MTS Reports Strong Third Quarter Results and Raises EPS Guidance



    Stock Symbol: MBT

    Key earnings drivers include growth services gains and cost reductions

    
    Third Quarter Highlights

    -   Growth services revenues rose by 13.2%
        -  contributed 41% of total third quarter revenues as compared to 36%
           last year
    -   Double-digit revenue growth in wireless, high-speed Internet, digital
        television, converged IP services, and unified communications
    -   Earnings per share ("EPS") from continuing operations increased by
        17.6% year-over-year
        -  2007 EPS outlook guidance increased by $0.10 to a range of $2.65
           to $2.85
        -  EBITDA and free cash flow expected to be at the high end of their
           guidance ranges
    -   2007 cost reduction program achieves approximately $33 million in
        annualized savings
    -   Declared fourth quarter dividend of $0.65 per share, providing one of
        the highest yields on the TSX
    

    This news release contains forward-looking statements. For a description
    of the related risk factors and assumptions, please see the section
    entitled "Forward-Looking Statements Disclaimer" later in this news
    release.

    WINNIPEG, Nov. 1 /CNW/ - Manitoba Telecom Services Inc. ("MTS" or the
"Company") (TSX: MBT) today announced its seventh successful quarter of solid
business performance, including a 13.2% increase in growth services revenues
and a 17.7% increase in EPS from continuing operations. The Board of Directors
declared a cash dividend of $0.65 per share for the fourth quarter, which is
payable on January 15, 2008 to shareholders of record on December 31, 2007.
    "MTS continued to build strong and sustainable momentum in the third
quarter," said Pierre Blouin, Chief Executive Officer. "Results are in line
with our business plan at all levels as we continue to capitalize on strong
customer relationships and our ability to bring innovative new services to
market. On the strength of this performance, we are pleased to once again be
in a position to raise our 2007 EPS guidance range and confirm that we expect
our EBITDA(1) and free cash flow(2) to be at the high end of their established
2007 guidance ranges."
    EPS from continuing operations(3) increased by 17.7% to $0.73 per share
in the third quarter of 2007, and by 17.6% to $2.27 in the first nine months
of 2007 on a year-over-year basis. This was a result of higher EBITDA, lower
debt charges, lower amortization and fewer shares outstanding.
    In the third quarter, EBITDA from continuing operations increased by 1.3%
to $164.8 million, and for the first nine months of 2007, EBITDA increased by
1.5% to $500.3 million as compared to last year. This higher EBITDA reflects
strong performance in growth services revenues and lower expenses resulting
from cost reduction initiatives. Overall, these solid results contributed to
free cash flow of $63.8 million and $241.0 million for the quarter and
nine-month period, respectively. On a year to date basis, free cash flow is
stable and essentially flat compared to last year.
    Revenues from continuing operations declined by 0.4% to $475.9 million in
the third quarter of 2007, and by 1.4% to $1,417.4 million in the first nine
months of the year compared to the same periods last year. These results
reflect the Company's business strategy to increase growth services revenues,
offsetting declines in legacy services and the loss of business revenue as
Rogers Communications Inc. ("Rogers") and AT&T Corp. ("AT&T") continue to
migrate their communications traffic to their own networks. If the revenues
from Rogers and AT&T were excluded, third quarter and year to date revenue
from continuing operations would be positive by 1.9% and 0.8%, respectively.
    Growth services revenues, which include wireless, high-speed Internet,
digital television, converged Internet protocol ("IP") and unified
communications services, were up by 13.2% to $194.7 million in the third
quarter of 2007, and by 11.8% to $554.8 million in the first nine months of
2007. Growth services contributed approximately 41% of total revenue in the
third quarter of 2007 and 39% in the first nine months, which is well ahead of
the 36% and 35% contributions respectively, for the same periods last year.
    The 2007 cost reduction program has achieved approximately $33 million in
annualized savings as at September 30, 2007. This is in line with the
objective to achieve annualized expense savings of $40 million to $50 million.
Actual in quarter realized savings from this program were $13 million and
$28 million for the nine months ended September 30, 2007.

    FINANCIAL HIGHLIGHTS

    
    -------------------------------------------------------------------------
                               three months              nine months
    in millions of dollars,        ended                   ended
    except per share amounts   September 30    change   September 30   change
                              ----------------         ---------------
                                2007  2006(4)           2007  2006(4)
    -------------------------------------------------------------------------
    Continuing Operations
    -------------------------------------------------------------------------
      EPS                       0.73    0.62   17.7%    2.27    1.93   17.6%
    -------------------------------------------------------------------------
      EBITDA                   164.8   162.7    1.3%   500.3   493.0    1.5%
    -------------------------------------------------------------------------
      Free Cash Flow            63.8    70.7   (9.8%)  241.0   248.9   (3.2%)
    -------------------------------------------------------------------------
      Growth Services Revenues 194.7   172.0   13.2%   554.8   496.3   11.8%
    -------------------------------------------------------------------------
      Legacy Services Revenues 281.2   305.9   (8.1%)  862.6   941.1   (8.3%)
    -------------------------------------------------------------------------
      Revenues                 475.9   477.9   (0.4%)1,417.4 1,437.4   (1.4%)
    -------------------------------------------------------------------------
    Reported
    -------------------------------------------------------------------------
      Basic EPS                 0.70    0.60   16.7%    2.38    1.23   93.5%
    -------------------------------------------------------------------------
      EBITDA                   162.5   152.9    6.3%   504.9   489.6    3.1%
    -------------------------------------------------------------------------
      Free Cash Flow            57.9    48.1   20.4%   245.3   190.6   28.7%
    -------------------------------------------------------------------------
      Revenues                 475.9   477.9   (0.4%)1,416.6 1,447.3   (2.1%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    MTS provides financial information on continuing operations in order to
    assist investors in understanding its underlying financial performance.
    MTS's definition of continuing operations excludes certain non-recurring
    items such as restructuring costs and the retroactive impact of
    regulatory decisions, as well as its directories business, which has been
    reclassified as discontinued operations following the announced sale of
    this business in the third quarter of 2006.
    

    Including items that are not from continuing operations(*), MTS's reported
EPS was $0.70 in the third quarter of 2007 as compared to $0.60 in the third
quarter of 2006, and $2.38 in the first nine months of 2007 as compared to
$1.23 in the first nine months of 2006.
    Reported EBITDA in the third quarter of 2007 was $162.5 million as
compared to $152.9 million in the third quarter of 2006, and was
$504.9 million in the first nine months of 2007 as compared to $489.6 million
in the first nine months of 2006. Free cash flow increased by 20.4% to $57.9
million from $48.1 million in the third quarter of 2006, and by 28.7% to
$245.3 million from $190.6 million in the first nine months of 2006.
    "Our key financial metrics are all showing healthy performance. In
particular, there has been demonstrated improvement in revenues, as growth
services continue to increase their contribution to our overall business
results," said Wayne Demkey, Chief Financial Officer. "In fact, overall
revenues are growing when the migration of Rogers and AT&T is excluded. MTS is
successfully leveraging its business plan to deliver excellent value to
shareholders."

    ----------------------------
    (*) These include a non-cash tax asset valuation adjustment, a non-cash
    impact of changes in income tax rates on the Company's tax asset,
    restructuring costs, a positive adjustment related to a regulatory
    decision and certain tax recoveries. In the third quarter and the first
    nine months of 2006, items not from continuing operations that impacted
    EPS include discontinued operations, a non-cash impact of changes in
    income tax rates on the Company's tax asset, solvency funding to our
    pension plans, the retroactive adjustment related to the Band F
    Decision(5), the adjustment related to the Direct Connect/Access Tandem
    Decisions(6) and the taxes recoverable related to the sale of our
    investment in Bell West Inc. Refer to MTS's third quarter 2007 interim
    Management's Discussion and Analysis ("MD&A") for the impacts that these
    items not from continuing operations had on reported EPS, EBITDA, revenue
    and free cash flow.

    Update on MTS's Share Buyback Program

    In December 2006, MTS announced that it planned to purchase for
cancellation approximately $320 million worth of common shares through a
normal course issuer bid (the "Issuer Bid") using the proceeds from non-core
assets to fund these buybacks. To date, the Company has purchased
$172.9 million worth of shares for cancellation, representing more than half
the amount permitted under the Issuer Bid.
    The Company believes it is prudent to refrain from purchasing additional
common shares for cancellation under the Issuer Bid until it has evaluated
various opportunities, such as a potential national wireless initiative,
presented by the rapidly changing Canadian telecommunications landscape.
Purchases of shares under the Issuer Bid, or any new Issuer Bid, will be made
by MTS when management and the Board views such purchases to be the most
appropriate use of the Company's funds.

    DIVISIONAL HIGHLIGHTS

    The Company's Enterprise Solutions division continued to deliver solid
results and margins in the third quarter of 2007. Throughout the year, this
division has been leveraging improvements in its market focus, cost management
and leadership in IP-based products, as well as its efforts to target the
Canadian mid-market segment. Next generation data revenues continued their
strong performance increasing by 13.1% over the third quarter of 2006 while
its IP-virtual private network ("IP-VPN") customer count increased to 239,
reflecting the continued strong demand for innovative next generation IP-based
services offered to business customers. The Enterprise Solutions division won
$48.9 million in new contracts in the third quarter of 2007. New business
contracts included Transat A.T. Inc. ("Transat"), Selectcom Telecom, and the
Western Canadian Lottery Corporation ("WCLC"). In the quarter, the division
also launched the innovative new Secure Connect service, which builds on the
Company's innovative national IP network, and establishes a new standard for
the delivery of firewall and VPN services to customers.
    Third quarter performance in the Company's Consumer Markets division
reflects the continued strong performance of growth services within the
business, and the success of the division's strategy of bundling products and
services for customers. Wireless, digital television and high-speed Internet
services once again delivered double-digit growth in subscribers and revenues
as compared to the same period last year. Wireless customers grew by 10.0%,
with revenues increasing by 15.9%, and high-speed Internet customers increased
by 15.7%, with Internet services revenues increasing by 14.6%. Digital
television customers increased by 25.3%, with revenues increasing by 30.5% as
compared to the third quarter of 2006. In early October 2007, the Company
achieved another significant milestone by signing up the 75,000th digital
television customer and representing a 30% market share in Winnipeg. The
Consumer Markets division's residential access lines demonstrated continued
stability as line losses continued to diminish as compared to previous
quarters.

