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TELUS Communications Inc. • annual report 2002 table of contents

forward-looking statements inside front cover management’s discussion and analysis 1 consolidated statistics 22 management’s report 23 auditors’ report 24 consolidated financial statements 25 directors and officers 51 investor information 52

forward-looking statements

Management’s discussion and analysis contains statements about expected future events and financial and operating results that are forward-looking and subject to risks and uncertainties. Communications Inc.’s actual results, performance or achievement could differ materially from those expressed or implied by such statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. Factors that could cause actual results to differ materially include but are not limited to: general business and economic conditions in TELUS Communications Inc.’s service territories across Canada and future demand for services; competition in wireline and services, including voice, data and Internet services and within the Canadian telecommunications industry generally; re-emergence from receivership of newly restructured competitors; levels of capital expenditures; success of operational and capital efficiency programs including maintenance of customer service levels; success of integrating acquisitions; network upgrades, billing system conversions, and reliance on legacy systems; implementation of new customer relationship management software; realization of tax savings; the impact of credit rating changes; availability and cost of capital including renewal of credit facilities; financial condition and credit risk of customers affecting collectibility of receivables; ability to maintain an accounts receivable securitization program; adverse regulatory action; attraction and retention of key personnel; collective labour agreement negotiations and the outcome of conciliation efforts; future costs of retirement and pension obligations and returns on invested pension assets; technological advances; the final outcome of pending or future litigation; the effect of environment, health and safety concerns and other risk factors described in Risks and Uncertainties and listed from time to time in TELUS Communications Inc.’s reports, TELUS Communications Inc.’s comprehensive public disclosure documents, including the Annual Information Form, and in other filings with securities commissions in Canada and the U.S. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Copyright © 2003 TELUS Corporation. All rights reserved. Certain brands of products and services named in this report are trademarks: * indicates those under licence; ™/ ® indicates those owned by TELUS Corporation or its subsidiaries. management’s discussion and anaylsis

The following is a discussion of the consolidated financial condition and results of operations of TELUS Communications Inc.1 (“TCI” or the “Corporation”) for the years ended December 31, 2002 and 2001. This discussion contains forward-looking information that is qualified by reference to, and should be read in conjunction with, the Corporation’s discussion regarding forward-looking statements (see forward-looking statements on the inside front cover). The following should also be read in conjunction with the accompanying Audited Consolidated Financial Statements of TCI and notes thereto. The Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”).

Developments in 2002

Accounting entity Change in external auditor in 2002 On September 30, 2002, TELUS Communications Inc., Clearnet Inc. Effective for the second quarter of 2002, as a result of the partners and 612459 B.C. Ltd., corporations under the common control of and staff of the Canadian operations of Arthur Andersen LLP joining TELUS Corporation, the ultimate parent corporation, effected a corpo- Deloitte & Touche LLP, Deloitte & Touche LLP was appointed as rate reorganization. Clearnet Inc. changed from being the immediate the external auditor of TCI. parent corporation of TELUS Communications Inc., to becoming TELUS Communications Inc.’s subsidiary, when 612459 B.C. Ltd. trans- Accounting policy changes in 2002 ferred its ownership interest in Clearnet Inc. to TELUS Communications The 2002 financial results reflect the adoption of three recent accounting Inc. As a consequence of this corporate reorganization, 612459 B.C. pronouncements. Ltd. replaced Clearnet Inc. as TELUS Communications Inc.’s immediate Earlier in 2002, the Corporation adopted the provisions of parent corporation. Furthermore, this reorganization resulted in the TELE- Financial Accounting Standards Board (“FASB”) EITF 01-9 regarding MOBILE COMPANY partnership becoming wholly-owned by TELUS the accounting for consideration given by a vendor to a customer. Communications Inc. On September 30, 2002, Clearnet Inc. was wound The application of this standard by TCI results in costs specific to the up into TELUS Communications Inc. On December 31, 2002, and Internet operations, which were previously recorded as Communications Inc. purchased TELUS Risk Management Inc. from operations expenses, being reclassified to offset revenues. Comparative TELUS Corporation. Subsequently on December 31, 2002, TELUS Risk revenues and operations expense for the year ended December 31, 2001 Management Inc. was wound up into TELUS Communications Inc. for Mobility operations were reduced by $122.1 million restated on As related party transactions not involving a substantive change a consistent basis with 2002 results (which have been reduced by in ownership, these transactions were recorded at net book value and $139.5 million) – with no change to reported 2001 earnings or other key accounted for using the continuity-of-interests method, which is similar operating metrics such as marketing cost of acquisition (“COA”). See to the pooling-of-interests method. Under this method, the assets, Note 3(b) to the Consolidated Financial Statements for more information. liabilities, shareholders’ equity and results of operations for the current In addition, effective January 1, 2002, the Corporation adopted and prior periods have been restated to reflect the Corporation’s oper- the changes in accounting policy as required by Canadian Institute ations on a combined basis. See Note 1, Note 11 and Note 18 to the of Chartered Accountants (“CICA”) Handbook Section 3062 – Goodwill Consolidated Financial Statements for more information. and Other Intangible Assets. As a result, the Corporation no longer amortizes goodwill or indefinite life intangible assets.

1 TELUS Communications Inc. is a wholly-owned subsidiary of TELUS Corporation (“TELUS”), a public reporting issuer whose shares are listed on the and New York stock exchanges. All of TELUS’ Mobility operations, including those previously carried out by Clearnet Communications Inc. and TELUS Québec Mobilité, are con- ducted by TELE-MOBILE COMPANY partnership (“TMC”) and are included in TCI, as are TELUS’ and wireline operations and Non-ILEC operations outside of the Province of Québec. TELUS Québec Mobilité results are included effective July 1, 2001, when they became part of TMC.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 1 management’s discussion and analysis

Under Section 3062, rather than being systematically amortized, In 2001, TCI filed with the CRTC a ‘review and vary’ request the value of intangible assets with indefinite lives and goodwill are relating to the costing assumptions prescribed to be used in calculating periodically tested for impairment. In the first quarter of 2002, TELUS portable subsidy requirements, relating to CRTC Decisions 2000-745 assessed its intangible assets with indefinite lives, which are its wireless and 2001-238. Under these decisions, the costs the Corporation can spectrum licences, and determined it necessary to record a transitional recover through the contribution regime were reduced. On October 25, impairment amount in the TELUS Corporation financial statements. 2002, the CRTC released Decision 2002-67, denying the ‘review and As a result of the corporate structure of TELUS Corporation, the con- vary’ request. However, the CRTC noted it would consider portfolio solidated financial statements of TCI are not affected by the TELUS expenses in upcoming proceedings. Other than the impacts described Corporation transitional impairment amount. TELUS Corporation also in the paragraph above, no additional financial impacts are expected. completed its test for transitional impairment for goodwill and deter- The Corporation believes that Decision 2002-67 made two critical policy mined that there was no transitional goodwill impairment amount. TELUS errors: first, that the costs TCI and other Incumbent Local Exchange Corporation’s annual review of impairment for intangible assets with Carriers (“ILECs”) are required to use to calculate subsidies for residential indefinite lives and for goodwill will be complete as of December each primary exchange service and for unbundled loops are not actual year. No impairment was recorded as a result of TELUS Corporation’s corporation-specific costs that take into account different geography review in December 2002. See Note 3(a) to the Consolidated Financial and population density in Western Canada; and second, that the costs Statements for additional details. are too low for TCI and appear to be too low for certain other ILECs Commencing January 1, 2002, the Corporation adopted the new as well. recommendations of the CICA dealing with accounting for share-based On January 22, 2003, TCI filed a petition to the Governor in compensation awards granted to its employees by its parent, TELUS Council of the Government of Canada requesting a variance of Decision Corporation (CICA Handbook Section 3870). As required, the accounting 2002-67. TCI has asked the Governor in Council to vary the decision change was applied prospectively. In 2002, the Corporation applied to require that the CRTC employ corporation-specific costs for residen- the intrinsic method for share-based compensation awards granted to tial primary exchange service and unbundled loops filed by the ILECs employees. Accordingly, no compensation cost was recorded in the in January 2001. accounts for its share option plans. The Corporation intends to comply Price cap decisions with the CICA’s Accounting Standards Board’s direction for the treat- On May 30, 2002 the CRTC announced its decisions on the Regulatory ment of share-based compensation. Amendments to Section 3870 Framework for the Second Price Cap Period for ILECs, or CRTC Decision are expected to be finalized in mid-2003 and would be effective com- 2002-34, which established the framework for regulation of ILECs, mencing with the 2004 fiscal year. See Note 3(c) and Note 9 to the including TCI. These decisions cover a four-year period beginning Consolidated Financial Statements. June 2002. The impact of this decision was a decrease in consolidated EBITDA of $55 million for 2002, when compared with 2001. Regulatory changes in 2002 The positive aspects of the CRTC decision were that it confirms Contribution decisions TCI’s preferred regulatory model of facilities-based competition, did not Commencing January 1, 2002, operating revenues and EBITDA1 introduce the significantly larger discounts of up to 70% for use of were impacted by changes to the contribution revenues received and incumbent facilities sought by competitors and allows TCI to benefit as contribution expenses paid as a result of the following: Canadian it becomes more efficient. On the negative side, the CRTC has extended Radio-television and Telecommunications Commission (“CRTC”) Decision the regulation of local prices and service levels, reduced the ability 2000-745 on Changes to the Contribution Regime, and Decision of corporations to raise prices, introduced more complexity and caused 2001-238 on Restructured Bands. The impact of these decisions was additional negative impact to TCI’s earnings. a decrease in consolidated EBITDA of $205 million for 2002, when TELUS anticipates that the financial impact of the CRTC price cap compared with 2001. decisions is an incremental annual negative EBITDA impact of approxi- mately $80 million for 2003. This is in part due to the CRTC allowing a reduction of between 15 to 20% on the fees paid by competitive local exchange carriers (“CLECs”) for access to the TELUS network.

1 Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) is defined as Operating revenues less Operations expense and, as defined, excludes Restructuring and workforce reduction costs.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 2 In an effort to foster competition for residential basic service in non Status of labour negotiations high-cost service areas (“non-HCSAs”), the concept of a deferral account TCI and the Telecommunications Workers Union (“TWU”) are currently mechanism was introduced by the CRTC as a conservative accounting negotiating a new collective agreement to replace the multiple legacy alternative to mandating price reductions. The deferral account arises agreements from the predecessors BC TEL and the Alberta-based from the CRTC requiring the Corporation to defer the income statement TELUS. In the fourth quarter of 2002, TCI’s application to the federal recognition of a portion of the monies received in respect of residential Minister of Labour for conciliation was granted and two federal basic services provided to non-HCSAs. The revenue deferral is based conciliators were appointed. on the rate of inflation (as measured by a chain-weighted GDPPI index), In January 2003, TCI and the TWU mutually agreed to extend less a productivity offset of 3.5%, and an “exogenous factor” that is the conciliation timeline. During the first phase of the extension, associated with allowed recoveries in previous price cap regimes that the conciliators are conducting a global review with both parties of have now expired. The Corporation may recognize the deferred amounts all outstanding issues. The timeframe for this phase is at the discretion upon the undertaking of qualifying actions, such as service improvement of the conciliators. Once the global review has been completed, the programs (“SIPs”) in qualifying non-HCSAs, rate reductions (including conciliators will create an action plan for the second phase of concil- those provided to competitors as required in Decision 2002-34) and/ iation. At this point, both parties will enter a conciliation period of or rebates to customers. To the extent that a balance remains in the 60 days under the supervision of the conciliators. The second phase of deferral account, interest is required to be accrued at the Corporation’s conciliation can be extended by the mutual agreement of both parties. short-term cost of borrowing. The Corporation believes its use of If the outstanding issues are not resolved at the conclusion of the 60- the deferral account, for the recognition of revenues related to monies day period, a 21-day cooling-off period will follow before any legal work received in respect of residential services provided to non-HCSAs, disruption can take place. The Canada Labour Code further requires is conservative. 72-hour advance notice to be provided between the parties prior to Subsequent to Decision 2002-34, AT&T Canada Inc. petitioned the the start of a work disruption. Phase one conciliation meetings began federal Cabinet to increase competitor discounts from those provided on January 27, 2003, with additional meeting dates scheduled through for in the Decision. On March 25, 2003, the federal Cabinet upheld to August 2003. These scheduled dates are agreed to between TCI Decision 2002-34 thereby denying the petition. In addition, CallNet and the TWU and are expected to either be part of the global review Enterprises Inc. filed for a ‘review and vary’ in respect of the follow-up or fall under the 60-day conciliation period. Given these timeframes, process as set by the CRTC in Decision 2002-34 to examine the services it is currently expected that this process will not conclude until the third that are included and qualify for Competitor Digital Network Access quarter of 2003. (“CDNA”) pricing. On August 9, 2002, the CRTC issued Public Notice On January 27, 2003, TCI and the TWU signed a Maintenance of 2002-4 to determine the scope of CDNA services, which among other Activities agreement as required by federal legislation. This agreement issues, addresses CallNet’s application. This proceeding is expected ensures the continuation of services to 911 emergency, police, fire, to conclude some time in 2003. The CRTC continues to consider making ambulance, hospitals and coast guard, with provisions to cover other new services available to competitors at reduced rates. potential emergency services necessary to prevent immediate and serious danger to the health or safety of the public, in the event of a work stoppage.

Overview of 2002 results and performance to targets

As referred to in the Notes to the Consolidated Financial Statements, British Columbia and Alberta wireline operations and Non-ILEC TELUS Communications Inc. is not managed as a legal entity and operations outside of the Province of Québec. its financial results are a subset of TELUS Corporation. All of TELUS TCI’s results and performance are a substantial subset of, and Corporation’s Mobility operations, including those carried out by the inextricably linked to, TELUS Corporation’s. To assist in understanding former Clearnet Communications Inc. and TELUS Québec Mobilité, the 2002 results of TCI, for which no targets are separately established, are conducted by the TELE-MOBILE COMPANY partnership and are the overview of TELUS Corporation’s 2002 results and performance included in TELUS Communications Inc., as are TELUS Corporation’s to targets follows in this section.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 3 management’s discussion and analysis

TELUS revised its guidance quarterly in 2002 as new information became available. Original targets and guidance revisions are summarized in the table below with footnotes explaining the changes.

2002 2001 annual report Revised guidance results targets for 2002 Met for 2002 Met

Consolidated Revenues $7.01 billion $7.5 to $7.6 billion ✗ $7.35 to $7.45 billion1 ✗ See note 1 Approx. $7.0 billion2

EBITDA5 $2.52 billion $2.475 to $2.525 billion Approx. $2.5 billion4

Earnings (loss) per share (75) cents 15 to 20 cents ✗ (90) to (95) cents2 See note 2 Approx. (80) cents3 Approx. (75) cents4

EPS excluding restructuring 43 cents See note 2 – 15 to 20 cents2 Approx. 35 cents3 Approx. 42 cents4

Capital expenditures $1.70 billion $2.1 to $2.2 billion $1.8 to $2.0 billion1 Approx. $1.8 billion2 Less than $1.8 billion3 Approx. $1.7 billion4

Communications segment Revenue (external) $4.99 billion $5.4 to $5.45 billion ✗ Approx. $5.0 billion2

Central Canadian wireline revenue $840 million $945 million ✗ Approx. $800 million2

Non-ILEC revenue (included in Central Canadian wireline revenue) $527 million $650 million ✗ Approx. $525 million2

EBITDA $1.98 billion $2.025 to $2.055 billion ✗ Approx. $2.0 billion2 ~

Non-ILEC EBITDA $(107) million $(125) million Approx. $(110) million4

Capital expenditures $1.24 billion $1.55 to $1.65 billion $1.3 to $1.5 billion1 Approx. $1.3 billion2 Approx. $1.24 billion4

High-speed Internet net additions 195,200 200,000 or more ✗ Approx. 200,0004 ~

Mobility segment Revenue (external) $2.02 billion $2.1 to $2.15 billion $1.95 to $2.0 billion1 See note 1 Approx. $2.0 billion2

EBITDA $535 million $450 to $470 million $470 to $490 million1 Approx. $490 million2 Approx. $510 million4

Capital expenditures $460 million $560 million Approx. $500 million1 Approx. $460 million4

Wireless subscriber net additions 417,800 425,000 to 450,000 ✗ Approx. 425,0004 ~

Revisions were made to the original guidance for expected 2002 results in each quarter, as follows: 1 Guidance for Consolidated revenues and Mobility revenues was amended with the announcement of first quarter results to reflect implementation of an accounting classification change in order to comply with EITF 01-9, as described in “Accounting Policy Changes in 2002”. In addition, the guidance for capital expenditures was amended to reflect a reduction in planned discretionary spending, while guidance for Mobility EBITDA was changed to include a retroactive recovery associated with the favourable clarification of tax legislation by the Provincial Sales Tax Authority. 2 Guidance issued with second quarter results reflected the impacts of new regulatory decisions, lower than expected revenue growth in Central Canadian operations, the receipt of investment tax credits, the expected impacts of the announced OEP (including expected savings and the workforce restructuring charge), and further reductions in discretionary capital spending. EPS guidance issued in the 2001 annual report did not include Restructuring and workforce reduction costs. With the announcement of the OEP, revised EPS guidance was provided for both basic EPS and EPS before Restructuring and workforce reduction costs. Excluding Restructuring and workforce reduction costs, EPS was 43 cents and exceeded the annual guidance for 2002. 3 Guidance issued with the third quarter results was updated to reflect an improved annual outlook including increased expected OEP savings, the impact of the workforce restructuring costs expected to be recorded in 2002, the after-tax gain on third quarter debt repurchases, and the impacts of the third quarter public equity issue. 4 Final guidance for 2002 was issued on the December 16, 2002 conference call that announced 2003 financial and operational targets. The guidance for 2002 was revised to reflect further reductions in capital expenditures in both segments, improving margins in the Mobility segment and the Communications segment’s non-incumbent operations. 5 Excluding Restructuring and workforce reduction costs.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 4 Results of operations

Highlights since the beginning of the year, and approximately 6,000 positions reduced since the first phase of the OEP that began in July 2001. Years ended December 31 ($ in millions except per share amounts) 2002 2001 Change % In addition, the OEP included the closure of 33 TELUS stores and

Operating revenues 6,096.3 6,224.0 (127.7) (2.1) closure or consolidation of 24 customer contact centres. Other initiatives EBITDA1 normalized for of the program include: streamlining of business processes; reduction regulatory impacts 2 2,495.1 2,368.9 126.2 5.3 of TELUS product portfolio and processes to support them; optimizing EBITDA 2,282.8 2,368.9 (86.1) (3.6) the use of real estate, networks and other assets; and operational Restructuring and workforce and administrative function consolidation. The program is expected reduction costs 553.3 175.4 377.9 215.5 Income from continuing to be completed during 2003 to meet the Corporation’s planned operations (68.4) (97.8) 29.4 30.1 financial objectives. Discontinued operations – 575.8 (575.8) (100.0) Consolidated operating revenue and EBITDA decreased for the Net income (loss) (68.4) 478.0 (546.4) (114.3) year ended December 31, 2002, when compared with the same period Ordinary Share income (loss) (131.1) 466.6 (597.7) (128.1) one year ago, reflecting negative impacts of recent regulatory decisions Capital expenditures totalling $414.9 million and $212.3 million. After normalizing for these – wireless spectrum 4.6 355.9 (351.3) (98.7) – general 1,442.1 1,910.4 (468.3) (24.5) impacts, TCI operating revenues improved by 4.6% for the year-to-date period. Similarly, normalized EBITDA improved by 5.3% for the year- 1 Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) is defined as Operating revenues less Operations expense and, as defined, excludes to-date period. The Corporation is focused on reducing the rate of Restructuring and workforce reduction costs. erosion from traditional revenue streams such as long distance, while The Corporation reports EBITDA because it is a key measure used by TELUS Corporation to evaluate performance of business units and is utilized in measuring maximizing gains in growth areas primarily in wireless and Internet. compliance with debt covenants. The Corporation also believes EBITDA is a measure Net income decreased in 2002, when compared with 2001, primarily commonly reported and widely used by investors as an indicator of a corporation’s operating performance and ability to incur and service debt. The Corporation believes due to the following: recognition of approximately $224 million in after- EBITDA assists investors in comparing a corporation’s performance on a consistent tax restructuring and workforce reduction costs, the regulatory decision basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating impacts of approximately $128 million after tax, and improved EBITDA factors such as historical cost; and without regard to Restructuring and workforce reduction costs, which are transitional in nature. EBITDA is not a calculation based on before regulatory decision impacts of approximately $76 million after tax. Canadian Generally Accepted Accounting Principles and should not be considered Voice local revenue is generated from monthly access charges an alternative to Net income in measuring the Corporation’s performance or used as an exclusive measure of cash flow because it does not consider the impact of work- and enhanced services. Voice local revenue increased by $76.6 million ing capital growth, capital expenditures, debt principal reductions and other sources (3.9%) in the year ended December 31, 2002, when compared with and uses of cash which are disclosed in the Consolidated Statements of Cash Flows. Investors should carefully consider the specific items included in TCI’s computation the same period one year ago. Local access revenue decreased by of EBITDA. While EBITDA has been disclosed herein to permit a more complete $7.1 million, due to CRTC price cap decision impacts and approximately comparative analysis of the Corporation’s operating performance and debt servicing ability relative to other corporations, investors should be cautioned that EBITDA 56,000 fewer access lines than one year ago, partly offset by price as reported by TCI may not be comparable in all instances to EBITDA as reported increases implemented in 2001 and growth in Non-ILEC business. by other corporations. 2 Regulatory impacts as described under section “Regulatory changes in 2002” above. Network access lines decreased by approximately 37,000 consumer lines and 34,000 business lines between December 31, 2001 and Quarterly information December 31, 2002. ILEC consumer lines in Western Canada decreased due to removal of second lines as a result of the significant increase ($ in millions) Q4 2002 Q3 2002 Q2 2002 Q1 2002 in high-speed Internet subscribers and technological substitution Operating revenues 1,568.9 1,540.3 1,508.7 1,478.4 including migration to wireless services. To a lesser extent, consumer Income (loss) from continuing lines decreased due to losses to competitors. Business line losses operations (100.6) (121.2) 84.4 69.0 Net income (loss) (100.6) (121.2) 84.4 69.0 of 38,000 were due to technological substitution to more efficient Inte- grated Services Digital Network (“ISDN”) services and economic factors.

($ in millions) Q4 2001 Q3 2001 Q2 2001 Q1 2001 Partly offsetting this was a 4,000 line net competitive gain as growth in Central Canada Non-ILEC business lines exceeded ILEC business Operating revenues 1,592.3 1,545.3 1,500.3 1,586.1 Income (loss) from continuing line losses. operations 18.6 96.5 (181.0) (31.9) Voice contribution revenue decreased by $359.7 million (85.0%) Net income (loss) 17.5 647.6 (155.2) (31.9) for the year ended December 31, 2002, when compared with the same period one year ago. The change in contribution revenue resulted prin- TCI made significant cost structure improvements in the current year cipally from CRTC Decisions 2000-745 on Changes to the Contribution resulting from execution of the Operational Efficiency Program (“OEP”). Regime and 2001-238 on Restructured Bands, which reduced the Within TELUS, this program plans to reduce net targeted staff count revenues that TCI received to subsidize high-cost service areas in positions by approximately 6,500 in 2002 and 2003, primarily through 2002. Under these decisions, there was also a much smaller decrease voluntary retirement and departure programs. As at December 31, 2002, in contribution expense (or revenue tax) impacting Mobility in 2002 approximately 5,200 positions have been reduced in the wireline business (see discussion under Operations expense).

