MTS Reports Second Quarter Results



    Strong Growth in Earnings Leads to an Increase in EPS Guidance

    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.

    
    -   Earnings per share ("EPS") from continuing operations increased by
        16.2% year-over-year
        -  EPS outlook guidance increased by 11% to $2.55 to $2.75 range
        -  EBITDA and free cash flow expected to be at the high end of their
           guidance ranges
    -   Growth services revenues rose by 12.3%
        -  contributed 39% of total second quarter revenues as compared to
           35% last year
    -   Double-digit revenue growth in wireless, high-speed Internet, digital
        television, converged IP services, and unified communications
    -   Declared third quarter dividend of $0.65 per share, providing one of
        the highest yields on the TSX
    

    WINNIPEG, Aug. 2 /CNW/ - Manitoba Telecom Services Inc. ("MTS" or the
"Company") (TSX: MBT) today announced strong results with better than expected
earnings for the second quarter of 2007. The Board of Directors declared the
third quarter cash dividend at $0.65 per share which is payable on October 15,
2007 to shareholders of record on September 28, 2007.
    "Our results reflect the momentum this company has built in the
marketplace over the first six months of 2007," said Chief Executive Officer,
Pierre Blouin. "We have built a stronger, more competitive business, with an
improved focus on our customers. We have now achieved six consecutive quarters
of solid results, and continue to deliver on our plans to evolve and grow our
business while delivering significant value to our shareholders. This has
given us the confidence to announce today that we are increasing our 2007 EPS
guidance range and expect to be at the high end of our EBITDA(1) and free cash
flow(2) guidance ranges."
    The Company has increased its 2007 guidance from continuing operations
for EPS to $2.55 to $2.75 from the $2.30 to $2.50 level, and expects to be at
the high end of guidance for EBITDA and free cash flow as a result of strong
performance from its operations. 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.
    EPS from continuing operations(3) increased by 16.2% to $0.79 per share
in the second quarter of 2007 and by 17.6% to $1.54 in the first six months of
2007 on a year-over-year basis. This was a result of higher EBITDA, higher
other income, lower debt charges, lower amortization and fewer shares
outstanding.
    In the second quarter, EBITDA from continuing operations increased by
2.0% to $170.5 million, and for the first six months of 2007, EBITDA increased
by 1.6% to $335.5 million as compared to last year. The higher EBITDA reflects
a strong increase in growth services and lower expenses from cost reduction
initiatives. Overall, these solid results contributed to free cash flow of
$85.6 million and $177.2 million for the quarter and six month period,
respectively.
    Revenues from continuing operations declined by 1.0% to $474.1 million in
the second quarter of 2007, and by 1.9% to $941.5 million in the first six
months of the year as compared to the same periods last year. They reflect the
business strategy to increase the growth services areas of the business,
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 from the network of MTS Allstream Inc.
("MTS Allstream") to their own networks. If the revenues from Rogers and AT&T
were excluded, second quarter revenue growth from continuing operations would
be positive at 1.7%.
    Growth services revenues, which include wireless, high-speed Internet,
digital television, converged Internet protocol ("IP") and unified
communications services, were up by 12.3% to $186.2 million for the second
quarter of 2007, and by 11.0% to $360.1 million for the first six months of
2007. Growth services contributed approximately 39% of total revenue in the
second quarter of 2007 and 38% in the first six months, as compared to 35% and
34%, respectively, for the same periods last year.

    
    FINANCIAL HIGHLIGHTS
    -------------------------------------------------------------------------
                                three months             six months
    in millions of dollars,    ended June 30  change   ended June 30  change
    except per share amounts  ---------------         ---------------
                                2007  2006(4)           2007  2006(4)
    -------------------------------------------------------------------------
    Continuing Operations
    -------------------------------------------------------------------------
      EPS                       0.79    0.68   16.2%    1.54    1.31   17.6%
    -------------------------------------------------------------------------
      EBITDA                   170.5   167.1    2.0%   335.5   330.3    1.6%
    -------------------------------------------------------------------------
      Free Cash Flow            85.6    91.3   (6.2%)  177.2   178.2   (0.6%)
    -------------------------------------------------------------------------
      Growth Services Revenues 186.2   165.8   12.3%   360.1   324.3   11.0%
    -------------------------------------------------------------------------
      Legacy Services Revenues 287.9   313.3   (8.1%)  581.4   635.2   (8.5%)
    -------------------------------------------------------------------------
      Revenues                 474.1   479.1   (1.0%)  941.5   959.5   (1.9%)
    -------------------------------------------------------------------------
    Reported
    -------------------------------------------------------------------------
      Basic EPS                 0.88   (0.02)    n.m.   1.68    0.63     n.m.
    -------------------------------------------------------------------------
      EBITDA                   172.2   176.6   (2.5%)  342.4   336.7    1.7%
    -------------------------------------------------------------------------
      Free Cash Flow            86.9    78.6   10.6%   187.4   142.5   31.5%
    -------------------------------------------------------------------------
      Revenues                 474.1   489.0   (3.0%)  940.7   969.4   (3.0%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.
    

    MTS's reported EPS in the second quarter of 2007 was $0.88 as compared to
a loss of $0.02 in the second quarter of 2006 and was $1.68 in the first six
months of 2007 as compared to $0.63 in the first six months of 2006. Included
in the reported EPS for the second quarter and first six months of 2007 are
items that are not from continuing operations(*).
    Reported EBITDA in the second quarter of 2007 was $172.2 million as
compared to $176.6 million in the second quarter of 2006, and was
$342.4 million in the first six months of 2007 as compared to $336.7 million
in the first six months of 2006. Free cash flow increased by 10.6% to $86.9
million from $78.6 million in the second quarter of 2007, and by 31.5% to
$187.4 million from $142.5 million in the first six months of 2007 as compared
to similar periods in 2006.
    "These results highlight the ability of our business to deliver stable
and predictable dividends to our shareholders, which represents a yield that
is among the highest on the Toronto Stock Exchange," said Wayne Demkey, Chief
Financial Officer.
    The Company also provided an update on its normal course issuer bid (the
"Issuer Bid") to acquire up to 6,807,624 Common Shares, or approximately 10%
of the public float, for cancellation. In total, as at August 1, 2007, MTS had
purchased 3.7 million Common Shares for cancellation at a cost of
approximately $172.9 million since the Issuer Bid commenced. The Issuer Bid
commenced on December 18, 2006, and will end no later than December 17, 2007.
The Company has completed approximately 54% of its $320 million share buyback
program that was announced on December 13, 2006.

    
    ----------------------
    (*) 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 second quarter and the
        first six 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, integration
        costs, the retroactive adjustment related to the Band F Decision(5)
        and the adjustment related to the Direct Connect/Access Tandem
        Decisions(6). Refer to MTS's second 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.
    

    DIVISIONAL HIGHLIGHTS

    The Company's Enterprise Solutions division once again delivered solid
results and stable margins in the second quarter of 2007. This division
continues to leverage improvements in its market focus, cost management and
leadership in IP-based products, as well as progress in the mid-market
segment. Next generation data revenues, which include converged IP and unified
communications services, climbed by 17.3% as compared to the second quarter of
2006, while its IP-virtual private network customer count increased to 212,
reflecting the continued strength of demand for innovative next generation
IP-based services offered to business customers. The Enterprise Solutions
division won $94 million in new contracts in the second quarter of 2007. New
business contracts included a contract with the Canadian Payments Association
("CPA"), Brink's Canada Limited ("Brink's"), Ontario's Community Care Access
Centres ("CCACs"), The City of Winnipeg and recently, the Government of
Quebec. The division also was recognized for outstanding performance and
partnership achievements by Juniper Networks, Inc. ("Juniper").
    Second quarter performance in the Company's Consumer Markets division
reflected the continued prominence of growth services within the business, and
the strategy of bundling these services together with local service to help
drive success in local competition. Wireless, high-speed Internet and digital
television services once again delivered double-digit growth in subscribers
and revenues as compared to the same period last year. Wireless customers grew
by 11.1%, with revenues increasing by 17.5%, and high-speed Internet customers
increased by 17.4%, with revenues increasing by 11.3%. Digital television
customers increased by 25.5%, with revenues increasing by 31.6% as compared to
the second quarter of 2006. The Consumer Markets division's residential access
lines have been steadily improving as the declines in line losses are
diminishing as compared to previous quarters.
    "These results continue to demonstrate our ability to compete on value,
as opposed to price, and preserving margins while leveraging a strategy that
combines a suite of products no competitor in the market can match," said Mr.
Blouin.
    "Throughout the year, we have been engaging our stakeholders in the
important regulatory discussions which continue to shape our industry," he
added. "We have demonstrated that competitor quality of service metrics
required for deregulation are achievable. With our recent filing of these
metrics for the Winnipeg market, we expect Winnipeg to become forborne
shortly. We have also provided a strong voice in favour of greater competition
in the national wireless sector, where pricing and penetration trends are
unfavourable to customers across the country. Given the recent announced
planned privatization and potential consolidation within the industry, we are
optimistic that the government will consider the need for more competition
very carefully as it prepares for the auction of new wireless licences in
early 2008."