    REGULATORY UPDATE

    MTS participated early this year in the federal government's public
consultation process on the auction of spectrum for advanced wireless services
("AWS"). Throughout this process, MTS and others presented evidence that new
entrants would increase competition and innovation for the benefit of Canadian
telecommunications consumers and businesses. The AWS spectrum auction rules
are anticipated to be issued soon.
    The Company will consider these auction rules carefully, and will
evaluate the potential business opportunities presented by them. MTS currently
has engaged in discussions with interested parties, both financial and
strategic, who could contribute significant capital and wireless expertise to
a potential wireless initiative.  Mr. Blouin reaffirmed that these statements
should not be construed in any way as constituting an indication by the
Company that it has committed at this time to undertake a national wireless
opportunity.
    Commenting on a potential national wireless initiative, Mr. Blouin said,
"The opportunity for a fourth national wireless player in Canada is
significant and has the potential, under the right circumstances, to create
significant long-term value for MTS shareholders. Be that as it may, MTS will
not make any decisions about whether or how it might pursue such an
opportunity until we have had ample opportunity to evaluate the auction rules
and the full range of available strategic and/or financial partnership
structures available to us."
    MTS also participated in October in the hearings convened by the Canadian
Radio-television and Telecommunications Commission ("CRTC") on essential
facilities, making its case that a robust definition of essential facilities
is more important than ever to ensure continued innovation and competitive
pricing for customers, especially in the business market. "The government's
deregulation efforts are based on the premise of fair wholesale access," said
Chief Regulatory Officer, Chris Peirce. "Reliable network access for
competitors coupled with retail deregulation allows maximum reliance upon
market forces and the least interventionist regulatory approach. We support
such an approach, which is crucial to delivering the benefits of competition
to customers in both the business and consumer markets."

    2007 OUTLOOK

    On November 1, 2007, MTS, based on the Company's strong performance this
year, again increased its 2007 guidance for EPS from continuing operations to
a range of $2.65 to $2.85 from the $2.55 to $2.75 range announced on August 2,
2007. Guidance ranges for other performance measurements remain unchanged, and
the Company expects to come in at the high end of its 2007 range for EBITDA
and free cash flow. Growth services revenues continue to show excellent
results, growing at double-digit rates, and the success of cost reduction
programs combined to improve margins. Other factors contributing to an
improved performance include expected lower amortization, lower debt charges
and higher other income.

    
               ----------------------------------------------
               2007 Financial Outlook - Continuing Operations
               ----------------------------------------------
               Revenues                  $1.875 B to $1.925 B
               EBITDA                        $625 M to $655 M
               EPS                             $2.65 to $2.85
               Free Cash Flow                $240 M to $270 M
               Capital Expenditures    14% to 15% of revenues
               ----------------------------------------------
    

    OTHER DEVELOPMENTS

    Enterprise Solutions division announcements

    MTS Allstream calls for strong essential facilities regime to spur
    competition and innovation

    On October 26, 2007, MTS Allstream announced that it had made a
submission to the CRTC in connection with the regulator's hearings to review
the definition of essential facilities and the terms governing competitor
access to those facilities. This submission advocates that a robust definition
of essential facilities is more important than ever to ensure continued
competition and innovation in the Canadian telecommunications landscape, and
the associated benefits of choice and competitive pricing for customers,
especially in the business market. MTS Allstream views the approach of
reliable network access for competitors, coupled with retail deregulation,
allowing maximum reliance upon market forces and the least interventionist
regulatory approach as crucial to delivering the competitive benefits of
choice, innovation and competitive pricing to customers.

    MTS Allstream completes expansion of telecom services for Transat

    On August 8, 2007, MTS Allstream announced that it had completed the
implementation of expanded telecommunications services valued at more than
$6 million over three years for Quebec-based Transat. These services include a
global managed data network business IP service based on multiprotocol label
switching ("MPLS") technology, and toll-free, long distance and local voice
services for Transat's locations across Canada, the United States and France.
MTS Allstream will provide this network in conjunction with its international
carrier partners. A long-time customer of MTS Allstream, Transat looked to MTS
Allstream for achieving the goal of centralizing telecommunications services
for its subsidiaries and affiliated companies. With this contract, MTS
Allstream has helped Transat become more efficient in a challenging travel
market by providing a one-stop solution for telecommunications needs.

    MTS Allstream wins $10 million contract from Selectcom Telecom

    On September 12, 2007, MTS Allstream announced the signing of a contract
with Selectcom Telecom valued at more than $10 million. The services under
this contract include domestic long distance, international long distance,
calling cards, toll-free, MPLS, Internet services, local lines and private
lines. Building on a 13-year relationship with MTS Allstream, this new
contract allows Selectcom Telecom to offer a whole array of new and innovative
products and solutions geared towards corporate Canada and its changing
telecommunications needs.

    WCLC selects MTS Allstream to power its gaming network in Manitoba,
    Yukon, NWT and Nunavut

    On September 20, 2007, WCLC, a provider of games such as Lotto 6/49 and
Super 7 in the Prairies and Territories, selected MTS Allstream to provide IP
network connectivity and network management for its gaming terminals in
Manitoba, Yukon, the Northwest Territories and Nunavut. MTS Allstream was the
first to deploy MPLS solutions for enterprise customers in Canada. This
eight-year contract will see MTS Allstream provide MPLS connectivity to nearly
900 WCLC retail locations, and also will provide managed wide area network
services in all locations. In addition to connecting WCLC's retail locations,
MTS Allstream also will provide MPLS services to any expansion within the
territories covered by this contract.

    MTS Allstream introduces Secure Connect

    On October 3, 2007, MTS Allstream announced that it had launched Secure
Connect, a true "in the cloud" security capability that builds on its national
business IP/MPLS offerings. Secure Connect embeds the latest unified threat
management technology into MTS Allstream's national IP network architecture,
and immediately establishes a new standard for the delivery of firewall and
VPN services. This MTS Allstream offering makes high-performance and secure
network connectivity more feasible for customers with remote sites and branch
offices, bringing the benefits of IP-enabled communications to a new class of
business customers. It dispenses with expensive and complex private data
networking, and allows inherently secure VPN connections via the public
Internet, while driving greater flexibility and increased productivity for
customers by allowing telecommuters and other mobile employees to connect
easily to their corporate network. In addition to information technology
("IT") security benefits, Secure Connect also will allow customers to find new
efficiencies in their IT service, in addition to the innovative security
benefits.

    MTS Allstream adds Microsoft(R) Office Communications Server 2007 to its
    Collaboration Suite

    On October 16, 2007, MTS Allstream announced that its Allstream
Collaboration Suite ("ACS") had been enhanced with the addition of Microsoft
Office Communications Server 2007. ACS users will experience simplified
collaboration while taking advantage of Microsoft's unified communications
technologies. Geographically dispersed employees, customers, vendors and
partners are able to communicate in real-time from any access point with an
Internet connection and to benefit from enhanced services. Chosen by Microsoft
to participate in its Technology Adoption Program for Office Communications
Server 2007, MTS Allstream experienced the enhancements and associated
benefits of this system firsthand, and provided developmental input.
    MTS Allstream successfully tested interoperability between its IP
trunking service and Microsoft Office Communications Server 2007, and
confirmed compatibility. With MTS Allstream's IP trunking service, customers
can leverage their IP data connectivity to seamlessly connect to the public
switched telephone network while avoiding the need for costly telephony
gateways. MTS Allstream is the first Canadian service provider to offer IP
trunking nationally.

    Consumer Markets division announcements

    MTS TV - 75,000 subscribers strong in Winnipeg

    On October 30, 2007, MTS Allstream announced that MTS TV, the digital
television service it offers in Winnipeg, had reached another milestone after
officially acquiring a total of 75,000 customers. In the last two years, MTS
TV has grown by over 30,000 customers, with over 5,000 new customers added
since April 2007. MTS TV continues to make outstanding progress in the
marketplace by offering customers a variety of channel packages, high quality
100% digital picture and sound, and value through unique features that allow
customers to make the most of their bundled MTS services.

    MTS Allstream welcomes CRTC forbearance ruling in Winnipeg market

    On August 3, 2007, MTS Allstream announced that it welcomed a ruling by
the CRTC granting retail local exchange services deregulation, known as
forbearance, in the Winnipeg residential telecommunications market. In order
to obtain this ruling, MTS Allstream had filed evidence with the CRTC
demonstrating both that the Winnipeg market is competitive, and that MTS
Allstream fully meets the requisite competitor quality of service criterion
for forbearance of the residential local telephone market.
    This ruling makes Winnipeg one of the first major urban retail markets in
Canada to be deregulated, and will help MTS Allstream further improve service
to its customers. It also creates opportunities to simplify pricing
structures, and to develop new and innovative cross-business services and
promotions. In addition, MTS Allstream will have more flexibility to serve
customers who subscribe to multiple service offerings while building on
already successful bundling offers.

    MTS TV adds five new channels to its lineup

    On August 16, 2007, MTS Allstream announced that MTS TV had added five
sports and gaming channels to its subscriber packages. The Fight Network,
GOLTV, WFN-World Fishing Network ("WFN") and The Fan 590 radio were added to
existing sports theme groups, and CGTV Canada-Casino and Gaming Television
were added to the basic package. In addition, The Fight Network, GOLTV and WFN
also can be subscribed to individually. To introduce the newly offered
channels, subscribers have been provided with three-month free previews for
The Fight Network and The Fan 590 radio, and one year free previews for GOLTV
and WFN.

    Winnipeg On Demand now showing on MTS TV

    On August 20, 2007, MTS Allstream announced that it had introduced new
programming on MTS TV called Winnipeg On Demand, a free interactive
destination celebrating Winnipeg. MTS TV on Demand provides all MTS TV
customers with instant access to Winnipeg On Demand, where viewers can watch
stories about people, events and activities within the community. Winnipeg On
Demand content will refresh on an ongoing basis while building a library of
programming that builds pride and understanding about Winnipeg's people and
places.

    Keep in contact with Windows Live(TM) Messenger and MTS Mobility

    On August 23, 2007, MTS Allstream announced that MTS Mobility customers
could download Windows Live Messenger and subscribe to this service on their
cell phones. This popular instant messaging service, often referred to as "MSN
Messenger", allows users to communicate in real-time with friends and family
on their computers and cell phones. With the MTS Mobility wireless network
covering 97% of the Manitoba population, customers who subscribe to this
service can stay connected with their Windows Live Messenger contacts no
matter where they are. This service is available on the Samsung m500, a640,
a900 and LG 150, 3300 cell phones, with more phones to come.