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 5 management’s discussion and analysis

Voice long distance revenue decreased by $78.0 million (7.4%) Key operating indicators for the year ended December 31, 2002, when compared with the same Years ended December 31 period one year ago. Wholesale settlement revenues decreased by (000s for subscribers and additions) 2002 2001 Change % $41.9 million (33.1%) year-to-date, when compared with the same period Network access lines, in 2001, due to lower inbound minutes from domestic carriers and migra- end of period 4,567 4,637 (70) (1.5) tion of competitors’ minutes to their own networks, as well as lower Total Internet subscribers, 1,2 rates on international traffic, partly offset by higher inbound international end of period 675.5 281.0 394.5 140.4 Dial-up 280.7 184.3 96.4 52.3 transit volumes and favourable retroactive adjustments to certain domes- High-speed 394.8 96.7 298.1 308.3 tic settlement rates in the fourth quarter. Substitution to alternative Total Internet subscriber technologies such as e-mail, Internet and wireless, and lower business net additions1 157.9 54.9 103.0 187.8 long distance rates contributed to long distance revenue erosion. Dial-up (32.0) (1.3) (30.7) NM These declines were partially offset by implementation of a $1.25 monthly High-speed 189.9 56.2 133.7 237.9 long distance plan administration fee and a 2-cent per minute rate 1 Internet net additions and year-end subscriber counts for 2002 include reductions increase in consumer calling plans effective February 2002. of approximately 21,100 dial-up subscribers and approximately 3,400 high-speed Internet subscribers as a result of a post-implementation review following billing Data revenues include Enhanced/IP data services (services such as system conversions. 2 2001 Internet amounts do not reflect the corporate reorganization that resulted Internet access, hosting and applications, LAN/WAN, gateway service, in British Columbia Internet subscribers being included in TCI’s 2002 amounts. internetworking and remote access) and other data services (managed information technology (“IT”) services and legacy data services such The following revenue analysis is presented on a pro forma basis as private line, switched data services, data local access, data settle- (information has been normalized to include TELUS Québec Mobilité ments and data equipment sales). Total Data revenue increased by operations for the first six months of 2001, prior to the corporate $119.2 million (18.2%) for the year ended December 31, 2002, when reorganization which resulted in it being included in TMC). compared with the same periods in 2001. Negative price cap decision impacts were $21.5 million since June 2002. Operating revenues – TELUS Mobility • Enhanced data/IP revenue increased by $158.7 million for the year mainly due to the year-over-year growth in consumer high-speed Years ended December 31 ($ in millions) 2002 2001 Change % Internet customer base of 308.3%, and increased internetworking Network revenue 1,852.7 1,645.0 207.7 12.6 and hosting revenues, partly offset by lower e-commerce, content Equipment revenue 164.7 163.5 1.2 0.7 and hosting revenues. External operating revenue 2,017.4 1,808.5 208.9 11.6 • Other data revenues decreased by $39.5 million for the year ended Intersegment revenue 17.5 17.4 0.1 0.6 December 31, 2002, when compared with the same period in 2001. Total operating revenue 2,034.9 1,825.9 209.0 11.4 The decrease for the year was primarily attributable to $10.4 million

lower data settlements revenue and $21.5 million negative price TELUS Mobility Network revenue is generated from monthly billings cap impacts. for access fees, incremental airtime charges, prepaid time consumed Other revenue decreased by $32.4 million (5.1%) for the year ended or expired, wireless data and fees for value-added services. Network December 31, 2002, when compared with the same period in 2001. revenue increased by 12.6% in 2002, when compared with 2001. The The decrease was due to lower voice equipment sales volumes as a Network revenue growth was a result of the continued expansion of result of reduced demand and increased focus on higher margin TELUS Mobility’s subscriber base by 16.2% to approximately 3.0 million product portfolios, as well as a greater emphasis on data equipment subscribers from 2.6 million one year ago while maintaining an industry sales as opposed to voice equipment sales and, to a lesser extent, leading average revenue per subscriber unit per month (“ARPU”). closure of retail stores. TELUS Mobility continued to pursue a strategy focused on profitable revenue growth and subscriber retention, which resulted in steady ARPU and a substantially improved churn rate year-over-year. While ARPU was $55 for 2002, compared with $57 in 2001, the relative stability of ARPU in the fourth quarter ($56 in both 2002 and 2001) was in contrast with historical trends observed in the fourth quarter (typically an approximate 3% rate of decrease). This was a significant achievement considering 2002 trends of greater in-bucket usage, postpaid/prepaid mix changes, retention offers aimed at reducing postpaid churn, and overall competi- tive market pressures. In-bucket usage refers to plans that offer free minutes (at a fixed fee) for periods of time including free evenings and weekends and after-school calling. The slight decline in ARPU was

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 6 attributed to increased usage and to TELUS Mobility’s pricing discipline. Key operating indicators – TELUS Mobility Average minutes of use (“MOU”) per subscriber per month were 290 Years ended December 31 in 2002 compared with 270 in 2001. As of December 31, 2002, postpaid (000s for subscribers and additions) 2002 2001 Change % subscribers accounted for 83.1% of the total cumulative subscriber Net subscriber additions – postpaid 301.6 221.5 80.1 36.2 base as compared to 84.9% one year earlier. Net postpaid additions Net subscriber additions – prepaid 116.2 196.0 (79.8) (40.7) of 301,600 represented 72.2% of all net additions, an 80,100 or 36.2% Net subscriber additions – total 417.8 417.5 0.3 0.1 increase, as compared to 221,500 or a 53.1% increase in 2001. Total Subscribers – postpaid 2,490.6 2,189.0 301.6 13.8 net subscriber additions were 417,800 as compared to 417,500 in 2001. Subscribers – prepaid 504.9 388.7 116.2 29.9 TELUS Mobility’s strong subscriber growth in the first three quarters Subscribers – total 2,995.5 2,577.7 417.8 16.2 of 2002 provided the flexibility to exercise pricing discipline despite Churn, per month (%) 1.8 2.0 (0.2) – significant promotional activity by competitors for the fourth quarter. Cost of Acquisition (“COA”) per gross subscriber addition1 ($) 497 502 (5) (1.0) Net additions for 2002 were similar to those for the prior year and COA per gross subscriber addition reflect an increase in market share given declining industry net addi- 1 excluding retention and migration ($) 425 446 (21) (4.7) tions as compared to the previous year. ARPU ($) 55 57 (2) (3.5) The blended postpaid and prepaid churn rate averaged 1.8% per Total POPs2 covered (millions) 25.3 24.6 0.7 2.8 month for 2002 and represented an improvement from 2.0% churn Digital POPs covered (millions) 25.2 24.2 1.0 4.1 Digital POPs covered including for the same period in 2001. Deactivations increased by 4.5% to roaming/resale3 27.4 ––– 599,100 from 573,300 in 2001. The improved churn rate and industry EBITDA ($ millions) 534.8 355.8 179.0 50.3 leading ARPU are evidence of the continued focus and execution EBITDA excluding COA ($ millions) 1,016.4 837.7 178.7 21.3 by TELUS Mobility on subscriber retention and profitable revenue gen- 1 For 2002, COA of $497 and $425 before retention and migration costs excluded erating subscriber growth. The decline in the churn rate is attributed the $21.0 million favourable clarification of tax legislation by the Ontario Provincial to improved network quality and coverage including the implementation Sales Tax authorities, representing a reversal of a cumulative COA liability. When including the $21.0 million reduction, COA for 2002 would be $476 and $404 of the roaming/resale agreements with and Aliant Telecom excluding retention and migration. Wireless, improved client service levels, client contracting as part of 2 POPs is an abbreviation for Population. A POP refers to one person living in a population area, which in whole or substantial part is included in the coverage area. loyalty and retention programs, and the grandfathered per-second rate 3 TELUS Mobility has not activated all digital roaming areas. TELUS PCS digital population coverage was 21.4 million, and 27.4 million including the roaming/resale plans compared to new per-minute billing plans. agreement with Bell Mobility and Aliant Telecom Wireless. TELUS PCS and Mike™ Equipment sales, rental and service revenue for 2002 was digital population coverage was 25.2 million. $164.7 million compared to $163.5 million for the same period in 2001. The increase in equipment revenues was principally due to a 26,100 Operations expense (2.6%) increase in gross subscriber activations to 1,016,900 in 2002 ($ in millions) 2002 2001 Change % from 990,800 in 2001. Years ended December 31 3,813.5 3,855.1 (41.6) (1.1) Intersegment revenues represent services provided by the Mobility segment to TELUS’ Communications segment and are eliminated Operations expenses decreased in 2002, when compared with 2001, upon consolidation along with the associated expense in TELUS’ as a result of OEP cost reductions including lower salaries and benefits financial statements. from approximately 5,800 net staff reductions since December 31, 2001, a lower contribution expense, and the favourable impact of investment tax credits (“ITCs”) of $45.3 million in 2002. The ITCs were recognized as a result of a settlement with Canada Customs and Revenue Agency (“CCRA”) for previous years’ claims and were recorded as a reduction of operations expense as this is where the qualifying expenses were recorded originally. A provincial sales tax clarification, arising in the Mobility operations, contributed $21.0 million reduction in expenses in 2002. Excluding the ITCs and the provincial sales tax clarification, operations expense increased by $24.7 million for the year ended December 31, 2002, when compared with the same period in 2001. As noted in the discussion of TELUS Mobility operations expense following, if the provincial sales tax clarification is excluded, TELUS Mobility operations expense increased $51.0 million on a year over year, pro forma basis. Of the decrease in operations expense offsetting the TELUS Mobility increase, the most significant items were OEP-related salary savings from reduced staff counts and other non-labour savings and a decrease in contribution expense of $154.9 million for the year. The change to contribution expense resulted from the lowering of contribution rates

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 7 management’s discussion and analysis

from 4.5% of eligible revenues to a final rate of 1.3% of eligible revenues, were attributed to transmission and site-related expenses including as determined in contribution and rebanding decisions. Payments costs in support of the roaming/resale agreement with Bell Mobility under the Software and Related Technology and Services Agreement and Aliant Telecom Wireless. Enhancements to both PCS and Mike with Verizon decreased by $24.6 million year-to-date. Offsetting these digital networks across Canada helped to support the increased expense decreases were the inclusion of TELUS Québec Mobilité subscriber base and improve service levels. PCS digital population operations in the current year, but not in the comparative period; coverage increased by 6.0 million (Bell – 4.8 million and Aliant – increased consumer Internet costs due to the 308% growth rate in net 1.2 million) from 21.4 million before the roaming/resale agreements additions of high-speed Internet subscribers; costs associated with to 27.4 million including roaming/resale areas activated by the end Internet present in 2002 that were in a different legal entity in 2001; of the fourth quarter. Total digital population coverage (Mike and PCS) higher pension costs ($27.9 million); increased building lease payments as of December 31, 2002, was 25.2 million (27.4 million including due to the sale and leaseback of administrative buildings in 2001; all current digital roaming service areas) as compared to 24.2 million and increased bad debt expense ($27.9 million). one year ago. Marketing expenses excluding handset subsidies were $249.4 million The following expense analysis is presented on a pro forma basis for 2002, as compared to $230.2 million for 2001. The increase was (information has been normalized to include TELUS Québec Mobilité principally the result of dealer compensation as a result of 37,100 higher operations for the first six months of 2001, prior to the corporate postpaid gross subscriber additions. COA per gross subscriber addition reorganization which resulted in it being included in TMC). was $497 (excluding any benefit from the $21.0 million PST ruling) as compared to $502 in 2001. Excluding retention and migration costs, Operations expense – TELUS Mobility COA per gross subscriber addition was $425 and $446 for 2002 and 2001, respectively. Increased retention spending is consistent with ($ in millions) 2002 2001 Change % TELUS Mobility’s focus on reducing postpaid churn by contracting Years ended December 31 1,500.1 1,470.1 30.0 2.0 and offering incentives to the existing subscriber base. G&A expenses consist of employee compensation and benefits, TELUS Mobility operations expenses increased for the year ended facilities, client services, bad debt and various other expenses. G&A December 31, 2002, when compared to the same period one year ago. expenses increased 11.7% to $512.8 million for 2002, compared to Expenses included a $21.0 million reduction resulting from a clarification $458.9 million in 2001. The increases were principally related to an of provincial sales tax legislation related to handset subsidies, which increase in staffing levels in the areas of client operations, corporation- represented the reversal of a cumulative liability previously recorded in owned retail stores, expansion into new coverage territory, and channel marketing cost of acquisition (“COA”). Normalized for this reduction distribution expansion to support subscriber growth and improve service in expenses, Operations expense increased by $51.0 million or 3.5%. levels. Employee costs increased due to growth of 5.1% in staffing The increase was principally due to general and administrative expenses levels to 5,420 employees from 5,156 at December 31, 2001. Client (“G&A”) for client services to support higher subscriber levels and, operations expense increased principally due to increases in bad debts to a lesser extent, COA attributed to higher postpaid gross activations. and subscriber related expenses, such as billing and postage charges. However, significant productivity improvement is evident when G&A Bad debts and other customer losses increased $22.6 million for expense increase of 11.7% is compared with network revenue growth 2002 as compared to 2001. This significant increase in bad debt and of 12.6% and annual subscriber growth of 16.2%. other customer losses was related to certain temporary impacts Expenses related to equipment sales decreased $22.8 million or related to billing system conversions completed in 2002. By the fourth 5.8% when compared to one year earlier. The decrease was related quarter, such expenses had begun to return to historical levels as to the $21.0 million favourable clarification of PST legislation. Once bad debt and other customer losses declined by $5.4 million or 36.2% normalized, equipment costs decreased by $1.8 million or 0.5% due as compared to the third quarter of 2002. TELUS Mobility expects to favourable exchange rates and vendor pricing being partly offset bad debt related expenses to decline to more historical levels in 2003. with 26,100 higher gross subscriber additions. These costs are included TELUS Mobility completed its fifth and final major billing system conver- in COA. sion over the past 18 months with the completion of the Mike billing Network operating expenses consist of site-related expenses, system conversion in early October 2002. transmission costs, spectrum licence fees, contribution revenue taxes, and other direct costs related to network operations. Network operating expenses decreased by $20.3 million or 5.2% to $366.7 million in 2002 from $387.0 million in 2001. These costs improved as a result of reduced contribution charges, $18.6 million in 2002 as compared to $60.1 million in 2001. When normalized for reduced contribution revenue taxes in 2002, network operating expenses increased by $21.2 million or 5.5% as compared to 2001. The normalized increases

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 8 Earnings1 Before Interest, Taxes, Depreciation $5.7 million lower depreciation on network assets due to service life and Amortization (“EBITDA”) increases implemented in late 2001. Amortization increased, primarily because of growth in administrative ($ in millions) 2002 2001 Change % software, by $78.0 million for the year ended December 31, 2002, when Years ended December 31 2,282.8 2,368.9 (86.1) (3.6) compared to the same period in 2001. Commencing January 1, 2002, the Corporation no longer amortizes intangible assets with indefinite EBITDA1 margin2 lives as a result of the required adoption of CICA policy discussed in

(%) 2002 2001 Change Note 3(a) to the Consolidated Financial Statements.

Years ended December 31 37.4 38.1 (0.7) Restructuring and workforce reduction costs 1 Excluding Restructuring and workforce reduction costs. 2 EBITDA divided by total revenue. ($ in millions) 2002 2001 Change %

The Corporation’s EBITDA decreased by $86.1 million for the year Years ended December 31 553.3 175.4 377.9 215.5 ended December 31, 2002, when compared to the same period in 2001, primarily due to the negative impacts of the changes in contri- Restructuring and workforce reduction costs were recorded in 2001 bution rates and the recent price cap decision. Normalized for these and 2002 for Operational Efficiency Program (“OEP”) costs. In 2001, negative regulatory impacts, the Corporation’s EBITDA would have the Corporation initiated a phased OEP aimed at improving operating increased by $126.2 million. The normalized improvement is attributable and capital productivity and competitiveness. The first phase of the to operational efficiency savings, receipt of investment tax credits, OEP was to complete merger-related restructuring activities in TELUS and increased data revenue offset by decreases in other areas such Mobility and the reorganization for TELUS Communications. In the first as long distance. quarter of 2001, a restructuring charge of $175.4 million was recorded. Approximately one-half of the 2001 charge was related to integration

The following EBITDA analysis is presented on a pro forma basis costs for TELUS Mobility including the write-down of redundant capital (information has been normalized to include TELUS Québec Mobilité assets, handset reconfiguration costs and employee severance costs. operations for the first six months of 2001, prior to the corporate The remaining charge was related to reorganization costs in TELUS reorganization which resulted in it being included in TMC). Communications, including employee severance costs and capital asset impairment charges. In the first quarter of 2002, the Corporation

TELUS Mobility continued to successfully execute its national recorded a $12.5 million expense in respect of restructuring and strategy focused on profitable revenue growth. Incremental network workforce reduction costs incurred in excess of the 2001 provision. revenue flowed through to EBITDA excluding COA at a rate of 86.0% By December 31, 2001, excluding the impacts of staff increases in 2002, compared to 67.7% in 2001. Excluding the $21.0 million favour- associated with acquisitions, there were approximately 800 net staff able PST clarification and reduced regulatory contribution expense of reductions in TELUS as a result of the OEP. $41.5 million, full year 2002 EBITDA improved by $116.5 million (32.7%) The second phase of the OEP, which commenced at the beginning as compared to the same period in 2001. EBITDA margin as a per- of 2002, continued to focus on reducing staff, but also entailed a com- centage of network revenue (before the PST clarification) improved to prehensive review of enterprise-wide processes to identify capital and 27.7% compared to 21.6% in 2001. The improvement in EBITDA margin operational efficiency opportunities. Consequently, on June 7, 2002, was attributable to strong subscriber and revenue growth, economies the Corporation initiated a program offering an Early Retirement Incentive of scale recognized through improved efficiencies resulting from the Plan (“ERIP”) and Voluntary Departure Incentive Plan (“VDIP”) to 11,000 successful integration of TELUS Mobility’s operations, and investments of the more than 16,000 bargaining unit employees and on July 11, 2002, in information systems and technology, as well as lower contribution the Corporation announced details on OEP initiatives including: stream- charges and the favourable PST clarification. For TELUS Mobility, EBITDA lining of business processes; reducing the TELUS product portfolio divided by network revenue was 28.9% in 2002 as compared to 21.6% and processes that support them; optimizing the use of real estate, in 2001. Excluding the $21.0 million PST clarification, the margin for networks and other assets; improving customer order management; 2002 was 27.7%. reducing the scope of corporate support functions; consolidating operational and administrative functions; and consolidating customer Depreciation and amortization contact centres. The third phase of the OEP commenced in the third quarter of Years ended December 31 2002 and was focused on operationalizing the above noted initiatives. ($ in millions) 2002 2001 Change % Twenty-four of the 43 customer contact centres targeted for con- Depreciation 1,040.8 988.8 52.0 5.3 solidation were consolidated by December 31, 2002. All 33 of the Amortization of intangible assets 295.6 217.6 78.0 35.8 TELUS stores targeted for closure were closed by December 31, 2002. Depreciation increased by $52.0 million for the year ended December Consolidation of administrative offices was largely completed by 31, 2002, when compared to the same period one year earlier. For the December 31, 2002. TELUS reduced its staff count by approximately year, an increase in depreciation expense of $57.7 million due to growth 5,200 for the year ended December 31, 2002. Since the inception in wireless and data network capital assets was partially offset by of the OEP in 2001 through December 31, 2002, TELUS has reduced

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 9 management’s discussion and analysis

its staff count by approximately 6,000, comprised of 4,200 bargaining Excluding gains and losses on debt repurchase and redemption and unit positions and 1,800 management positions. TELUS currently interest income received on ITCs and inter-corporate debt, Financing expects approximately 1,300 additional net employee reductions to costsfortheyearendedDecember31,2002decreasedby$195.8million occur in 2003 as a result of the OEP. See Note 5 to the Consolidated when compared to the same period one year ago. Interest on long-term Financial Statements. and short-term debt decreased by $204.0 million for the year ended The expense and liability for the ERIP and VDIP programs are December 31, 2002, due to the lower effective interest rates on floating recognized when the employee accepts the Corporation’s formalized rate inter-corporate debt that replaced the publicly held Senior Dis- offer. The total restructuring and workforce reduction expense of count Notes and the September 2002 corporate reorganization which $553.3 million for 2002 consisted of phase one expense of $12.5 million resulted in the effective conversion of $3,572.9 million of inter-corporate incurred in 2002, which was in excess of the phase one 2001 provision, indebtedness into an equity settled note (the interest on which is as well as $540.8 million related to the second and third phases of charged to retained earnings). the OEP. This 2002 provision included management, ERIP, VDIP and other operational efficiency pursuits. An additional restructuring amount Income taxes of approximately $20 million is expected to be recorded in 2003 ($ in millions) 2002 2001 Change % in respect of the OEP for items that were not eligible to be recorded Years ended December 31 58.1 269.6 (211.5) (78.4) in 2002.

The tax expense for both 2002 and 2001 was significantly impacted Other expense (income), net by the revaluation of future tax assets and future tax liabilities for

($ in millions) 2002 2001 Change % change in statutory rates, Large Corporations Tax and, in 2001, non-tax

Years ended December 31 16.9 (26.4) 43.3 NM effected elements of net income before tax. The required liability method of accounting for future income taxes, by definition, emphasizes the Other expense (income) includes gains and losses on disposal of meaningfulness of the future taxes recorded on the balance sheet. property, charitable donations, a non-recurring adjustment of prior An outcome of this balance sheet emphasis is that adjustments arising period inter-corporation recoveries and accounts receivable securitiza- from the future taxes recorded on the balance sheet are recorded tion expense. Other income for the year ended December 31, 2001, in the income statement, irrespective of the results of operations. Reduc- included a $24.5 million gain from the sale of a fibre asset. Charitable tions in future tax rates result in a decrease in the Corporation’s future donations increased by $4.3 million as compared to 2001. Other tax assets and an expense being recorded in the income statement. income for the year ended December 31, 2001 included an increase Similarly, changes in the estimates of when the underlying temporary in prior period inter-corporation recoveries of $13.6 million. Accounts differences will be settled affect the expense recorded in the income receivable securitization expense increased by $2.7 million when statement. See Note 7 to the Consolidated Financial Statements. compared with the same period in 2001 as a result of the establish- ment of a new, expanded program at the end of July 2002 – see Discontinued operations Note 3(d) and Note 10 to the Consolidated Financial Statements for ($ in millions) 2002 2001 Change % further discussion. Years ended December 31 – 575.8 (575.8) (100.0)

Financing costs Discontinued operations represented income from the directory

($ in millions) 2002 2001 Change % advertising business prior to the divestiture date. The sale of TELUS

Years ended December 31 386.5 841.7 (455.2) (54.1) Advertising Services’ Alberta, British Columbia and Ontario directory business and TELUS Québec’s directory business to Verizon’s Dominion Financing costs for the year ended December 31, 2002 included Information Services closed on July 31, 2001. See Note 8 to the pre-tax gains on debt redemption of $1.5 million as well as recognition Consolidated Financial Statements. of interest income of $49.6 million associated with the receipt of ITCs and interest on inter-corporate debt. The pre-tax gain on debt redemp- Preferred dividends tion arose from the repurchase of $59.5 million of notes and debentures. ($ in millions) 2002 2001 Change % Refer to the discussion under Cash provided by financing activities Years ended December 31 3.5 3.5 – – in the following pages for further details. Financing costs for the year ended December 31, 2001, included a $257.7 million loss on redemption There were no changes to the quarterly preferred dividend. of debt. See Note 6 to the Consolidated Financial Statements for the components of Financing costs.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 10 Interest on equity settled note reorganization, the corresponding interest charge in 2002 was for nine months compared to twelve months in 2001. The interest on con- ($ in millions) 2002 2001 Change % vertible debentures is presented net of related income taxes. As these Years ended December 31 53.3 – 53.3 100.0 debentures were convertible into equity shares and are classified as equity on the consolidated balance sheet, the related interest is recorded As part of the September 2002 corporate reorganization, $3,572.9 mil- as a charge to retained earnings rather than an interest expense. lion of outstanding inter-corporate indebtedness was converted into an equity settled note bearing interest at 9.7%. The interest on the equity Ordinary Share income (loss) settled note is presented net of related income taxes. As the equity settled note is convertible into Ordinary Shares and is classified as equity ($ in millions) 2002 2001 Change % on the balance sheet, the related interest is recorded as a charge to Years ended December 31 (131.1) 466.6 (597.7) (128.1) retained earnings rather than an interest expense. The Ordinary Share income was reduced in the year ending Decem- Interest on convertible debentures ber 31, 2002, when compared to the same period in 2001, primarily due to recognition in 2001 of $575.8 million income in discontinued ($ in millions) 2002 2001 Change % operations, and significantly increased restructuring and workforce Years ended December 31 5.9 7.9 (2.0) (25.3) reduction costs in 2002 (an increase of approximately $224 million after tax). As these convertible debentures, which were held by TELUS Corporation, were redeemed as part of the September 2002 corporate

Liquidity and capital resources

Cash provided by operating activities Capital expenditures

($ in millions) 2002 2001 Change % Years ended December 31 ($ in millions) 2002 2001 Change % Years ended December 31 1,326.6 1,076.9 249.7 23.2 Capital expenditures Cash provided by operating activities increased by $249.7 million – general 1,442.1 1,910.4 (468.3) (24.5) – wireless spectrum 4.6 355.9 (351.3) (98.7) (23.2%) for the year ended December 31, 2002, when compared with the same period in 2001, due mainly to an increase in sold accounts Total capital expenditures 1,446.7 2,266.3 (819.6) (36.2) receivable, lower cash income taxes, and the negative impacts on 2001 TCI’s capital expenditures decreased by 36.2% for the year ended working capital due to the sale of directory operations, partly offset by December 31, 2002, when compared with the same period in 2001. higher workforce restructuring payments and higher paid interest. Non-ILEC expenditures decreased by approximately $89 million, when compared with 2001, mainly due to the completion of the national Cash used by investing activities optical carrier network and IP backbone in 2001 and expenditures ($ in millions) 2002 2001 Change % on an Intelligent data centre in Toronto in 2001. Expenditures for ILEC Years ended December 31 1,421.9 1,976.2 (554.3) (28.1) sustainment decreased by approximately $255 million, when compared with 2001, mainly due to $134 million lower payments for software Net cash used by investing activities decreased by $554.3 million licences and brand-marks from Verizon, $76 million lower expendi- in the year ended December 31, 2002 when compared to the same tures on network infrastructure and $34 million lower expenditures period one year earlier. The decrease was mainly due to lower capital for e-hosting. expenditures and spectrum purchases in 2002 (described in more In addition to capital expenditures detailed above, a fibre asset detail below), and lower other investing activity in 2002. Cash used for was purchased in June 2001 from a third party for non-monetary investing activities in 2001 was reduced by receipt of proceeds from consideration of $76.0 million. As this was a non-cash purchase, the the sale of non-core assets: $810.0 million from the sale of the directory amount is not reflected in Capital expenditures on the Consolidated advertising business; and $228.4 million proceeds from the sale of Statements of Cash Flows. administrative buildings. The following capital expenditure analysis is presented on a pro forma basis (information has been normalized to include TELUS Québec Mobilité operations for the first six months of 2001, prior to the corporate reorganization which resulted in it being included in TMC).

