

Interest rate risk is minimized by the Company’s capital structure management policies outlined in Note 12.

The Company enters into foreign currency forward contracts to manage foreign currency exposure which arises in the normal course of business

operations. As at September 30, 2008, the Company has outstanding foreign currency forward contracts to purchase $14.2 million U.S. As part

of the Company’s accounting policy to adjust outstanding foreign currency forward contracts from book value to fair value, the Company has

recorded a gain in other income of $0.5 million and $1.9 million for the three and nine months ended September 30, 2008, respectively. These

contracts mature periodically beginning in October 2008 and ending in December 2008.

Reasonable fluctuations in market interest rates and foreign currency exchange rates would not have a material impact on the Company’s net

income and comprehensive income.

6. OTHER CURRENT ASSETS

The Company’s inventory balance consists of wireless handsets, parts and accessories, and communications equipment held for resale. The

Company performs periodic reviews of inventory for obsolescence and, during the three and nine months ended September 30, 2008, expensed

$0.1 million and $0.3 million, respectively, in obsolete inventory (2007 – $0.1 million and $0.3 million). During the three and nine months ended

September 30, 2008, the Company expensed $12.0 million and $38.3 million, respectively, of inventory relating to cost of goods sold (2007 –

$11.6 million and $28.7 million).

7. NOTES PAYABLE

The Company has a $350 million bank credit facility with a syndicate of financial institutions which consists of $150 million to support the

Company’s commercial paper program, and a $200 million revolving credit facility for cash management purposes and the issuance of letters of

credit. As at September 30, 2008, the Company had utilized $20 million in notes payable under the commercial paper backstop facility and

$95.0 million in notes payable under its revolving credit facility. As at September 30, 2008, the Company had $74.5 million in undrawn letters of

credit outstanding. The Company paid short-term interest costs of $1.3 million and $1.4 million for the three and nine months ended

September 30, 2008, respectively.


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8. EARNINGS PER SHARE RECONCILIATION

The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share:

Nine months ended

September 30 2008 2007


Basic and diluted 130.3 155.4

Weighted average shares outstanding (in millions)

Weighted average number of shares outstanding – basic 64.6 65.2 Dilutive effect of outstanding stock options - 0.2

Weighted average number of shares outstanding - diluted 64.6 65.4

Earnings per share ($) Basic earnings per share 2.02 2.38 Diluted earnings per share 2.02 2.38

9. SHARE CAPITAL

As at September 30, 2008, share capital consists of 64,635,967 issued and outstanding Common Shares (December 31, 2007 – 64,631,667).

During the nine months ended September 30, 2008, 4,300 stock options to purchase Common Shares were exercised for cash consideration of

$0.2 million, of which $0.2 million was credited to share capital.

10. EMPLOYEE FUTURE BENEFITS

The Company’s total net benefit credit for all of its defined benefit and defined contribution pension plans, supplemental pension arrangements,

and other non-pension employee future benefits for the three and nine months ended September 30, 2008 is $0.2 million and $0.5 million,

respectively.

11. SEGMENTED INFORMATION

As at September 30, 2008, the Company had two reportable operating segments: the Consumer Markets division and the Enterprise Solutions

division. The Consumer Markets division provides a full range of wireless, high-speed Internet and data, digital television, and wireline voice

services to residential and small business customers in Manitoba. The Consumer Markets division also provides alarm monitoring services to

residential and small business customers in the western provinces, and Internet, data and voice services to small business customers in

Canada. The Enterprise Solutions division provides Internet protocol-based communications, unified communications, voice, and data

connectivity services to medium and large business customers in Canada. In 2008, the Company changed the basis for its allocation of certain

expenses across divisions. Accordingly, segmented information for 2007 has been restated to conform with these changes.

The Company evaluates performance based on EBITDA (earnings before interest, taxes, amortization, other income, and discontinued

operations). EBITDA, as reported below, includes intersegment revenues and expenses. The Company accounts for intersegment revenues

and expenses at either prices that approximate current market prices or cost, depending on the type of service.


