ITEM 4 — INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

        Our legal and commercial name is Quebecor Media Inc. Our registered office is located at 612 St. Jacques Street, Montréal, Québec, Canada H3C 4M8, and our telephone number is (514) 954-0101. Our corporate website can be accessed through quebecor.com . The information found on our corporate website is, however, not part of this annual report. Under our Senior Notes and Senior Discount Notes, our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011.

        Quebecor Media Inc. was incorporated in Canada on August 8, 2000 under Part 1A of the Companies Act (Québec). In connection with our formation, our parent company Quebecor Inc. transferred all the shares of its wholly-owned subsidiary Quebecor Communications Inc., or QCI, to us, which made QCI our wholly-owned subsidiary. The assets of QCI, as of the date of the transfer in October 2000, included: a 70% interest in Sun Media Corporation, or Sun Media, a 57.3% interest in Nurun Inc., or Nurun, all the assets of the CANOE network and all the assets of our Leisure and Entertainment segment. Concurrently, we sold our interest in our subsidiary TQS Inc. to Quebecor Inc., which subsequently sold such interest to a private consortium. In addition, Quebecor Inc. and Capital d'Amérique CDPQ inc., or Capital CDPQ, a wholly-owned subsidiary of Caisse de dépôt et placement du Québec contributed $0.9 billion and $2.8 billion, respectively, in cash in exchange for common shares of the capital stock of Quebecor Media. In December 2001, QCI was liquidated into Quebecor Media Inc.

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        In October 2000, we acquired all of the outstanding shares of Groupe Vidéotron for $5.3 billion. At the time of the acquisition, the assets of Groupe Vidéotron included all of the shares of Vidéotron ltée, which we refer to as Vidéotron, a 99.9% voting interest in TVA Group Inc., or TVA Group, Le SuperClub Vidéotron ltée, which we refer to as Le SuperClub Vidéotron, Protectron Inc., a 66.7% voting interest in Vidéotron Télécom Ltd., or Videotron Telecom, a 54.0% voting interest in Netgraphe Inc. (which changed its name, effective December 31, 2004, to Canoe Inc., or Canoe) and a minority interest in Microcell Telecommunications Inc.

        During our financial year ended December 31, 2004, we proceeded with several business acquisitions, divestitures, financing transactions and combinations through our direct and indirect subsidiaries, including, among others, the following:

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In December 2004, TVA Group and Sun Media Corporation successfully acquired 75% and 25%, respectively, of the outstanding shares of Toronto 1, a television station in Toronto, Canada. In connection with the acquisition of Toronto 1, Sun Media Corporation transferred to CHUM its 29.9% interest in CablePulse 24, which we refer to as CP24, a Toronto all-news station. See "— Newspaper Operations" and "— Broadcasting" below.



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In July 2004, Vidéotron and Videotron Telecom Ltd. announced a plan to launch a telephony service using Voice over IP technology in the Province of Québec. Following a trial period with 2,000 customers in the fall of 2004, this service was officially launched on January 24, 2005. Vidéotron became the first major cable company in Canada to offer consumers residential telephone service over cable. See "— Cable Television" below.



•

On November 19, 2004, Vidéotron issued US$315 million aggregate principal amount of 6 ⁷ / 8 % Senior Notes due January 15, 2014 and amended the terms of its credit facilities to increase from Cdn$100 million to Cdn$450 million its revolving credit facility, increase its capacity to make future distributions to Quebecor Media and extend maturity to 2009. See "— Cable Television" below.



•

On November 1, 2004, Archambault Group Inc., which we refer to as Archambault Group, launched Groupe Archambault France S.A.S., a new producer, publisher and distributor of cultural content in Europe, and announced a contract with Warner Music France. In January 2004, Archambault Group launched archambaultzik.ca , a music downloading service with per track fees. See "— Leisure and Entertainment" below.



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In November 2004, it was announced that Videotron Telecom will be integrated with Vidéotron, subject to the approval of the CRTC, in order to offer more consistent residential and business communications services through attractive bundles. See "— Business Telecommunications" below.