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 11 management’s discussion and analysis

TELUS Mobility capital expenditures were significantly reduced for of the Equity settled note, which effectively replaced notes payable the year ended December 31, 2002, when compared with 2001. TELUS to affiliated corporations, and because of the inter-corporation notes Mobility continued the enhancement of digital cellular coverage, digi- receivable which qualified for offsetting against inter-corporation notes tization of the analogue network, and implementation of the 1X CDMA payable. The Net debt to EBITDA ratio decreased mainly due to (“code division multiple access”) data network. Excluding the spectrum the aforementioned decrease in debt arising from the September 2002 purchase, capital spending has declined significantly because of the corporate reorganization partially offset by an $86 million decrease implementation of the 1X digital network in 2001, digital conversion in the 12-month trailing EBITDA of $2,283 million ($2,369 million one of analogue networks in 2001, and reduced coverage expansion costs year earlier). The EBITDA interest coverage ratio for the year ended in 2002 due to the recently operationalized roaming/resale agreements December 31, 2002, increased as compared to the same period one with Bell Mobility and Aliant Telecom Wireless. year earlier, mainly due to lower financing costs in the 2002 period.

Cash provided by financing activities Credit facilities TELUS credit facilities at the end of December 2002, consisted of a ($ in millions) 2002 2001 Change % $1.5 billion (or U.S. dollar equivalent) revolving credit facility expiring on Years ended December 31 130.3 873.0 (742.7) (85.1) May 30, 2004 ($655 million drawn along with $47 million in outstanding undrawn letters of credit), an undrawn $800 million (or the U.S. dollar Cash used by financing activities decreased by $742.7 million in the equivalent) 364-day revolving credit facility extendible at TELUS’ option year ended December 31, 2002 when compared with the same period for any amount outstanding as at May 28, 2003 for one year on a one year ago, primarily due to the need last year to fund a higher level non-revolving basis, and approximately $74 million in other bank facili- of investing activities. In 2001, the components comprising cash pro- ties (nil drawn and approximately $5 million in outstanding undrawn vided by financing activities were significantly affected by the redemption letters of credit, at December 31, 2002). During the fourth quarter of of the former Clearnet Inc. Senior Discount Notes and their replacement 2002, the amount drawn on TELUS’ $1.5 billion revolving credit facility by inter-corporate debt; cash provided by net inter-corporate indebted- increased to $655 million primarily due to cash payments related ness decreased by $2,430.3 million to $307.6 million in 2002. In 2002, to TELUS’ OEP and the payment of semi-annual interest coupons on $213.3 million of net debt was repaid as compared to $2,552.4 million TELUS’ public notes. Outstanding undrawn letters of credit increased a year earlier. Aside from normal maturities, $59.5 million of debt was from $47 million to approximately $102 million after December 31, 2002. repurchased in 2002 and a corresponding gain on repurchase of At December 31, 2002, TELUS had unutilized available liquidity $1.5 million was realized. The issuance of Ordinary Shares and Preferred well in excess of $1 billion. TELUS’ credit facilities contain customary Shares arises primarily because of corporate reorganizations; proceeds covenants including a requirement that TELUS not permit its consoli- from shares issued were $46.7 million in 2002 as compared to dated Leverage ratio (Funded debt and Asset securitization amount to $993.2 million in 2001. Dividends paid to shareholders decreased trailing 12-month EBITDA) to exceed 4.0:1 (approximately 3.3:1 as at by $304.0 million due to no inter-corporate dividends being December 31, 2002) and not permit its consolidated Coverage ratio declared in 2002. (EBITDA to Interest expense and Asset securitization charges on a trail- ing 12-month basis) to be less than 2.5:1 (approximately 3.6:1 as at Liquidity and capital resource ratios December 31, 2002) at the end of any financial quarter. There are certain Years ended December 31 2002 2001 Change differences in the calculation of the Leverage ratio and Coverage ratio Net debt1 to total capitalization (%) 32.6 63.4 (30.8) under the credit agreement as compared with the calculation of Net debt 2 Net debt to EBITDA 1.9 3.7 (1.8) to EBITDA and EBITDA interest coverage. Calculated to one decimal Earnings coverage 3 1.0 2.3 (1.3) point, the Leverage ratio and Net debt to EBITDA were the same at EBITDA interest coverage4 5.9 4.1 1.8 December 31, 2002, while the Coverage ratio and EBITDA interest 1 The sum of notes payable to affiliated corporations, short-term obligations and coverage ratio were 3.6:1 and 3.7:1, respectively. Continued access long-term debt, net of cash and temporary investments. Net debt does not include the equity settled note. The equity settled note is subordinate to senior indebtedness to TELUS’ credit facilities is not contingent on the maintenance by of the Corporation. 2 Net debt as at December 31, 2002, divided by 12-month trailing EBITDA. TELUS of a specific credit rating. 3 Earnings coverage ratio is calculated on a 12-month trailing basis as net income before interest expense on total debt and income tax expense divided by interest expense on total debt. Accounts receivable sale 4 EBITDA divided by net financing cost before loss, or gain, on redemption of debt, On July 26, 2002, TCI signed an agreement with an arm’s-length calculated on a 12-month trailing basis. The loss on redemption of debt was recorded in 2001. securitization trust under which TCI is able to sell an interest in certain of its receivables up to a maximum of $650 million. TCI is required The Net debt to total capitalization ratio decreased mainly due to the to maintain at least a BBB(low) credit rating by Dominion Bond Rating significant decrease in Net debt that arose as a result of the September Service (“DBRS”), or the purchaser may require the sale program to 2002 corporate reorganization. Net debt decreased primarily because be wound down.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 12 During the third quarter of 2002, TCI terminated a prior securitiza- segment, continued EBITDA growth in the Mobility segment, lower tion trust agreement dated November 20, 1997. Collection and final expected EBITDA losses in non-ILEC operations, declining capital remittances in respect of the accounts receivable subject to the prior expenditures, improved working capital, lower cash income taxes due securitization transaction were completed by September 27, 2002. to application of significant tax losses carried forward and discounted On September 30, 2002, the new securitization agreement was debt repurchases, as well as equity issuances including employee amended in order to make available for purchase by the securitization and dividend share issuances, among other factors. TELUS’ mid-term trust, an interest in some of TCI’s other trade receivables of a certain objective is to have BBB to A- ratings for its long-term credit and class that were of the type previously sold to the prior securitization senior unsecured debt. trust. As at December 31, 2002, TCI had received aggregate cash proceeds of $475 million under its new accounts receivable Off-balance sheet arrangements and contractual liabilities securitization program. Financial Instruments (Note 4 to the Consolidated Financial Statements) TELUS’ credit facilities require that a portion of sold accounts TCI uses various financial instruments, the fair values of which are receivable be added to debt for purposes of calculating the Leverage not reflected on the balance sheet, to reduce or eliminate exposure to ratio covenant under the credit agreement. The amount of sold interest rate and currency risks. These instruments are accounted for accounts receivable, which is added to debt for purposes of this ratio, on the same basis as the underlying exposure being hedged. is calculated on a monthly basis and is a function of the ongoing The Corporation is exposed to interest rate risk arising from collection performance of the receivables pool. At December 31, 2002, fluctuations in interest rates on its temporary investments, short-term this amount, defined as the Asset Securitization Amount, was obligations and long-term debt. The Corporation has entered into approximately $120.4 million. interest rate swap arrangements that have the effect of fixing the interest rate on $107 million of floating rate debt. Hedge accounting Credit ratings is not applied to these swap agreements. As of March 31, 2003, no new rating actions on TELUS’ debt had The Corporation’s foreign exchange risk management includes been announced since July 2002. TELUS has an objective to preserve the use of foreign currency forwards to fix the exchange rates on access to capital markets at a reasonable cost by maintaining short-term foreign currency transactions and commitments. Hedge investment grade credit ratings. accounting is not applied to these foreign currency forwards. On July 8, 2002, DBRS confirmed its ratings at R-2(high) for Counterparties to the Corporation’s interest rate swap agreements TELUS Corporation, TELUS Communications (Québec) Inc. and TELUS and foreign exchange hedges are major financial institutions that Communications Inc. commercial paper, but changed the trend for have all been accorded investment grade ratings by a primary rating all to negative. DBRS also downgraded the ratings for all other debt agency. The dollar amount of credit exposure under contracts with instruments and changed the trend to negative. On July 11, 2002, any one financial institution is limited and counterparties’ credit ratings Standard & Poor’s (“S&P”) lowered its ratings of TELUS’ long-term credit are monitored. The Corporation does not give or receive collateral and senior unsecured debt to BBB from BBB+ and lowered its Canadian on swap agreements and hedges due to its credit rating and those scale commercial paper rating to A-2 from A-1(low). At the same time, of its counterparties. While the Corporation is exposed to credit losses S&P lowered its ratings for TELUS’ wholly-owned subsidiaries TELUS due to the nonperformance of its counterparties, the Corporation Communications (Québec) Inc. and TELUS Communications Inc. considers the risk of this remote; if all counterparties were not to per- The outlook for all ratings was changed to negative. On July 23, 2002, form, the pre-tax effect would be limited to the value of the deferred Fitch Ratings initiated ratings of TELUS’ and TELUS Communications hedging asset. Inc.’s long-term credit and senior unsecured debt at BBB with negative outlook. On July 25, 2002, Moody’s Investors Service lowered its Commitments and contingent liabilities ratings of TELUS’ long-term credit and senior unsecured debt to Ba1 The Corporation has a number of commitments and contingent liabilities (non-investment grade) from Baa2. The outlook for the Moody’s rating as disclosed in Note 19 to the Consolidated Financial Statements. is negative. The Corporation occupies leased premises in various centres and has TELUS plans to improve its credit ratings over time by increasing land, buildings and equipment under operating leases. The Corporation its cash flow and reducing debt through increased operating cash flow is also currently engaged in labour contract negotiations through the driven in significant part by the announced OEP in the Communications federal conciliation process.

2003 Outlook

As referred to in the Notes to the Consolidated Financial Statements, are conducted by the TELE-MOBILE COMPANY partnership and are TELUS Communications Inc. is not managed as a legal entity and included in TELUS Communications Inc., as are TELUS Corporation’s its financial results are a subset of TELUS Corporation. All of TELUS British Columbia and Alberta wireline operations and Non-ILEC Corporation’s Mobility operations, including those carried out by operations outside of the Province of Québec. the former Clearnet Communications Inc. and TELUS Québec Mobilité,

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 13 management’s discussion and analysis

TCI’s results and performance are a substantial subset of, and become more conservative with their reviews, resulting in most telecom inextricably linked to, TELUS Corporation’s. To assist in understanding companies facing negative outlooks and/or receiving ratings down- TCI’s future business results going forward, TELUS Corporation’s grades on outstanding debt. In 2002, TELUS continued its Operational 2003 Outlook follows. Efficiency Program (“OEP”), an initiative to significantly enhance produc- tivity. TELUS also significantly reduced its capital expenditures in 2002. The Canadian telecommunications industry encountered challenging Financial markets have reacted favourably to TELUS’ initiatives and circumstances in 2002, as the industry slowdown experienced in 2001 the improvement in cash flow that they entail. continued. Operators within the industry were impacted by a number In the current environment of slower revenue growth, industry players of factors, including continued pricing pressures, restrictive financial are generally more focused on profitable subscriber growth over mere markets, regulatory decisions and a weaker economic outlook. As a market share or revenue expansion, and are emphasizing productivity. result of competitive intensity and declining industry revenues in key In addition, in this environment, strong and established players in markets, combined with the inability to access capital markets, several the telecommunications market are beneficiaries of customers’ flight emerging operators were forced to restructure financially. Some to service quality and stability. of these operators have re-emerged or are re-emerging from creditor In 2003, telecom companies are expected to be generally more protection with recapitalized balance sheets and may compete more disciplined and to strive for profitable revenue growth and continued vigorously and/or consolidate. operating and capital cost containment. Growth prospects remain In 2002, the Canadian telecom industry generated revenues of focused on enhanced data, Internet and wireless portfolios, with a approximately $33 billion, with and its affiliated regional continued decline in wireline local and long distance voice revenues. telcos representing over 50% of the total revenue. TELUS revenues Due to TELUS’ strategic focus, its national operations and the capital represented $7 billion in 2002, amounting to about 21% of total investments it has made in the past several years, TELUS believes revenues for the industry. it is well positioned to take advantage of increased demand driven by Revenue growth in the Canadian telecom market in 2002 was IP-based solutions, such as wireless data services, broadband access, approximately 3%, less than the 7% growth experienced in 2001, and managed Web hosting, managed applications and entertainment. weakness was evident especially in the corporate business market. The wireless market in Canada is expected to continue its growth similar Wireline local voice experienced flat revenue growth, while long dis- to what was experienced in 2002, which was an approximately 4% tance continued a decline that has been evident over the past few penetration gain (% of POPs) to 38%. There is the potential for consoli- years. Enhanced data, Internet and wireless growth continued in 2002, dation within the industry from four to three national competitors. Trends but at a slower rate than previously anticipated, particularly in the last seen in 2002 are expected to continue into 2003 including reduced half of the year. It is estimated that wireless revenue growth in Canada churn rates, stabilization of ARPU, increased focus on network revenues was approximately 13% in 2002. The strongest growth areas remain and strong EBITDA growth despite relatively flat industry net additions. wireless, data and IP, consistent with TELUS’ strategic focus. TELUS is projecting a 3 to 4% overall revenue growth in 2003 made up Key priorities and targets for 2003 of 9 to 11% wireless growth and flat to 1% wireline growth. TELUS will continue to be guided by its six strategic imperatives In May 2002, the CRTC announced a new price cap regime and established in mid-2000. For 2003, TELUS is focusing and moving reconfirmed the facilities-based competitive model that will govern until forward on the following priorities: June 2006. This regime regulates the ILECs with respect to pricing 1. Continuing to deliver on our efficiency improvement objectives. rules for tariffed retail services and services purchased from the ILECs TELUS is dedicated to driving a further $300 million in cost reduc- by competitors. The stated goal of the CRTC is to support competition tions in 2003, while turning to a number of programs to improve in the Canadian telecom industry. The regulatory decisions on contri- customer service, rationalize our products and eliminate bureaucracy. bution in 2001, and the price cap decisions in 2002, mark the end 2. Improving customer service. A planned outcome for 2003 of the of material regulatory decisions expected from the CRTC until the next ongoing operational efficiency program is to focus on improving price cap review for 2006. As a result, three years of relative regulatory systems and processes, increasing training and putting more stability are expected going forward. decision making into the hands of the employees dealing directly Capital markets in 2002 continued their pronounced scrutiny with customers. of corporation balance sheets, placing increased focus on current and 3. Enhancing our leadership position in the North American wireless expected cash flow and debt loads. The importance placed on more industry. Building on the momentum from 2002, TELUS Mobility is traditional financial metrics has made the containment of operating targeting to increase EBITDA by 17 to 21% in 2003, and cash flow, costs and capital expenditures more significant, with capital markets as measured by EBITDA less capital expenditures, is set to more rewarding those companies that are able to demonstrate strong positive than double to the $175 to $200 million range. cash flows and de-leveraging prospects. Credit rating agencies have

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 14 4. Strengthen our financial position, based on improved operating per- 2003 financing plan formance. TELUS is intent on strengthening its current credit ratings. TELUS’ financing plan for 2003 is to use free cash flow generated by TELUS wants to improve the three investment grade ratings and its business operations to repay or repurchase indebtedness including increase the fourth to also be investment grade. This is expected to current maturities of long-term debt. Dispositions of assets and sales be accomplished through generation of significant future free cash of certain businesses currently carried on by TELUS may also provide a flow, which is planned to be applied primarily to reducing debt. While source of funds. Leasing and incremental sales of accounts receivable TELUS does not control the decisions of the rating agencies, TELUS will also be considered to provide further available liquidity to TELUS believes that delivering on our financial targets and improving our and to meet any other financing requirements. Equity or quasi-equity leverage ratios will ultimately have a positive impact. issuances, especially in connection with any acquisition activity, could 5. Improving the operating and economic fundamentals of TELUS’ form a part of the financing activities. TELUS expects to maintain its business expansion into Ontario and . In 2003, TELUS is current position of fully hedging its foreign exchange exposure. At the prioritizing profitable growth as it drives to improve EBITDA and end of 2002, approximately 93% of TELUS’ total debt was borrowed to achieve a breakeven position by 2004. This is expected to be on a fixed-rate basis. Short-term obligations totalled $190 million at enabled by cost containment including focus on increasing the per- December 31, 2002 and the weighted average term to maturity of total centage of business carried on TELUS network facilities (“on-net”) debt was 6.6 years. TELUS believes that its internally generated cash and realizing certain post-acquisition integration synergies. flow, combined with its ability to access external capital including its 6. Achieving a settlement with our unionized employees. TELUS is bank credit facilities, provides sufficient resources to finance its cash committed to reaching a collective agreement that considers the requirements during 2003 and to maintain appropriate available liquidity. competitive marketplace, balances the needs of all employees and TELUS generally expects to maintain a minimum of $1 billion in unuti- provides the flexibility to meet the evolving needs of our customers. lized liquidity.

Risks and uncertainties

As referred to in the Notes to the Consolidated Financial Statements, lines. However, competitors remain intent on winning market share in TELUS Communications Inc. is not managed as a legal entity and the business local and long distance voice market. its financial results are a subset of TELUS Corporation. All of TELUS Wireline voice and data Corporation’s Mobility operations, including those carried out by TELUS expects local access competition activity in 2003 to focus the former Clearnet Communications Inc. and TELUS Québec Mobilité, mainly on the business market. TELUS’ competitors offer varying arrays are conducted by the TELE-MOBILE COMPANY partnership and are of long distance, local and advanced data/IP services. TELUS’ major included in TELUS Communications Inc., as are TELUS Corporation’s business market competitors are increasingly bundling long distance British Columbia and Alberta wireline operations and Non-ILEC with price-discounted local access and advanced data, Web-based operations outside of the Province of Québec. and e-commerce services. Certain of TELUS’ competitors, having built TCI’s results and performance are a substantial subset of, and extensive local fibre-optic facilities throughout Western Canada over the inextricably linked to, TELUS Corporation’s. To assist in understanding past several years, are increasingly focusing on marketing and revenue the risks and uncertainties that could affect TCI’s future business generation, particularly in the small and medium-sized business market results going forward, TELUS Corporation’s discussion of the major due to the size of this market, concentrated geographic urban clustering risks and uncertainties that could affect TELUS Corporation’s future and consequent attractive margins. Some of these competitors have business results going forward follows. financial strength and resources and other financially weaker competitors may gain improved financial strength and competitive viability as a Competition result of re-capitalization after restructurings. Increased competition, including that arising from the consolidation Competition is likely to continue to remain strong in the large and successful recapitalization of smaller industry players, may business market. TELUS was formerly a member of Stentor, an alliance adversely affect market shares, volumes and pricing in certain of of the major regional Canadian telecommunications companies estab- TELUS’ business segments lished to facilitate the provision of long distance and data services Competition is expected to remain intense. Competitors are primarily that cross provincial and national boundaries, and to facilitate planning focusing on local access, data and e.business services in the business and co-ordination of the provision of national services. In 1998, the market and high-speed Internet and wireless services across both the former Stentor members agreed to unwind existing arrangements and consumer and business markets, as these services offer the highest replace them with a new set of commercial agreements. The former growth potential. Long distance is experiencing negative revenue growth members, including TELUS, have largely developed their own systems and voice local access is experiencing a decline in network access and replacement products and services, and competition in the large business market has intensified accordingly.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 15 management’s discussion and analysis

During the past few years, TELUS has been active in building other competitors may have increased scale resulting from consolidation and acquiring local and cross-Canada fibre-optic facilities and Internet or the financially weaker competition may gain improved financial data centres (“IDCs”) in Central and Western Canada. TELUS is also strength from the recapitalization. continuing to build up a Central Canadian sales organization and an Wireless competition is also coming from new digital wireless tech- increasingly broader portfolio of business-oriented data and IP products nologies, which may be offered from both traditional and non-traditional and services. TELUS has been successful in increasing Central Canadian sources, that deliver higher speed data/Internet services over current revenues to $840 million in 2002 as compared to negligible revenues and next generation wireless devices. Such availability may also lead in 1999. This growth has been accomplished through a combination to increased re-subsidization costs related to the migration of existing of acquisition and internal growth. However, there can be no assurance subscribers to advanced feature handsets based on newer techno- that TELUS will continue to be successful in its efforts to expand its logies. There can be no assurance that new services offered by TELUS market share and profitability in Central Canada or that pricing will remain Mobility will be available on time, or that TELUS Mobility will be able at reasonable levels as competition remains significant. to charge incrementally for the services. (See “Technology”)