    2007 OUTLOOK

    The Company is increasing its 2007 guidance from continuing operations
for EPS to $2.55 to $2.75 from the $2.30 to $2.50 level as a result of strong
performance from its operations along with expected lower amortization, lower
debt charges and higher other income. The outlook for 2007 is as follows:

    
    -------------------------------------------------------------------------
               2007 Financial Outlook - Continuing Operations
    -------------------------------------------------------------------------
                            December 13, 2006         August 2, 2007
    -------------------------------------------------------------------------
    Revenues                $1.875 B to $1.925 B      $1.875 B to $1.925 B
    EBITDA                  $625 M to $655 M          $625 M to $655 M
    EPS                     $2.30 to $2.50            $2.55 to $2.75
    Free Cash Flow          $240 M to $270 M          $240 M to $270 M
    Capital Expenditures    14% to 15% of Revenues    14% to 15% of Revenues
    -------------------------------------------------------------------------
    

    OTHER DEVELOPMENTS

    Enterprise Solutions division announcements

    MTS Allstream signs $17 million contract with Government of Quebec

    On July 31, 2007, MTS Allstream announced that it had signed a five-year
$17 million contract for the provision of primary rate interface access
services to the Government of Quebec. These services will be used by
ministries, organizations, and potentially other clients such as health, 
education and municipal networks. The contract involves approximately 31,000
phone numbers, 800 analog lines, and 500 network accesses for the ministries,
organizations, and health facilities across the province of Quebec.

    Brink's selects MTS Allstream to implement MPLS solution

    On May 17, 2007, MTS Allstream announced that it had secured a three-year
$1 million contract to implement and manage a 23-site North American
multiprotocol label switching ("MPLS") network for Brink's. Another testament
of MTS Allstream's ability to collaborate and deliver compelling IP-based
solutions to its customers, this MPLS network provides Brink's with a more
robust, scalable, IP-converged network that gives the flexibility of enhancing
its network capabilities as its business grows and needs change. This
three-year contract, which encompasses deployment to over 50% of Brink's
Canadian offices and its head office in Mississauga, Ontario, expands upon MTS
Allstream's five-year existing relationship with Brink's. Brink's local and
long distance voice services also are provided by MTS Allstream.

    MTS Allstream to deploy managed MPLS solution for Canadian Payments
    Association

    On May 30, 2007, MTS Allstream announced that it had secured a three-year
$2.5 million contract to design, build, deploy and manage an MPLS network for
the CPA. This network, which will span 15 sites across Canada, is one of two
that will be used in the deployment of the CPA's truncation and electronic
cheque presentment project - an initiative that will modernize the clearing
process for Canadian cheques. In the current clearing process, almost
five million paper cheques are transported between Canadian financial
institutions each business day. Under the new process, financial institutions
that receive cheques on deposit will capture images of the front and back of
these items and transmit them via a secure MPLS network to the financial
institutions on which they are drawn - eliminating the need to deliver the
paper cheques. This contract speaks to the integrity of MTS Allstream's
network, and its 20-year history of building complex connectivity solutions
that support the development of leading-edge communications solutions for
customers.

    MTS Allstream IP telephony solutions to enhance health care service in
    Ontario

    On June 5, 2007, MTS Allstream announced that it had been named the
telecommunications Vendor of Record for Ontario's 14 CCACs, which help
individuals navigate the province's array of health services. MTS Allstream
will provide IP telephony equipment and services that will enhance the ability
of the CCACs to provide efficient, quality care to a rapidly growing
population. The IP telephony solution, based on Mitel Networks communication
platforms, will provide the CCACs with mobility and virtual environments,
tools for improved pandemic planning and responsiveness, and enhanced call
centre services and infrastructure. It also will help the CCACs reduce
communication and infrastructure costs, streamline network management, and
respond quickly to changing client and business needs.

    MTS Allstream honoured by Juniper

    On June 6, 2007, MTS Allstream announced that it had been named a
Canadian J-Partner of the Year award winner by Juniper at the organization's
annual J-Partner Summit in Las Vegas, Nevada. MTS Allstream and Juniper have
had an alliance since 2001, and this collaboration enhances MTS Allstream's
security solutions and strengthens its position in the market. This award is
one of six regional J-Partner awards that were awarded based on significant
partnership achievements of growth and balanced performance across multiple
Juniper product lines and underscores the successful alliance of MTS Allstream
and Juniper.

    MTS Allstream recognized by Websense with All-Star Partner award

    On July 13, 2007, MTS Allstream announced that it had been recognized by
Websense, Inc. ("Websense") with a 2007 "All-Star Partner" Award for its
success in helping clients with their information technology ("IT") security
needs. The award was presented at the Websense Partner Conference at the Lake
Las Vegas Resort in Henderson, Nevada. Out of more than 2,000 channel partners
in the Americas, only 16 Websense channel partners were awarded this year. The
award recognizes channel partners based on a variety of criteria including new
business development, sales certifications, engineering certifications,
product competencies and commitment to Websense. MTS Allstream has been a
successful advocate of Websense's innovative security technology and has shown
leadership in helping solve tough IT security issues.

    MTS Allstream honoured by Mitel for outstanding business performance

    On July 25, 2007, MTS Allstream announced that it received two awards
from Mitel(R): "Solution Provider of the Year for Canada" and "Highest
Application Sales". The awards were presented at the Mitel Forum 2007 awards
dinner at the Bellagio Hotel and Casino in Las Vegas. MTS Allstream and Mitel
have worked together collaboratively for more than 25 years and these awards
are a testament to the outstanding accomplishments and enthusiasm forged
through their relationship. As a result of this relationship, MTS Allstream
provides its customers with advanced unified communications solutions such as
IP telephony, mobility, collaboration and contact centres. As Mitel's
"Solution Provider of the Year for Canada", MTS Allstream demonstrates
business performance, experience, and high levels of sales achievement and
customer satisfaction that most closely exemplifies what Mitel seeks in its
solution providers. The distinction of "Highest Application Sales" honours MTS
Allstream for its demonstrated ability to attain the highest in net revenue
based on selling Mitel's award-winning portfolio of unifying business
communications applications.

    MTS Allstream helps develop revolutionary parking solution for Calgary
    Parking Authority

    On July 26, 2007, MTS Allstream announced that the Calgary Parking
Authority ("CPA") launched its proprietary ParkPlus System(TM) ("ParkPlus"),
in which MTS Allstream was the prime development partner and solution
integrator. MTS Allstream worked with two vendors, Cale Systems of Stockholm,
Sweden and Tannery Creek Systems of Concord, Ontario to develop the unique
parking solution which is one of the world's most innovative solar-powered pay
parking systems. ParkPlus will improve street parking in downtown Calgary,
Alberta by replacing existing parking meters with state-of-the-art,
solar-powered pay machines and developing new street parking zones that will
revolutionize parking in Calgary's downtown by adding additional short stay
parking spots with convenient payment methods. ParkPlus also enforces parking
payments through photos and vehicle GPS, thereby eliminating the need for
paper on windshields. In addition, cell phone parkers pay only for the time
that is actually used, can be notified when their time is running out, and are
able to pay using interactive voice recognition technology. There is no
solution with this breadth and technology existing in the world today and MTS
Allstream is proud to have been a lead partner on this initiative as it
represents new standards for parking convenience and simplicity, as well as
respect for the environment.

    Consumer Markets division announcements

    MTS TV adds TSN HD

    On May 4, 2007, MTS Allstream announced that MTS high definition ("HD")
television subscribers now can enjoy TSN's sports broadcast in stunning HD
quality. Sports is the driving force behind the rise in popularity of HD
television and TSN is Canada's sports leader in HD with more overall sports
coverage, hockey coverage, Canadian and internationally-produced sports
events, and total hours of HD sports action than any other broadcaster in
Canada.

    Customize your MTS TV package over the Web

    On May 7, 2007, MTS Allstream announced the availability of an
interactive Web-based service that enables its customers to customize their
MTS TV channel packages over the Internet. MTS TV customers can experience the
ease and freedom of changing and adding new channel packages over the Web with
"MTS TV Channel Changes". Changes can be made whenever a customer wants to
make them - 24 hours a day and 7 days a week. All it takes is an Internet
connection. As changes are made to their MTS TV subscription choices,
customers see what it means for their monthly bill right on their Web browser
and within minutes, the channel changes are available on their MTS TV
interactive program guide. This customer service improvement establishes, yet
again, that MTS TV is the clear leader when it comes to delivering digital
television service.