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In September 2004, Quebecor Media acquired all of the remaining outstanding Multiple Voting Shares and Subordinate Voting Shares of Netgraphe Inc. (now known as Canoe Inc.) not owned by Quebecor Media and its affiliates. See "— Internet/Portals" below.

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•

In July 2004, SuperClub Vidéotron Canada Inc. acquired substantially all of the assets of Jumbo Entertainment Inc., which we refer to as Jumbo Entertainment, a franchisor and operator of 105 video and video game rental stores across Canada. See "— Cable Television" below.



•

On April 28, 2004, Nurun acquired Ant Farm Interactive LLC, a full-service interactive marketing communications firm, which we refer to as Ant Farm Interactive, and, in May 2004, Nurun sold a majority of its interest in Mindready Solutions Inc., which we refer to as Mindready Solutions, its test engineering solutions business. See "— Interactive Communications and Technology" below.

Business Overview

        We are a leading Canadian-based media company with interests in cable distribution, newspaper publishing, television broadcasting, business telecommunications, book, magazine and video retailing and publishing, distribution and music recording, and new media services. Through these interests, we hold leading positions in the creation, promotion and distribution of news, entertainment and Internet-related services that are designed to appeal to audiences in every demographic category.

        We were formed in August 2000 to facilitate the growth and integration of our established, complementary media assets. Our operating subsidiaries have created leading positions in several Canadian media sectors, particularly in the Province of Québec. Through Vidéotron, we are the largest distributor of pay-television services in the Province of Québec, the third largest distributor of pay-television services in Canada based on the number of cable customers, a major Internet service provider and a provider of telephone services. Through Sun Media Corporation, we are the largest national chain of tabloids and community newspapers in Canada, and we have established the number one or two market position in each of our eight urban daily markets, in each case, in terms of paid circulation. Through TVA Group, we are the largest privately-owned television broadcaster in Québec, the largest French-language television broadcaster in North America and the largest private producer of French-language television programming in North America. In the new media sector, we have developed, through Canoe and its subsidiaries, two of Canada's leading English and French-language Internet news and information portals, as well as leading sites dedicated to automobiles, employment, personals and classifieds and, through Nurun, we provide interactive communications and technology services. We are also engaged in book publishing, magazine publishing and production, distribution and retailing of cultural products through companies such as Archambault Group, the largest chain of music stores in eastern Canada, TVA Films Inc., a film and television distributor, and Le SuperClub Vidéotron, a chain of video and video game rental and retail stores.

        We believe our diversified portfolio of media assets provides us with a number of competitive advantages, including the ability to:

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Cross-promote our brands, programs and other content across multiple media platforms;



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Provide advertisers with an integrated solution for local, regional and national, multi-platform advertising;



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Deliver a bundled suite of entertainment, information and communication services including analog and digital cable television services, high speed Internet access, and selected interactive television services, as well as business telephony and high speed data transmission services;

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Leverage our content, management, sales and marketing and production resources to provide superior information and entertainment services to our customers; and



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Extend our market reach by leveraging our multimedia platform and cross-marketing expertise and experience to enhance our national media platform.

        For the twelve-month period ended December 31, 2004, we generated revenues of $2.46 billion and an operating income of $697.2 million.

        As calculated in our consolidated financial statements, operating income (or loss) means earnings before amortization, financial expenses, reserves for restructuring of operations, impairment of assets and other special charges, gains (losses) on sale of businesses and other assets, net gain (loss) on debt refinancing and on repurchase of redeemable preferred shares of a subsidiary, write-down of goodwill and income taxes. Equity income (or loss) from non-consolidated subsidiaries and non-controlling interest and the results of discontinued operations are not considered in the computation of operating income. See "Item 17. Financial Statements" on pages F-1 to F-71.

        Operating income (or loss) is not a measure of results that is consistent with generally accepted accounting principles. It is not intended to be regarded as an alternative to other financial operating performance measures or to the statement of cash flows as a measure of liquidity. It is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses, and should not be considered in isolation as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. We use operating income (or loss) because management believes it is a meaningful measure of performance. Operating income (or loss) is commonly used in the sectors in which we are engaged and by the investment community to analyze and compare companies. It also facilitates year-over-year comparison of results, since operating income excludes, among other things, unusual items that are not readily comparable from year to year. Our definition of operating income (or loss) may not be identical to similarly titled measures reported by other companies.