Wireless Wireline Internet access Competition in the Canadian wireless market is expected to remain While residential dial-up Internet access competition and growth have intense in 2003 and is expected to increase in Western Canada. TELUS subsided, TELUS expects to face significant competition from high- Mobility is targeting 400,000 to 450,000 net subscriber additions in speed Internet services of cable-TV companies. In response to extended 2003 and there is no assurance that it will achieve its objective given high-speed ADSL coverage by TELUS, cable-TV companies have the level of competition and recent trend toward declining growth increased their marketing efforts. With a Western Canadian industry rates in the Canadian wireless industry. Bell Mobility entered Western high-speed Internet penetration rate already double that of the U.S., Canada in the fall of 2001 and has built its own network and operational and continued economic uncertainty, industry growth for Internet service capabilities, launching its own 1X data network in urban centres may decline more quickly than anticipated, resulting in reduced net in Alberta and B.C. in the fall of 2002. In addition, the roaming/resale additions for all industry competitors. TELUS could also experience high agreements among TELUS Mobility, Bell Mobility and affiliates, future rates of churn or subscriber deactivations if its current high quality and Aliant Telecom Wireless first operationalized in mid-2002 allow of service and competitive pricing are not maintained. Bell Mobility to expand its availability and range of wireless services In addition, current ADSL modem technology does not permit to approximately 2.5 million incremental POPs throughout rural Alberta telecommunications companies to readily offer high-speed service to and B.C. much sooner and more cost effectively than if it had to wait all of their service territories due to distance limitations and the con- to fully build out its own duplicative rural network coverage. As a result, dition of the lines extending from central offices to customer locations. the entry of Bell Mobility in such rural areas has increased the effective Extended-reach ADSL modems now on the market are expected number of competitors to two in such regions. These agreements to eliminate some of these limitations and allow TELUS to address a have similarly allowed TELUS Mobility, on a reciprocal basis, to expand broader geographical market, but there is no guarantee these limitations its PCS network coverage and distribution in Central and Atlantic can be fully eliminated. As a result, there is no assurance that TELUS Canada by 6 million people, generally currently served by two other will be able to achieve its high-speed Internet subscriber growth targets. competitors, bringing TELUS Mobility’s national digital coverage and Slower speed dial-up Internet access subscribers are declining addressable market to 27.4 million. There is no assurance that TELUS due to competition and the attractiveness of high-speed Internet service. Mobility’s marketing efforts will be as successful in the new markets Losses to high-speed services of competitors are mitigated by our as in existing coverage areas. own efforts to transfer these customers to our own high-speed ADSL With up to four major players, including TELUS Mobility, currently Internet service. There can be no assurance that the rate of loss operating in each region in the Canadian wireless marketplace, of dial-up business or share retained by TELUS will be as expected. competitive rivalry is intense. Aggressive advertising and innovative Voice over Internet Protocol (“VoIP”) marketing approaches are expected to continue to be the norm. Internet , also referred to as VoIP, continues to be a developing Certain competitors have offered subsidized low or “zero” cost hand- service that could negatively impact TELUS’ local and long distance sets and have lowered airtime prices in the past and may continue business over the next few years. This technology has been in operation to do so. This could increase churn rates, cause marketing costs for several years and in addition, next generation cable-TV modems are of subscriber acquisitions to remain high, and lower average revenue expected to allow cable-TV companies, from a technological standpoint, per subscriber. Microcell Telecommunications Inc. (“Microcell”) has to begin offering VoIP over their cable networks. But in addition to the recently received creditor and court approval for the restructuring of its next generation cable modems, cable companies also need to make debt and capital. Accordingly, this competitor may enhance its future considerable investments in back office functions and infrastructure in competitiveness as a result of such restructuring and recapitalization order to deliver voice service comparable to the quality offered by efforts or alternatively be acquired by an existing competitor. Accordingly, traditional service providers. As a result, in December 2002, TELUS’

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 16 principal cable-TV competitor announced a delay of up to five years in of active Canadian chartered banks as a result of reduced activity offering VoIP service; however, there is no guarantee that their plans or consolidation, could reduce capital available for corporate credits will not change. TELUS launched its own VoIP initiative in the fall of 2001; such as TELUS. The $1.5 billion, three-year revolving term portion of however, there can be no assurance of the level of adoption for VoIP the bank facility matures on May 30, 2004. There can be no assurance services in the market or that the provision of such service by TELUS that the bank facility will be renewed on terms and in an amount would not cannibalize existing revenues. If significant VoIP competition acceptable to TELUS. In the absence of such renewal, the available develops, it could erode TELUS’ existing market share of traditional liquidity of TELUS may be negatively affected. local and long distance services and adversely affect future revenues On July 26, 2002, TELUS entered into an agreement with an arm’s- and profitability. length securitization trust under which it is able to sell an interest in certain of its trade receivables up to a maximum of $650 million. As at Economic fluctuations December 31, 2002, TELUS had received aggregate cash proceeds of $475 million. Under the program, TELUS is required to maintain at Economic fluctuations may adversely impact TELUS least a BBB(low) credit rating by Dominion Bond Rating Service. In the In 2002, North America’s economy experienced lackluster performance. event this rating is not maintained, TELUS may be required to wind Interest rate cuts served to stimulate the economy, but the entire market down the program. A change in credit rating could impact TELUS’ cost was significantly impacted by the aftermath of the September 11, 2001 of and access to capital. There can be no assurance that TELUS can tragedy and a series of corporate accounting scandals which over- maintain or improve current credit ratings. shadowed investment market performance and eroded consumer Consistent with its financial policy, TELUS intends to reduce its confidence. During a period of slow economic growth, including that future debt leverage and is targeting a debt to EBITDA ratio of 3.0:1 in caused by global turmoil, residential and business telecommunications December 2003 and less than 2.7:1 in December 2004. This intention customers may delay new service purchases, reduce volumes of could constrain its ability to invest in its operations for future growth. use and/or discontinue use of services. In 2002, bad debt expense There is no assurance TELUS will significantly reduce its debt leverage increased, primarily as a result of temporary billing conversion issues, on a timely basis, if at all. as well as economic difficulties experienced by certain businesses and consumers. Tax matters Economic fluctuations could adversely impact TELUS’ profitability and free cash flow, realization of income tax losses carried forward, Income tax assets may not be realized as expected return on invested pension assets and associated pension expenses, The operations of TELUS are complex and related tax interpretations, bad debt expense and/or require TELUS to record impairments of regulations and legislation are continually changing. TELUS has signi- the carrying value of its assets, including, but not limited to, its intangible ficant income taxes receivable and future income tax assets, including assets with indefinite lives (which are its spectrum licences) and its tax loss carry forwards. The timing of the monetization or realization goodwill. Impairments to the carrying value of assets would result in of these receivables or tax assets is uncertain. The timing of the a charge to earnings and a reduction in shareholders’ equity. collection of the income tax receivable is substantially out of the control of TELUS and is dependent on expected assessments, reassessments Financing and debt requirements and other processes by the Canada Customs and Revenue Agency (“CCRA”) and other provincial tax authorities. Therefore, there can be no TELUS’ business plans and growth could be negatively affected assurance that taxes will be sheltered as anticipated and/or the amount if existing financing is not sufficient and timing of receipt of these assets will be as currently expected. TELUS may finance its future capital requirements with internally generated funds as well as, from time to time, borrowings under the Dividends unutilized portion of its bank facility. In May 2002, the 364-day portion of the bank facility was renewed for $800 million (a reduction of Current dividend levels may not be maintained $200 million from the original $1 billion) on substantially the same On January 1, 2002, TELUS reduced the quarterly dividend on its com- terms. Continued availability of the $800 million 364-day portion mon shares and non-voting shares from 35 cents to 15 cents. This of the bank facility on a revolving basis is dependent on renewal of change aligned the dividend level with its growth strategy and current this portion of the facility on or prior to its maturity on May 28, 2003 business profile. On July 25, 2002, TELUS announced that it had on terms acceptable to TELUS. There can be no assurance that the no intention of reducing the dividend further and that it is committed 364-day portion of the bank facility will be renewed on terms accept- to the maintenance of the existing payout. While there is no current able to TELUS. Failing such renewal, any amount drawn by TELUS plan to change the dividend payout, TELUS reviews its dividend policy on the 364-day portion of the facility which remains outstanding quarterly and there can be no assurance that a future change will on May 28, 2003 will be available only for one year on a non-revolving not be implemented. basis. TELUS has not borrowed under and does not currently intend to borrow under the 364-day portion of the bank facility. Disruptions in the capital markets, increased bank capitalization regulations, reduced lending to the telecom sector, reduced number

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 17 management’s discussion and analysis

Human resources BC TEL–TWU collective agreement. Neither of these cases has yet been scheduled for a hearing by the CIRB. There can be no assurance that The outcome of outstanding labour relations issues may increase costs compensation expense will be as planned, or that reduced productivity and reduce productivity will not occur as a result of or following any decisions made by the CIRB. Collective agreement negotiations between TELUS and the TWU for a new collective agreement covering approximately 11,300 employees Reliance on key personnel in Alberta and B.C. are ongoing. Existing agreements expired in The success of TELUS is largely dependent on the abilities and December 2000. In the fourth quarter of 2002, TCI’s application to the experience of its key employees. Competition for highly skilled and federal Minister of Labour for conciliation was granted and two federal entrepreneurial management and other employees is intense in the conciliators were appointed. TCI and the TWU mutually agreed to communications industry. The vast majority of existing share options extend the conciliators’ appointment in January 2003 through a multi- are currently trading at less than their respective exercise prices, phase process that may not conclude until the third quarter of 2003. diminishing their effectiveness as a retention incentive. There can be no There can be no assurance that the negotiated compensation expenses assurance that TELUS can retain its current key employees or attract will be as planned, or that reduced productivity and work disruptions and retain additional executive officers or key employees as needed. will not occur as a result of or following these negotiations. The loss of certain key employees, or a deterioration in employee morale The TWU made an application to the Canadian Industrial Relations resulting from organizational changes or cost reductions, including the Board (“CIRB”) in September 2002 seeking reconsideration of earlier Operational Efficiency Program, could have an adverse impact upon CIRB decisions (dated February 9, 2001 and November 19, 2001) in TELUS’ growth, business and profitability. which the CIRB declined to issue orders sought by the TWU to impose the terms and conditions of the predecessor BC TEL–TWU collective Technology agreement on unionized employees in Alberta and instead held that the Changing technology in data, IP and wireless may adversely affect terms and conditions of the predecessor Alberta collective agreements revenues, costs and the value of assets would continue to apply to unionized employees in Alberta pending The pace and scope of technological advancements in the communica- negotiation of a new collective agreement for the consolidated Alberta tions industry are expected to continue to increase at a rapid rate. Three and B.C. bargaining units. In this 2002 application, the TWU is again of the universal characteristics of technological advancements are lower seeking an order that the BC TEL–TWU agreement should apply to all unit costs, lower operating costs and increasing flexibility. This creates unionized employees in Alberta and B.C. No decision with respect to opportunities for new and existing competitors to offer price reductions this application has been rendered. There can be no assurances that and service differentiation to gain market share. TELUS’ future success compensation expense will be as planned, or that reduced productivity depends in part upon its ability to anticipate, invest in and implement and work disruptions will not occur as a result of or following this new technologies with the levels of service and prices that its customers pending application. expect. TELUS may be required to make more capital expenditures In March 2001, the TWU also made an application to the CIRB than are currently expected if a technology’s performance falls short of to extend its existing TELUS bargaining unit in Alberta and B.C. to expectations and TELUS’ earnings may also be affected if technological include TELE-MOBILE employees. In its application, the TWU is seeking advances shorten the useful life of certain of its existing assets. to include non-unionized former Clearnet employees and unionized In 2002, TELUS began to convert its core circuit-based infrastruc- employees in the QuébecTel Mobilité operations. The TWU also ture to IP technology. This conversion to Next Generation Network challenged TELUS’ position that unionized wireless employees in Alberta (NGN) may allow TELUS to: (a) offer integrated services across voice, and B.C. are, for the purposes of labour relations, employees of data and video applications to customers; (b) improve capital and TELE-MOBILE. In TELUS’ view, by operation of law, TELE-MOBILE operating efficiencies; and (c) deliver improved operating effectiveness employees form a separate bargaining unit (or units) and collective in launching and supporting services. However, there is no assurance bargaining in respect of unionized TELE-MOBILE employees should that the applications will be available or accepted by customers as be conducted between TELE-MOBILE and the TWU. Both these issues planned, or that the efficiencies will materialize as expected. are the subject of proceedings currently before the CIRB, which are anticipated to conclude by the third quarter of 2003. Reliance on systems and information technology (“IT”) may cause In addition to the TELE-MOBILE application, the TWU has made service problems two further applications seeking to extend its existing TELUS bargaining TELUS, as a complex telecommunications corporation, is reliant on many unit in Alberta and B.C. to include employees working in TELUS National legacy and new IT systems and applications such as billing systems, Systems Inc. (“TNS”) and other TELUS employees working east of customer relationship management software, order entry and service Alberta (with the exception of employees working in TELUS Québec). systems, network systems and the associated complex computer The TNS application was received in July 2002 and the “employees equipment and software. Customer service, revenue generation and the east of Alberta” application in November 2002. Both applications seek value of IT assets could be negatively affected if the cost of IT solutions to include currently non-unionized employees and apply to them the is uneconomic, legacy systems fail, projects to integrate systems and

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 18 applications or introducing new systems and software are not effective, Contribution payment calculation modified by CRTC and third party suppliers fail or do not meet their performance or The CRTC requires TELUS and other regional telephone companies delivery obligations. to provide basic residential services at below-cost rates in high-cost service areas. The difference between the costs of these services and The digital protocols and technologies utilized by TELUS Mobility may the rates charged for them is made up through higher prices for some become technologically inferior, which could adversely affect TELUS services and through a “contribution” payment from other TELUS The wireless industry is adopting second (“2.”) and third generation services and services of other telecommunications providers. Effective (“”) technologies that are expected to deliver increased data speeds January 1, 2001, the CRTC changed the method used to collect con- required for many new wireless IP and data services. TELUS Mobility’s tribution payments from a per-minute charge on long distance services Mike service uses the iDEN technology protocol and has had operational to a percentage of revenue charge on all telecommunications service 2.5G packet data capability and service offerings for over two years. providers including wireline, wireless, data and other services. Internet, TELUS Mobility implemented initial 1X protocol 3G services on its digital paging and terminal equipment revenues are exempt from the revenue CDMA PCS and cellular networks during 2002. While we believe TELUS charge. The CRTC also changed the way in which contribution is Mobility’s CDMA protocol has a reasonable and cost-effective migration pooled for subsequent distribution from separate corporation-specific path to future evolutions of higher speed 3G, there can be no assurance contribution pools to one national contribution pool. This change that it will be successful and timely. Work is ongoing to determine an resulted in a net positive EBITDA impact for TELUS in 2001. optimal migration path for iDEN to 3G, but there can be no assurance In 2002, the percentage of revenue collection method and the that the selected path will be successful or that operating expenses national pooling of contribution payments continued, but the method and capital expenditures will be economical. of calculating the amount of contribution to be received by companies Furthermore, there can be no assurance that the digital wireless providing residential basic service in high-cost service areas changed. technologies utilized by TELUS Mobility today will continue to enjoy The CRTC decision modified the basis upon which the required subsidy favourable market pricing. The pricing for handsets and network to fund service to high-cost service areas is calculated. Rather than infrastructure is subject to change due to world market buying patterns allowing recovery of corporation-specific costs, the CRTC reduced the and foreign exchange rates and as a result, there may be an adverse costs that can be recovered through the contribution regime. As a impact on TELUS’ future expenditures. result, the amount of contribution to be collected has been significantly TELUS’ Mike digital wireless iDEN network is in part differentiated reduced and the percentage of revenue charge applied to all telecom- by its wide-area, high-capacity digital push-to-talk two-way radio dis- munications service providers was reduced to 1.3 per cent of eligible patch services, which are marketed as Mike Direct Connect™, as well as revenues in 2002, down from 4.5 per cent in 2001. In 2002, this resulted its installed base of customer work groups. These services are currently in a significant negative impact on TELUS’ revenues and earnings and not available from any of TELUS’ major wireless competitors and if an estimated year-over-year reduction in EBITDA of $211 million. they were, we believe that the installed base of Mike work groups would TELUS appealed these decisions in a ‘review and vary’ application still represent a significant market advantage. Development of CDMA to the CRTC in September 2001. In October 2002, the CRTC denied based push-to-talk technology may become commercially available TELUS’ ‘review and vary’ request relating to the costing assumptions within the next few years. TELUS also operates a CDMA network and used in calculating the subsidy requirements. However, the CRTC does not currently expect CDMA push-to-talk services will be highly noted that it would consider non-service specific expenses related substitutable for those provided by the iDEN technology utilized by its to groupings of services in upcoming proceedings. Mike network. However, there can be no assurance that CDMA or In January 2003, TELUS filed a petition to the federal Cabinet, other cellular technologies may not develop similar dispatch service requesting a variance of the CRTC’s denial of its ‘review and vary’ functionality, which if successfully deployed and marketed could reduce application. The petition argues that the CRTC employs costs for regu- or eliminate the competitive differentiation of TELUS’ Mike network. latory purposes that do not reflect actual corporation-specific costs, contrary to the Telecommunications Act. The costs being used are below Regulatory TELUS’ actual costs, given the geography and population density in Regulatory developments could have an adverse impact on TELUS’ its operating territory in Western Canada. The federal Cabinet can take operating procedures, costs and revenues up to October 2003 to respond to this petition. TELUS’ telecommunications services are regulated under federal TELUS foresees no additional impacts in 2003 from these contribu- legislation through the CRTC. The CRTC has taken steps to forbear tion decisions absent a favourable Cabinet decision; however, complete from regulating prices for services offered in competitive markets, such assurance that TELUS’ future earnings will not be further adversely as long distance and some data services, and does not regulate the affected cannot be given. pricing of wireless services. Major areas of regulatory review currently 2002 price cap regulation decision include the services made available to competitors at cost-based rates Price cap regulation and local competition were introduced in 1998. and a detailed review of the ILECs’ incremental costing methodology. The CRTC adopted a facilities-based regulatory model that encouraged The outcome of the regulatory reviews, proceedings and court competitors to invest in facilities and did not provide discounts for use or federal Cabinet appeals discussed below and other regulatory devel- of incumbent facilities. In March 2001, the CRTC began its scheduled opments could have a material impact on TELUS’ operating procedures, public review of the regulatory regime for 2002 and beyond. TELUS costs and revenues.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 19 management’s discussion and analysis

and other incumbent telecommunications companies sought to modify of Appeal by certain cities in February 2001. A majority decision from the price cap regime to achieve greater pricing flexibility for regulated the Court in December 2002 denied the appeal. A motion for leave services. Certain CLECs requested additional benefits including the to appeal this decision to the Supreme Court of Canada was filed by use of incumbent facilities at a large discount. Some parties also the municipalities in March 2003. If granted, the appeal would likely requested that the CRTC impose penalties on the incumbent compa- be heard late in 2004 or 2005. If annual fees are charged, the earnings nies for failure to meet CRTC-established quality of service indicators. of TELUS would be affected. On May 30, 2002 and July 31, 2002, the CRTC announced its decisions Radiocommunication licences regulated by Industry Canada on the Regulatory Framework for the Second Price Cap Period for All wireless communications depend on the use of radio transmis- the ILECs, which established the framework for regulation of ILECs, sions and therefore require access to radio spectrum. Under the including TELUS. These decisions cover a four-year period beginning Radiocommunication Act, Industry Canada regulates and controls June 2002 (for TELUS Communications Québec Inc., a four-year the allocation of spectrum to users and licenses radio channels period beginning August 2002). The impact of these decisions was a within various frequency bands to service providers and private users. decrease in consolidated EBITDA of $57 million for the twelve-month Voice and data wireless communications via cellular, SMR, ESMR and period ended December 31, 2002, when compared to the same period PCS systems, among others, require such licences. Effective April 2001, one year earlier. TELUS Mobility’s PCS and cellular licences were renewed for a five-year The CRTC price cap decisions confirmed TELUS’ preferred period under the same terms and conditions, such as: meeting certain regulatory model of facilities-based competition, did not introduce the performance levels, meeting Canadian ownership requirements, obli- significantly larger discounts of up to 70 per cent for use of ILEC facilities gations regarding coverage and build-out, spending at least 2 per cent sought by competitors, and allowed TELUS to benefit as it becomes of certain PCS and cellular revenues on research and development, more efficient over and above an annual 3.5 per cent productivity factor annual reporting, and resale to competitors. While TELUS believes that on a subset of its services. However, the CRTC has extended the regu- it is substantially in compliance with its licence conditions, there can be lation of local prices and service levels, reduced the ability of companies no assurance that it will be found to comply with all licence conditions, to raise prices, introduced more complexity and caused a negative or if found not to be compliant that a waiver will be granted, or that impact on TELUS earnings. The price cap decision initiated a number the costs to be incurred to achieve compliance will not be significant. of implementation proceedings, some of which are expected to be con- cluded in 2003. TELUS anticipates an approximate $80 million negative Foreign ownership restrictions EBITDA impact for 2003. TELUS can give no assurance that earnings TELUS and its subsidiaries are subject to the foreign ownership will not be further adversely affected as rules are reviewed, adjusted or restrictions imposed by the Telecommunications Act and the changed. The price cap decision also established a penalty regime for Radiocommunication Act. Although TELUS believes that TELUS and ILECs that do not meet the quality of service standards approved by its subsidiaries have at all times been in compliance with the relevant the CRTC. TELUS expects to pay some penalties for the initial reporting legislation, there can be no assurance that a future CRTC or Industry period ending June 2003, but this amount is not expected to materially Canada determination or events beyond TELUS’ control will not result affect TELUS’ earnings in 2003. However, there can be no assurance in TELUS ceasing to comply with the relevant legislation. In addition, that these penalties will not significantly affect earnings in the future. TELUS believes that it has fully and satisfactorily addressed certain foreign ownership-related issues raised by Industry Canada in the Terms of access course of its review of TELUS Mobility’s eligibility to hold the 24-38 GHz TELUS is participating in a CRTC proceeding to establish terms of and additional PCS spectrum licences provisionally awarded to it, access to tenants in multi-unit dwellings such as apartment buildings and TELUS expects such licences to be awarded to TELUS Mobility. and office complexes. Building owners are currently demanding However, there can be no assurance that it will receive such licences. substantial fees for such access. An interim decision was issued by TELUS believes that TELUS Mobility has complied with all eligibility the CRTC in September 2001 whereby local exchange carriers, such as requirements and notes that Industry Canada renewed its PCS licences TELUS, would “own” in-building wires in existing buildings. As for new in April 2001, but should a favourable determination not be made, buildings, the building proprietors would “own” the in-building wires. the ability of TELUS’ subsidiaries to operate as Canadian carriers under A further decision on this matter is expected in 2003. There can be the Telecommunications Act or to maintain, renew or secure licences no assurance that the outcome of this decision will not be materially under the Radiocommunication Act could be jeopardized and TELUS’ adverse for TELUS. business could be materially adversely affected if TELUS becomes A January 2001 decision by the CRTC on the payment of fees subject to proceedings before the CRTC or Industry Canada with for access to municipal rights of way was favourable to telecommuni- respect to compliance with the relevant legislation. TELUS could be cations and cable-TV companies, generally restricting payments to materially adversely affected, even if TELUS were ultimately success- reimburse the municipalities’ direct costs caused by the construction ful in such a proceeding. of the communications facilities, but rejecting annual fees to occupy the land. However, this decision was appealed to the Federal Court