    Whiteshell Provincial Park and Lake of the Woods areas get MTS high-speed
    wireless data service

    On May 7, 2007, MTS Allstream announced the launch of evolution-data
optimized ("EV-DO") service for its wireless customers in Lac du Bonnet,
Falcon Lake and Jessica Lake (in Whiteshell Provincial Park in Manitoba), and
in Clearwater Bay/Deception Bay (in Lake of the Woods in Ontario). These
customers now can enjoy five-times faster wireless e-mail, downloads, Web
browsing, gaming, streaming audio, and streaming video on their EV-DO-enabled
wireless devices and with a PC card or a data cable connecting their wireless
device to their computer, they will also be able to get high-speed Internet
access - five-times faster, on average, than traditional wireless download
speeds and 10-times faster than dial-up speeds - on their laptops using the
wireless network. MTS Allstream's cellular network covers 97% of Manitoba's
population, and its EV-DO high-speed wireless data network will cover 72% of
Manitobans by the end of 2007.

    MTS expands wireless coverage in Riverton area and Southeast Manitoba

    On May 7, 2007, MTS Allstream announced that its wireless customers now
will be able to use their cell phones in more areas of Manitoba. New digital
wireless sites in Manitoba will provide digital cellular coverage in the areas
of Riverton and Vita, and coverage soon will be provided in the La Broquerie
area. As well, customers with EV-DO-enabled devices in these areas soon will
be able to access EV-DO wireless services, and with a data cable or PC card,
access high-speed Internet on their laptops using the wireless network. MTS
Allstream is committed to investing in its network to deliver advanced
communications services to more customers and communities. This year alone, it
is investing approximately $15 million to provide digital wireless coverage
and high-speed wireless data service for customers across Manitoba.

    The City of Winnipeg awards contract for provision of Wi-Fi wireless
    Internet service to MTS Allstream

    On June 5, 2007, The City of Winnipeg announced that the five-year
contract for the provision of Wi-Fi wireless Internet service at all
20 branches of the Winnipeg Public Library and the Pan Am Pool had been
awarded to MTS Allstream. This new service will increase the number of Wi-Fi
wireless Internet Hotspots across Winnipeg, Manitoba, build on the free
Internet access available from the Library's computer workstations, provide
greater access to city e-government services, and include toll-free customer
service and support by MTS Allstream. By early fall 2007, citizens, business
people and visitors to Winnipeg will be able to access this service using
their own wireless-enabled equipment from these city facilities. Through this
contract, MTS Allstream will provide a portion of the revenues back to The
City of Winnipeg to support ongoing technology needs and the purchase of
library materials. Users of the Wi-Fi wireless Internet service will also get
free access to The City of Winnipeg e-government services through the MTS
portal.

    MTS Allstream expands high-speed Internet service in Manitoba

    On June 28, 2007, MTS Allstream announced further expansion to its
high-speed Internet service in Manitoba. Already the most comprehensive
Internet service provider in Manitoba - providing high-speed Internet service
to 165 communities and 85% of Manitoba's population - MTS Allstream added the
communities of Gillam, Oak River, Cypress River, Rosenort, Darlingford,
Oakburn, Pierson and Libau to its expansive network.

    Small businesses in Vancouver have a better choice

    On July 16, 2007, MTS Allstream announced the launch of Allstream Small
Business, a group of unique, easy to understand and affordable communications
services packages tailored to suit the needs of small business in the
Vancouver, British Columbia area. These packages redefine telecommunications
the way small business redefines work: there is no IT department or no human
resources department - likely, the same person performs all of these
functions, and more. Allstream Small Business is tailor-made to support such
an environment, and provides a real telecommunications choice which allows the
customer to save money.

    MTS Allstream begins $3 million project in Portage la Prairie

    On July 17, 2007, MTS Allstream announced that it had started a
$3 million network improvement program in Portage la Prairie, Manitoba. This
program involves the installation of fibre optic cables feeding 22 high-speed
Internet network cabinets at various locations throughout Portage la Prairie,
as well as improvements to the existing network lines connecting homes to MTS
Allstream's central network equipment in the city. This infrastructure will
increase the speed and overall quality of Internet service for customers in
the area.

    NBC Universal content now available on MTS Video On Demand

    On July 25, 2007, MTS Allstream announced a long-term licence agreement
with NBC Universal to provide hit Universal Pictures' films and specials for
MTS Video On Demand. With the touch of button on their remote control, MTS
customers can enjoy a variety of award-winning movies and content from NBC
Universal. The addition of NBC Universal to MTS TV's ever-growing Video On
Demand library continues to build on an outstanding digital television service
that other providers in North America are striving to follow.

    Corporate announcements

    MTS Allstream applies for local deregulation in Winnipeg

    On May 8, 2007, MTS Allstream announced that it had applied to the
Canadian Radio-television and Telecommunications Commission ("CRTC") for
residential local telephone service deregulation, known as forbearance, in
Winnipeg. As part of its application, MTS Allstream included evidence
demonstrating the necessary competitor presence and indicating its intention
to achieve the requisite quality of service ("QoS") metrics, as required by
the federal government's recent Order-in-Council which established the rules
for local forbearance. These rules allow incumbent telecommunications carriers
to apply to the CRTC for local telephone deregulation in the consumer market
for any community where customers can choose between at least three service
providers with their own network infrastructure, one of which can be a
wireless provider, and where the provider meets specific QoS measures for six
months.

    MTS Allstream meets forbearance quality of service requirements in
    Winnipeg market

    On June 15, 2007, MTS Allstream filed evidence with the CRTC confirming
that it has met the requisite QoS criteria for deregulation of the residential
local telephone market in Winnipeg. This QoS evidence is the last information
required to obtain forbearance or deregulation in this market. With the filing
of this evidence, MTS Allstream became the first incumbent local exchange
carrier to fully meet all the requirements for deregulation.

    MTS Allstream encourages auction rules that promote greater wireless
    competition

    On May 25, 2007, MTS Allstream filed a submission in response to the
federal government's consultation on the auction framework for advanced
wireless services ("AWS") spectrum, which encouraged the government to set
auction rules that will allow the entry of new wireless competitors. In its
submission, MTS Allstream explained that Canadians are paying higher prices
for wireless services that are less advanced than those available to people in
other countries, while the pace of innovation increasingly lags as new
technology becomes available to other countries first. MTS Allstream's
submission also stated that the federal government must seize the opportunity
presented by auctioning new spectrum licences to ensure that barriers to entry
by new competitors are removed. Without the federal government ensuring
dedicated AWS spectrum for new entrants to bid on, and mandating reasonable
roaming arrangements and tower sharing, the existing national wireless
carriers could block any further competition. New entrants to the wireless
marketplace will spur more competition, greater investment and speedier
roll-out of innovative new services for Canadians. As a leading regional
wireless provider in Manitoba, MTS Allstream is well-positioned to illustrate
the case for greater wireless competition on a national basis.

    MTS Allstream confirms call for greater wireless competition

    On June 27, 2007, MTS Allstream announced that it had filed its reply in
relation to the federal government's consultation on the auction framework for
AWS spectrum. This reply responded to first round submissions, and again
emphasized the need for greater competition and innovation in the nation's
wireless industry and the crucial role of government in enabling entry by new
wireless competitors. This reply also demonstrated that designated spectrum
for new entrants, mandated roaming and tower sharing, are the
internationally-accepted and proven conditions for new wireless entry and
truly competitive market forces.

    
    NOTES

    1.  MTS's interim MD&A for the six months ended June 30, 2007 and
        supplementary financial information are available in the Investors
        section of the MTS Web site at www.mtsallstream.com.
    2.  MTS's second quarter 2007 conference call with the investment
        community is scheduled for 4:30 p.m. Eastern time on August 2, 2007.
        Investors are invited to listen to the conference call. The dial-in
        number is 1-800-732-0232. 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 August 12, 2007
        and can be accessed by dialing 1-877-289-8525 or 1-416-640-1917
        (access code 21238471 followed by the number sign).
    

    About Manitoba Telecom Services Inc.