Cable

        Through our cable television operations, we are the largest distributor of pay-television services in the Province of Québec and the third largest cable operator in Canada based on the number of cable customers. We are a major Internet service provider and a provider of telephone services. Our cable network covers approximately 80% of Québec's 3.0 million homes passed by cable, which includes residential and commercial premises. Our cable licenses include licenses for the greater Montréal area, the second largest urban area in Canada. The greater Montréal area represents one of the largest contiguous clusters in Canada and is among the largest in North America as measured by the number of cable customers. This concentration provides us with improved operating efficiencies and is a key element in the development and launch of our bundled service offerings. In 2001, we substantially completed our network modernization program, which has provided us with one of the largest bi-directional hybrid fiber coaxial (HFC) networks in North America, with approximately 97% of our systems upgraded to two-way capability and 74% of our customers served by systems upgraded to 750 MHz.

        As of December 31, 2004, we had approximately 1.45 million basic cable customers, representing a basic penetration rate of 60.9%. Through our extensive broadband coverage, we also offer digital television and high-speed Internet access services to approximately 97% of our total homes passed. We have rapidly grown our digital customer base in recent years, and at December 31, 2004, we had 333,664 digital customers, representing 23.0% of our basic customers and 14.0% of our total homes passed. We have also rapidly grown our high-speed Internet access customer base, and at December 31, 2004, we had 502,630 high-speed Internet access customers, representing 34.6% of our basic customers and 21.1% of our total homes passed. We believe that the continued increase in the penetration of our digital television and high-speed Internet access services will result in increased average revenue per customer and higher operating income margins.

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        We offer our advanced products and services, which include video-on-demand and selected interactive television services, as a bundled package that is unique among the competitors in our market. We differentiate our services by offering a higher speed Internet access product and the widest range of French-language programming in Canada. We believe that our bundled packages of products and services, together with our focus on customer service and the breadth of our French-language offerings, have resulted in improved customer satisfaction, increased use of our services and higher customer retention.

        In July 2004, Vidéotron announced that it intends to launch a telephony service using Voice over IP technology in Québec. This project is being conducted with another wholly owned subsidiary of Quebecor Media, Videotron Telecom Ltd., which holds a license as a CLEC and will initially provide the circuit switches and local network interconnection services. In January 2005, technical field tests for this telephony service were completed successfully, and Vidéotron launched this telephony service in selected areas. Vidéotron expects to continue to launch this service progressively among its other residential and commercial customers in 2005. The new telephony service includes local and long-distance calling and permits its customers to access a host of other telephony services, such as enhanced 911 Emergency service, name and number caller ID and automatic call forwarding. Capital investments for this project, excluding customer acquisition costs, are expected to total $80.0 million over four years. Customer acquisition costs are expected to total approximately $250 per customer.

        On July 9, 2004, Le SuperClub Vidéotron acquired substantially all of the assets of Jumbo Entertainment Inc., a franchisor and operator of 105 video and video game rental stores across Canada. Through Le SuperClub Vidéotron, we also own the largest chain of video and game rental stores in Québec and among the largest of such chains in Canada, with a total of 285 retail locations (of which 238 are franchised) and more than 1.65 million video club rental members. With approximately 154 retail locations located in our markets, Le SuperClub Vidéotron is both a showcase and a valuable and cost-effective distribution network for our growing array of advanced products and services, such as high-speed Internet access and digital television.

        On November 19, 2004, Vidéotron issued US$315.0 million aggregate principal amount of its 6 ⁷ / 8 % Senior Notes due January 15, 2014 and amended the terms of its credit agreement to increase its total borrowing capacity under its revolving credit facility by $350.0 million to $450 million, to increase its capacity to make future distributions to Quebecor Media and to extend maturity to 2009. The new notes were sold at a 5% premium to their face amount. This resulted in gross proceeds of approximately US$331.0 million before accrued interest and an effective interest rate of 6.15%. The net proceeds from the sale of the new notes were used to repay in full Vidéotron's term loan of approximately $318.1 million under its bank credit facilities and to declare and pay a dividend of $54.6 million to Quebecor Media Inc. The remainder of such net proceeds will be used for other general corporate purposes. Financing costs of US$6.2 million were incurred for the transactions and will be amortized over the life of the financings. The new notes issued on November 19, 2004 were sold in private placements exempt from the registration requirements of the Securities Act of 1933. Vidéotron completed a registered exchange offer for the new notes on March 5, 2005. Consequently, the new notes form a single series with Vidéotron's existing US$335.0 million aggregate principal amount of 6 ⁷ / 8 % Senior Notes, and Vidéotron has US$650.00 million aggregate principal amount of its 6 ⁷ / 8 % Senior Notes, which are registered under the Securities Act of 1933, outstanding.