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 20 Process risks the conclusion that there is no demonstrated public health risk associ- ated with the use of wireless phones. TELUS believes that the handsets Billing/revenue assurance sold by TELUS Mobility comply with all applicable Canadian and U.S. TELUS has acquired several companies with a variety of billing systems. government safety standards. The number of different billing systems at TELUS presents the risk There can be no assurance that future health studies, government that the systems are not sufficiently integrated, causing unrecognized regulation or public concerns about the health effects of radio frequency revenue leakage, billing errors in customer accounts, and incorrect emissions would not have an adverse effect on the business and and inaccurate information being shared. Given the volume and variety prospects for TELUS’ wireless business. For example, public concerns of transactions from these billing systems, there is a potential impact could reduce customer growth and usage or increase costs as a result on TELUS revenues, which may adversely affect the earnings of TELUS. of the need to modify handsets and from product liability lawsuits. Cost and availability of services Responsible driving The availability of various data, video and voice services in CLEC regions TELUS promotes responsible driving and recommends that driving where the Company’s wireline network is only partly available repre- safely should be each wireless customer’s first responsibility. The sents a significant challenge in terms of delivery deadlines, quality and Insurance Corporation of B.C. and the University of Montreal have costs of services. The lease of facilities from other telecommunications released studies showing an increase in distraction levels for drivers companies and rebilling for the use of their networks may prove to using wireless phones while driving (other activities, such as eating, be costly and unprofitable. To offset these costs and to enhance profit- smoking or tuning the radio, were also shown to increase driver ability, the Company must implement an efficient capital investment distraction). In December 2002, Newfoundland and Labrador banned plan that enables the migration of these services onto its own network. drivers’ use of handheld wireless phones while still allowing the use Although efforts are being made in this regard, the Company cannot of hands-free wireless kits. There can be no assurance that other provide assurance as to results. provinces will not follow. TELUS believes that current laws already Efficiency adequately address all forms of careless and negligent driving and To remain cost competitive and maintain profitability when prices are that laws that are specific to mobile phones are unnecessary and lowered by regulatory and/or competitor actions, it is important for counterproductive. There can be no assurance that laws against TELUS to continue reducing costs. Beginning in 2001 and continuing utilization of wireless phones while driving will not be passed and that, through to 2003, TELUS has undertaken a multi-phase Operational if passed, such laws will not have a negative effect on subscriber Efficiency Program (“OEP”) aimed at improving operating and capital growth rates, usage levels and wireless revenues. productivity and competitiveness. The OEP is a multifaceted program that is focused on reducing staff, optimizing the use of resources Strategic partners and maintaining and ultimately improving customer service. This is being TELUS’ interests may conflict with those of its strategic partners accomplished by consolidating functions, closing and consolidating While strategic alliance partners such as Verizon are expected to assist facilities and streamlining processes. While approximately 5,200 of TELUS in executing its growth strategy in Canada, their interests may the targeted 6,500 staff reductions planned for 2002 and 2003 were not always align with those of TELUS. This could potentially affect the complete by end of 2002, there can be no assurance that the targeted speed and outcome of strategic and operating decisions. Also, the staff reductions, financial goals and maintenance and improvement insolvency of Genuity and the sale of its assets to Level 3 could poten- of customer service levels will be achieved in 2003. If TELUS is unable tially affect TELUS’ provisioning of certain IP-based telecommunications to reduce costs for any reason, we may not achieve cost competitive- services, especially into the U.S., and the current arrangements ness and the profitability required to be attractive to investors. among TELUS, Verizon and Genuity. Further, with the local price cap formula regime that was in place from 1998 through to 2002, there was a decrease in certain local Sales of substantial amounts of TELUS shares by our strategic partners prices by a 4.5 per cent productivity factor less inflation which, under may cause our share price to decline the new regime, has changed to a 3.5 per cent factor until 2006. Some of TELUS’ strategic partners may decide to sell all or part of It is expected that ongoing efficiency programs are necessary in order their share positions. For example, Motorola is permitted to sell its to avoid an adverse impact on earnings. 9.7 million non-voting shares, a 2.8 per cent economic interest. Verizon could sell a portion of its 73.4 million common and non-voting shares, Health and safety a 21.2 per cent economic interest, although it is not permitted to reduce its shareholding to less than 19.9 per cent of all outstanding common Concerns about health and safety, particularly in the wireless business, and non-voting shares without the prior approval of a majority of the may affect future prospects independent directors on the TELUS Board. Sales of substantial amounts Radio frequency emission concerns of TELUS shares, or the perception that these sales may occur, could There have been studies which have asserted that radio frequency adversely affect the market price of TELUS shares. emissions from wireless handsets may be linked to certain adverse health effects. However, there is substantial evidence, as determined and published in numerous scientific studies worldwide, supporting

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 21 consolidated statistics

Restated

2002 2001 2000 19991

Statement of Earnings Operating revenues 6,096.3 6,224.0 5,614.9 5,341.0 Operating expenses 5,149.9 5,061.5 4,471.2 4,216.4 Income (loss) before discontinued operations, goodwill amortization and extraordinary item (68.4) (97.8) 317.0 299.9 Net income (loss) (68.4) 478.0 364.1 338.2 Ordinary share income (loss) (131.1) 466.6 357.9 334.7 Balance Sheet Total assets 15,461.0 15,942.0 12,985.6 7,780.4 Total capitalization 13,102.6 14,012.1 11,315.9 6,368.2 Capital structure Notes payable to affiliated companies 23.8% 53.4%34.9% 8.4% Short-term obligations, net 1.2% 1.3%9.3%9.1% Long-term debt 7.7% 8.6%24.6%21.5% Equity settled note 27.3% ––– Convertible debentures – 1.1%1.3% – Preference and preferred shares 0.5% 16.6%13.2%23.4% Ordinary share equity 39.5% 19.0%16.7%37.5% Financial Statistics Interest coverage 5.9 4.1 12.1 10.7 Capital expenditures 1,446.7 2,266.3 1,240.9 1,160.0 Other Statistics Network access lines in service (000s) 4,567 4,637 4,641 4,551 Wireless subscribers (000s) 2,996 2,578 2,160 1,099 Total Internet subscribers (000s) 676 281 226 172 Regular employees at year-end 18,805 21,848 18,240 17,906

1 Data for 1999 is pro forma (includes TELUS Québec Mobilité and Clearnet subscribers prior to TELUS’ acquisition of TELUS Québec and Clearnet).

Note 2002, 2001 and 2000 have been presented on a continuity-of-interests method, which is similar to the pooling-of-interests method, to reflect the following transactions, which occurred in 2002: • On September 30, 2002, TELUS Communications Inc., Clearnet Inc. and 612459 B.C. Ltd., corporations under the common control of TELUS Corporation, the ultimate parent corporation, effected a corporate reorganization. Clearnet Inc. changed from being the immediate parent corporation of TELUS Communications Inc., to becoming TELUS Communications Inc.’s subsidiary, when 612459 B.C. Ltd. transferred its ownership interest in Clearnet Inc. to TELUS Communications Inc. As a consequence of this corporate reorganization, 612459 B.C. Ltd. replaced Clearnet Inc. as TELUS Communications Inc.’s immediate parent corporation. Furthermore, this reorganization resulted in the TELE-MOBILE COMPANY partnership becoming wholly-owned by TELUS Communications Inc. On September 30, 2002, Clearnet Inc. was wound up into TELUS Communications Inc. • On December 31, 2002, TELUS Communications Inc. purchased TELUS Risk Management Inc. from TELUS Corporation. Subsequently on December 31, 2002, TELUS Risk Management Inc. was wound up into TELUS Communications Inc.

The 2002 transactions did not affect 1999. Additionally, 1999 has been presented on a pooled basis to reflect the December 31, 2002, corporate reorganization whereby TELUS Communications (B.C.) Inc. acquired the shares of three affiliated companies: TELUS Communications Inc., TELUS Mobility Cellular Inc. and 3759709 Canada Inc. and was subsequently renamed TELUS Communications Inc.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 22 management’s report

anagement is responsible to the Board of Directors for the Andersen LLP joining Deloitte & Touche LLP in June 2002, the Board Mpreparation of the consolidated financial statements of the Cor- of Directors appointed Deloitte & Touche LLP, as external auditors of poration and its subsidiaries. These statements have been prepared the Corporation to fill the vacancy left when Arthur Andersen LLP ceased in accordance with Canadian Generally Accepted Accounting Principles operations in Canada. Deloitte & Touche LLP has been appointed to (“GAAP”) and necessarily include some amounts based on estimates express an opinion as to whether these consolidated financial statements and judgements. Financial information presented elsewhere in this annual present fairly the Corporation’s consolidated financial position and oper- report is consistent with that in the consolidated financial statements. ating results in accordance with Canadian GAAP. Their report follows. The Corporation maintains a system of internal controls that provides The Board of Directors has reviewed and approved these con- management with reasonable assurance that assets are safeguarded solidated financial statements. To assist the Board in meeting its and that reliable financial records are maintained. This system includes responsibility, it has appointed an audit committee that is comprised written policies and procedures, an organizational structure that segre- of a majority of independent directors, which oversees the financial gates duties and a comprehensive program of periodic audits by the reporting process. The committee meets no less than quarterly with internal auditors. The Company has also instituted policies and guidelines management (including the internal auditors) and the external auditors that require employees to maintain the highest ethical standards, and to review various matters. It receives quarterly reports on: internal has established mechanisms for the reporting to the audit committee audit program results and evaluation of internal control systems; of perceived accounting and ethics policy complaints. Annually the risk management services including notable projects for the quarter, Corporation performs an extensive risk assessment process, which legal claims and environmental issues; disaster recovery plans includes interviews with senior management and conducts a risk man- and financial derivative exposure. The audit committee also reviews agement survey distributed to a large sample of employees. Results and approves methods of controlling corporate assets and information of this process influence the development of the internal audit program. systems on a quarterly basis and reviews major accounting policies Key enterprise-wide risks are assigned to executive owners for the including alternatives and potential key management estimates development and implementation of appropriate risk mitigation plans. or judgements. The committee’s terms of reference are available, The Corporation has recently instituted a Sarbanes-Oxley certification on request, to shareholders. enablement process, which, among other things, cascades informative certifications from the key stakeholders within the financial reporting process, which are reviewed by the Chief Executive Officer and the Chief Financial Officer as part of their due diligence process. The shareholders appointed Arthur Andersen LLP as the external Robert G. McFarlane auditors of the Corporation at its annual meeting on May 1, 2002. As a Executive Vice-President result of the partners and staff of the Canadian operations of Arthur and Chief Financial Officer

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 23 auditors’ report

To the Shareholders of TELUS Communications Inc. The financial statements of TELUS Communications Inc. as of December 31, 2001, and for the year then ended were audited by other e have audited the consolidated balance sheet of TELUS auditors who have ceased operations in Canada. As described in WCommunications Inc. as at December 31, 2002 and the consoli- Note 1, these financial statements have been restated. We audited the dated statements of income, retained earnings and cash flows for adjustments described in Note 1 that were applied to restate the 2001 the year then ended. These consolidated financial statements are the financial statements. In our opinion, such adjustments are appropriate responsibility of the Corporation’s management. Our responsibility is and have been properly applied. However, we were not engaged to to express an opinion on these financial statements based on our audit. audit, review, or apply any procedures to the 2001 financial statements We conducted our audit in accordance with Canadian generally of the Corporation other than with respect to such adjustments and, accepted auditing standards. Those standards require that we accordingly, we do not express an opinion or any other form of assur- plan and perform an audit to obtain reasonable assurance whether the ance on the 2001 financial statements taken as a whole. financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dis- closures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by manage- ment, as well as evaluating the overall financial statement presentation. Deloitte & Touche LLP In our opinion, these consolidated financial statements present fairly, Chartered Accountants in all material respects, the financial position of the Corporation as at Vancouver, B.C. December 31, 2002 and the results of its operations and its cash flows January 31, 2003 for the year then ended in accordance with Canadian generally accepted accounting principles.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 24 consolidated statements of income

Years ended December 31 (millions) 2002 2001 (restated – Note 1(a))

Operating Revenues $ 6,096.3 $ 6,224.0 Operating Expenses Operations 3,813.5 3,855.1 Depreciation 1,040.8 988.8 Amortization of intangible assets 295.6 217.6 Restructuring and workforce reduction costs (Note 5) 553.3 175.4

5,703.2 5,236.9

Operating Income from Continuing Operations 393.1 987.1 Other expense (income), net 16.9 (26.4) Financing costs (Note 6) 386.5 841.7

Income (Loss) from Continuing Operations Before Income Taxes (10.3) 171.8 Income taxes (Note 7) 58.1 269.6

Income (Loss) from Continuing Operations (68.4) (97.8) Discontinued operations (Note 8) – 575.8

Net Income (Loss) (68.4) 478.0 Preference and preferred share dividends 3.5 3.5 Interest on equity settled note, net of income taxes 53.3 – Interest on convertible debentures, net of income taxes 5.9 7.9

Ordinary Share Income (Loss) $ (131.1) $ 466.6

The accompanying notes are an integral part of these consolidated financial statements consolidated statements of retained earnings

Years ended December 31 (millions) 2002 2001 (restated – Note 1(a))

Balance at Beginning of Year (Notes 1(a), 18(b)) $ 700.2 $ 435.6 Net income (loss) (68.4) 478.0

631.8 913.6 Less: Preference and preferred share dividends 3.5 3.5 Interest on equity settled note, net of income taxes 53.3 – Interest on convertible debentures, net of income taxes 5.9 7.9 Ordinary Share dividends – 202.0

Balance at End of Year $ 569.1 $ 700.2

The accompanying notes are an integral part of these consolidated financial statements

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 25 consolidated balance sheets

As at December 31 (millions) 2002 2001 (restated – Note 1(a)) Assets Current Assets Cash and temporary investments, net (Note 2(j)) $ 22.3 $ – Accounts receivable (Notes 3(d), 10) 383.6 786.6 Income and other taxes receivable 95.8 – Due from affiliated corporations (Note 11(a)) 850.7 249.7 Inventories 83.7 101.3 Notes receivable from affiliated corporations (Note 11(b)) 4,024.7 2,021.1 Current portion of future income taxes (Note 7) 97.9 130.4 Prepaid expenses and other 140.0 158.6 5,698.7 3,447.7 Capital Assets, Net (Note 12) Property, plant, equipment and other 7,322.4 7,273.4 Intangible assets subject to amortization 585.8 564.8 Intangible assets with indefinite lives 362.5 357.8 8,270.7 8,196.0 Other Assets Deferred charges 498.6 347.8 Future income taxes (Note 7) 871.4 931.0 Investments (Note 14) 109.7 3,007.9 Other 11.9 11.6 1,491.6 4,298.3 $ 15,461.0 $ 15,942.0 Liabilities and Shareholders’ Equity Current Liabilities Cash and temporary investments, net (Note 2(j)) $ – $ 12.7 Accounts payable and accrued liabilities 900.8 841.4 Restructuring and workforce reduction accounts payable and accrued liabilities (Note 5) 370.3 77.4 Income and other taxes payable – 17.1 Due to affiliated corporations (Note 11(c)) 438.9 359.3 Dividends payable 0.3 0.3 Advance billings and customer deposits 280.1 256.6 Notes payable to affiliated corporations (Note 11(d)) – 7,487.6 Short-term obligations (Note 15) 158.8 175.1 2,149.2 9,227.5 Long-Term Debt (Note 16) 1,009.6 1,208.1 Notes payable to affiliated corporations (Note 11(d)) 3,111.9 – Other Long-Term Liabilities 368.0 377.8 Shareholders’ Equity (Note 18) Equity settled note 3,572.9 – Convertible debentures – 150.1 Preference and preferred shares 69.7 2,328.2 Ordinary equity 5,179.7 2,650.3 8,822.3 5,128.6 $ 15,461.0 $ 15,942.0 Commitments and Contingent Liabilities (Note 19) The accompanying notes are an integral part of these consolidated financial statements

Approved by the Directors:

Iain J. Harris, Director Brian A. Canfield, Director

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 26 consolidated statements of cash flows

Years ended December 31 (millions) 2002 2001 (restated – Note 1(a)) Operating Activities Income (loss) from continuing operations $ (68.4) $ (97.8) Items not affecting cash: Depreciation and amortization 1,336.4 1,206.5 Future income taxes 106.3 48.7 Asset write-offs related to restructuring 0.3 30.5 (Gain) loss on redemption of long-term debt (1.5) 257.7 Net pension credits (25.4) (47.4) Other, net (48.5) (53.0)

Operating cash flow before restructuring and workforce reduction costs 1,299.2 1,345.2 Restructuring and workforce reduction costs, net of cash payments (Note 5) 292.9 82.7

Operating cash flow 1,592.1 1,427.9 Net change in non-cash working capital from continuing operations (Note 20(a)) (265.5) (302.8) Operating cash flow and net change in non-cash working capital from discontinued operations (Note 20(b)) – (48.2)

Cash provided by operating activities 1,326.6 1,076.9 Investing Activities Capital expenditures (Note 12) (1,442.1) (1,910.4) Purchase of spectrum (4.6) (355.9) Purchase of preferred shares – affiliated corporations – (728.5) Proceeds from the sale of property – 228.4 Net proceeds from divestiture – 810.0 Other 24.8 (19.8)

Cash used by investing activities (1,421.9) (1,976.2) Financing Activities Ordinary and preferred shares issued 46.7 993.2 Dividends to shareholders (3.5) (307.5) Redemptions and repayments of long-term debt (Note 16(b)-(d)) (178.3) (1,752.7) Change in short-term obligations (35.0) (799.7) Change in advances and notes receivable from, and advances and notes payable to affiliated corporations 307.6 2,737.9 Interest on convertible debentures (7.2) (13.9) Other – 15.7

Cash provided by financing activities 130.3 873.0 Cash Position Net increase (decrease) in cash and temporary investments, net 35.0 (26.3) Cash and temporary investments, net, beginning of year (12.7) 13.6

Cash and temporary investments, net, end of year $ 22.3 $ (12.7) Supplemental Disclosure Interest paid $ 596.4 $ 383.4

Income taxes (inclusive of Investment Tax Credits (Note 7)) paid (received) $ (22.2) $ 268.2

The accompanying notes are an integral part of these consolidated financial statements

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 27 notes to consolidated financial statements

December 31, 2002

TELUS Communications Inc. is a wholly-owned subsidiary of TELUS Corporation (“TELUS”), a public reporting issuer whose shares are listed on the Toronto and New York stock exchanges. TELUS is one of Canada’s largest telecommunications companies, providing a full range of telecom- munications products and services. TELUS is the largest incumbent telecommunications service provider in Western Canada and provides data, Internet protocol, voice and wireless services to Central and Eastern Canada. All of TELUS’ Mobility operations, including those carried out by the former Clearnet Communications Inc. and TELUS Québec Mobilité, are conducted by the TELE-MOBILE COMPANY partnership (“TMC”) and are included in TELUS Communications Inc., as are TELUS’ British Columbia and Alberta wireline operations and non-ILEC operations outside of the Province of Quebec.

1. Accounting Entity

(a) TELUS Communications Inc. corporation of TELUS Communications Inc., to becoming TELUS TELUS Communications Inc. (formerly TELUS Communications (B.C.) Communications Inc.’s subsidiary, when 612459 B.C. Ltd. transferred Inc.) underwent a corporate reorganization effective December 31, 2000 its ownership interest in Clearnet Inc. to TELUS Communications Inc. in which it acquired the shares of certain affiliated corporations under As a consequence of this corporate reorganization, 612459 B.C. Ltd. the common control of TELUS Corporation, the parent corporation. replaced Clearnet Inc. as TELUS Communications Inc.’s immediate The acquired entities under common control were TELUS Communi- parent corporation. Furthermore, this reorganization resulted in the cations Inc., TELUS Mobility Cellular Inc. and 3759709 Canada Inc. TELE-MOBILE COMPANY partnership becoming wholly-owned by TELUS On January 1, 2001, these corporations were amalgamated and Communications Inc. On September 30, 2002, Clearnet Inc. was continued as TELUS Communications Inc. wound up into TELUS Communications Inc. On August 30, 2001, TELUS Communications Inc. became a On December 31, 2002, TELUS Communications Inc. purchased subsidiary of Clearnet Communications Inc. and acquired all the shares TELUS Risk Management Inc. from TELUS Corporation. Subsequently of Clearnet PCS Inc. On September 1, 2001, TELUS Communications Inc. on December 31, 2002, TELUS Risk Management Inc. was wound and its subsidiary, Clearnet PCS Inc., were amalgamated and contin- up into TELUS Communications Inc. ued as TELUS Communications Inc. On December 30, 2001, Clearnet As related party transactions not involving a substantive change Communications Inc. and Clearnet Inc. were amalgamated and in ownership, these transactions were recorded at net book value and continued as Clearnet Inc. accounted for using the continuity-of-interests method, which is similar On September 30, 2002, TELUS Communications Inc., Clearnet Inc. to the pooling-of-interests method. Under this method, the results and 612459 B.C. Ltd., corporations under the common control of TELUS of operations and the assets, liabilities and shareholders’ equity (see Corporation, the ultimate parent corporation, effected a corporate Note 18(b)) for the current and prior periods have been restated to reorganization. Clearnet Inc. changed from being the immediate parent reflect the Corporation’s operations on a combined basis.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 28 The restatement of the December 31, 2001 consolidated balance sheet is as follows:

December 31, 2001 December 31, 2001 Financial Adjustments to Financial Statements, as reflect corporate Statements, As at December 31, 2001 (millions) previously reported reorganization (a) as restated

Assets Current Assets Accounts receivable $ 786.8 $ (0.2) $ 786.6 Due from affiliated corporations 1,028.0 (778.3) 249.7 Inventories 101.3 – 101.3 Notes receivable from affiliated corporations 2,314.6 (293.5) 2,021.1 Current portion of future income taxes 130.4 – 130.4 Prepaid expense and other 158.3 0.3 158.6 4,519.4 (1,071.7) 3,447.7 Capital Assets, Net Property, plant, equipment and other 7,089.8 183.6 7,273.4 Intangible assets subject to amortization 548.4 16.4 564.8 Intangible assets with indefinite lives 357.8 – 357.8 7,996.0 200.0 8,196.0 Other Assets Deferred charges 347.9 (0.1) 347.8 Future income taxes 575.4 355.6 931.0 Notes receivable from affiliated corporations 239.9 (239.9) – Investments 3,008.1 (0.2) 3,007.9 Other 11.3 0.3 11.6 4,182.6 115.7 4,298.3 $ 16,698.0 $ (756.0) $ 15,942.0 Liabilities and Shareholders’ Equity Current Liabilities Cash and temporary investments, net $ 12.8 $ (0.1) $ 12.7 Accounts payable and accrued liabilities 912.5 (71.1) 841.4 Restructuring and workforce reduction accounts payable and accrued liabilities – 77.4,(b) 77.4 Income and other taxes payable 9.4 7.7 17.1 Due to affiliated corporations 177.7 181.6 359.3 Dividends payable 0.3 – 0.3 Advance billings and customer deposits 256.6 – 256.6 Notes payable to affiliated companies 4,716.0 2,771.6 7,487.6 Short-term obligations 175.1 – 175.1 6,260.4 2,967.1 9,227.5 Long-Term Debt 1,206.5 1.6 1,208.1 Other Long-Term Liabilities 368.8 9.0 377.8 Non-Controlling Interest 2,159.7 (2,159.7) – Shareholders’ Equity (Note 18(b)) Convertible debentures – 150.1 150.1 Preference and preferred shares 2,328.2 – 2,328.2 Ordinary equity 4,374.4 (1,724.1) 2,650.3 6,702.6 (1,574.0) 5,128.6 $ 16,698.0 $ (756.0) $ 15,942.0

(a) Restatement arising from application of continuity-of-interests accounting. (b) This item has been reclassified from the December 31, 2001, accounts payable and accrued liabilities so as to conform to the presentation adopted in the current year.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 29 notes to consolidated financial statements

The restatement of the consolidated income statement for the year ended December 31, 2001, is as follows:

December 31, 2001 December 31, 2001 Financial Change in Adjustments to Financial Statements, as accounting reflect corporate Statements, Year ended December 31, 2001 (millions) previously reported policies reorganization (a) as restated (see Note 3)

Operating Revenues $ 6,348.5 $ (122.1) $ (2.4) $ 6,224.0 Operating Expenses Operations 3,973.9 (122.1) 3.3 3,855.1 Depreciation – 988.8 – 988.8 Amortization of intangible assets – 199.7 17.9 217.6 Depreciation and amortization 1,188.5 (1,188.5) – – Restructuring and workforce reduction costs 175.4 – – 175.4 5,337.8 (122.1) 21.2 5,236.9 Operating Income (Loss) from Continuing Operations 1,010.7 – (23.6) 987.1 Other expense (income), net (12.7) – (13.7) (26.4) Financing costs 542.7 – 299.0 841.7 Income (Loss) from Continuing Operations Before Income Taxes 480.7 – (308.9) 171.8 Income taxes 279.5 – (9.9) 269.6 Income (Loss) from Continuing Operations 201.2 – (299.0) (97.8) Non-controlling interest (40.8) – 40.8 – Income (Loss) from Continuing Operations 242.0 – (339.8) (97.8) Discontinued operations 391.4 – 184.4 575.8 Net Income (Loss) 633.4 – (155.4) 478.0 Preference and preferred share dividends 3.5 – – 3.5 Interest on convertible debentures – – 7.9 7.9 Ordinary Share Income (Loss) $ 629.9 $ – $ (163.3) $ 466.6

(a) Restatement arising from application of continuity-of-interests accounting.