    Manitoba Telecom Services Inc. is one of Canada's leading national
communication solutions providers, delivering innovative products and services
through its Enterprise Solutions and Consumer Markets divisions. The
Enterprise Solutions division, which operates under the Allstream brand
nationally and under the MTS 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 security and alarm
monitoring services through AAA Alarm Systems Ltd., a subsidiary of MTS which
also operates in other western provinces. MTS'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
("statements") about our corporate direction, 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
August 2, 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 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.
    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 (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 and second 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 second quarter 2007 interim MD&A for the definition of
        free cash flow.
    (3) Refer to MTS's second 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 June 30,
    2007 is as at August 2, 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 six months ended June 30, 2007 updates the
    information contained in our first quarter 2007 interim MD&A and 2006
    annual MD&A.

    This interim MD&A includes forward-looking statements about our corporate
    direction and financial objectives 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 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 information, include, but are not limited to, the items
    identified in this interim MD&A under the "Risks and Uncertainties" and
    "Material Assumptions" sections, our first quarter 2007 interim MD&A, 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 six 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; and a reduction to our tax asset valuation allowance and
        other adjustment.

        In the first six 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); and the adjustment related to the Direct Connect/Access
        Tandem Decisions(2).

    -   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                                                   %
         June 30                                    2007      2006    change
    -------------------------------------------------------------------------
    EPS (Continuing Operations)                     0.79      0.68      16.2

    Reduction in Tax Asset Allowance and Other
     Adjustment                                     0.15         -       n.m.

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

    Decision 2007-10                                0.05         -       n.m.

    Discontinued Operations                            -      0.07       n.m.

    Restructuring Costs                            (0.02)    (0.06)    (66.7)

    Retroactive Band F Decision                        -      0.09       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -      0.06       n.m.

                                                  ---------------------------
    Basic EPS                                       0.88     (0.02)      n.m.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the three months ended June 30 is based on weighted average
    shares outstanding of 64.7 million for 2007, and 68.1 million for 2006.
    

    We delivered strong double-digit increases in revenues from our growth
services, including wireless, high-speed Internet, digital television,
converged IP and unified communications services. Including our operating cost
reduction initiatives, we are continuing to offset successfully the impacts of
strong competition and technology migration to IP-based services by customers
in our industry. Combined with higher other income, lower debt charges, lower
amortization and fewer shares outstanding, EPS from continuing operations
increased by 16.2% in the second quarter of 2007 and 17.6% in the first six
months of the year as compared to the same periods in 2006.

    
    -------------------------------------------------------------------------
    six months ended                                                     %
        June 30                                     2007      2006    change
    -------------------------------------------------------------------------
    EPS (Continuing Operations)                     1.54      1.31      17.6

    Reduction in Tax Asset Allowance and Other
     Adjustment                                     0.15         -       n.m.

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

    Decision 2007-10                                0.15         -       n.m.

    Discontinued Operations                            -      0.12       n.m.

    Restructuring Costs                            (0.07)    (0.09)    (22.2)

    Retroactive Band F Decision                        -      0.09       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -      0.06       n.m.

                                                  ---------------------------
    Basic EPS                                       1.68      0.63       n.m.
    -------------------------------------------------------------------------
    Note: EPS for the six months ended June 30 is based on weighted average
    shares outstanding of 65.5 million for 2007, and 67.9 million for 2006.
    

    Basic EPS was $0.88 in the second quarter of 2007 and $1.68 in the first
six months of 2007, which is up $0.90 and $1.05 when compared to the
respective periods in 2006. These increases reflect certain items that are not
from continuing operations. As indicated in the tables above, these items
include a reduction in our tax asset valuation allowance and other adjustment,
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 $)                                Q2/07     Q2/06    change
    -------------------------------------------------------------------------
    EBITDA (Continuing Operations)                 170.5     167.1       2.0

    Decision 2007-10                                 4.4         -       n.m.

    Restructuring Costs                             (2.7)     (7.1)    (62.0)

    Retroactive Band F Decision                        -       9.9       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -       6.7       n.m.

                                                  ---------------------------
    EBITDA                                         172.2     176.6      (2.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                         %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    EBITDA (Continuing Operations)                 335.5     330.3       1.6

    Decision  2007-10                               13.5         -       n.m.

    Restructuring Costs                             (6.6)    (10.2)    (35.3)

    Retroactive Band F Decision                        -       9.9       n.m.

    Retroactive Direct Connect/Access Tandem
     Decisions                                         -       6.7       n.m.

                                                  ---------------------------
    EBITDA                                         342.4     336.7       1.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Strong growth in wireless, unified communications, converged IP, digital
television and high-speed Internet services, along with the continuing success
of our cost reduction initiatives, have led to EBITDA from continuing
operations for the second quarter of 2007 increasing by 2.0% to $170.5 million
as compared to the corresponding period in 2006. Similarly, year to date
EBITDA from continuing operations was up 1.6% to $335.5 million in 2007 as
compared to $330.3 million in 2006. The positive impact from growth services
was offset partially by declines in local, legacy data, long distance, and
small business market services revenues.
    Consolidated EBITDA was down 2.5% to $172.2 million in the second quarter
of 2007 versus $176.6 million a year earlier. Contributing to this decrease
were factors that are not from continuing operations, including the positive
impacts relating to the Band F Decision and the Direct Connect/Access Tandem
Decisions that were both received in the second quarter of 2006, which were
offset partly by lower restructuring costs and the positive impact of Decision
2007-10.
    Consolidated EBITDA increased by 1.7% to $342.4 million in the first six
months of 2007 versus the same period last year. Contributing to this increase
were factors that are not from continuing operations, including lower
restructuring costs and 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 $)                                Q2/07     Q2/06    change
    -------------------------------------------------------------------------
    Revenue (Continuing Operations)                474.1     479.1      (1.0)

    Retroactive Band F Decision                        -       9.9       n.m.

                                                  ---------------------------
    Revenue                                        474.1     489.0      (3.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                         %
    (in millions $)                               YTD/07    YTD/06    change
    -------------------------------------------------------------------------
    Revenue (Continuing Operations)                941.5     959.5      (1.9)

    Retroactive Band F Decision                        -       9.9       n.m.

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

                                                  ---------------------------
    Revenue                                        940.7     969.4      (3.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Consolidated revenues from continuing operations were $474.1 million in
the second quarter of 2007 and $941.5 million year to date, representing a
1.0% decrease in the second quarter and a 1.9% decrease year to date. These
decreases are due primarily to decreased revenues from legacy services, which
were offset partially by increased revenues from growth services. Included in
this legacy revenue decrease is reduced network traffic from AT&T Corp.
("AT&T") and Rogers Communications Inc. ("Rogers") as they transition their
business to their own networks. In 2007, excluding these revenues from AT&T
and Rogers, we expect to see overall revenue growth year-over-year and in the
second quarter, if these revenues are excluded, we would have growth of 1.7%.
As the proportion of our revenue that is derived from growth services
increases, the continuing migration from legacy-related services to next
generation communications services is expected to have a decreasing impact on
our overall revenues leading to overall revenue growth in 2008.

    
    Segmented Revenues (Continuing Operations)
    -------------------------------------------------------------------------
    (in millions $)                                Q2/07     Q2/06  % change
    -------------------------------------------------------------------------
    Growth services                                186.2     165.8      12.3
    Legacy services                                287.9     313.3      (8.1)
                                                  ---------------------------
    Total                                          474.1     479.1      (1.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in millions $)                               YTD/07    YTD/06  % change
    -------------------------------------------------------------------------
    Growth services                                360.1     324.3      11.0
    Legacy services                                581.4     635.2      (8.5)
                                                  ---------------------------
    Total                                          941.5     959.5      (1.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Growth Services Revenues

    Revenues from our growth services were up by 12.3% or $20.4 million in
the second quarter of 2007 and by 11.0% or $35.8 million in the first half of
the year in comparison to the same periods in 2006. This strong performance
was driven by double-digit year-over-year growth in wireless, high-speed
Internet, digital television, converged IP and unified communications
services.

    Legacy Services Revenues

    Revenues in the second quarter of 2007 from our legacy services were down
by 8.1% or $25.4 million and in the first six months of the year, were down by
8.5% or $53.8 million when compared to the second quarter and first six months
of 2006, respectively. The loss of business from AT&T and Rogers, as they
migrate their communications traffic from our network to their own networks,
also continued to have an impact on our legacy services revenues during this
quarter. Continued competitive pressures impacted all lines of business
related to our traditional legacy services this quarter as customers migrate
to newer IP-based growth services. While the influences of re-pricing and
customer churn contributed to lower year-over-year revenues, we are confident
in our marketing strategies, such as bundling of services. These strategies,
which already are in place, are assisting with profitably accelerating our
customer transition to growth services products and, in turn, developing new
and growing revenue streams.