        As of December 31, 2004, we own a 100% voting and 100% equity interest in Vidéotron.

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        For the year ended December 31, 2004, our cable operations generated revenues of $871.6 million and operating income of $341.2 million.

Broadcast Distribution Industry Overview

Cable Television Industry Overview

        Cable television has been available in Canada for more than 50 years and is a well developed market. Competition in the cable industry was first introduced in Canada in 1997. As of August 31, 2003, there were approximately 6.9 million cable television customers in Canada, representing a basic cable penetration rate of 65.2% of homes passed. The Canadian cable television market is fairly concentrated with the four largest cable service providers serving 6.6 million customers, or approximately 96% of total basic cable customers. For the twelve months ended August 31, 2003, total industry revenue was estimated to be over $4.2 billion and is expected to grow significantly in the future because Canadian cable operators have aggressively upgraded their networks and have begun launching and deploying new products and services, such as high-speed Internet access and digital television services. The following table summarizes recent annual key statistics for the Canadian and U.S. cable television industries.

Source of Canadian data: CRTC. Source of U.S. data: NCTA, Nielsen Media Research, Kagan Research, and Broadband Cable Financial Databook 2004.

(1)

Compounded annual growth rate from 1999 until 2003.

(2)

Compounded annual growth rate from 2000 until 2004.

        The traditional cable business, which is the delivery of video via hybrid fiber coaxial network, is fundamentally similar in the U.S. and Canada. Different economic and regulatory conditions, however, have given rise to important differences between the two markets. Canadian operators have more limited revenue sources than U.S. operators due to Canadian regulations which prevent cable operators from generating revenue from local advertising. However, the lack of local advertising revenues allows Canadian cable operators to benefit from lower programming costs as compared to U.S. cable operators.

        A significant portion of Canada's cable television customers are based in Québec. As of August 31, 2003, Québec was home to approximately 24% of Canada's population and approximately 21.8% of its basic cable customers. Basic cable penetration in Québec, which was approximately 55.2% as of August 31, 2003, has traditionally been lower than in other populated provinces in Canada, principally due to the higher concentration of French-speaking Canadians in Québec. It is estimated that over 80% of Québec's population is French-speaking. Contrary to the English-speaking provinces of Canada, where programming in English comes from all over North America, programming in French is available "off-air" in most of Québec's French-speaking communities. The arrival of a variety of French-language specialty programming not available "off air" contributed to a slight cable penetration increase in the 1990s. See "— Regulation" for more information on the regulatory framework governing Canada's cable industry.

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Expansion of Digital Distribution and Programming

        In order to compete with the DBS offerings, the cable industry began deploying digital technology which allows for a large number of programming channels and advanced services to be offered.

        In addition, in the last four years, the choice and range of television programming has expanded substantially in Canada. In November 2000, the CRTC released its decisions on the applications for new digital pay and specialty television channels. In total, the CRTC approved 21 Category One licenses (16 English-language and five French-language) and 262 Category Two licenses, as well as two pay-per-view and four video-on-demand licenses. Cable service providers using digital technology are required to carry all of the approved Category One services appropriate to their markets while Category Two licensees who do not have guaranteed distribution rights must negotiate with cable service providers for access. Since then, the CRTC has licensed dozens of Category Two additional programming licenses. The increase in programming content as a result of the launch of approximately 50 of these programming services is believed to be a key factor in driving increases in digital cable penetration in Canada.