(b) Parent Corporation On December 31, 2002, TELUS Corporation became the immediate parent of TELUS Communications Inc. when 612459 B.C. Ltd. was wound up into TELUS Corporation.

2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements have been (b) Use of Estimates prepared in accordance with accounting principles generally accepted The preparation of financial statements in conformity with Generally in Canada and in conformity with prevailing practices in the Canadian Accepted Accounting Principles (“GAAP”) requires management to make telecommunications industry. estimates and assumptions that affect the reported amounts of assets The term “Corporation” is used to mean TELUS Communications and liabilities and disclosure of contingent assets and liabilities at the Inc. and, where the context of the narrative permits or requires, date of the financial statements and the reported amounts of revenues its subsidiaries. and expenses during the reporting period. Actual results could differ TELUS reports segments for Communications and Mobility. TELUS from those estimates. Communications Inc. is not managed as a legal entity and therefore Examples of significant estimates include: the key economic no segments are disclosed. assumptions used to determine the fair value of residual cash flows arising from accounts receivable securitization; the allowance for (a) Consolidation doubtful accounts; the allowance for inventory obsolescence; the The consolidated financial statements include the accounts of estimated useful lives of assets; the recoverability of intangible assets the Corporation and all of the Corporation’s subsidiaries, of which with indefinite lives; the recoverability of long-term investments; the the principal one is the TELE-MOBILE COMPANY partnership. composition of future income tax assets; the accruals for restructuring

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 30 and workforce reduction costs; and certain actuarial and economic The revenue deferral is based on the rate of inflation (as measured assumptions used in determining defined benefit pension costs, by a chain-weighted GDPPI index), less a productivity offset of 3.5%, accrued pension benefit obligations and pension plan assets. and an “exogenous factor” that is associated with allowed recoveries in previous price cap regimes that have now expired. The Corporation (c) Revenue Recognition may recognize the deferred amounts upon the undertaking of qualifying The Corporation earns the majority of its revenue (voice local, voice actions, such as Service Improvement Programs (“SIPs”) in qualifying contribution, voice long distance, data and mobility network) from non-HCSAs, rate reductions (including those provided to competitors access to, and usage of, the Corporation’s telecommunication infrastruc- as required in Decision 2002-34) and/or rebates to customers. To the ture. The majority of the balance of the Corporation’s revenue (other extent that a balance remains in the deferral account, interest is required and mobility equipment) arises from providing products facilitating access to be accrued at the Corporation’s short-term cost of borrowing. to, and usage of, the Corporation’s telecommunication infrastructure. The Corporation has adopted the liability method of accounting for Voice Local, Voice Long Distance, Data and Mobility Network: the deferral account. This results in the Corporation recording a liability The Corporation recognizes revenues on the accrual basis and includes to the extent that activities it has undertaken, realized rate reductions an estimate of revenues earned but unbilled. Wireline and wireless for Competitor Services and other future qualifying events do not extin- service revenues are recognized based upon usage of the Corporation’s guish the balance of the deferral account. As at December 31, 2002, network and facilities and upon contract fees. a liability of $22 million has been recorded and is included with advance Advance billings are recorded when billing prior to rendering of billings and customer deposits. Other than for the interest accrued the associated service; such advance billings are recognized as revenue on the balance of the deferral account, which would be included in the period in which the services are provided. Similarly, upfront in financing costs, all income statement effects of the deferral account customer activation and installation fees, along with the corresponding are recorded through operating revenues. direct costs not in excess of the revenues, are deferred and recognized over the average expected term of the customer relationship. (d) Advertising Costs When the Corporation receives no identifiable, separable benefit Costs of advertising production, airtime and space are expensed for consideration given to a customer, the consideration is recorded as as incurred. a reduction of revenue rather than as an expense as the Corporation considers this to result in a more appropriate presentation of trans- (e) Research and Development actions in the financial statements. Research and development costs are expensed except in cases Voice Contribution: The Canadian Radio-television and Telecom- where development costs meet certain identifiable criteria for deferral. munications Commission (“CRTC”) has established a portable subsidy Deferred development costs are amortized over the life of the com- mechanism to subsidize Local Exchange Carriers, such as the Cor- mercial production, or in the case of serviceable property, plant and poration, that provide residential service to high-cost service areas equipment, are included in the appropriate property group and are (“HCSAs”). The CRTC has determined the per line/per band portable depreciated over its estimated useful life. Research and development subsidy rate for all Local Exchange Carriers. The Corporation recognizes costs incurred during the year amounted to $40 million (2001 – $32 mil- the portable subsidy on an accrual basis by applying the subsidy rate lion) of which $39 million (2001 – $18 million) was capital in nature. to the number of residential network access lines it has in HCSAs. Other and Mobility Equipment: The Corporation recognizes product (f) Depreciation and Amortization revenues, including wireless handsets sold to re-sellers and customer Assets are depreciated on a straight-line basis over their estimated premises equipment, when the products are delivered and accepted by useful life as determined by a continuing program of studies. The the end-user customers. When the Corporation receives no identifiable, composite depreciation rate for the year ended December 31, 2002, separable benefit for consideration given to a customer, the consider- was 6.2% (2001 – 6.4%). Depreciation includes amortization of assets ation is recorded as a reduction of revenue rather than as an expense under capital leases. as the Corporation considers this to result in a more appropriate Intangible assets with finite lives (“intangible assets subject to presentation of transactions in the financial statements. amortization”) are amortized on a straight-line basis over their estimated Non-HCSA Deferral Account: On May 30, 2002, the CRTC issued lives; estimated lives are annually reviewed. The wireline subscriber Decision 2002-34, a pronouncement that will affect the Corporation’s bases are amortized over 50 years and wireless subscriber bases are wireline revenues for four-year periods beginning June 1, 2002. In an amortized over 7 years. Software is amortized over 3 to 4 years and effort to foster competition for residential basic service in non-high access to rights-of-way and other are amortized over 7 to 30 years. cost service areas (“non-HCSAs”), the concept of a deferral account Commencing January 1, 2002, rather than being systematically mechanism was introduced by the CRTC, as an alternative to amortized, the carrying value of intangible assets with indefinite lives mandating price reductions. is periodically tested for impairment. The frequency of the impairment The deferral account arises from the CRTC requiring the Corporation test generally is the reciprocal of the stability of the relevant events to defer the income statement recognition of a portion of the monies and circumstances, but intangible assets with indefinite lives must, received in respect of residential basic services provided to non-HCSAs. at a minimum, be tested annually; TELUS Corporation has selected

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 31 notes to consolidated financial statements

December as its annual test time. No impairment arose from the (j) Cash and Temporary Investments, Net December 2002 annual test. The test is applied to each of TELUS Cash and temporary investments, which include investments in money Corporation’s reporting units (the reporting units being identified market instruments that are purchased three months or less from in accordance with the Canadian Institute of Chartered Accountants maturity, are presented net of outstanding items including cheques (“CICA”) Handbook section for intangible assets and goodwill); TELUS written but not cleared by the bank as at the balance sheet date. Cash Corporation has two reporting units, both of which include discrete and temporary investments, net, are classified as a liability on the bal- components of, but are not solely comprised of, TELUS Communi- ance sheet when the amount of the cheques written but not cleared by cations Inc. Consistent with current industry-specific valuation methods, the bank exceeds the amount of the cash and temporary investments. TELUS Corporation uses a discounted cash flow model as a part of determining the fair value of its spectrum licences. (k) Sales of Receivables Effective July 1, 2001, transfers of receivables in securitization transac- (g) Translation of Foreign Currencies tions are recognized as sales when the Corporation is deemed to have Trade transactions completed in foreign currencies are translated into surrendered control over the transferred receivables and consideration, Canadian dollars at the rates prevailing at the time of the transactions. other than for its beneficial interests in the transferred receivables, Monetary assets and liabilities denominated in foreign currencies are has been received. When the Corporation sells its receivables, it retains translated into Canadian dollars at the rate of exchange in effect at reserve accounts, which are retained interests in the securitized the balance sheet date with any resulting gain or loss being included receivables, and servicing rights. When a transfer is considered a sale, in the Consolidated Statements of Income (see Note 6). the Corporation derecognizes all receivables sold, recognizes at fair value the assets received and the liabilities incurred and records the (h) Income Taxes gain or loss on sale in “Other expense (income), net”. Such gain or loss The Corporation and its subsidiaries follow the liability method of recognized on the sale of receivables depends in part on the previous accounting for income taxes. Under this method, current income taxes carrying amount of the receivables involved in the transfer, allocated are recognized for the estimated income taxes payable for the current between the receivables sold and the retained interests based upon their year. Future income tax assets and liabilities are recognized for relative fair market value at the sale date. The Corporation estimates the temporary differences between the tax and accounting bases of assets fair value for its retained interests based on the present value of future and liabilities as well as for the benefit of losses available to be carried expected cash flows using management’s best estimates of the key forward to future years for tax purposes that are more likely than assumptions – credit losses, the weighted average life of the receivables not to be realized. sold and discount rates commensurate with the risks involved. The Corporation’s research and development activities may be For transfers of receivables occurring prior to July 1, 2001, the eligible to earn Investment Tax Credits (“ITCs”). The Corporation’s transactions were recognized as sales of receivables when the significant research and development activities and their eligibility to earn ITCs risks and rewards of ownership were transferred to the purchasers. is a complex matter and, as a result, the threshold of more likely than not is normally only achieved after the relevant taxation authorities (l) Inventories have made specific determinations. When it is more likely than not The Corporation’s inventory consists primarily of wireless handsets, that the ITCs will be received, they are accounted for using the cost parts and accessories and communications equipment held for resale. reduction method whereby such credits are deducted from the Inventories of wireless handsets, parts and accessories are valued expenditures or assets to which they relate (see Note 7). at the lower of cost and replacement cost, with cost being determined on an average cost basis. Inventories of communications equipment (i) Share-Based Compensation are valued at the lower of cost and net realizable value, with cost being The Corporation applies the intrinsic value based method of accounting determined on an average cost basis. for share-based compensation awards granted to its employees by its parent, TELUS Corporation. Accordingly, no compensation cost is (m) Capital Assets recorded in the accounts for the share option plans. Canadian GAAP Property is recorded at historical cost and, with respect to self- requires that a fair value be determined for share options at the date of constructed property, includes materials, direct labour and applicable grant and that such fair value is recognized in the financial statements. overhead costs. In addition, where construction projects exceed In respect of share options awarded to employees, it is permissible $20 million and are of a sufficiently long duration, an amount is capital- to use either the fair value based method or the intrinsic value based ized for the cost of funds used to finance construction (see Note 6). method; however, if the intrinsic value based method is used, pro The rate for calculating the capitalized financing costs is based on the forma disclosure is required so as to show what the effect would have Corporation’s one-year cost of borrowing. been had the fair value based method been applied (see Note 9).

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 32 When property, plant and/or equipment are sold by the Corporation, and earnings from such investments are recognized only to the extent the historical cost less accumulated depreciation is netted against the received or receivable. sale proceeds and the difference is included in “Other expense Carrying values of equity and cost investments are reduced to (income), net.” estimated market values if there is other than a temporary decline in the value of the investment; such reduction is included in the Consolidated (n) Leases Statements of Income as “Other expense (income), net.” Leases are classified as capital or operating depending upon the terms and conditions of the contracts. (p) Other Long-Term Liabilities – Individual Line For the year ended December 31, 2002, real estate and vehicle Service Program operating lease expenses, which are net of the amortization of the Included in Other Long-Term Liabilities are past contributions from deferred gain on the sale-leaseback of buildings (see Note 17 and Note the Government of Alberta under the Individual Line Service program, 21), were $117.0 million (2001 – $110.8 million). which are recognized as revenue on a straight-line basis over the Where the Corporation is the lessee, asset values recorded under estimated useful life of the related assets (which is reached in 2003). capital leases are amortized on a straight-line basis over the period of The amount to be recognized as revenue within one year is included expected use. Obligations recorded under capital leases are reduced with “Advance billings and customer deposits” in the Consolidated by lease payments net of imputed interest. Balance Sheets. Revenue from operating leases of equipment is recognized when service is rendered to customers. The leased equipment is depreciated (q) Employee Defined Benefit Plans in accordance with the Corporation’s depreciation policy. The Corporation accrues its obligations under employee defined benefit plans and the related costs, net of plan assets. The cost of pensions (o) Investments and other retirement benefits earned by employees is actuarially deter- The Corporation accounts for its investments in affiliated corporations mined using the projected benefit method pro-rated on service and over which it has significant influence using the equity basis of account- management’s best estimate of expected plan investment performance, ing whereby the investments are initially recorded at cost and subse- salary escalation and retirement ages of employees. For the purpose quently adjusted to recognize the Corporation’s share of earnings or of calculating the expected return on plan assets, those assets are losses of the investee corporations and reduced by dividends received. valued at fair value. The excess of the net actuarial gain (loss) over 10% The excess of the cost of equity investments over the underlying book of the greater of the benefit obligation and the fair value of the plan value at the date of acquisition, except for goodwill, is amortized over the assets is amortized over the average remaining service period of active estimated useful lives of the underlying assets to which it is attributed. employees of the plan. The Corporation accounts for its other investments using the cost basis of accounting whereby investments are initially recorded at cost

3. Change in Accounting Policies

(a) Intangible Assets (b) Revenue Recognition – Consideration Given by a Vendor Commencing January 1, 2002, the new recommendations of the to a Customer CICA for intangible assets and goodwill apply to the Corporation (CICA Commencing January 1, 2002, the Corporation adopted the provisions Handbook Section 3062) (see Note 2(f)). The test is applied to each of the Financial Accounting Standards Board’s Emerging Issues of TELUS Corporation’s reporting units (the reporting units being identi- Task Force dealing with accounting for consideration given by a vendor fied in accordance with the CICA Handbook section for intangible to a customer (EITF 01-9), on a retroactive basis (see Note 2(c)). The assets and goodwill); TELUS Corporation has two reporting units, both Corporation considers this accounting change, which is required for of which include discrete components of, but are not solely comprised U.S. GAAP reporting purposes, to result in a more appropriate presen- of, TELUS Communications Inc. tation of transactions in the financial statements. For the year ended TELUS Corporation has assessed its intangible assets with indefinite December 31, 2002, the impact of the change was to reduce operating lives, which are its spectrum licences, and determined it necessary to revenues and operating expenses, for Mobility operations (both in record a transitional impairment in the TELUS Corporation consolidated 2002 and 2001) and Internet operations (in 2002 only), by $139.5 million financial statements in the first quarter of 2002. As a result of the cor- (2001 – $122.1 million). The adoption of EITF 01-9 did not have an porate structure of TELUS Corporation, the consolidated financial state- effect on the Corporation’s financial position, key operating measures ments of TELUS Communications Inc. are not affected by the TELUS or cash flows. Corporation transitional impairment amount.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 33 notes to consolidated financial statements

(c) Share-Based Compensation (d) Sales of Receivables Commencing January 1, 2002, the Corporation adopted the new During the third quarter of 2002, the Corporation adopted the guidance recommendations of the CICA for share-based compensation (CICA of the CICA dealing with accounting for transfers of receivables (CICA Handbook Section 3870) (see Note 2(i)). As required, the accounting Accounting Guideline AcG-12) (see Note 2(k)). As required, the account- change was applied prospectively. ing change was applied prospectively. The CICA’s Accounting Standards Board has announced that it anticipates finalizing, in 2003, amendments to Section 3870 which (e) Translation of Foreign Currencies would result in companies no longer being allowed to use the intrinsic During the fourth quarter of 2001, the Corporation adopted the new value method of accounting for share-based compensation; the recommendations of the CICA dealing with gains and losses arising from amendments would be effective commencing with 2004 fiscal years. translation of non-current monetary assets and liabilities denominated in a foreign currency (CICA Handbook Section 1650) (see Note 2(g)). The accounting change was applied on a retroactive basis and resulted in no material change.

4. Financial Instruments

The Corporation’s financial instruments consist of cash and temporary Credit risk associated with accounts and leases receivable is investments, accounts receivable, leases receivable, due to/from affili- minimized by the Corporation’s large customer base, which covers all ated corporations, notes receivable/payable to affiliated corporations, consumer and business sectors in Canada. The Corporation follows bank indebtedness, accounts payable, restructuring and workforce a program of credit evaluations of customers and limits the amount of reduction accounts payable, dividends payable, short-term obligations, credit extended when deemed necessary. The Corporation maintains long-term debt, foreign exchange hedges and convertible debentures. provisions for potential credit losses, and any such losses to date have The Corporation uses various financial instruments, the fair values been within management’s expectations. of some which are not reflected on the balance sheets, to reduce or Counterparties to the Corporation’s foreign currency forwards are eliminate exposure to interest rate and currency risks. These instruments major financial institutions that have all been accorded investment grade are accounted for on the same basis as the underlying exposure ratings by a primary rating agency. The dollar amount of credit exposure being hedged. Use of these instruments is subject to a policy, which under contracts with any one financial institution is limited and counter- requires that no derivative transaction be effected for the purpose parties’ credit ratings are monitored. The Corporation does not give of establishing a speculative or a levered position, and sets criteria or receive collateral on swap agreements and hedges due to its credit for the credit worthiness of the transaction counterparties. rating and those of its counterparties. While the Corporation is exposed Price risk – interest rate: The Corporation is exposed to interest to credit losses due to the nonperformance of its counterparties, the rate risk arising from fluctuations in interest rates on its temporary Corporation considers the risk of this remote; if all counterparties were investments, short-term obligations and long-term debt. not to perform, the expected effect on the results of operations and Price risk – currency: The Corporation’s foreign exchange risk financial position would not be material. management includes the use of foreign currency forwards to fix the Fair value: The carrying value of cash and temporary investments, exchange rates on short-term foreign currency transactions and bank indebtedness, accounts receivable, leases receivable, amounts commitments. Hedge accounting is not applied to these foreign due to/from affiliated corporations, accounts payable, restructuring and currency forwards. workforce reduction accounts payable, dividends payable and short- Credit risk: The Corporation is exposed to credit risk with respect term obligations approximates their fair values due to the immediate to its short-term deposits, accounts and leases receivable and foreign or short-term maturity of these financial instruments. currency forwards. The fair values of the Corporation’s long-term debt and convertible Credit risk associated with short-term deposits is minimized debentures are estimated based on quoted market prices for the same substantially by ensuring that these financial assets are placed with or similar issues or on the current rates offered to the Corporation for governments, well-capitalized financial institutions and other credit- debt of the same maturity as well as the use of discounted future cash worthy counterparties. An ongoing review is performed to evaluate flows using current rates for similar financial instruments subject to changes in the status of counterparties. similar risks and maturities. The fair values of the Corporation’s deriva- tive financial instruments used to manage exposure to interest rate and currency risks are estimated similarly.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 34 2002 2001

(millions) Carrying amount Fair value Carrying amount Fair value (restated – Note 1(a))

Long-term debt $ 1,168.4 $ 1,260.1 $ 1,348.2 $ 1,470.6 Derivative financial instruments used to manage exposure to interest rate and currency risks (a) $ – $ 0.9 $ – $ 1.4

(a) Notional amount outstanding $70.1 (2001 – $103.8).

5. Restructuring and Workforce Reduction Costs

Restructuring and workforce reduction costs were recorded in 2001 The expense and liability for the ERIP and VDIP programs are recog- and 2002 for Operational Efficiency Program (“OEP”) costs. In 2001, nized when the employee accepts the Corporation’s formalized offer. TELUS Corporation initiated a phased OEP aimed at improving The total restructuring and workforce reduction expense of $553.3 million operating and capital productivity and competitiveness. The first phase for 2002 consisted of phase one expense of $12.5 million incurred of the OEP was to complete merger-related restructuring activities in 2002, which was in excess of the phase one 2001 provision, as well in TELUS Mobility and the reorganization for TELUS Communications. as $540.8 million related to the second and third phases of the OEP. In the first quarter of 2001, a restructuring charge of $175.4 million This 2002 provision included management and bargaining unit ERIP was recorded. Approximately one-half of the 2001 charge was related and VDIP employee acceptances and planned involuntary terminations, to integration costs for TELUS Mobility including the write-down of qualifying lease termination and other operational efficiency pursuits. redundant capital assets, handset reconfiguration costs and employee An additional restructuring amount of approximately $20 million is severance costs. The remaining charge was related to reorganization expected to be recorded in 2003 in respect of the OEP for items that costs in TELUS Communications, including employee severance costs were not eligible to be recorded in 2002. and capital asset impairment charges. By December 31, 2001, excluding Years ended December 31 (millions) 2002 2001 the impacts of staff increases associated with acquisitions, there Workforce reduction costs were approximately 800 net staff reductions in TELUS Corporation Voluntary (Early Retirement Incentive Plan, as a result of the OEP. Voluntary Departure Incentive Plan The second phase of the OEP, which commenced at the beginning and other) (a) $ 392.7 $ 74.8 of 2002, continued to focus on reducing staff, but also entailed a Involuntary and other (b) 148.1 70.1 comprehensive review of enterprise-wide processes to identify capital 540.8 144.9 and operational efficiency opportunities. Consequently, on June 7, 2002, Lease termination charges 10.1 – the Corporation offered an Early Retirement Incentive Plan (“ERIP”) and Asset write-off and other charges 2.4 30.5 a Voluntary Departure Incentive Plan (“VDIP”) to 11,000 of the more than Restructuring and workforce reduction costs 553.3 175.4 16,000 bargaining unit employees and on July 11, 2002, announced Less: Current payments 253.5 62.2 Asset write-off related to restructuring details on OEP initiatives including: streamlining of business processes; and other 1.5 30.5 reducing the TELUS product portfolio and processes that support them; Reclassified to other long-term liabilities optimizing the use of real estate, networks and other assets; improving (pension and other post-retirement customer order management; reducing the scope of corporate support benefit liabilities) 5.4 – functions; consolidating operational and administrative functions; and Restructuring and workforce reduction costs, consolidating customer contact centres. net of cash payments $ 292.9 $ 82.7

The third phase of the OEP commenced in the third quarter of 2002 (a) Includes an amount of $65.7 in respect of multi-employer pension plan expense that and was focused on operationalizing the above noted initiatives. Twenty- allowed qualifying employees the opportunity to retire with a normal pension earlier than they otherwise would have (see Note 22). four of the 43 customer contact centres targeted for consolidation (b) Includes an amount of $5.4 in respect of defined benefit pension plans that allowed were consolidated by December 31, 2002. All 33 of the TELUS stores qualifying employees the opportunity to retire with a normal pension earlier than they otherwise would have (see Note 22). targeted for closure were closed by December 31, 2002. Consolidation of administrative offices was largely completed by December 31, 2002. TELUS Corporation reduced its staff count by approximately 5,200 for the year ended December 31, 2002. Since the inception of the OEP in 2001, up to the end of December 31, 2002, TELUS Corporation has reduced its staff count by approximately 6,000, comprised of 4,200 bargaining unit positions and 1,800 management positions. TELUS Cor- poration currently expects approximately 1,300 additional net employee reductions as a result of the OEP to occur in 2003.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 35 notes to consolidated financial statements

6. Financing Costs

Years ended December 31 (millions) 2002 2001 (restated – Note 1(a))

Interest on long-term debt $ 209.6 $ 377.9 Interest on short-term obligations and other 229.0 264.6 Foreign exchange (gain) loss (1.0) (6.3) (Gain) loss on redemption of long-term debt (a) (1.5) 257.7 436.1 893.9 Capitalized interest during construction – (2.8) Interest income (49.6) (49.4) $ 386.5 $ 841.7

(a) In the second half of 2002, the Corporation repurchased long-term debt and realized a gain on the redemption (see Note 16(b)-(c)).