    
    Operating Revenues (Continuing Operations)
    -------------------------------------------------------------------------
    (in millions $)                                Q2/07     Q2/06  % change
    -------------------------------------------------------------------------
    Wireless                                        67.8      57.7      17.5
    Data                                           162.6     165.5      (1.8)
    Local                                          133.6     138.1      (3.3)
    Long Distance                                   90.9     100.3      (9.4)
    Other                                           19.2      17.5       9.7
                                                  ---------------------------
    Total                                          474.1     479.1      (1.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in millions $)                               YTD/07    YTD/06  % change
    -------------------------------------------------------------------------
    Wireless                                       129.1     111.5      15.8
    Data                                           324.1     331.2      (2.1)
    Local                                          266.2     276.8      (3.8)
    Long Distance                                  183.2     205.3     (10.8)
    Other                                           38.9      34.7      12.1
                                                  ---------------------------
    Total                                          941.5     959.5      (1.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    Q2                                              67.8      57.7      17.5
    YTD                                            129.1     111.5      15.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our wireless portfolio consists of cellular, wireless data, paging and
    group communications services that we offer in the Manitoba market.
    

    Strong year-over-year growth continued through the first half of the
year. In the second quarter of 2007, revenues from wireless services grew by
17.5% to $67.8 million and in the first six months of the year, revenues grew
by 15.8% to $129.1 million. The primary driver of these increases was our
growing cellular customer base, which increased by 11.1% to 369,405 as at
June 30, 2007, along with increasing average revenue per user ("ARPU").
    Customers increasingly are accessing our MTS Mobility high-speed network
for their high-speed data services needs. The continued customer-adoption of
wireless data services, as well as the ongoing growth in popularity of text
messaging, has driven a year-over-year increase of 100% in our revenues from
wireless data services during the first six months of 2007. Increased
utilization of enhanced data features and higher revenues from system access
fees and roaming services contributed to our strong wireless revenues and ARPU
of $57.68 for the six months ended June 30, 2007, representing a 4.3%
improvement over the previous year.

    
    Data Services
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                             162.6     165.5      (1.8)
    YTD                                            324.1     331.2      (2.1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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 data services decreased to $162.6 million from
$165.5 million in the second quarter and to $324.1 million from $331.2 million
year to date as compared to the corresponding periods in 2006. Underlying
these decreases is the transitioning of revenues from legacy services to
growth services. The decline in our data legacy services was due to
re-pricing, churn and a drop in legacy data revenues related to decreased
network traffic from AT&T and Rogers. The strategies that we have underway to
facilitate the migration of customers to IP solutions utilizing our
capabilities are achieving our desired results and are mitigating these
impacts on our financial performance.
    Revenues from our next generation data services, which include converged
IP and unified communications services, experienced a strong year-over-year
increase of 17.3% in the second quarter and 14.2% year to date. Customer and
volume increases from business IP domestic multiprotocol label switching
("MPLS"), enterprise internet protocol telephony ("IPT"), switched Ethernet,
network resident IPT, and consumer high-speed Internet services led to strong
overall growth in this area.
    Our IP virtual private network ("IP-VPN") customer base has grown
strongly, increasing to 212 customers as at June 30, 2007, which is up by
47.2%.
    In the second quarter and first six months of 2007, revenues from
consumer Internet services was up solidly by 11.3% and 11.8%, respectively,
when compared to revenues in the same periods last year. Strong growth in our
consumer high-speed Internet customer base in Manitoba also continued in the
quarter. As at June 30, 2007, our consumer high-speed Internet customer base
totalled 158,549, which translates into strong year-over-year growth of 17.4%.

    
    Local Services
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                             133.6     138.1      (3.3)
    YTD                                            266.2     276.8      (3.8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.
    

    Local services revenues in the three and six months ended June 30, 2007
were $133.6 million, representing a decrease of 3.3%, and $266.2 million,
which reflects a decrease of 3.8%, respectively, over the corresponding
periods in 2006.
    The decrease in local services revenues is due mainly to the competitive
pressures that our Consumer Markets division faces in Winnipeg. By bundling
our residential service offerings together, which include wireless, Internet,
digital television and alarm services, we believe that we are well positioned
to compete successfully in the long term. Consequently, the pace of our
residential line losses has decelerated. Our residential line losses were
approximately 3,000 in the second quarter of 2007, after adjusting for
cottage-country seasonality and customers in transit. This is consistent with
the levels of line loss in the first quarter of 2007 and the fourth quarter of
2006, and approximately two thirds lower than the losses that occurred in the
second 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
    -------------------------------------------------------------------------
    Q2                                              90.9     100.3      (9.4)
    YTD                                            183.2     205.3     (10.8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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 decreased by 9.4% to $90.9 million in the second
quarter of 2007 and by 10.8% to $183.2 million year to date, as compared to
$100.3 million and $205.3 million in the corresponding periods of the previous
year. The effects of competitive pricing pressures across all of our market
segments are reflected in this decrease. Our Consumer Markets division
continued to experience decreased revenue due to local line losses and
customer migration to lower priced long distance plans, along with wireless
and e-mail substitutions. Our Enterprise Solutions division was impacted by
lower rates and volumes in the domestic market, higher volumes in the cross
border market and lower international rates, which were offset partly by
higher international volume and lower rates in the cross border market.

    
    Other Revenues
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                              19.2      17.5       9.7
    YTD                                             38.9      34.7      12.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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 second quarter and year to date increased by 9.7%
to $19.2 million from $17.5 million and by 12.1% to $38.9 million from
$34.7 million in the corresponding periods in 2006. These increases were
driven by increased revenues from our digital television, and security and
alarm monitoring services.
    For the three months and six months ended June 30, 2007, digital
television services revenues increased by 31.6% to $10.4 million and by 36.2%
to $20.3 million, respectively. These increases reflect strong year-over-year
growth in our customer base, and higher revenues from video on demand and core
television services. Contributing to our year to date increase in core
television services are price increases to basic packages and specialty
channels that we implemented in the first quarter of this year. In addition,
the popularity of our pay-per-view service, which we launched in the fourth
quarter of 2006, is adding to the growth in average revenue per subscriber
which increased by 2.5% to reach $46.96 year to date.
    Our subscriber base increased to 70,984 as at June 30, 2007, representing
an increase of 25.5%, which corresponds to a 29% market share.

    OPERATING EXPENSES

    
    Operations Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                             299.2     305.3      (2.0)
    YTD                                            591.7     622.5      (4.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operations expense in the three and six months ended June 30, 2007
decreased by 2.0% and 4.9% or $6.1 million and $30.8 million as compared to
the same periods last year. Contributing to these year-over-year decreases are
lower expenses resulting from our continued focus on cost reduction
initiatives. Our 2007 efficiency program has achieved approximately
$26 million in annualized savings as at June 30, 2007, which is in line with
our 2007 objective for expense savings of $40 million to $50 million with this
program. Actual in quarter realized expense savings from our 2007 efficiency
program was $7 million and $15 million for the six months ended June 30, 2007.
In addition, the year to date decrease was impacted by Decision 2007-10, a
one-time net positive $14.3 million adjustment that reflects the retroactive
impact of a competitor service for which we had been consistently
double-billed by incumbent carriers, which was offset by the positive impact
of the retroactive Direct Connect/Access Tandem Decisions 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
    -------------------------------------------------------------------------
    Q2                                               2.7       7.1     (62.0)
    YTD                                              6.6      10.2     (35.3)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Restructuring and integration expenses in the second quarter of 2007 were
$2.7 million, while in the same period of 2006, we incurred $7.1 million in
integration expenses. Year to date, restructuring and integration expenses
were $6.6 million, while in 2006, year to date expenses were $10.2 million.
    The restructuring costs incurred in 2007 are related to our 2007
efficiency program. We expect to achieve cost savings of $40 million to
$50 million with this program. As at June 30, 2007, we have achieved
approximately $26 million in annualized expense savings.
    The costs for our 2007 efficiency program are expected to be $30 million
to $40 million. As at June 30, 2007, we have incurred cash costs of
$15.2 million, including $6.6 million in restructuring expense and $6.4
million in restructuring capital expenditures. We took a restructuring charge
of $8.5 million related to a workforce reduction in the fourth quarter of 2006
and set up an accrued liability in this amount. A payment associated with this
program of $2.2 million was applied against this liability. This is outlined
in Note 3 to our interim consolidated financial statements.
    In relation to our Transition Phase II 2006 cost reduction program ("TP2
cost reduction program"), we have achieved annualized expense savings of
$117 million as at June 30, 2007. The outstanding liability associated with
the workforce reduction element of our TP2 cost reduction program as at
December 31, 2006 was $23.3 million. For the six months ended June 30, 2007,
we made payments of $17.0 million against this liability, leaving an
outstanding liability of $6.3 million. This is outlined in Note 3 to our
interim consolidated financial statements.