        In September 2001, Canadian cable service providers, including Vidéotron, significantly expanded their digital programming offering through the launch of many of the new digital channels licensed by the CRTC. From September 2001 to December 2003, we have launched over 30 new English-language and four new French-language digital channels, significantly increasing the programming offered to our digital customers. In 2004, we have launched 39 new channels, including four new French-language digital channels, six high definition channels, one ethnic channel and ten time shifting channels. We also launched 15 new audio channels in 2004. We have launched a French-language subscription video-on-demand service and intend to launch a similar English-language service in the first half of 2005. We believe the launch of these digital channels will help to improve the penetration of our digital television service among our customers.

Products and Services

        We currently offer our customers analog cable television services and programming as well as new and advanced high-bandwidth products and services such as high-speed Internet access, digital television, premium programming and selected interactive television services. We continue to focus on our high-speed Internet access and digital television services, both of which are increasingly desired by customers. With our advanced broadband network, we will be able to successfully increase penetration of value-added services such as video-on-demand, high definition television, personal video recorders, as well as interactive programming and advertising.

        In January 2005, Vidéotron launched a new telephony service in Québec together with another wholly-owned subsidiary of Quebecor Media, Videotron Telecom, by joining our customer base with Videotron Telecom's telecommunication network and expertise. We expect that we will integrate Videotron Telecom's operations within the operations of Vidéotron in 2005, subject to the approval of the CRTC, as well as the satisfactory completion of discussions with our labor unions.

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Traditional Cable Television Services

        Customers subscribing to our traditional analog "basic" and analog "extended basic" services generally receive a line-up of between 49 and 59 channels of television programming, depending on the bandwidth capacity of their local cable system. Customers who pay additional amounts can also subscribe to additional channels, either individually or in packages. For any additional programming, customers must rent or buy a set-top box. We tailor our channels to satisfy the specific needs of the different customer segments we serve.

        Our cable television service offerings include the following:

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Basic Service.   All of our customers receive a package of basic programming, consisting of local broadcast television stations, the four U.S. commercial networks and PBS, selected Canadian specialty programming services, and local and regional community programming. Our basic service customers generally receive 32 channels on basic cable.



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Extended Basic Service.   This expanded programming level of services includes a package of French- and English-language specialty television programming and U.S. cable channels in addition to the basic service channel line-up described above. Branded as Telemax , this service was introduced in almost all of our markets largely to satisfy customer demand for greater flexibility and choice.



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Premium Cable and Pay-Television Services.   We offer commercial-free movies, U.S. superstations and other special entertainment programming.



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Pay-Per-View Service.   These channels allow customers to pay on a per-event basis to view a single showing of a recently released movie, a special sporting event or a music concert on a commercial-free basis. We offer both French-language and English-language pay-per-view services.

Advanced Products and Services

        Cable's high bandwidth is a key factor in the successful delivery of advanced products and services. Several emerging technologies and increasing Internet usage by our customer base have presented us with significant opportunities to expand our sources of revenue. In most of our systems, we currently offer a variety of advanced products and services including high-speed Internet access, digital television and selected interactive services. We intend to continue to develop and deploy additional services to further broaden our service offering.

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High-Speed Internet Access.   Leveraging our advanced cable infrastructure, we offer high-speed Internet access to our residential customers primarily via cable modems attached to personal computers. We provide this service at speeds more than 90 times the speed of a conventional telephone modem. As of December 31, 2004, we had 502,630 high-speed Internet access customers, representing 34.6% of our basic customers and 21.1% of our total homes passed. In addition, as of December 31, 2004, we had 23,973 dial-up Internet access customers. Based on internal estimates, we are the largest provider of high-speed Internet access services in the areas we serve with an estimated market share of 48% as of December 31, 2004.