    MTS Allstream introduces Manitobans to BlackBerry(R) 8830 World Edition
    Smartphone

    On September 13, 2007, MTS Allstream announced the launch of the new
BlackBerry 8830 World Edition Smartphone in Manitoba. The BlackBerry 8830 is a
stylish, full QWERTY, industry-leading smartphone that has all the features of
a wireless phone with e-mail, instant messaging, organizer and Web browser
with media-rich music and video playback capabilities. Working on high-speed
mobile networks in Canada, such as MTS Mobility's, and partnering with other
wireless carriers in over 170 countries around the world, the BlackBerry 8830
combines the features of a wireless phone with e-mail - all in one sleek,
stylish handset. This phone works nationwide on CDMA networks and also allows
global roaming on GSM/GPRS networks with just one number with the MTS Mobility
international roaming service.

    MTS Allstream introduces free Connection Manager software

    On September 26, 2007, MTS Allstream announced that it would provide
Connection Manager PC software to its wireless and Internet customers at no
charge. This software program seamlessly connects laptops or cell phones to
wired and wireless networks for simplified access to e-mail, Internet and
Web-based applications. Anywhere an Ethernet, Wi-Fi or cellular network is
available, MTS Allstream's customers instantly can connect their laptop
computers or cell phones to the best data network available. Connection
Manager will monitor for networks and will automatically connect to the 1xEVDO
network when no other network connections are available and when an
alternative network connection is restored, Connection Manager will disconnect
the 1xEVDO connection automatically, all without the customer having to log in
or out of data sessions.

    MTS Allstream applies for local deregulation in Portage la Prairie

    On September 27, 2007, MTS Allstream announced that it had applied to the
CRTC for local residential telephone service forbearance, in the city of
Portage la Prairie, Manitoba. MTS Allstream and the local community fully meet
CRTC requirements for forbearance.

    MTS Allstream brings ultra cool Samsung u740 to Manitobans

    On October 4, 2007, MTS Allstream announced the availability of the new
Samsung u740 cell phone at MTS Connect Stores and authorized dealers. With
this launch, MTS Allstream takes the customer experience to an entirely new
level of wireless technology. The Samsung u740 is a high-speed device with a
dual-flipping screen that supports a full QWERTY keyboard for fast text
messaging. The dual hinge opens in portrait mode for phone calls and converts
to landscape mode for text messaging. It also features a rich multimedia
package that includes stereo speakers, camera and camcorder, microSD memory
slot and Bluetooth capability.

    
    NOTES

    1.  MTS's interim MD&A for the nine months ended September 30, 2007 and
        supplementary financial information are available in the Investors
        section of the MTS Web site at www.mtsallstream.com.

    2.  MTS's third quarter 2007 conference call with the investment
        community is scheduled for 4:00 p.m. Eastern time on November 1,
        2007. Investors are invited to listen to the conference call. The
        dial-in number is 1-800-814-4859. A live audio Webcast of the
        investor conference call can be accessed by visiting the Investors
        section of the MTS Web site (www.mtsallstream.com). A replay of the
        conference call will be available until midnight Eastern time on
        November 11, 2007 and can be accessed by dialing 1-877-289-8525 or
        1-416-640-1917 (access code 21249051 followed by the number sign).
    

    About MTS Allstream

    MTS Allstream Inc. is a wholly owned subsidiary of Manitoba Telecom
Services Inc., and is one of Canada's leading national communication solutions
providers, delivering innovative products and services through the Enterprise
Solutions and Consumer Markets divisions. The Enterprise Solutions division,
which operates under the Allstream brand nationally and under the MTS 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-based communications, unified
communications, 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 across Canada under the Allstream brand, and security
and alarm monitoring services through AAA Alarm Systems Ltd., an affiliate of
MTS Allstream which also operates in other western provinces. MTS Allstream'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.

    Forward-Looking Statements Disclaimer

    This news release includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, 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 statements.
Forward-looking statements reflect our expectations as at November 1, 2007.
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 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 our interim MD&As for the
first, second and third quarters of 2007, and our 2006 annual MD&A. 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.
    Factors that could cause 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 2006 Annual
Report and in other filings with the Canadian securities regulatory
authorities. Unless otherwise stated, all amounts are expressed in Canadian
dollars. For further information, refer to the "Risks and Uncertainties"
sections in our 2006 annual MD&A and our interim MD&As for the first, second
and third quarters of 2007.
    Additional information relating to our Company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. This news release
and the financial information contained herein have been reviewed by our Audit
Committee and approved by our Board of Directors.

    
    -------------------------------------------------------------------------
    (1) 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.
    (2) Refer to MTS's third quarter 2007 interim MD&A for the definition of
        free cash flow.
    (3) Refer to MTS's third quarter 2007 interim MD&A for the definition of
        continuing operations.
    (4) The prior period figures have been reclassified to conform to the
        current year's presentation of discontinued operations.
    (5) Band F Decision means Telecom Decision CRTC 2006-20 in which the CRTC
        approved the application of MTS Allstream to review and vary the
        CRTC's decision in MTS Allstream's application to review and vary
        certain decisions relating to its Band F subsidy, Telecom Decision
        CRTC 2005-52.
    (6) Direct Connect/Access Tandem Decisions means Aliant Telecom, Bell
        Canada, MTS Allstream, SaskTel and TCI - Approval of rates on a final
        basis for Access Tandem service, Telecom Decision CRTC 2006-22 and
        Aliant Telecom, Bell Canada, MTS Allstream, SaskTel and TCI -
        Approval of rates on a final basis for Direct Connection service,
        Telecom Decision CRTC 2006-23.

    -------------------------------------------------------------------------
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
    -------------------------------------------------------------------------
    

    Unless otherwise indicated, this Management's Discussion and Analysis
    ("MD&A") of our financial results for the interim period ended
    September 30, 2007 is as at November 1, 2007. 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,
    2006. This interim MD&A for the three and nine months ended September 30,
    2007 updates the information contained in our interim MD&As for the first
    and second quarters of 2007, and our 2006 annual MD&A.

    This interim MD&A includes forward-looking statements and information
    (collectively, the "statements") about our corporate direction, business
    opportunities, 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&As for the first and
    second quarters of 2007, and our 2006 annual MD&A. 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. Unless
    otherwise stated, all amounts are expressed in Canadian dollars.

    NON-GAAP MEASURES OF PERFORMANCE
    --------------------------------
    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 2007, continuing operations include
        synergies, and exclude 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.

        In the first nine months of 2006, continuing operations include
        synergies and exclude our directories business, which has been
        classified as discontinued operations; integration costs; the impact
        of changes in income tax rates on our tax asset; solvency funding to
        our pension plans; the retroactive adjustment related to the Band F
        Decision(1); the adjustment related to the Direct Connect/Access
        Tandem Decisions(2); and the taxes recoverable related to the sale of
        our investment in Bell West Inc. (the "Bell West gain").

    -   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.

    Notes:

    (1) Band F Decision means Telecom Decision CRTC 2006-20 in which the CRTC
        approved the application of MTS Allstream Inc. ("MTS Allstream") to
        review and vary the CRTC's decision in MTS Allstream's application to
        review and vary certain decisions relating to its Band F subsidy,
        Telecom Decision CRTC 2005-52
    (2) Direct Connect/Access Tandem Decisions means Aliant Telecom, Bell
        Canada, MTS Allstream, SaskTel and TCI - Approval of rates on a final
        basis for Access Tandem service, Telecom Decision CRTC 2006-22 and
        Aliant Telecom, Bell Canada, MTS Allstream, SaskTel and TCI -
        Approval of rates on a final basis for Direct Connection service,
        Telecom Decision CRTC 2006-23
    

    OVERVIEW
    --------
    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.
    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 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.

    Enterprise Solutions division

    The Enterprise Solutions division, which operates under the Allstream
brand nationally and under the MTS 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 by the
Consumer Markets division 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 addition, the Consumer Markets division is a leading
player in the national small business telecommunications market outside
Manitoba, providing customers in major Canadian centres with a range of
innovative business Internet, data and voice services under the Allstream
brand.

    RESULTS OF OPERATIONS
    ---------------------

    
    Earnings Per Share ("EPS") ($)

    -------------------------------------------------------------------------
    three months ended                                                    %
         September 30                               2007      2006    change
    -------------------------------------------------------------------------
    EPS (Continuing Operations)                     0.73      0.62      17.7

    Discontinued Operations                            -      0.07       n.m.

    Restructuring Costs                            (0.03)    (0.09)    (66.7)
                                                  ---------------------------
    Basic EPS                                       0.70      0.60      16.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the three months ended September 30 is based on weighted
    average shares outstanding of 64.6 million for 2007, and 68.1 million for
    2006.
    

    Our growth services, which include wireless, converged IP, unified
communications, digital television, and high-speed Internet services,
delivered double-digit revenue growth for the third quarter and year to date.
Along with the success of our cost reduction initiatives, these increases
contributed to our solid performance. We continue to compete successfully
against the pressures of tight competitive markets and technology migration to
IP-based services by customers in our industry. These factors, along with
lower debt charges, lower amortization and fewer shares outstanding, resulted
in increased EPS from continuing operations of 17.7% and 17.6% in the three
and nine months ended September 30, 2007, respectively, as compared to the
previous year.

    
    -------------------------------------------------------------------------
    nine months ended                                                     %
    September 30                                    2007      2006    change
    -------------------------------------------------------------------------
    EPS (Continuing Operations)                     2.27      1.93      17.6

    Reduction in Tax Asset Allowance                0.15         -       n.m.

    Future Tax Rate Adjustment                     (0.09)    (0.86)    (89.5)

    Decision 2007-10                                0.15         -       n.m.

    Discontinued Operations                            -      0.19       n.m.

    Restructuring Costs                            (0.10)    (0.18)    (44.4)

    Retroactive Band F Decision                        -      0.09       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -      0.06       n.m.
                                                  ---------------------------
    Basic EPS                                       2.38      1.23      93.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the nine months ended September 30 is based on weighted
    average shares outstanding of 65.2 million for 2007, and 68.0 million for
    2006.
    

    In the third quarter and first nine months of 2007, basic EPS increased
this year by $0.10 to $0.70 and by $1.15 to reach $2.38, respectively, when
compared to the same periods in 2006. As indicated in the tables above, these
increases reflect items that are not from continuing operations, such as a
reduction in our tax asset valuation allowance, a future tax rate adjustment,
the impact of Decision 2007-10, discontinued operations, restructuring costs,
and the positive retroactive adjustments related to the Band F Decision and
the Direct Connect/Access Tandem Decisions.

    
    EBITDA

    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                Q3/07     Q3/06    change
    -------------------------------------------------------------------------
    EBITDA (Continuing Operations)                 164.8     162.7       1.3

    Restructuring Costs                             (2.3)     (9.8)    (76.5)

                                                  ---------------------------
    EBITDA                                         162.5     152.9       6.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    EBITDA (Continuing Operations)                 500.3     493.0       1.5

    Decision 2007-10                                13.5         -       n.m.