    
    Amortization Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                              80.0      81.5      (1.8)
    YTD                                            159.0     161.8      (1.7)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the second quarter of 2007, amortization expense was $80.0 million
as compared to $81.5 million during the same period of the previous year, and
year to date, amortization expense was $159.0 million as compared to
$161.8 million last year. These lower amortization expenses are due primarily
to a decrease in the composite amortization rates.

    
    Other Income (Expense)
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                               2.7      (0.7)      n.m.
    YTD                                              6.1       0.4       n.m.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Other income was $2.7 million in the second quarter of 2007 versus
($0.7) million in the previous year, and was $6.1 million for the first six
months of 2007 as compared to $0.4 million in 2006. The positive impact of
Decision 2007-10 in 2007, the recognition of a pre-tax loss on the sale of
accounts receivable which we recorded in other income in the second quarter of
2006, and increased interest income related to the temporary investment of the
proceeds from the sale of non-core assets contributed to higher other income
for these periods.

    
    Debt Charges
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                              13.7      15.4     (11.0)
    YTD                                             26.6      30.7     (13.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Debt charges in the second quarter of 2007 decreased to $13.7 million as
compared to $15.4 million in the second quarter of 2006, and in the first six
months of the year, decreased to $26.6 million as compared to $30.7 million in
2006. Lower year-over-year short-term interest costs and maturing long-term
debt, which was refinanced at a lower interest cost with short-term debt and
temporary cash on hand, primarily contributed to these decreases. Short-term
debt levels are lower due to the temporary investment of the proceeds from the
sale of non-core assets in the fourth quarter of 2006.
    Our debt to total capitalization ratio as at June 30, 2007 was 36.8%, and
continues to provide us with financial strength and flexibility going forward.

    
    Income Tax Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2007      2006  % change
    -------------------------------------------------------------------------
    Q2                                              24.2      85.2     (71.6)
    YTD                                             53.0     110.1     (51.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    We have the benefit of substantial loss carryforwards, as a result of our
acquisition of Allstream Inc. ("Allstream") in 2004, which allows us to reduce
our taxable income to zero without utilizing our substantial and growing
capital cost allowance ("CCA") pools. 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.
    Our income tax expense in the second quarter of 2007 decreased to
$24.2 million as compared to $85.2 million in the same quarter of the previous
year. For the first six months of this year, income tax expense decreased to
$53.0 million from $110.1 million last year. These decreases have resulted
primarily due to a lower adjustment related to changes in federal statutory
tax rates in the amount of $6.0 million in 2007 versus $58.6 million in 2006.
In addition, we have reduced our tax asset valuation allowance by
$12.8 million in the second quarter of 2007 due to new pension plan actuarial
valuations that produce higher forecasted taxable income.

    CONSOLIDATED QUARTERLY DATA

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

    
    -------------------------------------------------------------------------
    (in millions $, except                 Q2        Q1        Q4        Q3
     earnings per share)                  2007      2007      2006      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating Revenues                   474.1     466.6     479.1     477.9
    Operating Income                      92.2      91.2      34.2      69.8
    Net Income (Loss) before
     discontinued operations              57.0      52.9      26.8      35.8
    Net Income (Loss)                     57.0      52.9     216.1      40.5
    Earnings (Loss) Per Share
     before discontinued operations       0.88      0.80      0.39      0.53
    Diluted Earnings (Loss) Per Share
     before discontinued operations       0.88      0.80      0.39      0.52
    Earnings (Loss) Per Share             0.88      0.80      3.18      0.60
    Diluted Earnings (Loss) Per Share     0.88      0.80      3.17      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (in millions $, except                 Q2        Q1        Q4        Q3
     earnings per share)                  2006      2006      2005      2005
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating Revenues                   489.0     480.4     494.2     507.7
    Operating Income                      95.1      79.8      34.0      82.7
    Net Income before discontinued
     operations                           (6.2)     40.7      10.8      41.8
    Net Income                            (1.2)     44.0      14.6      45.1
    Earnings Per Share before
     discontinued operations             (0.09)     0.60      0.16      0.62
    Diluted Earnings Per Share before
     discontinued operations             (0.09)     0.60      0.16      0.61
    Earnings Per Share                   (0.02)     0.65      0.22      0.67
    Diluted Earnings Per Share           (0.02)     0.65      0.22      0.66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 and second quarters of 2007 in the amounts of
        $3.9 million and $2.7 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 is
        related to Decision 2007-10; 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; and a $5.9 million
        positive retroactive impact in the third quarter of 2005 from the
        Band F Decision.

    -   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 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 recognition of restructuring costs in the third quarter of 2005
        in the amount of $5.0 million. This cost is associated with the
        initial integration of the operations of Allstream following the
        completion of our acquisition of this company in June 2004.

     -  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.

     -  The acquisition of Delphi Solutions Corp. on July 5, 2005 for a
        purchase price of approximately $15 million.

