for today and tomorrow

Dear investor,

We achieved many financial successes in 2007 and generated strong cash flow, enabling us to continue investing for future growth in our core businesses and returning cash to shareholders. TELUS enters 2008 with considerable financial strength and balance sheet flexibility that provide competitive advantage and allow TELUS to advance our strategy, regardless of the current unsettled capital markets.

generating solid financial results

In 2007, TELUS enjoyed a year of continued revenue and earnings growth. We advanced our national growth strategy with a continued focus on data and wireless. Data and wireless now represent 67 per cent of our consolidated revenue, up from 63 per cent in 2006.

Revenue was up 4.5 per cent in 2007, driven by doubledigit growth in wireless and high single-digit growth in data, partially offset by declining local voice and long distance revenues. EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for comparability, was up a modest four per cent, impacted by certain largely non-recurring mid-year expenses. However, earnings per share (EPS) was up strongly by 23 per cent due to positive tax adjustments and reduced financing costs in addition to the EBITDA growth.

Capital spending was up, as forecasted, by nine per cent to $1.77 billion, as we increased our wireless spending on network coverage and capacity by 29 per cent. We maintained our wireline capital expenditures at a relatively high level, investing in strategic growth initiatives such as the broadband network, TELUS TV, new converged wireline billing and customer care systems, and implementation of large complex government and enterprise wireline contracts. We also made network investments due to the strong economy and housing growth in Alberta and B.C.

Once again we have generated strong free cash flow of almost $1.6 billion after capital expenditures.

We are expecting the following operating performance in 2008.

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investing cash for today and tomorrow

We are following a consistent approach to utilizing our robust cash flow. Our three-pronged approach includes investing capital in our core businesses to generate long-term growth, increasing dividends in line with sustainable net earnings growth pursuant to our dividend payout policy, and repurchasing shares in the stock market.

We are forecasting a seven per cent increase in capital expenditures to $1.9 billion for 2008, as we pursue long-term growth investments similar to those in 2007, as noted earlier.

We are also intent on continuing to return cash to investors for ongoing share value creation. TELUS has declared four consecutive sizeable dividend increases. The most recent increase was 20 per cent in our quarterly dividend to 45 cents per share commencing in January 2008. On an annual basis, the dividend payout approximates $575 million.

In addition, we have established a three-year track record for significant share repurchases, which are designed to reduce share dilution and increase the value of the remaining shares. In 2007, we bought back 13.6 million shares at a cost of $750 million. Since we began this initiative in December 2004, we have repurchased a total of 53 million shares for $2.5 billion, leading to an overall 9.5 per cent reduction in shares outstanding. We also have embarked on a fourth program for up to 20 million shares that extends to December 2008.

New in 2007 was the implementation of a net-cash settlement feature for share options, which accelerates the reduction in shares outstanding by eliminating dilutive share issuances from the exercising of vested in-the-money options in a tax-efficient manner. Due to this innovative initiative, the share repurchases made in 2007 resulted in a four per cent reduction in shares outstanding at year-end.

staying the course

Through 2007, we maintained our conservative financial policies, in spite of occasional analyst and investor advice to increase debt leverage in the first half of the year when credit markets were incredibly buoyant. We chose to adhere to our policies mindful of a long-term orientation to an optimal capital structure that should be beneficial throughout credit cycles. In retrospect, this has been the right course for TELUS, as credit market conditions subsequently deteriorated severely, making our strong balance sheet a source of competitive and strategic financial advantage.

Our public long-term policies and guidelines for equity and debt holders are:

• Dividend payout ratio of 45 to 55 per cent of sustainable net earnings – 47 to 51 per cent of the 2008 EPS target based on a $1.80 dividend estimate
• Net debt to EBITDA of 1.5 to 2.0 times – 1.7 at end of 2007.

With good treasury execution and perhaps some luck in timing, in March we completed a well-received new debt issuance for $1 billion, comprised of five-year and 10-year Notes with a blended cost of 4.8 per cent. We also entered into an unsecured commercial paper (CP) program, enabling TELUS to issue up to a maximum of $800 million. Using primarily the net proceeds from the debt issue and the CP program, we refinanced our maturing $1.5 billion 7.5 per cent Notes in June 2007, resulting in annual interest savings of $33 million.

Notably, TELUS achieved two credit rating upgrades during the year that confirmed our financial strength. Today, investment grade credit ratings from the four agencies are consistent with TELUS’ current policy objective of achieving BBB+ to A–(or equivalent).

In the summer, we contemplated submitting an offer to acquire BCE, prudently taking a much more conservative approach than the competing private equity consortium bidders. Our approach would have used a healthy mix of both equity and debt, so as to preserve our investment grade credit ratings (BBB range). Unfortunately, due to process deficiencies, we chose not to submit an offer to acquire BCE. With the virtual collapse of the debt markets after the bidding was complete, the merits of our approach appear, relative to leveraged buyout alternatives, stronger than ever.

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Although the current debt and equity markets are quite volatile, we are well positioned to weather the storm since the market’s flight to quality should play to TELUS’ advantages. We have no significant debt coming due until 2011, and have just entered into a $700 million, 364-day revolving bank facility. This ensures we maintain ample liquidity consistent with our financial policies after the $743 million purchase in January 2008 of Emergis, a provider of healthcare and financial service processing solutions.

pursuing excellence in disclosure and governance

Underpinning all business decisions and actions at TELUS is a firm commitment to thorough and transparent reporting, excellence in corporate governance and ensuring high ethical standards.

TELUS received many honours in 2007 for our efforts. For example:

• The 2006 annual report was among the top one per cent in the world as determined by the Annual Report on Annual Reports, the only international ranking of corporate annual reports
• For the first time, we received the Overall Award of Excellence for Corporate Reporting in Canada from the Canadian Institute of Chartered Accountants (CICA), along with the Award of Excellence for Corporate Reporting for Sustainable Development
• Also, for the first time, the CICA presented TELUS with an Honourable Mention for Excellence in Financial Reporting, and noted that TELUS’ Management’s discussion and analysis “…is a great example of CICA’s best practices.”

For more information on corporate governance at TELUS, ethical and respectful workplace practices, and additional awards, please see the next section of this report.

for today and tomorrow

As we move into 2008 with a solid financial foundation, we are well positioned to foster competitive advantage during the current capital market uncertainty. With our strong cash flow position and healthy balance sheet, we have the ability to create value by continuing to return capital to investors while, at the same time, pursuing investment growth opportunities for tomorrow.

Sincerely,

Robert McFarlane
Executive Vice-President and Chief Financial Officer
February 22, 2008