    Restructuring Costs                             (8.9)    (20.0)    (55.5)

    Retroactive Band F Decision                        -       9.9       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -       6.7       n.m.
                                                  ---------------------------
    EBITDA                                         504.9     489.6       3.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    EBITDA from continuing operations for the third quarter of 2007 increased
by 1.3% to $164.8 million as compared to $162.7 million in the third quarter
of 2006. Year to date EBITDA from continuing operations was up 1.5% to
$500.3 million in 2007 as compared to $493.0 million in 2006. Driving this
solid performance was growth in revenues from our wireless, unified
communications, converged IP, digital television, and high-speed Internet
services combined with successful cost reduction initiatives.
    In the third quarter of 2007, consolidated EBITDA increased by 6.3% to
$162.5 million as compared to $152.9 million in the same period last year.
This increase is a result of improved continuing operations and lower
restructuring costs.
    Year to date consolidated EBITDA increased by 3.1% to $504.9 million in
2007 versus $489.6 million in the same period in 2006. This increase is a
result of improved continuing operations, lower restructuring costs, and the
net impact of positive regulatory adjustments associated with Decision 2007-10
received in 2007 versus positive regulatory adjustments relating to the Band F
Decision and the Direct Connect/Access Tandem Decisions received in 2006.

    REVENUES

    Operating Revenues

    
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                Q3/07     Q3/06    change
    -------------------------------------------------------------------------
    Revenue (Continuing Operations)                475.9     477.9      (0.4)

                                                  ---------------------------
    Revenue                                        475.9     477.9      (0.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    Revenue (Continuing Operations)              1,417.4   1,437.4      (1.4)

    Retroactive Band F Decision                        -       9.9       n.m.

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

                                               ------------------------------
    Revenue                                      1,416.6   1,447.3      (2.1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Consolidated revenues from continuing operations were $475.9 million in
the third quarter of 2007 and $1,417.4 million year to date, representing a
0.4% decrease in the third quarter and a 1.4% decrease year to date.
    Growth services continued to perform strongly increasing by 13.2% over
last year and were offset by decreased revenues from our legacy services,
which led to this slight decrease in overall revenue. Contributing to our
year-over-year decreases in legacy revenues is the effect of reduced network
traffic from AT&T Corp. ("AT&T") and Rogers Communications Inc. ("Rogers") as
they transition their business to their own networks. Our revenues would have
grown by 1.9% in the third quarter or by 0.8% year to date, excluding revenues
from AT&T and Rogers. We expect the impact of continuing migration from
legacy-related services to next generation communications services to lessen,
as the proportion of our revenue that is derived from growth services
increases and leads to overall revenue growth in 2008.

    
    Segmented Revenues (Continuing Operations)
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                Q3/07     Q3/06    change
    -------------------------------------------------------------------------
    Growth services                                194.7     172.0      13.2
    Legacy services                                281.2     305.9      (8.1)
                                               ------------------------------
    Total                                          475.9     477.9      (0.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    Growth services                                554.8     496.3      11.8
    Legacy services                                862.6     941.1      (8.3)
                                               ------------------------------
    Total                                        1,417.4   1,437.4      (1.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Growth Services Revenues

    Revenues from our growth services were up by 13.2% or $22.7 million in
the third quarter of 2007, and by 11.8% or $58.5 million in the first nine
months of the year in comparison to the same periods in 2006. Strong growth in
wireless, converged IP, unified communications, digital television, and
high-speed Internet services were the primary drivers of the double-digit
growth in our growth services revenues in these periods.

    Legacy Services Revenues

    Revenues in the third quarter of 2007 from our legacy services were down
as expected by $24.7 million as a result of AT&T and Rogers transitioning
their communications network traffic from our network to their own networks.
Year-over-year revenues were influenced by re-pricing and customer churn,
which we are managing through our marketing strategies and customer approach
of service bundling. With these strategies already in place, we are developing
new and growing revenue streams by profitably accelerating our customer
transition to growth services products.

    
    Operating Revenues (Continuing Operations)
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                Q3/07     Q3/06    change
    -------------------------------------------------------------------------
    Wireless                                        71.3      61.5      15.9
    Data                                           166.9     165.3       1.0
    Local                                          133.7     135.2      (1.1)
    Long Distance                                   84.9      99.0     (14.2)
    Other                                           19.1      16.9      13.0
                                               ------------------------------
    Total                                          475.9     477.9      (0.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    Wireless                                       200.4     173.0      15.8
    Data                                           491.0     496.5      (1.1)
    Local                                          399.9     412.0      (2.9)
    Long Distance                                  268.1     304.3     (11.9)
    Other                                           58.0      51.6      12.4
                                               ------------------------------
    Total                                        1,417.4   1,437.4      (1.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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 $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              71.3      61.5      15.9
    YTD                                            200.4     173.0      15.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our wireless portfolio consists of cellular, wireless data, paging and
    group communications services that we offer in the Manitoba market.
    

    In the third quarter of 2007, revenues from our wireless services grew by
15.9% to $71.3 million, and in the first nine months of the year, by 15.8% to
$200.4 million. Our growing cellular customer base and increasing average
revenue per user ("ARPU") have continued to drive these significant
year-over-year growth rates. As at September 30, 2007, our cellular customer
base grew by 10.0% to 377,619, while ARPU increased by 4.8% to $59.25, as
compared to the same period last year.
    The increasing popularity of next generation wireless data services along
with higher revenues from system access fees, roaming services, and service
features have contributed to our strong ARPU. Our year-over-year revenues from
wireless data services have grown by 97% in the first nine months of 2007 due
to the ongoing customer-adoption of such features as text messaging and Web
browsing services. Additionally, our MTS Mobility high-speed network provides
convenient and reliable access to the most advanced high-speed data services.

    
    Data Services
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                             166.9     165.3       1.0
    YTD                                            491.0     496.5      (1.1)
    -------------------------------------------------------------------------
    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.
    

    Revenues this year from wireline data services increased to
$166.9 million from $165.3 million in the third quarter and decreased to
$491.0 million from $496.5 million year to date as compared to the
corresponding periods in 2006. Strong performance by our data growth services
contributed to the quarter-over-quarter increase. The decrease in our year to
date revenues is related to the transitioning of revenues from legacy services
to growth services and decreased traffic on our network by AT&T and Rogers.
Excluding revenues from these two customers, year to date revenues would have
shown an increase of 2% reflecting the attractiveness of our next generation
products and services. Customers are continuing to migrate to IP solutions
that utilize our capabilities, and we are achieving our desired results.
    We experienced a strong year-over-year increase of 13.1% this quarter and
13.8% year to date in revenues from our next generation data services, which
include converged IP and unified communications services. Driving our strong
overall growth in this segment were customer and volume increases from
business IP domestic multiprotocol label switching ("MPLS"), enterprise IP
telephony ("IPT"), switched Ethernet, network resident IPT, and consumer
high-speed Internet services.
    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, 2007,
we were supporting 239 customers, which is 51.3% more than last year.
    Consumer Internet services revenue continued to post excellent results,
climbing 14.6% and 12.7% in the three and nine months ended September 30,
2007. Driving this strong performance was a 15.7% year-over-year growth in our
consumer Internet customer base which reached 162,640 as of September 30,
2007. Price increases, recently announced for the fourth quarter, will provide
additional growth in consumer Internet revenues going forward.

    
    Local Services
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                             133.7     135.2      (1.1)
    YTD                                            399.9     412.0      (2.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.
    

    Revenues from local services in the three-month and nine-month periods
ended September 30, 2007 declined by 1.1% to $133.7 million and by 2.9% to
$399.9 million, respectively, as compared to the corresponding periods in
2006.
    The impact of competitive pressures continued to be felt in the Winnipeg,
Manitoba market, and is the primary cause of decreased revenues from local
services. However, we believe that we have positioned ourselves for long-term
success by bundling our residential service offerings such as wireless,
Internet, digital television and alarm services. Consequently, the pace of our
residential line losses has decelerated. In the third quarter of 2007, our
residential line losses were approximately 3,000, after adjusting for
cottage-country seasonality. This is consistent with the levels of line loss
in the second and first quarters of 2007, and the fourth quarter of 2006. Our
customer connections, which include network access services, high-speed
Internet, wireless and digital television subscribers, increased by 3% as
compared to last year.

    
    Long Distance Services
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              84.9      99.0     (14.2)
    YTD                                            268.1     304.3     (11.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.
    

    Long distance revenues were $84.9 million in the third quarter and
$268.1 million in the first nine months of 2007, reflecting year-over-year
decreases of 14.2% and 11.9%, respectively. The effects of competitive pricing
and customer losses were offset partially by higher daytime calling and
calling card usage. Lower rates and volumes in the domestic and cross-border
markets, and higher international volumes impacted the market segments
serviced by our Enterprise Solutions division.

    
    Other Revenues
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              19.1      16.9      13.0
    YTD                                             58.0      51.6      12.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.
    

    Other revenues in the third quarter and year to date increased by 13.0%
to $19.1 million from $16.9 million and by 12.4% to $58.0 million from
$51.6 million in the corresponding periods in 2006. Growth in our digital
television services revenues was the main driver of these increases.
    For the three and nine months ended September 30, 2007, digital
television services revenues increased by 30.5% to $10.7 million and by 34.2%
to $31.0 million, respectively. Strong year-over-year growth in our digital
television subscribers and increased revenues from our core television
services drove these increases. We implemented increased pricing for our basic
packages and specialty channels in the first quarter of 2007, which
contributed to the increases in revenue from our core television services and
an increase in average revenue per subscriber of 2.2% year-over-year to
$47.11.
    As at September 30, 2007, our subscriber base increased to 74,453,
representing an increase of 25.3%, which corresponds to a 30% market share.

    OPERATING EXPENSES

    
    Operations Expense
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                             311.1     315.2      (1.3)
    YTD                                            902.8     937.7      (3.7)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operations expense in the three and nine months ended September 30, 2007
decreased by 1.3% and 3.7%, or by $4.1 million and $34.9 million, as compared
to the same periods last year. We continue to focus on our cost reduction
initiatives which contribute to these year-over-year decreases. Our 2007
efficiency program has achieved approximately $33 million in annualized
savings as at September 30, 2007, which is in line with our 2007 objective for
expense savings of $40 million to $50 million with this program. Actual
realized expense savings from our 2007 efficiency program was $13 million and
$28 million for the three and nine months ended September 30, 2007.
    The year to date decrease was impacted by a one-time net positive
$14.3 million adjustment related to Decision 2007-10 that reflects the
retroactive impact of a competitor service for which we had been double-billed
by incumbent carriers, which was offset by the positive impact of the
retroactive Direct Connect/Access Tandem Decisions in the amount of $6.7
million in the second quarter of 2006. Partly offsetting these savings were
higher expenses from our growth operations.