7. Income Taxes

Years ended December 31 (millions) 2002 2001 As referred to in Note 2(b), the Corporation must make significant (restated – Note 1(a)) estimates in respect of the composition of its future tax assets and

Current $ (48.2) $ 220.9 future tax liabilities. The operations of the Corporation are complex, Future 106.3 48.7 and related tax interpretations, regulations and legislation are continually $ 58.1 $ 269.6 changing. As a result, there are usually some tax matters in question. Temporary differences comprising the future tax assets (liabilities) The Corporation’s income tax expense differs from that calculated are estimated as follows: by applying statutory rates for the following reasons: (millions) 2002 2001 Years ended December 31 ($ in millions) 2002 2001 Capital assets (restated – Note 1(a)) Property, plant, equipment, other and Basic blended federal and provincial intangible assets subject to amortization $ 259.9 $ 358.6 tax at statutory income tax rates $ (4.2) 40.8% $ 74.3 43.2% Intangible assets with indefinite lives (67.0) (67.8) Revaluation of future tax assets Reserves not currently deductible 137.3 22.1 and liabilities for decreases Losses available to be carried forward 564.3 522.6 in statutory rates 30.7 54.1 Other 74.8 225.9 Non-tax effected elements of net $ 969.3 $ 1,061.4 income before tax – 116.7 Presented on the Consolidated Balance Sheets as: Prior year rates applied to Future tax assets settlement of tax issues 2.1 – Current $ 97.9 $ 130.4 Other 7.8 8.1 Non-current 871.4 931.0 36.4 NM.(a) 253.2 NM.(a) Net future tax assets $ 969.3 $ 1,061.4 Large corporations tax 21.7 16.4

Income tax expense per The Corporation conducts research and development activities, Consolidated Statements which are eligible to earn Investment Tax Credits (see Note 2(e) of Income $ 58.1 NM.(a) $ 269.6 NM.(a) and Note 2(h)). During the year ended December 31, 2002, the Cor- (a) “NM” – not meaningful. poration recorded Investment Tax Credits of $62.0 million (2001 – NIL) of which $45.3 million (2001 – NIL) was recorded as a reduction of Operations Expense and the balance was recorded as a reduction of capital expenditures.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 36 8. Discontinued Operations

On June 1, 2001, the Corporation’s parent, TELUS Corporation, entered At December 31, 2002, and 2001, no material assets or liabilities into an agreement, that closed on July 31, 2001, to sell substantially of the discontinued operations remained. Income statement disclosures all of TELUS Advertising Services (“TAS”) directory business and TELUS for discontinued operations are as follows: Québec directory business to Dominion Information Services Inc., a Years ended December 31 (millions) 2002 2001 wholly-owned subsidiary of Verizon Communications Inc., a significant (restated – Note 1(a)) shareholder of TELUS Corporation, for total proceeds of $810 million Revenues $ – $ 124.2 representing fair market value. In the third quarter of 2001, the Corporation recognized a gain of $545.7 million ($710.4 million before Operating results to measurement date Income before income taxes $ – $ 55.1 tax) on the sale. Income taxes – 25.0 As a result of this transaction, the operating results of the affected Income from operations to measurement date – 30.1 directory and advertising operations have been included in the Consoli- Gain and other dated Statements of Income as “discontinued operations.” Due to the – Gross – 710.4 timing of the 2001 legal reorganizations affecting the Corporation and – Income tax – 164.7 its subsidiaries, the discontinued operations exclude the TAS (Alberta) – Net – 545.7 and the TELUS Québec directory operations prior to June 1, 2001. Discontinued operations $ – $ 575.8

9. Share-Based Compensation

The Corporation applies the intrinsic value based method of accounting Due to the fact that only share options granted after 2001 are for share-based compensation awards granted to employees. Accord- included, these pro forma disclosures are not likely to be representative ingly, no compensation cost is recorded in the accounts for the share of the effects on reported net income (loss) for future years. option plans. For share options granted after 2001, disclosure of the The fair value of each option granted is estimated on the date of impact on earnings as if the fair value based method of accounting for grant using the Black-Scholes model with weighted average assumption the share-based compensation had been applied is required. Such for grants as follows: impact, using weighted average fair values of $5.14 for options granted Year ended December 31 2002 in 2002, would approximate the following pro forma amounts: Risk free interest rate 4.9% Year ended December 31 (millions) 2002 Expected lives (years) 6.2% Expected volatility 37% Compensation cost $ 6.7 Dividend rate Net income (loss) 3.7% As reported $ (68.4) Pro forma $ (75.1) Forfeitures of options are accounted for in the period of forfeiture.

10. Accounts Receivable

On July 26, 2002, the Corporation entered into an agreement with During the third quarter of 2002, the Corporation delivered a notice an arm’s-length securitization trust under which the Corporation is able of termination in respect of this prior securitization; collection and final to sell an interest in certain of its trade receivables up to a maximum remittances of the corresponding accounts receivable had been of $650 million. As a result of selling the interest in certain of the trade completed by September 27, 2002. receivables on a fully-serviced basis, a servicing liability is recognized (millions) 2002 2001 on the date of sale and is, in turn, amortized to earnings over the (restated – Note 1(a)) expected life of the trade receivables. This “revolving-period” securitiza- Total managed portfolio $ 882.2 $ 937.3 tion agreement has an initial term ending July 18, 2007. The Corporation Securitized receivables (595.4) (158.2) is required to maintain at least a BBB (low) credit rating by Dominion Retained interest in receivables sold (a) 96.8 7.5 Bond Rating Service, or the securitization trust may require the sale Receivables held $ 383.6 $ 786.6 program to be wound down prior to the end of the initial term. (a) Includes receivables sold pre and post adoption of AcG-12 (see Note 3(d)). On September 30, 2002, this securitization agreement was amended in order to make available for purchase by the securitization trust an interest in a certain class of the Corporation’s trade receivables, which were previously of the type sold to a different arm’s-length securitization trust under a prior securitization agreement dated November 20, 1997.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 37 notes to consolidated financial statements

The Corporation recognized a loss of $3.7 million on the sale The key economic assumptions used to determine the loss on of receivables, arising from the 2002 transaction. The loss on sale of sale of receivables, future cash flows and fair values attributed to the receivables is comprised of the discount on sale of receivables, the retained interest (see Note 3(d)) are as follows: adjustment arising form the fair valuation of the Corporation’s retained Year ended December 31 2002 interest and servicing. Expected credit losses as a percentage Cash flows from the current year’s securitization (see Note 3(d)) of accounts receivable sold 2.4% are as follows: Weighted average life of the receivables sold (days) 39% Effective annual discount rate 4.2% Year ended December 31 (millions) 2002 Servicing 1.0% Proceeds from new securitizations $ 475.0 Proceeds from collections reinvested Generally, the sold trade receivables do not experience prepayments. in revolving period securitizations $ 1,419.7 Proceeds from collections pertaining to retained interest $ 281.5

At December 31, 2002, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 per cent and 20 per cent changes in those assumptions are as follows: Hypothetical change in assumptions (a)

($ in millions) 2002 10% 20%

Carrying amount/fair value of future cash flows $ 96.8 Expected credit losses as a percentage of accounts receivable sold 1.8% $ 1.1 $ 2.1 Weighted average life of the receivables sold (days) 39% $– $ 0.1 Effective annual discount rate 4.2% $– $ 0.1

(a) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in an increased value, and unfavourable hypothetical changes in the assumptions result in a decreased value, of the retained interest in receivables sold. As the figures indicate, changes in fair value based on a 10 per cent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in change in another (for example, increases in market interest rates may result in increased credit losses), which might magnify or counteract the sensitivities.

11. Related Party Transactions

(a) Due From Affiliated Corporations

(millions) 2002 2001 (restated – Note 1(a))

Due from TELUS Corporation $ 786.2 $ 197.2 Due from affiliated entities under common control 64.5 52.5 $ 850.7 $ 249.7

Amounts due from affiliated corporations are non-interest bearing, are due on demand and are unsecured.

(b) Notes Receivable From Affiliated Corporations

(millions) Rate 2002 2001 (restated – Note 1(a))

Due from TELUS Corporation (see also (d)) 0% – 5% $ 3,976.1 $ 1,962.4 Due from affiliated entities under common control 4.2% – 6.3% 48.6 58.7 Notes receivable from affiliated corporations $ 4,024.7 $ 2,021.1

Notes receivable from affiliated corporations are due on demand and are unsecured. Of the amounts due from TELUS Corporation, $3,209.0 million is subordinate to TELUS Corporation’s senior indebtedness.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 38 (c) Due to Affiliated Corporations

(millions) 2002 2001 (restated – Note 1(a))

Due to TELUS Corporation $ 182.8 $ 310.5 Due to affiliated entities under common control 256.1 48.8 $ 438.9 $ 359.3

Amounts due to affiliated corporations are non-interest bearing, are due on demand and are unsecured.

(d) Notes Payable to Affiliated Corporations

(millions) Rate 2002 2001 (restated – Note 1(a))

Te r m n o te s Due to TELUS Corporation 7.9% – 8.8% $ 4,356.5 $ – Less: Demand note due from TELUS Corporation (a) 0% – 3.4% 1,244.6 – 3,111.9 – Demand notes Due to TELUS Corporation 3.5% – 10.5% – 7,223.3 Due to affiliated entities under common control 10.5% – 11.1% – 264.3 – 7,487.6 Total notes payable to affiliated corporations 3,111.9 7,487.6 Less: Current portion – 7,487.6 Long-term notes payable to affiliated corporations $ 3,111.9 $ –

(a) The amount due from TELUS Corporation has been offset against the amount due to TELUS Corporation as TELUS Communications Inc. has a right of set off and intends to settle the amounts on a net basis.

In September 2002, as part of the corporate reorganization (see (e) Other Note 1(a)), the Corporation issued two term Notes (totalling $4,356.5 mil- In 2001, TELUS Corporation entered into an agreement with Verizon lion) to 612459 B.C. Ltd., a subsidiary of TELUS Corporation. One Note, Communications Inc., a significant shareholder of TELUS Corporation, with a principal amount of $1,289.5 million and bearing an interest with respect to acquiring certain rights to Verizon’s software, technology, rate of 7.9%, is due in February 2004; the other Note, with a principal services and other benefits, thereby replacing and amending a pre- amount of $3,067.0 million and bearing an interest rate of 8.8%, vious agreement between TELUS Corporation and GTE Corporation. is due in June 2011. These two Notes were partial consideration for The agreement is renewable annually at the Corporation’s sole option the transfer of Clearnet Inc. to the Corporation (the total consideration up to December 31, 2008, and it has been renewed for 2003. As of was comprised of Notes, an Ordinary Share, the Equity Settled December 31, 2002, $312.1 million of specified software licences Note and Special Preferred Shares – see Note 18(c) and Note 18(g)). and a trademark licence have been acquired and recorded as capital Pursuant to the winding up of 612459 B.C. Ltd. into TELUS Corporation and other assets. These assets are valued at fair market value as on December 31, 2002 (see Note 1(b)), the Notes became assets determined by an arm’s-length party’s appraisal. Assuming renewal of TELUS Corporation. through to 2008, the total commitment under the new agreement Notes payable to affiliated corporations are senior unsecured is U.S.$377 million for the period 2001 to 2008 and the commitment obligations ranking equally with other unsubordinated creditors, including remaining after December 31, 2002 is U.S.$122 million. In addition, the amounts due to affiliated corporations and the Corporation’s in the normal course of operations and on market terms and conditions, Debentures and Medium Term Notes (see Note 16). ongoing services and benefits have been received and expensed; the Corporation owed Verizon, on a net basis, $64.4 million at December 31, 2002 (2001 – $79.8 million).

Years ended December 31 (millions) 2002 2001 Verizon agreement Specified software licences and trademark licence acquired and recorded as capital $ 112.8 $ 199.3 Ongoing services and benefits expensed $ 43.9 $ 68.5

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 39 notes to consolidated financial statements

Transactions with subsidiaries of TELUS were purchases and sales Years ended December 31 (millions) 2002 2001 of telecommunications technology, equipment and supplies, directory (restated – Note 1(a)) advertising commissions and payments for services under cost-sharing Sales to related parties $ 116.5 $ 98.5 arrangements. These transactions were conducted in the normal Purchases of goods and services course of business at prices established and agreed to by both parties. from related parties $ 265.7 $ 180.0 Net interest expense incurred on debts owed to related parties, including interest on equity settled note $ 392.8 $ 388.2

12. Capital Assets

Accumulated Depreciation and Net Book Value (millions) Cost Amortization 2002 2001 (restated – Note 1(a))

Property, plant, equipment and other Telecommunications assets $ 14,472.6 $ 8,860.1 $ 5,612.5 $ 5,482.1 Assets leased to customers 390.6 318.4 72.2 89.9 Buildings 1,345.2 611.2 734.0 680.3 Office equipment and furniture 664.8 442.9 221.9 195.9 Assets under capital lease 25.9 18.1 7.8 19.1 Other 615.6 313.7 301.9 317.1 Land 49.4 – 49.4 53.0 Plant under construction 304.8 – 304.8 395.2 Materials and supplies 17.9 – 17.9 40.8 17,886.8 10,564.4 7,322.4 7,273.4 Intangible assets subject to amortization Software 946.8 414.9 531.9 508.3 Access to rights-of-way and other 71.3 17.4 53.9 56.5 1,018.1 432.3 585.8 564.8 Intangible assets with indefinite lives Spectrum licences (a) 362.6 0.1 362.5 357.8 $ 19,267.5 $ 10,996.8 $ 8,270.7 $ 8,196.0

(a) Accumulated amortization of spectrum licences is amortization recorded prior to 2002 (see Note 3(a)).

Included in capital expenditures for 2002, were additions of intangible assets subject to amortization of $323.8 million (2001 – $283.7 million).

13. Deferred Charges

(millions) 2002 2001 (restated – Note 1(a))

Recognized transitional pension assets and pension plan contributions in excess of charges to income $ 334.4 $ 209.4 Deferred customer activation and installation (Note 2(c)) 100.3 122.5 Other 63.9 15.9 $ 498.6 $ 347.8

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 40 14. Investments

Investments consist of: redeemable preferred shares of 612459 (see Note 1(b)), the redeemable preferred shares ultimately ceased B.C. Ltd., a subsidiary of TELUS Corporation, in the amount of $NIL to exist. (2001 – $2,899.9 million) resulting from TELUS Corporation’s acquisition At December 31, 2002, a combination of preferred and common of Clearnet Inc. and Mobility restructuring. Pursuant to the winding shares in other affiliated corporations under common control totalled up of 612459 B.C. Ltd. into TELUS Corporation on December 31, 2002 $109.7 million (2001 – $108.0 million).

15. Short-Term Obligations

(millions) 2002 2001 Notes payable under commercial paper programs are unsecured. (restated – Note 1(a)) Outstanding notes payable under these programs, at December 31, 2001,

Current maturities of long-term debt $ 158.8 $ 140.1 carried a weighted average interest rate of 4.44%. Notes payable under commercial paper programs – 35.0 $ 158.8 $ 175.1

16. Long-Term Debt

(a) Details of Long-Term Debt

(millions) Series Rate Maturity 2002 2001 (restated – Note 1(a)) TELUS Communications Inc. Debentures (b) 1 12.00% May 2010 $ 50.0 $50.0 2 11.90% November 2015 125.0 125.0 3 10.65% June 2021 175.0 175.0 4 9.15% April 2002 – 1.0 5 9.65% April 2022 249.0 249.0 A 9.50% August 2004 189.5 200.0 B 8.80% September 2025 200.0 200.0 988.5 1,000.0

TELUS Communications Inc. Medium Term Note Debentures (c) 96-3 6.25% February 2002 – 20.0 96-5 7.25% April 2002 – 30.0 96-6 6.00% January 2002 – 25.0 96-7 6.125% January 2002 – 30.0 96-9 6.25% August 2004 20.0 20.0 99-1 6.40% June 2003 151.0 200.0 171.0 325.0 TELUS Communications Inc. Senior Discount Notes (d) 0.8 1.5 Capital leases issued at varying rates of interest from 5.33% to 8.5% and maturing on various dates up to 2005 8.1 21.2 Other – 0.5 Total debt 1,168.4 1,348.2 Less – current maturities 158.8 140.1 Long-Term Debt $ 1,009.6 $ 1,208.1

(b) TELUS Communications Inc. Debentures and a supplemental trust indenture dated September 22, 1995 relating The outstanding Series 1 through 5 debentures were issued by BC TEL, to Series B Debentures only. They are redeemable at the option of a predecessor corporation of TELUS Communications Inc., under a the Corporation, in whole at any time or in part from time to time, on Trust Indenture dated May 31, 1990 and are non-redeemable. not less than 30 days’ notice at the Government of Canada Yield plus The outstanding Series A Debentures and Series B Debentures 15 basis points. During 1995 the Corporation terminated an interest were issued by AGT Limited, a predecessor corporation of TELUS rate swap contract relating to the Series A Debentures and realized Communications Inc., under a Trust Indenture dated August 24, 1994 a gain on early termination in the amount of $16.8 million which is being

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 41 notes to consolidated financial statements

amortized and credited to interest expense over the remaining term A portion of the proceeds from TELUS Corporation’s public issuance of the Series A Debentures. The amortization of the gain resulted of Non-Voting Shares in the third quarter of 2002 was advanced in an effective rate of interest on Series A Debentures in 2002 of 8.79% to the Corporation and, in turn, was used to repurchase these Notes. (2001 – 8.79%). Due to an amalgamation on January 1, 2001, all the Debentures (d) TELUS Communications Inc. Senior Discount Notes became obligations of TELUS Communications Inc. The debentures are In June 2001, the indentures governing the notes were amended by not secured by any mortgage, pledge or other charge and are governed supplemental indentures pursuant to an Offer to Repay and Consent by certain covenants including a negative pledge and a limitation Solicitation. The effect of the supplemental indentures was to remove on issues of additional debt subject to a debt to capitalization ratio the limitations on business activities previously imposed by restrictive and interest coverage test. covenants. The Offer to Repay resulted in the redemption of approxi- Repurchases: During the second half of 2002, the Corporation mately 99.9% of the four series of Senior Discount Notes. repurchased $10.5 million (face value) of August 2004 Debentures. In April 1999, Clearnet (which was acquired by TELUS Corporation The gain on repurchasing these Debentures has been included in 2000) entered into cross currency interest rate swap agreements as a component of financing costs (gain on redemption of long-term which effectively converted principal repayments and interest obligations debt) (Note 6). A portion of the proceeds from TELUS Corporation’s to Canadian dollar requirements with an effective fixed rate of approxi- public issuance of Non-Voting Shares in the third quarter of 2002 mately 9.9%. During 2001, these swap agreements were terminated, was advanced to the Corporation and, in turn, was used to repurchase the security was released and a gain of $41.2 million was recognized by these Debentures. TELUS Corporation; as a result of the corporate structure of TELUS Corporation, and the application of the continuity-of-interests accounting (c) TELUS Communications Inc. Medium Term Note Programs to the September 30, 2002, corporate reorganization, TELUS At December 31, 2002, TELUS Communications Inc. had two series Communications Inc. recorded a loss of $257.7 million (see Note 6). of extendible medium term notes outstanding. These unsecured notes During the third quarter of 2002, the 11.75% Senior Discount Notes, were originally issued by BC TEL pursuant to a Trust Indenture dated due 2007, were called for redemption and were redeemed. Due to the May 31, 1990 and a supplement dated October 24, 1994. In June 2000, September 2002 corporate reorganization, the outstanding Clearnet $200 million of 6.4% notes were issued that mature in June 2003, Inc. Senior Discount Notes, which mature in 2008 and 2009, became extendible to 2030 at the option of the holder. If extended, the coupon obligations of TELUS Communications Inc. rate increases to 7.25%. At December 31, 2002, the remaining series of medium term notes, totaling $171 million, have maturities of $151 mil- (e) Long-Term Debt Maturities lion in 2003 and $20 million in 2004. The $20 million note, which Anticipated requirements to meet long-term debt repayments during currently has a maturity of August 2004, is extendible at the option each of the five years from December 31, 2002 are as follows: of TELUS Communications Inc. on a periodic basis through 2007. (millions) Repurchases: During the third quarter of 2002, the Corporation 2003 $ 158.8 repurchased $49.0 million (face value) of 6.4% Medium Term Notes. The 2004 211.5 gain on repurchasing these Notes has been included as a component 2005 – of financing costs (gain on redemption of long-term debt) (Note 6). 2006 – 2007 –

17. Other Long-Term Liabilities

(millions) 2002 2001 (restated – Note 1(a))

Deferred gain on sale-leaseback of buildings $ 111.1 $ 121.4 Pension and other post-retirement liabilities 124.6 95.2 Deferred customer activation and installation fees (Note 2(c)) 100.3 122.5 Other 32.0 38.7 $ 368.0 $ 377.8

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 42 18. Shareholders’ Equity

(a) Details of Shareholders’ Equity

($ in millions except per share amounts) 2002 2001 (restated – Note 1(a))

Equity settled note (c) $ 3,572.9 $ – Convertible debentures (d) – 150.1 Preference and Preferred Authorized Amount Non-voting first preferred shares Unlimited Second preferred shares Unlimited Special preferred Unlimited Series A preferred shares 1,000 Series B preferred shares 100 Series C preferred shares 20,000,000 Series D preferred shares 500,000,000 Series E preferred shares 500,000,000 Series F preferred shares 500,000,000 Redemption Issued Premium (a) Cumulative $6.00 Preference (e) 8,090 (2001 – 9,500) 10.0% 0.8 0.9 $4.375 Preferred (e) 53,000 (2001 – 57,000) 4.0% 5.3 5.7 $4.50 Preferred 47,500 (2001 – 47,500) 4.0% 4.8 4.8 $4.75 Preferred 71,250 (2001 – 71,250) 5.0% 7.1 7.1 $4.75 Preferred (Series 1956) 71,250 (2001 – 71,250) 4.0% 7.1 7.1 $5.15 Preferred 114,700 (2001 – 114,700) 5.0% 11.5 11.5 $5.75 Preferred 96,400 (2001 – 96,400) 4.0% 9.6 9.6 $6.00 Preferred 42,750 (2001 – 42,750) 5.0% 4.3 4.3 $1.21 Preferred 768,400 (2001 – 768,400) 4.0% 19.2 19.2 Series 1 Preference (f) – (2001 – 5,500,000) – – 724.7 Non-cumulative Series A Preferred (h) – (2001 – 1,000) – – 67.2 Series C Preferred (i) – (2001 – 9,129,000) – – 1,353.8 Series E Preferred (j) – (2001 – 25,000) – – 30.5 Series 2 Preference (k) – (2001 – 3,630,359) – – 14.6 Series 3 Preference (l) – (2001 – 811,606) – – 67.2 69.7 2,328.2 Ordinary and Common equity Ordinary Shares and Common Shares Authorized Amount Non-voting Ordinary Shares Unlimited Ordinary Shares Unlimited Issued Ordinary Shares 100,000,000 (2001 – 329,474,834) 4,204.4 1,899.2 Retained earnings 569.1 700.2 Contributed surplus 406.2 50.9 5,179.7 2,650.3 $ 8,822.3 $ 5,128.6

(a) The Corporation has the right to redeem the publicly held Preference and Preferred shares upon giving three months’ previous notice.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 43 notes to consolidated financial statements

(b) Effect of September 2002 Corporate Reorganization and restated as if the two companies, and their subsidiaries, had always December 2002 Purchase of Common Control Subsidiary been combined. The same accounting treatment was afforded when on Shareholders’ Equity the Corporation acquired a subsidiary, TELUS Risk Management Inc. Due to the September 2002 corporate reorganization, including the (see (g) and Note 1(a)), from TELUS Corporation. As a result of the wind up of Clearnet Inc. into the Corporation, and the application restatements, the Ordinary and Common Share Capital and retained of the continuity-of-interests method of accounting, which is similar to earnings for prior periods were adjusted to reflect the reorganized the pooling-of-interests method (see Note 1(a)), the prior periods were Corporation on the combined basis as follows:

December 31, 2002

(millions) As at December 31, 2001 Year ended As at

TELUS TELUS Risk Restructure Communications Adjusted Management Operations and wind up Inc. Clearnet Inc. (a) Inc. Eliminations Combined and other (Note 1(a)) Combined

Equity settled notes (c) $ – $ – $ – $ – $ – $ – $ 3,572.9 $ 3,572.9 Convertible debentures (d) – 150.1 – – 150.1 – (150.1) – Preference and Preferred Shares 2,328.2 806.5 – (806.5) 2,328.2 46.7 (2,305.2) 69.7 Ordinary and Common Share Capital 3,793.4 330.3 5.1 (2,229.6) 1,899.2 – 2,305.2 4,204.4 Retained earnings 538.2 99.5 (0.5) 63.0 700.2 (131.1) – 569.1 Contributed surplus 42.8 8.1 – – 50.9 355.3 – 406.2 Ordinary and Common Equity 4,374.4 437.9 4.6 (2,166.6) 2,650.3 224.2 2,305.2 5,179.7 Shareholders’ equity $ 6,702.6 $ 1,394.5 $ 4.6 $ (2,973.1) $ 5,128.6 $ 270.9 $ 3,422.8 $ 8,822.3

(a) For purposes of presentation, on the combined basis, Clearnet Inc. as at December 31, 2001, was adjusted for certain items including removal of its 2001 TELUS Communications Inc. ownership transaction, removal of deficit prior to its acquisition by TELUS in 2000 and the recognition of future tax assets realizable due to the combination of TELUS Communi- cations Inc. and Clearnet Inc.