    LIQUIDITY AND CAPITAL RE

SOURCES ------------------------------- Cash Flows from Operating Activities ------------------------------------------------------------------------- (in millions $) 2007 2006 $ change ------------------------------------------------------------------------- Q2 148.4 236.0 (87.6) YTD 226.8 308.8 (82.0) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities refers to cash we generate from our normal business activities. Cash flows from operating activities for the three and six months ended June 30, 2007 decreased by $87.6 million to $148.4 million and by $82.0 million to $226.8 million, respectively, as compared to the same periods in 2006. These decreases are attributable mainly to changes in working capital due to an accounts receivable securitization program which was undertaken in April 2006, which was offset partly by lower pension solvency funding, and higher EBITDA from continuing operations. Cash Flows used in Investing Activities ------------------------------------------------------------------------- (in millions $) 2007 2006 $ change ------------------------------------------------------------------------- Q2 62.8 59.9 2.9 YTD 113.8 113.0 0.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments. Cash flows used in investing activities increased by $2.9 million to $62.8 million in the second quarter and by $0.8 million to $113.8 million in the first half of the year when comparing activities in 2007 versus 2006. Higher capital expenditures were the reason for this increase. Free Cash Flow ------------------------------------------------------------------------- (in millions $) Q2/07 Q2/06 % change ------------------------------------------------------------------------- Free Cash Flow (Continuing Operations) 85.6 91.3 (6.2) Decision 2007-10 5.0 - n.m. Pension Solvency Funding (1.0) (22.0) n.m. Restructuring Expense (2.7) (7.1) (62.0) Restructuring Capital Expenditures (3.9) (0.2) n.m. Tax Recoveries 3.9 - n.m. Retroactive Direct Connect/Access Tandem Decisions - 6.7 n.m. Retroactive CDNA Decision - 9.9 n.m. --------------------------- Consolidated Free Cash Flow 86.9 78.6 10.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow from continuing operations was $85.6 million in the second quarter, which is down by 6.2% from the same period in the previous year. This decrease is due primarily to lower current tax recovery, which was offset partly by higher EBITDA from continuing operations. Consolidated free cash flow increased by 10.6% to $86.9 million in the second quarter of 2007. This increase is attributable primarily to lower pension solvency funding, lower restructuring expense and the positive impacts from Decision 2007-10 and certain tax recoveries during the quarter. Included in consolidated free cash flow in the second quarter of 2006 are pension solvency funding, restructuring expense and the positive retroactive impacts from the Direct Connect/Access Tandem Decisions and the CRTC's decision in Competitor Digital Network Services, Telecom Decision CRTC 2005-6, and restructuring capital expenses. ------------------------------------------------------------------------- (in millions $) YTD/07 YTD/06 % change ------------------------------------------------------------------------- Free Cash Flow (Continuing Operations) 177.2 178.2 (0.6) Decision 2007-10 14.9 - n.m. Pension Solvency Funding (1.0) (41.8) n.m. Restructuring Expense (6.6) (10.2) (35.3) Restructuring Capital Expenditures (6.4) (0.3) n.m. Retroactive Direct Connect/Access Tandem Decisions - 6.7 n.m. Retroactive Band F Decision - 9.9 n.m. Tax Recoveries 9.3 - n.m. ---------------------------- Consolidated Free Cash Flow 187.4 142.5 31.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Year-over-year, free cash flow from continuing operations decreased by 0.6% to $177.2 million in the first six months of 2007. This decrease is due to a lower current tax recovery and higher deferred wireless costs, which were offset partly by lower capital expenditures from continuing operations and higher EBITDA from continuing operations. Consolidated free cash flow, which includes items not from continuing operations, was $187.4 million in the first six months of the year as compared to $142.5 million in the same period of the previous year. Reflected in the year to date increase are the impacts of lower restructuring expenses, certain tax recoveries and lower pension solvency funding in 2007 offset by higher restructuring capital expenses and lower positive regulatory decisions. Cash Flows used in Financing Activities ------------------------------------------------------------------------- (in millions $) 2007 2006 $ change ------------------------------------------------------------------------- Q2 81.5 190.5 109.0 YTD 207.5 207.5 nil ------------------------------------------------------------------------- ------------------------------------------------------------------------- Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings. Cash flows used in financing activities were $81.5 million in the second quarter and $207.5 million in the first six months of the year as compared to $190.5 million and $207.5 million, respectively, in 2006. We initiated a normal course issuer bid in the fourth quarter of 2006, pursuant to which we purchased for cancellation, during the second quarter of 2007, 562,800 Common Shares for $26.3 million, and in the first six months of the year, we purchased for cancellation 2,377,500 Common Shares for $111.0 million. In the second quarter of 2007, we paid cash dividends of $42.3 million, and repaid long-term debt in the amount of $14.6 million. In the second quarter of 2006, we paid cash dividends of $44.0 million, and repaid net notes payable and long-term debt in the amount of $109.1 million and $48.1 million, respectively. In the first six months of 2007, we paid cash dividends of $86.6 million, and repaid long-term debt in the amount of $14.6 million. In the first six months of 2006, we paid cash dividends of $88.0 million, and repaid net notes payable and long-term debt in the amount of $85.7 million and $48.1 million, respectively. Credit Facilities ------------------------------------------------------------------------- (in millions $) capacity utilized at June 30/07 ------------------------------------------------------------------------- Commercial Paper 150.0 - Accounts Receivable Securitization 150.0 - Revolving Credit Facility 200.0 88.1 -------------------------- Total 500.0 88.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 June 30, 2007, our commercial paper program and accounts receivable securitization program were unutilized, and we utilized $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 ------------------------------------------------------------------------- (in millions $) June 30/07 December 31/06 ------------------------------------------------------------------------- Long-term Debt 831.2 845.9 Shareholders' Equity 1,426.7 1,505.9 ---------------------------- Total Capitalization 2,257.9 2,351.8 ---------------------------- ---------------------------- Debt to Capitalization 36.8% 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 36.8% as at June 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 July 24, 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 64,616,867 1,264.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock options: ------------------------------------------------------------------------- Weighted Average Exercise Price Options Number Per Share ------------------------------------------------------------------------- Outstanding 1,863,610 $41.97 Exercisable 612,190 $39.27 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 first quarter 2007 interim MD&A and our 2006 annual MD&A. For additional details, please consult our first quarter 2007 interim MD&A 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 first quarter 2007 interim MD&A and our 2006 annual MD&A. For additional details, please consult our first quarter 2007 interim MD&A 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 first quarter 2007 interim MD&A and our 2006 annual MD&A. For additional details, please consult our first quarter 2007 interim MD&A 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 first quarter 2007 interim MD&A and our 2006 annual MD&A, except as noted below. For additional details, please consult our first quarter 2007 interim MD&A 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 for 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 services, 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 will be active participants in this CRTC proceeding, which will carry on throughout 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. 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 have now 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. We expect the record of the proceeding to close in August 2007, with a decision 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 are the first incumbent to file an application for local forbearance in the Winnipeg, Manitoba market which fully and publicly meets the competitor presence and competitor quality of service requirements. We also continue to intervene in the multiple applications filed by the other ILECs to ensure that the requirements of the OIC have been met prior to forbearance orders being granted. As a result of the OIC, we also continue to capitalize on our already successful winback program utilizing more finely targeted promotions with the elimination of the waiting period for contacting customers lost to competitors. Price Caps On May 9, 2006, the CRTC issued Review of price cap framework, Telecom Public Notice CRTC 2006-5, which invited proposals for the regulation of the incumbent retail services that remain subject to rate regulation. The ILECs, including our Consumer Markets division, have been subject to price caps, a form of incentive regulation, since 1998. On April 30, 2007, the CRTC issued Price cap framework for large incumbent local exchange carriers, Telecom Decision CRTC 2007-27. This was the third price cap review undertaken by the CRTC, and the regime that has been put in place as a result of this decision commenced in June 2007. We are pleased to see that the CRTC has implemented a price cap regime that recognizes the different states of competition within the residential and business markets. 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 over billed 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. 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 stress 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 urged 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 framework later this year, and to conduct the auction in early 2008. 2007 OUTLOOK ------------ Forward-looking statements disclaimer This outlook includes forward-looking statements about our corporate direction, 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 August 2, 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 information, include, but are not limited to, the items identified in this interim MD&A, our first quarter interim MD&A, 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 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 (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 first quarter interim MD&A, and our 2006 annual MD&A. We have increased our 2007 guidance from continuing operations for EPS to $2.55 to $2.75 from the $2.30 to $2.50 level as a result of strong performance from our operations along with expected lower amortization, lower debt charges and higher other income. Our outlook for 2007 is as follows: ------------------------------------------------------------------------- 2007 Financial Outlook - Continuing Operations ------------------------------------------------------------------------- December 13, 2006 August 2, 2007 ------------------------------------------------------------------------- Revenues $1.875 B - $1.925 B $1.875 B - $1.925 B EBITDA $625 M - $655 M $625 M - $655 M EPS $2.30 - $2.50 $2.55 - $2.75 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, our business review also 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. We anticipate that local service will be forborne in Winnipeg by the end of 2007, which will enhance 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. 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: 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, 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 the 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. THIRD QUARTER DIVIDEND The Board of Directors of MTS today declared a quarterly cash dividend of $0.65 per share. The third quarter dividend is payable on October 15, 2007 to shareholders of record at the close of business on September 28, 2007. The third 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 second quarter 2007 conference call with the investment community is scheduled for 4:30 p.m. Eastern time on August 2, 2007. The dial-in number is 1-800-732-0232. 