    
    Restructuring and Integration Expenses
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                               2.3       9.8     (76.5)
    YTD                                              8.9      20.0     (55.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Restructuring expenses were $2.3 million in the third quarter of this
year as compared to $9.8 million of integration expenses in the third quarter
of 2006. Year to date, restructuring and integration expenses were
$8.9 million, while in 2006, year to date expenses were $20.0 million.
    In 2007, we have incurred restructuring expenses that are related to our
2007 efficiency program. We expect to achieve cost savings of $40 million to
$50 million with this program. As at September 30, 2007, we have achieved
approximately $33 million in annualized expense savings.
    The costs for our 2007 efficiency program are expected to be $30 million
to $40 million. As at September 30, 2007, we have incurred cash costs of
$25.0 million, including $8.9 million in restructuring expenses and $12.8
million in restructuring capital expenditures. In the fourth quarter of 2006,
we took a restructuring charge of $8.5 million, which is related to a
workforce reduction program, and set up an accrued liability in an equivalent
amount. We applied payments against this liability in the amount of $3.3
million. This is outlined in Note 3 to our interim consolidated financial
statements.

    
    Amortization Expense
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              80.0      83.1      (3.7)
    YTD                                            239.0     244.9      (2.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Amortization expense in the third quarter of 2007 decreased to
$80.0 million as compared to $83.1 million in the third quarter of 2006. Year
to date in 2007, amortization expense decreased to $239.0 million from
$244.9 million as compared to the same period in 2006, respectively. These
year-over-year decreases are due primarily to lower composite amortization
rates and from a reduction in the carrying value of intangible assets recorded
as part of a future tax asset valuation adjustment in the fourth quarter of
2006.

    
    Other Income
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                               1.1       3.0     (63.3)
    YTD                                              7.2       3.4       n.m.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In the third quarter of 2007, other income was $1.1 million as compared
to $3.0 million in the third quarter of 2006, and year to date, other income
was $7.2 million in 2007 versus $3.4 million in 2006. In the third quarter,
other income was lower primarily due to a gain on a sale of property in the
third quarter of 2006. Contributing to the significant year to date increase
as compared to last year were the positive impact of Decision 2007-10 in 2007,
a lower pre-tax loss on the sale of accounts receivable, and increased
interest income related to the temporary investment of the proceeds from the
sale of non-core assets.

    
    Debt Charges
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              12.8      15.6     (17.9)
    YTD                                             39.4      46.3     (14.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Year-over-year, debt charges decreased to $12.8 million from
$15.6 million in the third quarter of 2006, and in the first nine months of
the year, decreased to $39.4 million from $46.3 million in the same period a
year ago. These decreases resulted primarily from lower year-over-year
long-term debt levels that were refinanced with lower interest rate short-term
debt and temporary cash on hand.
    Our debt to total capitalization ratio as at September 30, 2007 was 34.1%
and continues to provide us with financial strength and flexibility going
forward.

    
    Income Tax Expense
    -------------------------------------------------------------------------
                                                                          %
    (in millions $)                                 2007      2006    change
    -------------------------------------------------------------------------
    Q3                                              25.3      21.4      18.2
    YTD                                             78.3     131.5     (40.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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. ("Allstream") in 2004. 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 any earlier
than 2014.
    When comparing our income tax expense in 2007 to 2006, an increase to
$25.3 million from $21.4 million occurred in the third quarter, while a
decrease to $78.3 million from $131.5 million was experienced for the year to
date. The increase in income tax expense during the third quarter is due to
higher income before tax which was offset partially by a lower effective tax
rate. Income tax expense year to date was lower primarily due to adjustments
related to changes in federal statutory tax rates in the amounts of
$6.0 million in 2007 versus $58.6 million in 2006, and a reduction, which we
made to our tax asset valuation allowance in 2007, of $12.8 million due to new
pension plan actuarial valuations that produced a higher forecasted taxable
income.

    CONSOLIDATED QUARTERLY DATA

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

    
    -------------------------------------------------------------------------
    (in millions $, except                 Q3        Q2        Q1        Q4
     earnings per share)                  2007      2007      2007      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating Revenues                   475.9     474.1     466.6     479.1
    Operating Income                      82.5      92.2      91.2      34.2
    Net Income before
     discontinued operations              45.5      57.0      52.9      26.8
    Net Income                            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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (in millions $, except                 Q3        Q2        Q1        Q4
     earnings per share)                  2006      2006      2006      2005
    -------------------------------------------------------------------------
    Operating Revenues                   477.9     489.0     480.4     494.2
    Operating Income                      69.8      95.1      79.8      34.0
    Net Income (Loss) before
     discontinued operations              35.8      (6.2)     40.7      10.8
    Net Income (Loss)                     40.5      (1.2)     44.0      14.6
    Earnings (Loss) Per Share
     before discontinued operations       0.53     (0.09)     0.60      0.16
    Diluted Earnings (Loss) Per Share
     before discontinued operations       0.52     (0.09)     0.60      0.16
    Earnings (Loss) Per Share             0.60     (0.02)     0.65      0.22
    Diluted Earnings (Loss) Per Share     0.59     (0.02)     0.65      0.22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 recognition of restructuring expenses for our 2007 efficiency
        program in the first, second and third quarters of 2007 in the
        amounts of $3.9 million, $2.7 million, and $2.3 million,
        respectively, 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; and a $9.9 million retroactive positive
        impact from the Band F Decision and a $6.7 million retroactive
        positive impact from the Direct Connect/Access Tandem Decisions,
        which both occurred in the second quarter of 2006.

    -   Adjustments in the amounts of $12.8 million for reductions to our tax
        asset valuation allowance in the second quarter of 2007, 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 of $6.0 million and $58.6 million in the
        second quarters of 2007 and 2006, respectively, to reflect a decrease
        in the value of our income tax asset as a result of a reduction in
        future income tax rates.

    -   The recognition of restructuring costs for our Transition Phase II
        ("TP2") cost reduction program in the first, second, third and fourth
        quarters of 2006 in the amounts of $3.1 million, $7.1 million,
        $9.8 million and $28.3 million, respectively, and $35.4 million in
        the fourth quarter of 2005. Included in the amount recognized in the
        fourth quarter of 2006 are costs associated with a workforce
        reduction initiative that was announced on October 2, 2006, which
        resulted in restructuring charges of $19.0 million.

    -   The recording of a provision against the carrying value of a long-
        term investment in the pre-tax amount of $4.5 million in the fourth
        quarter of 2005.