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11. SEGMENTED INFORMATION (continued)

The following table provides further segmented information:

Three months ended September 30 Consumer Markets Enterprise Solutions Other Total 2008 2007 2008 2007 2008 2007 2008 2007 Operating revenue External 208.2 204.8 271.7 271.1 - - 479.9 475.9 Internal 0.1 0.1 - 0.1 10.4 9.1 10.5 9.3 EBITDA 97.3 104.2 53.3 60.1 (0.1) (1.8) 150.5 162.5

Nine months ended September 30 Consumer Markets Enterprise Solutions Other Total 2008 2007 2008 2007 2008 2007 2008 2007 Operating revenue External 612.8 600.7 832.3 815.9 - - 1,445.1 1,416.6 Internal 0.3 0.3 0.1 0.1 29.0 28.2 29.4 28.6 EBITDA 296.3 306.6 183.9 200.6 - (2.3) 480.2 504.9

Reconciliation of net income and comprehensive income is as follows:

Three months ended September 30

Nine months ended September 30

2008 2007 2008 2007

Total EBITDA 150.5 162.5 480.2 504.9 Amortization (83.9) (80.0) (246.6) (239.0) Other income 2.5 1.1 7.6 7.2 Debt charges (12.1) (12.8) (36.7) (39.4) Income tax expense (18.9) (25.3) (74.2) (78.3) Consolidated net income and comprehensive income 38.1 45.5 130.3 155.4

12. CAPITAL STRUCTURE FINANCIAL POLICIES

Effective January 1, 2008, the Company adopted CICA Handbook section 1535 “capital disclosures”. These disclosure standards require the

Company to provide disclosure of how the Company manages its capital.

The Company’s objectives when managing capital are (i) to maintain an acceptable level of liquidity risk so that the Company can continue to

cover its financial obligations and investment requirements under the current business model; and (ii) to enhance shareholder value by

maintaining an efficient cost of capital.

The Company manages capital through the monitoring of a number of measures, with the primary one being debt to capitalization. This metric

illustrates the amount of assets that are financed by debt versus equity. As part of managing the capital structure, the Company will make

adjustments to it based on changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain an optimal

capital structure, the Company may buy back shares to reduce shareholders’ equity or sell assets to reduce debt.


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12. CAPITAL STRUCTURE FINANCIAL POLICIES (continued)

The following table provides information on the Company’s debt to capitalization ratio:

September 30

2008 December 31

2007 Bank indebtedness 3.5 10.1 Proceeds from accounts receivable securitization 115.5 43.0 Notes payable 115.0 - Capital lease obligations, including current portion 19.0 22.5 Long-term debt, including current portion 650.1 739.5 Total debt 903.1 815.1 Shareholders’ equity 1,409.8 1,404.0 Total capitalization 2,312.9 2,219.1 Debt to capitalization 39.0% 36.7%

The Company must comply with two types of covenants regarding capital structure. The first is an earnings coverage covenant on the

Company’s medium term notes that requires the Company to maintain a minimum ratio of earnings before interest and taxes over debt charges.

The second is a level of debt covenant on the Company’s medium term notes and bank credit facility that requires the Company not to exceed a

specified debt to total capitalization level. The Company continually monitors these covenants and is in full compliance.

13. ACQUISITION

Effective January 1, 2008, the Company acquired all of the outstanding shares of ICU Technologies Inc., a provider of video conferencing

solutions in Ontario, for a preliminary purchase price of $4.0 million. The purchase price is subject to adjustments, which are expected to be

resolved within one year from the date of acquisition. This acquisition was accounted for using the purchase method, and the purchase price

has been allocated on a preliminary basis to assets of $4.5 million, liabilities of $1.4 million, and goodwill of $0.9 million. The acquired assets

included intangible assets of $3.6 million. These intangible assets represent customer contracts and relationships of $1.9 million, brand name of

$0.5 million and a non-competition agreement of $1.2 million. The intangible assets are being amortized over estimated periods of benefit of

three to five years. The goodwill amount has been allocated to the Enterprise Solutions division operating segment. The operating results of this

business are included in the Company’s consolidated operating results from the effective date of acquisition.

14. COMPARATIVE FIGURES

The prior period figures have been reclassified when necessary to conform to the current period’s presentation.

MANITOBA TELECOM SERVICES INC. P.O. Box 6666 333 Main Street Winnipeg, Manitoba, Canada R3C 3V6 1.888.544.5554 www.mtsallstream.com

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