(c) TELUS Communications Inc. Equity Settled Note (d) Clearnet Inc. Convertible Debentures In September 2002, as part of the corporate reorganization (see Following its 2000 acquisition of Clearnet Communications Inc., Note 1(a)), the Corporation issued a $3,572.9 million, 9.7% Equity Settled TELUS Corporation made an Offer to Purchase the 6.75% Convertible Note to 612459 B.C. Ltd. as partial consideration for the transfer of Debentures, which were originally publicly issued on June 19, 2000, Clearnet Inc. to the Corporation (the total consideration was comprised by Clearnet Inc. (formerly Clearnet Communications Inc.). TELUS of Notes, an Ordinary Share, Special Preferred Shares and the Equity Corporation acquired, and prior to the September 2002 corporate Settled Note – see (g) and Note 11(d)). The Equity Settled Note is reorganization held, all of the Convertible Debentures. The Clearnet subordinate to senior indebtedness of the Corporation and can be Convertible Debentures were redeemed as part of the September 2002 prepaid, at the Corporation’s option and without penalty, prior to corporate reorganization. maturity on June 1, 2007. As the Corporation had the unrestricted ability to settle the interest, As the Corporation has the ability to settle the interest and principal principal and redemption payments through the issuance of Ordinary payments through the issuance of Ordinary Shares, the Equity Settled Shares, the Convertible Debentures have been classified as equity. Note has been classified as equity. Accordingly, the principal amount Accordingly, the principal amount is included in Shareholders’ Equity is included in Shareholders’ Equity on the Consolidated Balance Sheets. on the interim Consolidated Balance Sheets. Interest payments, Interest payments, net of income taxes, are classified as dividends net of income taxes, are classified as dividends and are charged and are charged directly to retained earnings. directly to retained earnings. Pursuant to the winding up of 612459 B.C. Ltd. into TELUS Corporation on December 31, 2002 (see Note 1(b)), the Equity Settled (e) TELUS Communications Inc. $6.00 Preference Shares Note became an asset of TELUS Corporation. and $4.375 Preferred Shares In conjunction with the September 2002 corporate reorganization, including the wind up of Clearnet Inc. into the Corporation, the 1,410 $6.00 Preference Shares and the 4,000 $4.375 Preferred Shares previously owned by TELUS Corporation were reacquired by the Corporation and cancelled.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 44 (f) Clearnet Inc. Series 1 Shares (i) TELUS Communications Inc. Series C Shares In 2001, Clearnet issued 5,500,000 Series 1 Preference Shares In 2000, the Corporation issued 9,129,000 Series C Redeemable to 612459 B.C. Ltd. as consideration for the transfer of the Western Subordinate Preferred Shares to TELUS Corporation as consideration Canadian Mobility business. The cumulative dividends on these for the transfer of all the common shares and Class B preferred Shares were 11.15% calculated upon the Shares’ redemption value. shares of the former TELUS Communications Inc. The non-cumulative The Shares were redeemable at Clearnet’s option for the full purchase dividends on these Shares were payable when declared. The Shares price of $1,000 per Share. At the holder’s option, the Shares were were redeemable at the Corporation’s option for the full purchase convertible into Clearnet Class A Non-Voting Shares. price of $1,000 per Share. At the holder’s option, the Shares were Due to the September 2002 corporate reorganization, including convertible into Ordinary Shares. the wind up of Clearnet Inc. into the Corporation, the Shares ultimately Due to the September 2002 corporate reorganization, including ceased to exist. the wind up of Clearnet Inc. into the Corporation, the Shares ultimately ceased to exist. (g) TELUS Communications Inc. Special Shares In September 2002, as part of the corporate reorganization (see (j) TELUS Communications Inc. Series E Shares Note 1(a)), the Corporation issued 10,507,513 Special Redeemable In 2001, the Corporation issued 25,000 Series E Redeemable Subor- Subordinate Preferred Shares to 612459 B.C. Ltd. as partial consider- dinate Preferred Shares to TELUS Advanced Services Inc., a subsidiary ation for the transfer of Clearnet Inc. (the total consideration was of TELUS Corporation, as consideration for the transfer of the TELUS comprised of Notes, an Ordinary Share, Special Preferred Shares Interactive business. The non-cumulative dividends on these Shares and the Equity Settled Note – see (c) and Note 11(d)). were payable when declared. The Shares were redeemable at the In December 2002, as part of a corporate reorganization, the Cor- Corporation’s option for the full purchase price of $1,000 per Share. poration issued 5,200 Special Preferred Shares to TELUS Corporation At the holder’s option, the Shares were convertible into Ordinary Shares. as consideration for the purchase of TELUS Risk Management Inc. Due to the September 2002 corporate reorganization, including (see Note 1(a)). the wind up of Clearnet Inc. into the Corporation, the Shares ultimately The non-cumulative dividends on these Special Shares are payable ceased to exist. when declared. The Shares are redeemable at the Corporation’s option, and the holder’s option, for the full purchase price of $1,000 (k) Clearnet Inc. Series 2 Shares per Share. At the holder’s option, the Shares are convertible into In 2001, Clearnet issued 210,000 Series 2 Preference Shares to Ordinary Shares. 612459 B.C. Ltd. as consideration for the transfer of the TELUS Québec Pursuant to the winding up of 612459 B.C. Ltd. into TELUS Corpo- Mobilité business. In 2002, Clearnet issued 2,875,499 Series 2 Pref- ration on December 31, 2002 (see Note 1(b)), the Shares became assets erence Shares to TELUS Corporation, and 544,860 of the same Series of TELUS Corporation. Subsequently, also on December 31, 2002, of Shares to TELUS Communications Inc., the proceeds from which TELUS Corporation exercised its option to convert the Shares it held were used to redeem notes payable to the respective corporations. into 100,000,000 Ordinary Shares. The non-cumulative dividends on these Shares were 8.00% calculated upon the Shares’ redemption value. The Shares were redeemable (h) TELUS Communications Inc. Series A Shares at Clearnet’s option for the full purchase price of $1,000 per share. In 1998, the Corporation issued 1,000 Series A Redeemable Subordinate At the holder’s option, the Shares were convertible into Clearnet Preferred Shares, which are voting shares, to TELUS Corporation as Class A Non-Voting Shares. consideration for the purchase of TELUS Systems Support Inc. The non- Due to the September 2002 corporate reorganization, including cumulative dividends on these Shares are payable when declared. the wind up of Clearnet Inc. into the Corporation, the Shares ultimately At the Corporation’s option, the Shares are redeemable for the full ceased to exist. purchase price of $160 million. Due to the September 2002 corporate reorganization, including (l) Clearnet Inc. Series 3 Shares the wind up of Clearnet Inc. into the Corporation, the Shares ultimately In 2001, Clearnet issued 811,606 Series 3 Preference Shares to ceased to exist. 612459 B.C. Ltd. as consideration for the transfer of the TELUS Adver- tising Services Partnership. The non-cumulative dividends on these Shares were 8.00% calculated upon the Shares’ redemption value. The Shares were redeemable at Clearnet’s option for the full purchase price of $1,000 per share. At the holder’s option, the Shares were convertible into Clearnet Class A Non-Voting Shares. Due to the September 2002 corporate reorganization, including the wind up of Clearnet Inc. into the Corporation, the Shares ultimately ceased to exist.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 45 notes to consolidated financial statements

19. Commitments and Contingent Liabilities

(a) CRTC Decision 2002-34 Deferral Account (e) Verizon Communications Inc. Agreement On May 30, 2002, the CRTC issued Decision 2002-34 and introduced Effective 2001, TELUS Corporation has entered into an agreement the concept of a deferral account (see Note 2(c)). The Corporation with Verizon Communications Inc., a significant shareholder of TELUS records a liability ($22 million as of December 31, 2002) to the extent Corporation, with respect to acquiring certain rights to Verizon’s that activities it has undertaken, other qualifying events and realized software, technology, services and other benefits, thereby replacing rate reductions for Competitor Services do not extinguish it. and amending a previous agreement between TELUS Corporation Management is required to make estimates and assumptions in and GTE Corporation. The agreement is renewable annually at TELUS respect of the offsetting nature of these items. If the CRTC, upon its Corporation’s sole option up to December 31, 2008, and it has been annual review of the Corporation’s deferral account, disagrees with renewed for 2003. Assuming renewal through to 2008, the total management’s estimates and assumptions, the CRTC may adjust the commitment under the agreement is U.S.$122 million for the period deferral account balance and such adjustment may be material. 2003 to 2008 and the current contractual obligation for 2003, none of which is capital in nature, is U.S.$20 million (see Note 11(e)). (b) Operational Efficiency Program Initiatives As disclosed in Note 5, the Corporation estimates that an additional (f) Labour Negotiations restructuring amount of $20 million is expected to be recorded in 2003 In 2000, TCI commenced collective bargaining with the Telecommuni- in respect of the OEP for items that were not eligible to be recorded cations Workers Union for a new collective agreement replacing the in 2002. legacy agreements from BC TEL and Alberta-based TELUS. Following the Clearnet acquisition and subsequent transactions, the Mobility (c) Capital Expenditure Commitments business assumed responsibility for separate negotiations for its union- The Corporation estimates expenditures for capital asset purchases to ized operations in British Columbia and Alberta. This is the first round be $1,317 million in 2003. Substantial purchase commitments have been of collective bargaining since the merger of BC Telecom and TELUS made in connection with these capital assets as at December 31, 2002. Alberta and the Corporation’s aim is to replace the multiple legacy collective agreements with a single collective agreement for the new (d) Leases bargaining unit. The Corporation occupies leased premises in various centres and During the fourth quarter of 2002, the Corporation’s application to has land, buildings and equipment under operating leases. As a result the Federal Minister of Labour, as provided for under the Canada of the consolidation of leased premises arising from the Operational Labour Code, requesting the appointment of a federal conciliator was Efficiency Program (see Note 5), some of the leased building premises granted. The Corporation and the Union have mutually agreed to were sub-let. At December 31, 2002, the future minimum lease pay- extend conciliation and this process can take a number of months. ments under capital leases and operating leases (including occupancy While the conciliation process is underway, a strike or lock out is pro- costs where applicable), and future receipts from building operating hibited by the Canada Labour code. Should a new collective agreement sub-leases, were: not be reached, there is the risk of a labour disruption. As a labour dis- Capital Leases Operating Leases ruption could occur in multiple forms, the operational and financial (millions) Payments Payments Receipts impacts of a labour disruption on the Corporation are not practicably 2003 $ 7.4 $ 150.0 $ 2.6 determinable currently. 2004 1.0 133.7 2.9 2005 – 115.7 1.0 2006 – 101.4 0.8 (g) Claims and Lawsuits 2007 – 93.3 – A number of claims and lawsuits seeking unspecified damages and Total future minimum other relief are pending against the Corporation. It is impossible at this lease payments 8.4 time for the Corporation to predict with any certainty the outcome of Less imputed interest 0.3 such litigation. However, management is of the opinion, based upon Capital lease liability $ 8.1 information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Corporation’s consolidated financial position.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 46 20. Net Change in Non-Cash Working Capital

(a) Continuing Operations (b) Discontinued Operations

Years ended December 31 (millions) 2002 2001 Years ended December 31 (millions) 2002 2001 (restated – Note 1(a)) (restated – Note 1(a))

Accounts receivable $ 403.0 $ 35.6 Operating cash flow $ – $ (105.2) Income and other taxes receivable/payable (112.9) (69.7) Accounts receivable – 41.6 Inventories 17.5 41.2 Prepaid expenses and other – 15.4 Prepaid expenses and other 18.5 (61.5) $ – $ (48.2) Accounts payable and accrued liabilities 64.7 24.7 Advance billings and customer deposits 23.5 77.3 Employer contributions to employee defined benefit plans (70.0) (42.3) Due from/to affiliated corporations (609.8) (308.1) $ (265.5) $ (302.8)

21. Sale of Property and Investments

During 2001, the Corporation sold a portion of a cross-Canada fibre During 2001, the Corporation disposed of certain selected, non- asset installation, which TELUS had recently completed construction strategic properties including various office buildings in Vancouver, of. Concurrently, TELUS purchased fibre asset installations for use and Calgary under the terms of sale-leaseback transactions. in its own network infrastructure in the U.S. and Eastern Canada from The pre-tax gain of $76.9 million, on total proceeds of $228.4 million, the same third party. The fair market value of the assets involved was has been deferred and will be amortized over the various terms $73.5 million resulting in a gain on sale of $24.5 million, which was of the leases. included in “Other expense (income), net” in the Consolidated Statements of Income.

22. Employee Benefits

The Corporation has a number of defined benefit and defined contri- At December 31, 2002, shares of TELUS Corporation, combined bution plans providing pension, other retirement and post-employment with shares of Verizon Communications Inc., a significant shareholder, benefits to most of its employees. accounted for less than 1% of the assets held in the pension and Certain employees are covered by a union-sponsored multi-employer other benefit trusts administered by the Corporation. pension plan. Contributions are determined in accordance with provisions of negotiated labour contracts and are generally based on employee gross earnings.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 47 notes to consolidated financial statements

Information concerning the Corporation’s defined benefit plans, in aggregate, is as follows:

Pension Benefit Plans Other Benefit Plans (millions) 2002 2001 2002 2001 Accrued benefit obligation: Balance at beginning of year $ 4,005.4 $ 3,693.8 $ 45.3 $ 41.2 Current service cost 103.8 95.2 4.5 4.0 Interest cost 269.2 256.9 7.9 3.5 Benefits paid (181.5) (180.6) (4.0) (4.0) Early retirement benefits (a) 9.4 – – – Impact of voluntary departure incentive program (35.0) – – – Actuarial loss (gain) (5.9) 140.1 (1.2) 0.6 Balance at end of year 4,165.4 4,005.4 52.5 45.3 Plan assets: Fair value at beginning of year 4,351.6 4,453.1 45.7 42.8 Annual return on plan assets (121.9) 2.1 3.4 3.2 Employer contributions 62.3 38.6 7.7 3.7 Employees’ contributions 35.9 38.4 – – Benefits paid (181.5) (180.6) (4.0) (4.0) Fair value at end of year 4,146.4 4,351.6 52.8 45.7 Funded status – plan surplus (deficit) (19.0) 346.2 0.3 0.4 Unamortized net actuarial loss (gain) 756.2 329.8 (21.8) (22.4) Unamortized transitional obligation (asset) (412.4) (457.1) 5.6 6.4 Accrued benefit asset (liability) 324.8 218.9 (15.9) (15.6) Valuation allowance (76.2) (50.8) – – Accrued benefit asset (liability), net of valuation allowance $ 248.6 $ 168.1 $ (15.9) $ (15.6)

(a) A component of the Corporation’s Operational Efficiency Program (see Note 5) was early retirement incentives. The early retirement incentives allowed qualifying employees the opportunity to retire with a normal pension earlier than they otherwise would have.

The accrued benefit asset (liability), net of valuation allowance, is reflected in the Consolidated Balance Sheets as follows:

(millions) 2002 2001

Pension benefit plans $ 248.6 $ 168.1 Other benefit plans (15.9) (15.6) $ 232.7 $ 152.5 Presented on the Consolidated Balance Sheets as: Deferred charges (Note 13) $ 334.4 $ 209.4 Other long-term liabilities (Note 17) (124.6) (95.2) Due from affiliated corporations 22.9 38.3 $ 232.7 $ 152.5

Included in the above accrued benefit obligations at year-end are the following amounts in respect of plans that are not funded: Pension Benefit Plans Other Benefit Plans (millions) 2002 2001 2002 2001

Accrued benefit obligation $ 142.2 $ 130.7 $ 10.3 $ 5.3

At December 31, 2002, TELUS Corporation had undrawn Letters of Credit that secured certain of the unfunded pension benefit plans. At December 31, 2001, a Standby Letter of Credit Facility secured certain of the unfunded pension benefit plans.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 48 The significant weighted average actuarial assumptions adopted in measuring the Corporation’s accrued benefit obligations are as follows:

Pension Benefit Plans Other Benefit Plans 2002 2001 2002 2001 Discount rate For the year ended December 31 6.75% 7.00% 6.75% 7.00% As at December 31 6.75% 6.75% 5.25% 6.75% Expected long-term rate of return on plan assets For the year ended December 31 7.82% 8.00% 7.75% 8.00% As at December 31 7.50% 7.75% 7.50% 7.75% Rate of future increases in compensation For the year ended December 31 4.25% 4.25% – – As at December 31 3.75% 4.25% – –

2002 sensitivity of key assumptions

Pension Benefit Plans Other Benefit Plans Change in Change in Change in Change in (millions) obligation expense obligation expense

Impact of hypothetical 0.25% change (a) in: Discount rate $ 137.3 $ 10.3 $ 0.7 $ 0.2 Expected long-term rate of return on plan assets $ 10.8 $ 0.1 Rate of future increases in compensation $ 25.4 $ 3.4 $ – $ –

(a) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in decreased amounts, and unfavourable hypo- thetical changes in the assumptions result in increased amounts, of the obligations and expenses. Changes in amounts based on a 0.25 per cent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear. Also, in this table, the effect of a variation in a particular assumption on the change in obligation or change in expense is calculated without changing any other assumption; in reality, changes in one factor may result in change in another (for example, increases in discount rates may result in increased expectations about the long-term rate of return on plan assets), which might magnify or counteract the sensitivities.

The Corporation’s net defined benefit plan expense was as follows:

Pension Benefit Plans Other Benefit Plans Years ended December 31 (millions) 2002 2001 2002 2001 (restated – Note 1(a)) (restated – Note 1(a))

Current service cost $ 67.2 $ 56.8 $ 4.5 $ 4.0 Interest cost 269.3 256.9 7.9 3.5 Expected return on plan assets (334.7) (352.8) (3.4) (3.2) Amortization of past service costs – 0.2 – – Amortization of actuarial gain (0.6) (0.9) (1.8) (2.1) Valuation allowance provided against accrued benefit asset 25.4 26.1 – – Amortization of transitional obligation (asset) (44.7) (44.7) 0.8 0.8 Expense allocated to related companies (6.0) 4.3 (0.1) – Net periodic expense (recovery) (24.1) (54.1) 7.9 3.0 Early retirement benefits (a) 5.4 – – – $ (18.7) $ (54.1) $ 7.9 $ 3.0

(a) A component of TELUS’ Operational Efficiency Program (see Note 5) was early retirement incentives. The early retirement incentives allowed qualifying employees the opportunity to retire with a normal pension earlier than they otherwise would have. The benefits expense has been included in the Consolidated Statements of Income as “Restructuring and workforce reduction costs”.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 49 notes to consolidated financial statements

The Corporation’s total defined contribution pension plans expense was as follows:

Years ended December 31 (millions) 2002 2001 Multi-employer pension plan contributions Regular benefits (a) $ 48.3 $ 51.5 Early retirement benefits (b) 65.7 – 114.0 51.5 Other defined contribution pension plan 2.5 1.4 $ 116.5 $ 52.9

(a) Regular benefits include other benefit plan amounts of $NIL (2001 – $3.7). (b) A component of TELUS’ Operational Efficiency Program (see Note 5) was an early retirement program, the ERIP. The ERIP allowed qualifying employees the opportunity to retire with a normal pension earlier than they otherwise would have. The early retirement benefits expense has been included in the Consolidated Statements of Income as “Restructuring and workforce reduction costs”.

23. Prior Period Presentation

The December 31, 2001, amounts have been reclassified, where applicable, to conform to the 2002 presentation.

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 50 directors & officers

board of directors officers

R.J. Butler Counsel to Bryan & Company R.P.Triffo Vice-Chairman

B.A. Canfield Chairman, TELUS Corporation D. Entwistle President and Chief Executive Officer

D. Entwistle President and CEO, TELUS Corporation B.A. Baptie Executive Vice-President, Technology & Operations I.J. Harris Chairman, BC Gas Inc. and Chairman and CEO, Summit Holdings Ltd. J. Beaton Vice-President, Strategic Alliance Management R.P.Triffo Chairman, Stantec Inc. D.H. Delaloye Executive Vice-President and President, Consumer Solutions

R. Gardner Vice-President and Treasurer

W.A. Grieve Vice-President, Government & Regulatory Affairs

N. Kwan Vice-President and Corporate Controller

R.G. McFarlane Executive Vice-President and Chief Financial Officer

T. McGillicuddy Vice-President, Taxation

J.W. Peters Executive Vice-President, Corporate Affairs and Chief General Counsel

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 51 investor information

if you need help with the following: • electronic delivery of shareholder documents • change of address • transfer of shares • loss of share certificates • estate settlements • direct deposits of dividend payments • elimination of multiple mailings • receipt of annual and interim Reports • Dividend Reinvestment and Share Purchase Plan please contact the transfer agent and registrar: • 1-800-564-5263 (toll free within North America) or • (514) 982-7555 (outside North America) • by e-mail: [email protected] • Web site: computershare.com • by mail: Computershare Trust Company of Canada Shareholder Services 9th Floor, 100 University Avenue Toronto, Ontario, Canada M5J 2Y1

Computershare also has offices in Vancouver, Calgary, Edmonton, Winnipeg, Montreal and Halifax. for additional financial or corporation information, please contact TELUS Investor Relations: • 1-800-667-4871 (toll free within North America) or • (780) 493-7311 (outside North America) • by e-mail: [email protected] • Web site: telus.com

TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 52

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