    LIQUIDITY AND CAPITAL RE

SOURCES ------------------------------- Cash Flows from Operating Activities ------------------------------------------------------------------------- $ (in millions $) 2007 2006 change ------------------------------------------------------------------------- Q3 196.5 74.8 121.7 YTD 423.3 383.6 39.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities refer to cash we generate from our normal business activities. Cash flows from operating activities for the three and nine months ended September 30, 2007 increased by $121.7 million to $196.5 million and by $39.7 million to $423.3 million, respectively, as compared to the same periods in 2006. The increase in the third quarter is due primarily to changes in working capital as a result of an increase in our accounts receivable securitization program, lower pension solvency funding, and higher EBITDA from operations. The increase year to date is due primarily to lower pension solvency funding and higher EBITDA from operations, which were offset partially by changes in working capital related to a smaller accounts receivable securitization program, net of timing of current payables. Cash Flows used in Investing Activities ------------------------------------------------------------------------- $ (in millions $) 2007 2006 change ------------------------------------------------------------------------- Q3 81.0 70.4 10.6 YTD 194.8 183.4 11.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments. In the third quarter of 2007, cash flows used in investing activities increased by $10.6 million to $81.0 million and year to date, they increased by $11.4 million to $194.8 million, as compared to the same periods in 2006, respectively. These increases were driven primarily by the timing of capital expenditures which occurred earlier in 2007 than in 2006. Free Cash Flow ------------------------------------------------------------------------- % (in millions $) Q3/07 Q3/06 change ------------------------------------------------------------------------- Free Cash Flow (Continuing Operations) 63.8 70.7 (9.8) Pension Solvency Funding (1.3) (27.6) (95.3) Restructuring Expense (2.3) (9.8) (76.5) Restructuring Capital Expenditures (6.4) (1.6) n.m. Tax Recoveries 4.1 16.4 (75.0) --------------------------- Consolidated Free Cash Flow 57.9 48.1 20.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow from continuing operations decreased by 9.8% to $63.8 million in the third quarter of 2007 as compared to the third quarter of 2006. This decrease is due primarily to the timing of capital expenditures occurring earlier in 2007 than in 2006, which was offset partly by decreased debt charges and higher EBITDA from continuing operations. Consolidated free cash flow increased by 20.4% to $57.9 million in the third quarter of 2007 year-over-year and includes items not from continuing operations as detailed in the table above. Primarily reflected in this increase are lower pension solvency funding and lower restructuring expenses, which were partly offset by lower tax recoveries mainly due to the refund of taxes in 2006 related to the Bell West gain. ------------------------------------------------------------------------- % (in millions $) YTD/07 YTD/06 change ------------------------------------------------------------------------- Free Cash Flow (Continuing Operations) 241.0 248.9 (3.2) Decision 2007-10 14.9 - n.m. Pension Solvency Funding (2.3) (69.4) n.m. Restructuring Expense (8.9) (20.0) (55.5) Restructuring Capital Expenditures (12.8) (1.9) n.m. Retroactive Direct Connect/Access Tandem Decisions - 6.7 n.m. Retroactive Band F Decision - 9.9 n.m. Tax Recoveries 13.4 16.4 (18.3) --------------------------- Consolidated Free Cash Flow 245.3 190.6 28.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow from continuing operations decreased by 3.2% to $241.0 million in the first nine months of 2007 year-over-year. This decrease reflects the timing of capital expenditures that occurred earlier in 2007 than in 2006, and higher deferred wireless costs, which were offset partly by higher EBITDA from continuing operations, lower debt charges and higher other income. Consolidated free cash flow was $245.3 million in the first nine months of the year as compared to $190.6 million in the same period of the previous year, and includes items not from continuing operations as detailed in the table above. Primarily impacting the year to date increase is decreased pension solvency funding. Cash Flows used in Financing Activities ------------------------------------------------------------------------- $ (in millions $) 2007 2006 change ------------------------------------------------------------------------- Q3 133.2 19.0 114.2 YTD 340.7 226.5 114.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings. In 2007, cash flows used in financing activities were $133.2 million in the third quarter and $340.7 million in the first nine months of the year as compared to $19.0 million and $226.5 million, respectively, in the previous year. 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. In the third quarter of 2006, we paid cash dividends of $44.3 million, and issued notes payable in the amount of $24.7 million. In the first nine months of 2007, we paid cash dividends of $128.6 million, and repaid long-term debt in the amount of $106.5 million. In the first nine months of 2006, we paid cash dividends of $132.3 million, and repaid net notes payable and long-term debt in the amount of $61.0 million and $48.1 million, respectively. In December 2006, we announced a plan to purchase for cancellation approximately $320 million worth of common shares through a normal course issuer bid (the "Issuer Bid") using the proceeds from non-core assets to fund these buybacks. To date, we have purchased $172.9 million worth of shares for cancellation, representing more than half the amount permitted under the Issuer Bid. We believe it is prudent to refrain from purchasing additional common shares for cancellation under the Issuer Bid until we have evaluated various opportunities, such as a potential national wireless initiative, presented by the rapidly changing Canadian telecommunications landscape. Purchases of shares under the Issuer Bid, or any new Issuer Bid, will be made by us when we and our Board view such purchases to be the most appropriate use of our funds. Credit Facilities ------------------------------------------------------------------------- utilized at (in millions $) capacity September 30/07 ------------------------------------------------------------------------- Commercial Paper 150.0 - Accounts Receivable Securitization 150.0 35.0 Revolving Credit Facility 200.0 88.1 ------------------------------ Total 500.0 123.1 ------------------------------------------------------------------------- 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 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, 2007, our commercial paper program was unutilized, while we utilized $35.0 million of our accounts receivable securitization program, and $88.1 million of our revolving credit facility, which represent undrawn letters of credit. Of this amount, $68.2 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 ------------------------------------------------------------------------- September December (in millions $) 30/07 31/06 ------------------------------------------------------------------------- Long-term Debt 739.4 845.9 Shareholders' Equity 1,431.2 1,505.9 ------------------------------ Total Capitalization 2,170.6 2,351.8 ------------------------------ ------------------------------ Debt to Capitalization 34.1% 36.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Our capital structure illustrates the amount of our assets that are financed by debt versus equity. Our debt to total capitalization ratio of 34.1% as at September 30, 2007 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 Dominion Bond Rating Service ("DBRS"), analyze us and assign ratings based on their assessments. We have consistently been assigned solid investment grade credit ratings. DBRS revised our credit ratings on December 13, 2006 to "BBB" on our senior debentures and "R-2 (high)" on our commercial paper, and changed its outlook to stable. On December 13, 2006, 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 22, 2007 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: ------------------------------------------------------------------------- Book Value Shares Number (in millions $) ------------------------------------------------------------------------- Common 64,631,667 1,265.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock options: ------------------------------------------------------------------------- Weighted Average Exercise Price Options Number Per Share ------------------------------------------------------------------------- Outstanding 1,868,810 $42.12 ------------------------------------------------------------------------- Exercisable 610,790 $39.48 ------------------------------------------------------------------------- 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 2007, and our 2006 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2007, and our 2006 annual MD&A, which are available on our Web site at www.mtsallstream.com. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS --------------------------------------------- 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 2007, and our 2006 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2007, and our 2006 annual MD&A, which are available on our Web site at www.mtsallstream.com. CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION ---------------------------------------------------------- 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 2007, and our 2006 annual MD&A. For additional details, please consult our interim MD&As for the first and second quarters of 2007, and our 2006 annual MD&A, which are available on our Web site at www.mtsallstream.com. RISKS AND UNCERTAINTIES ----------------------- Our risks and uncertainties remain substantially unchanged from those that were disclosed in our interim MD&As for the first and second quarters of 2007, and our 2006 annual MD&A, except as noted below. For additional details, please consult our interim MD&As for the first and second quarters of 2007, and our 2006 annual MD&A, which are available on our Web site at www.mtsallstream.com. Changes in Government Policy and CRTC Regulation The CRTC governs the telecommunications and broadcast industries in which we operate. We operate as both an incumbent local exchange carrier ("ILEC") 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. Telecommunications Policy Review On March 22, 2006, the final report (the "TPR Report") of the Telecommunications Policy Review Panel was submitted to the federal Minister of Industry and released to the public. The TPR Report is substantial, including over 120 recommendations for modernization of the telecommunications policy framework in Canada. The Government of Canada began the process of responding to, and implementing portions of, the TPR Report by issuing a Policy Direction (the "Policy Direction") to the CRTC on December 18, 2006. The Policy Direction calls on the CRTC to rely upon market forces to the greatest extent possible. As we and other competitive providers had requested, the Policy Direction further requires the CRTC, as part of its current review of essential access by competitors to network infrastructure controlled by the ILECs, to take account of the principles of technological and competitive neutrality, the potential for incumbents to exercise retail market power absent competitor wholesale access, and the impediments faced by competitors in seeking to develop competing network facilities. We are participants in the proceeding that has been commenced to review the definition of essential facilities. The federal government also has made reference to the TPR Report in its announcement of a revised framework for local forbearance and in its consultation on the auction of spectrum for advanced wireless services ("AWS"), both of which are referred to below. To date, the federal government has not disclosed its intentions with respect to further implementation of the recommendations in the TPR Report. Essential Facilities On November 9, 2006, the CRTC issued Review of regulatory framework for wholesale services and definition of essential service, Telecom Public Notice CRTC 2006-14. This is the first time since 1997 that a review of the definition of essential facilities has been undertaken. The starting point for the CRTC's review is the definition utilized by the Competition Bureau, which defines essential facility as "an input that provides the firm controlling it with the power to lessen or prevent competition in a relevant downstream market." As well, the Policy Direction mandates that the CRTC take account of the matters referred to above in its review. We have been active participants in this CRTC proceeding, which will conclude with final submissions in November 2007, with a decision expected by mid-2008. Deferral Account On February 16, 2006, the CRTC issued 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 $23 million. The final calculation of the balance to be cleared is dependent upon certain other CRTC proceedings. Groups representing consumers and Bell Canada each have been granted leave to appeal Decision 2006-9 by the Federal Court of Appeal. The appeal is expected to be argued before the end of 2007. As well, another company, Barrett Xplore Inc., had appealed this decision to the federal government and had made an application to the CRTC to review and vary its decision. However, both the appeal and the review and vary application now have been dismissed. We have submitted proposals for broadband expansion and other initiatives for the CRTC's consideration which meet the goals and objectives of Decision 2006-9, and which are consistent with our business goals. On November 30, 2006, the CRTC issued Review of proposals to dispose of the funds accumulated in the deferral accounts, Telecom Public Notice CRTC 2006-15. This public notice initiates a CRTC proceeding to review the proposals submitted by the ILECs. While the proceeding has been underway, the CRTC issued Decision 2007-50 on July 6, 2007, which approves several of the proposals that we submitted for broadband expansion. The record of the proceeding now has closed, and a decision is expected by the end of 2007 or early 2008. Local Forbearance On April 4, 2007, the federal government issued an Order in Council (the "OIC") which varies the forbearance framework previously established by the CRTC in Forbearance from the regulation of retail local exchange services, Telecom Decision CRTC 2006-15 (the "Forbearance Decision"). The OIC purports to accelerate the deregulation of retail local telephone services offered by ILECs within their operating territories by substituting the market share test established by the CRTC with a test based on the presence of competitive infrastructure; narrowing the relevant geographic market for any forbearance determination; maintaining the requirement for satisfaction of competitor quality of service indicators with some modification; and ending restrictions on winback and marketing promotional activity by ILECs in their operating territories. In response to the OIC, we were amongst the first incumbents to be granted local forbearance in the Winnipeg residential market pursuant to Telecom Decision 2007-63 dated August 3, 2007. In September of this year, we also applied for residential forbearance in Portage la Prairie, Manitoba. In a number of major urban markets across the country, the incumbents now have been forborne pursuant to the OIC. Basic Service Extension Feature ("BSEF") Charges On February 15, 2007, the CRTC issued Telecom Decision CRTC 2007-10 in which it determined that the ILECs had been incorrectly applying BSEF charges to certain competitor digital network access services requested by competitors. The CRTC ordered that the ILECs cease applying these charges prospectively and that they refund overbilled amounts. We currently are seeking recovery of applicable BSEF charges from the relevant ILECs. This decision will lower the network access costs of our Enterprise Solutions division going forward. We also will refund relevant BSEF charges that were charged by our Consumer Markets division to competitors. 