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 August 12, 2007 and can be accessed by dialing 1-877-289-8525 or 1-416-640-1917 (access code 21238471 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 August 2, 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. Manitoba Telecom Services Inc. is one of Canada's leading national communication solutions providers, delivering innovative products and services through its Enterprise Solutions and Consumer Markets divisions. The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS 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 security and alarm monitoring services through AAA Alarm Systems Ltd., a subsidiary of MTS which also operates in other western provinces. MTS'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 June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions, except earnings per share) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues $ 474.1 $ 489.0 $ 940.7 $ 969.4 Operating expenses Operations 299.2 305.3 591.7 622.5 Restructuring and integration (Note 3) 2.7 7.1 6.6 10.2 Amortization 80.0 81.5 159.0 161.8 ------------------------------------------------------------------------- 381.9 393.9 757.3 794.5 ------------------------------------------------------------------------- Operating income 92.2 95.1 183.4 174.9 Other income (expense) 2.7 (0.7) 6.1 0.4 Debt charges (13.7) (15.4) (26.6) (30.7) ------------------------------------------------------------------------- Income before income taxes and discontinued operations 81.2 79.0 162.9 144.6 Income tax expense (recovery) (Note 4) Current (3.8) (7.3) (9.1) (12.5) Future 28.0 92.5 62.1 122.6 ------------------------------------------------------------------------- 24.2 85.2 53.0 110.1 ------------------------------------------------------------------------- Income (loss) before discontinued operations 57.0 (6.2) 109.9 34.5 Income from discontinued operations, net of tax - 5.0 - 8.3 ------------------------------------------------------------------------- Net income (loss) for the period $ 57.0 $ (1.2) $ 109.9 $ 42.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings (loss) per share (Note 5) Income (loss) before discontinued operations $ 0.88 $ (0.09) $ 1.68 $ 0.51 Net income (loss) $ 0.88 $ (0.02) $ 1.68 $ 0.63 ------------------------------------------------------------------------- Diluted earnings (loss) per share (Note 5) Income (loss) before discontinued operations $ 0.88 $ (0.09) $ 1.67 $ 0.51 Net income (loss) $ 0.88 $ (0.02) $ 1.67 $ 0.63 ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited) For the periods ended June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 145.2 $ 96.6 $ 183.9 $ 96.6 Net income (loss) for the period 57.0 (1.2) 109.9 42.8 Dividends declared (42.0) (44.3) (84.3) (88.3) Purchase of outstanding shares (Note 6) (15.2) - (64.5) - ------------------------------------------------------------------------- Retained earnings, end of period $ 145.0 $ 51.1 $ 145.0 $ 51.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, (in millions) 2007 2006 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 12.2 $ 106.7 Accounts receivable 207.5 215.8 Prepaid expenses 41.7 24.3 Future income taxes (Note 4) 114.5 111.4 ------------------------------------------------------------------------- 375.9 458.2 Property, plant and equipment 3,593.3 3,607.6 Accumulated amortization 2,158.8 2,148.0 ------------------------------------------------------------------------- 1,434.5 1,459.6 Other assets 313.3 297.7 Future income taxes (Note 4) 588.8 654.0 Goodwill and other intangible assets 50.4 51.8 ------------------------------------------------------------------------- $ 2,762.9 $ 2,921.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities $ 319.8 $ 387.0 Advance billings and payments 41.1 38.8 Current portion of long-term debt 181.6 106.5 Current portion of capital lease obligations 4.7 4.5 ------------------------------------------------------------------------- 547.2 536.8 Long-term debt 649.6 739.4 Long-term portion of capital lease obligations 17.6 18.3 Deferred employee benefits 46.0 46.4 Other long-term liabilities 72.6 71.3 Future income taxes (Note 4) 3.2 3.2 ------------------------------------------------------------------------- 1,336.2 1,415.4 ------------------------------------------------------------------------- Shareholders' equity Share capital (Note 6) 1,264.9 1,305.1 Contributed surplus 16.8 16.9 Retained earnings 145.0 183.9 ------------------------------------------------------------------------- 1,426.7 1,505.9 ------------------------------------------------------------------------- $ 2,762.9 $ 2,921.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) For the periods ended June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities Income (loss) before discontinued operations $ 57.0 $ (6.2) $ 109.9 $ 34.5 Add items not affecting cash Amortization 80.0 81.5 159.0 161.8 Future income taxes (Note 4) 28.0 92.5 62.1 122.6 Deferred wireless costs (8.2) (6.5) (17.4) (12.6) Pension funding and net pension credit (7.2) (24.3) (8.8) (46.2) Other, net 0.1 1.4 (3.7) (4.4) Changes in non-cash working capital (1.3) 97.6 (74.3) 53.1 ------------------------------------------------------------------------- Cash flows from operating activities 148.4 236.0 226.8 308.8 ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures, net (62.8) (59.8) (113.7) (113.2) Other, net - (0.1) (0.1) 0.2 ------------------------------------------------------------------------- Cash flows used in investing activities (62.8) (59.9) (113.8) (113.0) ------------------------------------------------------------------------- Cash flows from financing activities Dividends paid (42.3) (44.0) (86.6) (88.0) Repayment of long term debt (14.6) (48.1) (14.6) (48.1) Purchase of outstanding shares (Note 6) (26.3) - (111.0) - Repayment of notes payable, net - (109.1) - (85.7) Issuance of share capital (Note 6) 1.5 9.4 5.4 11.8 Other, net 0.2 1.3 (0.7) 2.5 ------------------------------------------------------------------------- Cash flows used in financing activities (81.5) (190.5) (207.5) (207.5) ------------------------------------------------------------------------- Cash flows before discontinued operations 4.1 (14.4) (94.5) (11.7) Cash flows from discontinued operations - 4.3 - 9.2 ------------------------------------------------------------------------- Change in cash and cash equivalents (bank indebtedness) 4.1 (10.1) (94.5) (2.5) Cash and cash equivalents (bank indebtedness), beginning of period 8.1 (2.3) 106.7 (9.9) ------------------------------------------------------------------------- Cash and cash equivalents (bank indebtedness), end of period $ 12.2 $ (12.4) $ 12.2 $ (12.4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 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 equals 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 June 30, 2007 is $832.6 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 June 30, 2007, total deferred costs presented as a reduction of long-term debt are $2.3 million (December 31, 2006 - $2.2 million). 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 six months ended June 30, 2007 and 2006, the Company recorded restructuring and integration expenses as follows: --------------------------------------------------------------------- Three months ended June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Integration - 2.1 - 5.0 - - - 7.1 Restructuring 0.3 - 2.4 - - - 2.7 - --------------------------------------------------------------------- 0.3 2.1 2.4 5.0 - - 2.7 7.1 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Integration - 4.5 - 5.7 - - - 10.2 Restructuring 2.1 - 4.5 - - - 6.6 - --------------------------------------------------------------------- 2.1 4.5 4.5 5.7 - - 6.6 10.2 --------------------------------------------------------------------- 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 six months ended June 30, 2007, payments of $17.0 million were applied against this liability, leaving an outstanding liability of $6.3 million as at June 30, 2007. 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 six months ended June 30, 2007, payments of $2.2 million were applied against this liability, leaving an outstanding liability of $6.3 million as at June 30, 2007. 4. 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 3.7% 40.5% Reduction of Valuation Allowance (7.9%) - Other items 1.0% (0.3%) --------------------------------------------------------------------- Effective tax rate 32.5% 76.1% --------------------------------------------------------------------- --------------------------------------------------------------------- The balances of future income taxes as at June 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 466.8 584.2 Property, plant and equipment 370.1 330.4 Other (41.9) (44.7) --------------------------------------------------------------------- Total future income tax asset 795.0 869.9 Valuation allowance (94.9) (107.7) --------------------------------------------------------------------- Net future income tax asset 700.1 762.2 --------------------------------------------------------------------- --------------------------------------------------------------------- Future income taxes are comprised of: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Current future income tax asset 114.5 111.4 Long-term future income tax asset 588.8 654.0 Long-term future income tax liability (3.2) (3.2) --------------------------------------------------------------------- Net future income tax asset 700.1 762.2 --------------------------------------------------------------------- --------------------------------------------------------------------- During the six months ended June 30, 2007, the Company recovered $3.7 million in cash income taxes (2006 - recovered $0.7 million). As at June 30, 2007, the Company had non-capital loss carryforwards available to reduce future years' taxable income, which expire as follows: --------------------------------------------------------------------- 2007 --------------------------------------------------------------------- 2009 1,353.0 2010 and beyond 8.0 --------------------------------------------------------------------- 1,361.0 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Earnings per share reconciliation The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Net income - basic and diluted Income before discontinued operations 109.9 34.5 Income from discontinued operations, net of tax - 8.3 --------------------------------------------------------------------- Net income 109.9 42.8 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average shares outstanding (in millions) Weighted average number of shares outstanding - basic 65.5 67.9 Dilutive effect of outstanding stock options 0.2 0.1 --------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 65.7 68.0 --------------------------------------------------------------------- --------------------------------------------------------------------- Basic earnings per share ($) Income before discontinued operations 1.68 0.51 Discontinued operations - 0.12 --------------------------------------------------------------------- Net income 1.68 0.63 --------------------------------------------------------------------- --------------------------------------------------------------------- Diluted earnings per share ($) Income before discontinued operations 1.67 0.51 Discontinued operations - 0.12 --------------------------------------------------------------------- Net income 1.67 0.63 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. Share capital As at June 30, 2007, share capital consists of 64,616,867 issued and outstanding Common Shares (December 31, 2006 - 66,817,707). During the six months ended June 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 six months ended June 30, 2007, 176,660 stock options to purchase Common Shares were exercised for cash consideration of $5.4 million, of which $6.3 million was credited to share capital and $0.9 million was charged to contributed surplus. 7. 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 June 30, 2007, the Company has outstanding foreign currency forward contracts to purchase $31.7 million U.S. These contracts mature periodically beginning in July 2007 and ending in December 2007. 8. 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 six months ended June 30, 2007 are $0.6 million and $0.4 million, respectively. 9. Segmented information As at June 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 June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 ------------------------------------------------------- Operating revenue External 201.3 206.4 272.8 282.6 - - 474.1 489.0 Internal 0.1 - - - 8.1 8.5 8.2 8.5 EBITDA 101.3 102.9 68.7 74.0 2.2 (0.3) 172.2 176.6 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 ------------------------------------------------------- Operating revenue External 395.9 398.9 544.8 570.5 - - 940.7 969.4 Internal 0.2 - - - 16.1 17.1 16.3 17.1 EBITDA 196.2 193.3 142.0 142.4 4.2 1.0 342.4 336.7 --------------------------------------------------------------------- --------------------------------------------------------------------- Reconciliation of net income is as follows: --------------------------------------------------------------------- Three months ended Six months ended --------------------------------------------------------------------- 2007 2006 2007 2006 --------------------------------------------------------------------- --------------------------------------------------------------------- Consolidated net income (loss) Total EBITDA 172.2 176.6 342.4 336.7 Amortization (80.0) (81.5) (159.0) (161.8) Other income (expense) 2.7 (0.7) 6.1 0.4 Debt charges (13.7) (15.4) (26.6) (30.7) Income tax expense (24.2) (85.2) (53.0) (110.1) --------------------------------------------------------------------- Income (loss) before discontinued operations 57.0 (6.2) 109.9 34.5 Income from discontinued operations, net of tax - 5.0 - 8.3 57.0 (1.2) 109.9 42.8 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. 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 or media.relations@mtsallstream.com

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