2007 OUTLOOK ------------ Forward-looking statements disclaimer This outlook includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, 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 1, 2007. 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 2007, and our 2006 annual MD&A. 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 2006 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 2007, and our 2006 annual MD&A. On August 2, 2007, we increased our 2007 guidance from continuing operations for EPS to a range of $2.55 to $2.75 from the $2.30 to $2.50 level. As at November 1, 2007, we increased our EPS guidance by $0.10 to be $2.65 to $2.85. We also expect to be at the top end of the range for EBITDA and free cash flow guidance. Our outlook for 2007 is as follows: ------------------------------------------------------------------------- 2007 Financial Outlook - Continuing Operations ------------------------------------------------------------------------- August 2, 2007 November 1, 2007 ------------------------------------------------------------------------- Revenues $1.875 B - $1.925 B $1.875 B - $1.925 B EBITDA $625 M - $655 M $625 M - $655 M EPS $2.55 - $2.75 $2.65 - $2.85 Free Cash Flow $240 M - $270 M $240 M - $270 M Capital Expenditures 14% - 15% of revenues 14% - 15% of revenues ------------------------------------------------------------------------- ------------------------------------------------------------------------- Looking beyond 2007, we expect consolidated revenue and EBITDA growth in the range of 1% to 3% for 2008 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. In addition to serving our current markets, the business review we completed in 2006 identified 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. 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 2007 in a more competitive and deregulated market. In August, we were forborne in 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. Material Assumptions We made a number of assumptions in preparing our outlook and making certain other forward-looking statements, including, but 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, we assumed a growth rate of approximately 2.6% for gross domestic product for the Manitoba and national markets. 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 2007. 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 2007. 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 2006. 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: - converged IP revenue growth of 25% to 30%; - unified communications revenue growth of 45% to 50%; - wireless customer growth of 9% to 12%; - consumer high-speed Internet customer growth of 12% to 15%; - digital television revenue growth of 35% to 40%; and - residential network access services decline of 5% to 7%. 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 2007. Cost Reduction Assumptions Key to our operating and financial progress will be our restructuring activities. We expect to achieve further cost reductions in 2007 of between $40 million and $50 million. To capture these additional savings, we expect to incur further restructuring costs of $30 million to $40 million in 2007. These costs are not included in our 2007 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 2007. 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 positions 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 2007, our capital program is expected to be 14% to 15% of our revenues. Our cash requirements for 2007 include two non-recurring obligations. These consist of approximately $50 million to $60 million for restructuring programs in 2007, and based on January 1, 2007 valuations, our pension solvency funding expectation for 2007 is approximately $4 million. Cash expenditures for restructuring in 2007 will include approximately $20 million to complete our TP2 cost reduction program, and $30 million to $40 million for our 2007 efficiency initiatives. From a 2007 cash flow perspective, we anticipate funding all of our requirements, including quarterly dividend payments, capital expenditures, restructuring costs and pension contributions, from operations with no incremental borrowings. AWS Spectrum Consultation In February 2007, the federal government initiated a consultation on a framework to auction spectrum in the 2 GHz range, including AWS. On May 25, 2007, we submitted comments in that consultation and on June 27, 2007 submitted reply comments. Our submissions indicated 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. The federal government is expected to announce the auction rules soon, and to conduct the auction in early 2008. We will consider these AWS rules carefully, and will evaluate the potential business opportunities presented by them. We are currently engaged in discussions with interested parties, both financial and strategic, who could contribute significant capital and wireless expertise to a potential wireless initiative. These statements should not be construed in any way as constituting an indication that we have committed at this time to undertake a national wireless opportunity. The opportunity for a fourth national wireless player in Canada is significant and has the potential, under the right circumstances, to create significant long-term value for our shareholders. Be that as it may, we will not make any decisions about whether or how we might pursue such an opportunity until we have had ample opportunity to evaluate the auction rules and the full range of available strategic and/or financial partnership structures available to us. FOURTH QUARTER DIVIDEND The Board of Directors of MTS today declared a quarterly cash dividend of $0.65 per share. The fourth quarter dividend is payable on January 15, 2008 to shareholders of record at the close of business on December 31, 2007. 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. Notes: 1. Supplementary financial information is available in the Investors section of the MTS Web site at www.mtsallstream.com. 2. MTS's third quarter 2007 conference call with the investment community is scheduled for 4:00 p.m. Eastern time on November 1, 2007. The dial-in number is 1-800-814-4859. A live audio Webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Web site (www.mtsallstream.com). A replay of the conference call will be available until midnight November 11, 2007 and can be accessed by dialing 1-877-289-8525 or 1- 416-640-1917 (access code 2124905 followed by the number sign). The audio Webcast will be archived on MTS's Web site. This interim MD&A contains 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 1, 2007. 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 forward-looking statements, whether as a result of new information, future events or otherwise. This 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 "2007 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 MTS Allstream MTS Allstream Inc. is a wholly owned subsidiary of Manitoba Telecom Services Inc., and is one of Canada's leading national communication solutions providers, delivering innovative products and services through the Enterprise Solutions and Consumer Markets divisions. The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS 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-based communications, unified communications, 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 across Canada under the Allstream brand, and security and alarm monitoring services through AAA Alarm Systems Ltd., an affiliate of MTS Allstream which also operates in other western provinces. MTS Allstream'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. MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENT OF INCOME (unaudited) For the periods ended September 30 Three months ended Nine months ended ------------------------------------------------------------------------- (in millions, except 2007 2006 2007 2006 earnings per share) ------------------------------------------------------------------------- Operating revenues $ 475.9 $ 477.9 $ 1,416.6 $ 1,447.3 Operating expenses Operations 311.1 315.2 902.8 937.7 Restructuring and integration (Note 3) 2.3 9.8 8.9 20.0 Amortization 80.0 83.1 239.0 244.9 ------------------------------------------------------------------------- 393.4 408.1 1,150.7 1,202.6 ------------------------------------------------------------------------- Operating income 82.5 69.8 265.9 244.7 Other income 1.1 3.0 7.2 3.4 Debt charges (12.8) (15.6) (39.4) (46.3) ------------------------------------------------------------------------- Income before income taxes and discontinued operations 70.8 57.2 233.7 201.8 Income tax expense (recovery) (Note 5) Current (4.1) (5.7) (13.2) (18.2) Future 29.4 27.1 91.5 149.7 ------------------------------------------------------------------------- 25.3 21.4 78.3 131.5 ------------------------------------------------------------------------- Income before discontinued operations 45.5 35.8 155.4 70.3 Income from discontinued operations, net of tax - 4.7 - 13.0 ------------------------------------------------------------------------- Net income for the period $ 45.5 $ 40.5 $ 155.4 $ 83.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share (Note 6) Income before discontinued operations $ 0.70 $ 0.53 $ 2.38 $ 1.04 Net income $ 0.70 $ 0.60 $ 2.38 $ 1.23 ------------------------------------------------------------------------- Diluted earnings per share (Note 6) Income before discontinued operations $ 0.70 $ 0.52 $ 2.38 $ 1.03 Net income $ 0.70 $ 0.59 $ 2.38 $ 1.22 ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited) For the periods ended September 30 Three months ended Nine months ended ------------------------------------------------------------------------- (in millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 145.0 $ 51.1 $ 183.9 $ 96.6 Net income for the period 45.5 40.5 155.4 83.3 Dividends declared (42.0) (44.3) (126.3) (132.6) Purchase of outstanding shares (Note 7) - - (64.5) - ------------------------------------------------------------------------- Retained earnings, end of period $ 148.5 $ 47.3 $ 148.5 $ 47.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, (in millions) 2007 2006 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ - $ 106.7 Accounts receivable (Note 4) 180.1 215.8 Prepaid expenses 35.3 24.3 Future income taxes (Note 5) 115.0 111.4 ------------------------------------------------------------------------- 330.4 458.2 Property, plant and equipment 3,649.4 3,607.6 Accumulated amortization 2,203.0 2,148.0 ------------------------------------------------------------------------- 1,446.4 1,459.6 Other assets 321.0 297.7 Future income taxes (Note 5) 558.9 654.0 Goodwill and other intangible assets 49.6 51.8 ------------------------------------------------------------------------- $ 2,706.3 $ 2,921.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Bank indebtedness $ 5.5 $ - Accounts payable and accrued liabilities 343.0 387.0 Advance billings and payments 43.4 38.8 Current portion of long-term debt 89.7 106.5 Current portion of capital lease obligations 4.6 4.5 ------------------------------------------------------------------------- 486.2 536.8 Long-term debt 649.7 739.4 Long-term portion of capital lease obligations 17.8 18.3 Deferred employee benefits 46.2 46.4 Other long-term liabilities 72.0 71.3 Future income taxes (Note 5) 3.2 3.2 ------------------------------------------------------------------------- 1,275.1 1,415.4 ------------------------------------------------------------------------- Shareholders' equity Share capital (Note 7) 1,265.5 1,305.1 Contributed surplus 17.2 16.9 Retained earnings 148.5 183.9 ------------------------------------------------------------------------- 1,431.2 1,505.9 ------------------------------------------------------------------------- $ 2,706.3 $ 2,921.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) For the periods ended September 30 Three months ended Nine months ended ------------------------------------------------------------------------- (in millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Cash flows from operating activities Income before discontinued operations $ 45.5 $ 35.8 $ 155.4 $ 70.3 Add items not affecting cash Amortization 80.0 83.1 239.0 244.9 Future income taxes (Note 5) 29.4 27.1 91.5 149.7 Deferred wireless costs (8.9) (7.3) (26.3) (19.9) Pension funding and net pension credit (7.4) (29.6) (16.2) (75.8) Other, net 0.4 0.4 (3.3) (4.0) Changes in non-cash working capital 57.5 (34.7) (16.8) 18.4 ------------------------------------------------------------------------- Cash flows from operating activities 196.5 74.8 423.3 383.6 ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures, net (81.1) (61.4) (194.8) (174.6) Acquisition - (4.3) - (4.3) Other, net 0.1 (4.7) - (4.5) ------------------------------------------------------------------------- Cash flows used in investing activities (81.0) (70.4) (194.8) (183.4) ------------------------------------------------------------------------- Cash flows from financing activities Dividends paid (42.0) (44.3) (128.6) (132.3) Repayment of long term debt (91.9) - (106.5) (48.1) Purchase of outstanding shares (Note 7) - - (111.0) - (Repayment) issuance of notes payable, net - 24.7 - (61.0) Issuance of share capital (Note 7) 0.5 2.6 5.9 14.4 Other, net 0.2 (2.0) (0.5) 0.5 ------------------------------------------------------------------------- Cash flows used in financing activities (133.2) (19.0) (340.7) (226.5) ------------------------------------------------------------------------- Cash flows before discontinued operations (17.7) (14.6) (112.2) (26.3) Cash flows from discontinued operations - 9.1 - 18.3 ------------------------------------------------------------------------- Change in cash and cash equivalents (17.7) (5.5) (112.2) (8.0) Cash and cash equivalents (bank indebtedness), beginning of period 12.2 (12.4) 106.7 (9.9) ------------------------------------------------------------------------- Bank indebtedness, end of period $ (5.5) $ (17.9) $ (5.5) $ (17.9) ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (unaudited) (All financial amounts are in $ millions, except where noted.) 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, 2006, except as described in Note 2. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2006. 2. Changes in accounting policies Effective January 1, 2007, the Company adopted the following new accounting standards relating to financial instruments, as issued by the Canadian Institute of Chartered Accountants: Section 3855 Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; Section 1530, Comprehensive Income; and Section 3865, Hedges. These changes in accounting policy were applied in accordance with the transitional provisions contained in each of these sections. Financial Instruments Section 3855, Financial Instruments - Recognition and Measurement, and Section 3861, Financial Instruments - Disclosure and Presentation, provide guidance for the recognition, measurement, presentation and disclosure of financial assets, financial liabilities and non-financial derivatives. These standards require financial assets, liabilities and derivatives to initially be recognized at fair value. After initial recognition, financial instruments are measured at fair value, amortized cost or cost, depending on the classification of the financial instrument. These standards also require the Company to recognize and measure derivative instruments embedded in host contracts that were issued on or after January 1, 2003. The following is a summary of the Company's financial instruments, their classification and measurement basis, and the financial statement impact of adopting the new standards: - Cash and cash equivalents are classified as held-for-trading and are measured at fair value with changes in fair value recognized in net income. This classification had no impact on the Company's financial statements at the time of adoption. - Accounts receivable are classified as loans and receivables and are measured at amortized cost. This classification had no impact on the Company's financial statements at the time of adoption. - Accounts payable, long-term debt and other long-term liabilities are classified as other liabilities and are measured at amortized cost. This classification had no impact on the Company's financial statements at the time of adoption. The carrying values of cash and cash equivalents equal fair value. The carrying values of accounts receivable, accounts payable and other long-term liabilities approximate their fair values. The fair value of short-term financial instruments approximates their carrying amounts due to their short-term nature. The fair value of long-term debt, including the current portion, as at September 30, 2007 is $739.4 million. 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. The Company has elected to account for deferred costs associated with the issuance of long-term debt as a reduction in the carrying value of long-term debt. Upon initial application of this change in amortization method, the impact on the Company's financial statements was insignificant. These costs, which are amortized over the life of long-term debt using the effective interest rate method, are included in debt charges. As at September 30, 2007, total deferred costs presented as a reduction of long-term debt are $2.2 million (December 31, 2006 - $2.2 million). 2. Changes in accounting policies (continued) Comprehensive Income Section 1530, Comprehensive Income, establishes standards for the reporting and display of comprehensive income. The Company does not have any items that required separate recognition outside of net income, and, as a result, the adoption of this section did not have any impact on the Company's financial statements. Hedges Section 3865, Hedges, establishes standards on when and how hedge accounting may be applied. Hedge accounting under this section is optional. The Company has elected not to designate any of its foreign currency forward contracts as accounting hedges under Section 3865, Hedges. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated balance sheet as an asset or liability, with changes in fair value recognized in the consolidated statement of income. The Company did not have any outstanding hedges in place as at January 1, 2007, so the adoption of this section did not have any impact on the Company's financial statements. 3. Restructuring and integration During the three and nine months ended September 30, 2007 and 2006, the Company recorded restructuring and integration expenses as follows: --------------------------------------------------------------------- Three months ended September 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total --------------------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Integration - 5.8 - 2.2 - 1.8 - 9.8 Restructuring 0.2 - 2.1 - - - 2.3 - --------------------------------------------------------------------- 0.2 5.8 2.1 2.2 - 1.8 2.3 9.8 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Nine months ended September 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total --------------------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Integration - 10.3 - 7.9 - 1.8 - 20.0 Restructuring 2.3 - 6.6 - - - 8.9 - --------------------------------------------------------------------- 2.3 10.3 6.6 7.9 - 1.8 8.9 20.0 --------------------------------------------------------------------- --------------------------------------------------------------------- Integration In the fourth quarter of 2005, the Company launched the second phase of its integration and restructuring program to integrate its operating divisions and corporate functions. This followed the first phase of integration and restructuring, which was completed in 2005. This cost reduction program includes both workforce reduction initiatives and activities to improve network access costs and further integrate compatible functions and processes. While the Company has completed substantially all initiatives under the second phase of integration and restructuring, some employee departures will continue in 2007. The outstanding liability as at December 31, 2006 relating to the workforce reduction element of the program was $23.3 million. In the nine months ended September 30, 2007, payments of $18.9 million were applied against this liability, leaving an outstanding liability of $4.4 million as at September 30, 2007. 3. Restructuring and integration (continued) Restructuring In the fourth quarter of 2006, the Company commenced a restructuring program in order to improve efficiencies and reduce operating costs. This program, which will continue throughout 2007, is estimated to cost approximately $30 million to $40 million. These costs include severance and other employee-related expenses, as well as costs to automate and consolidate certain systems and processes. In the fourth quarter of 2006, the Company accrued expenses of $8.5 million relating to a workforce reduction element of the program. The outstanding liability as at December 31, 2006 relating to the workforce reduction element of the program was $8.5 million. In the nine months ended September 30, 2007, payments of $3.3 million were applied against this liability, leaving an outstanding liability of $5.2 million as at September 30, 2007. 4. 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 (2006 - $0.2 million) has been recognized by the Company as at September 30, 2007. 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, 2007, the Company had received $35 million (2006 - $123.0 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 $45.2 million (2006 - $157.3 million) and the reserve accounts of $10.2 million (2006 - $34.3 million). During the three and nine months ended September 30, 2007, the Company recognized a pre-tax loss of $0.4 million in each period (2006 - pre-tax gain of $0.2 million and a pre-tax loss of $1.0 million, respectively) on the sale of accounts receivable, which is recorded in other income. The following table is a summary of certain cash flows received and paid to the trust for the three and nine months ended September 30, 2007 and 2006: --------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 --------------------------------------------------------------------- 2007 2006 2007 2006 ---------------------------------------- Proceeds from new securitizations - - - 150.0 Proceeds from collections reinvested in revolving period securitizations 376.0 416.0 476.0 803.0 --------------------------------------------------------------------- --------------------------------------------------------------------- The key assumptions used to determine the loss on sale of receivables and the fair values attributed to the retained interest for the three and nine months ended September 30, 2007 and 2006, are as follows: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Annual discount rate 5.52% 4.51% Weighted average life of receivables sold (days) 37 36 Credit loss ratio 0.92% 0.76% Servicing fee liability 1.0% 1.0% --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Income taxes A reconciliation of the statutory income tax rate to the effective income tax rate is as follows: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Combined basic federal and provincial statutory income tax rate 35.7% 35.9% Change in substantively enacted tax rates 2.6 29.0 Reduction of Valuation Allowance (5.5) - Other items 0.7 0.3 --------------------------------------------------------------------- Effective tax rate 33.5% 65.2% --------------------------------------------------------------------- --------------------------------------------------------------------- The balances of future income taxes as at September 30, 2007 and December 31, 2006 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: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Non-capital loss carryforwards 411.4 584.2 Property, plant and equipment 394.5 330.4 Other (40.3) (44.7) --------------------------------------------------------------------- Total future income tax asset 765.6 869.9 Valuation allowance (94.9) (107.7) --------------------------------------------------------------------- Net future income tax asset 670.7 762.2 --------------------------------------------------------------------- --------------------------------------------------------------------- Future income taxes are comprised of: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Current future income tax asset 115.0 111.4 Long-term future income tax asset 558.9 654.0 Long-term future income tax liability (3.2) (3.2) --------------------------------------------------------------------- Net future income tax asset 670.7 762.2 --------------------------------------------------------------------- --------------------------------------------------------------------- During the nine months ended September 30, 2007, the Company recovered $3.8 million in cash income taxes (2006 - recovered $2.9 million). As at September 30, 2007, the Company had non-capital loss carryforwards available to reduce future years' taxable income, which expire as follows: --------------------------------------------------------------------- --------------------------------------------------------------------- 2009 1,196.8 2010 and beyond 8.3 --------------------------------------------------------------------- 1,205.1 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. Earnings per share reconciliation The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Net income - basic and diluted Income before discontinued operations 155.4 70.3 Income from discontinued operations, net of tax - 13.0 --------------------------------------------------------------------- Net income 155.4 83.3 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average shares outstanding (in millions) Weighted average number of shares outstanding - basic 65.2 68.0 Dilutive effect of outstanding stock options 0.2 0.1 --------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 65.4 68.1 --------------------------------------------------------------------- --------------------------------------------------------------------- Basic earnings per share ($) Income before discontinued operations 2.38 1.04 Discontinued operations - 0.19 --------------------------------------------------------------------- Net income 2.38 1.23 --------------------------------------------------------------------- --------------------------------------------------------------------- Diluted earnings per share ($) Income before discontinued operations 2.38 1.03 Discontinued operations - 0.19 --------------------------------------------------------------------- Net income 2.38 1.22 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Share capital As at September 30, 2007, share capital consists of 64,631,667 issued and outstanding Common Shares (December 31, 2006 - 66,817,707). During the nine months ended September 30, 2007, the Company purchased 2,377,500 Common Shares for cancellation for cash consideration of $111.0 million pursuant to its normal course issuer bid. The excess of the purchase price over the stated capital in the amount of $64.5 million was charged to retained earnings. During the nine months ended September 30, 2007, 191,460 stock options to purchase Common Shares were exercised for cash consideration of $5.9 million, of which $6.9 million was credited to share capital and $1.0 million was charged to contributed surplus. 8. Foreign currency forward contracts 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, 2007, the Company has outstanding foreign currency forward contracts to purchase $15.1 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 $0.9 million loss at September 30, 2007. These contracts mature periodically beginning in October 2007 and ending in December 2007. 9. Employee future benefits The Company's total benefit cost 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, 2007 are $0.2 million and $0.6 million, respectively. 10. Segmented information As at September 30, 2007, 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 2006, the Company announced that it was adopting this organizational structure, and effective January 1, 2007, has changed the reporting structure of its divisions for both revenues and expenses to match this organizational structure. Accordingly, segmented information for 2007 and 2006 is provided under this new basis of segmentation. 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. The following table provides further segmented information: --------------------------------------------------------------------- Three months ended September 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 ------------------------------------------------------- Operating revenue External 204.8 197.1 271.1 280.8 - - 475.9 477.9 Internal 0.1 - 0.1 - 8.0 8.5 8.2 8.5 EBITDA 101.0 87.8 60.9 66.8 0.6 (1.7) 162.5 152.9 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Nine months ended September 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 ------------------------------------------------------- Operating revenue External 600.7 596.0 815.9 851.3 - - 1,416.6 1,447.3 Internal 0.3 - 0.1 - 24.1 25.6 24.5 25.6 EBITDA 297.2 281.1 202.9 209.2 4.8 (0.7) 504.9 489.6 --------------------------------------------------------------------- --------------------------------------------------------------------- Reconciliation of net income is as follows: --------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 --------------------------------------------------------------------- 2007 2006 2007 2006 --------------------------------------------------------------------- Consolidated net income Total EBITDA 162.5 152.9 504.9 489.6 Amortization (80.0) (83.1) (239.0) (244.9) Other income 1.1 3.0 7.2 3.4 Debt charges (12.8) (15.6) (39.4) (46.3) Income tax expense (25.3) (21.4) (78.3) (131.5) --------------------------------------------------------------------- Income before discontinued operations 45.5 35.8 155.4 70.3 Income from discontinued operations, net of tax - 4.7 - 13.0 --------------------------------------------------------------------- 45.5 40.5 155.4 83.3 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Subsequent event On October 17, 2007, the provisions for the provincial corporate income tax rate reductions in the 2007 Manitoba Provincial Budget received first reading. The provincial corporate income tax rate reductions will result in a decrease in the Company's future tax asset and an increase in future tax expense of approximately $9 million. 12. Comparative figures The prior period figures have been reclassified when necessary to conform to the current year's presentation for discontinued operations and financial instruments. %SEDAR: 00003357E

For further information:

For further information: Investor contact; Ian Chadsey, Vice-President,
Investor Relations, (204) 941-8283, investor.relations@mtsallstream.com; Media
contact; Greg Burch, Manager, Corporate Communications, (416) 345-3576, or
(204) 941-8576, media.relations@mtsallstream.com

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