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Digital Television.   As part of our network modernization program, we have installed headend equipment capable of delivering digitally encoded transmissions to a two-way digital-capable set-top box in the customer's home. This digital connection provides significant advantages. In particular, it increases channel capacity, which allows us to increase both programming and service offerings while providing increased flexibility in packaging our services. We launched our digital television service in March 1999 with the introduction of digital video compression terminals in the greater Montréal area. Since introducing our digital television service in the greater Montréal area, we have also introduced the service in other major markets. In September 2001, we launched a new digital service offering under the illico™ brand. In addition to providing high quality sound and image quality, illico™ offers our customers significant programming flexibility. Our basic digital package includes 24 television channels, 45 audio services providing CD quality music, 14 AM/FM radio channels, an interactive programming guide as well as television-based e-mail capability. Our extended digital basic television service, branded as Self-Service, offers customers the ability to select more than 100 additional channels of their choice, allowing them to customize their choices among many specialty channels. This service also offers customers significant programming flexibility including the option of French-language only, English-language only or a combination of French- and English-language programming. We also offer pre-packaged themed service tiers in the areas of news, sports and discovery. Customers who purchase basic service and one customized package can also purchase channels on an à la carte basis at a specified cost per channel per month. As part of our digital service offering, customers can also purchase near-video-on-demand services on a per-event basis. Our customers currently have the option to purchase or lease the digital set-top boxes required for digital service. As of December 31, 2004, we had 333,664 customers for our digital television service. Notwithstanding our digital television service, we intend to continue to offer analog cable service to our customers.

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•

Interactive Services.   In September 2001, we also launched digital interactive services under the illico™ Interactive brand. These services, which combine our digital television and Internet access services, will enable customers equipped with wireless keyboards to access the Internet and send and receive e-mail. In the near future, we intend to provide additional functionality including e-commerce. We believe interactive services will be increasingly desired by customers, and we intend to continue to develop and deploy advanced products and services to add greater functionality to our interactive services offering.



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Video-On-Demand.   Video-on-demand service enables digital cable customers to rent from a library of movies, documentaries and other programming through their digital set-top box. Our digital cable customers are able to rent their video-on-demand selections for a period of 24 hours, which they are then able to watch at their convenience with full stop, rewind, fast forward, pause and replay functionality during that period. Our video-on-demand service is available to 97% of the homes passed by us. We also offer pay television channels on a subscription basis that permit our customers to access and watch any of their video-on-demand selections at any time at their convenience.



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Voice over IP.   In July 2004, we announced our intention to launch a telephony service using Voice over IP technology in Québec. In January 2005, technical field tests for our telephony service were completed successfully, and Vidéotron launched this service in selected areas. Vidéotron expects to continue to launch this service progressively among its other residential and commercial customers in 2005. Our new telephony service includes local and long-distance calling and permits our customers to access a host of other telephony services, such as enhanced 911 Emergency service, name and number caller ID and automatic call forwarding.



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Other New Business Initiatives.   To maintain and enhance our market position, we are focused on increasing penetration of high-definition television and personal video recorders, as well as other high-value products and services.

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        The following table summarizes our customer statistics for our analog and digital cable and advanced products and services:

(1)

"Homes passed" means the number of residential premises, such as single dwelling units or multiple dwelling units, passed by the cable television distribution network in a given cable system service area in which the programming services are offered.

(2)

Basic customers are customers who receive basic cable service in either the analog or digital mode. The numbers of basic customers for the years 2000-2003, inclusive, were restated in order to permit such numbers to be compared to the 2004 number of basic customers.

(3)

Represents customers as a percentage of total homes passed.

(4)

Represents customers for the digital service as a percentage of basic customers.

        In the year ended December 31, 2004, we recorded a net increase of 28,410 basic cable customers. During the same period, we also recorded net growth of 96,353 customers of our high-speed Internet access service and 92,801 customers of our digital television service, the latter of which includes customers who have upgraded from our analog cable service.

Our New Telephony Service

        In January 2005, we launched our new telephony service using Voice over IP technology in selected areas, and we expect to continue to launch this service progressively among our other residential and commercial customers in Québec during 2005. Our new telephony service includes both local and long-distance calling, and permits all of our telephony customers, both residential and commercial, to access all service features mandated by CRTC Decision 97-8 and other regulatory decisions and orders, including: enhanced 911 Emergency service; number portability from and to any local exchange carrier; a message relay service allowing subscribers to communicate with the hearing impaired; and a variety of personal privacy features including universal call tracing.

        We also offer free basic listings in local telephone directories, as well as full operator assistance, including: operator-assisted calls; collect and third-party calls; local, national and international directory assistance; person-to-person calls; and busy-line verification.

        Finally, we offer as part of our new telephony service a host of convenient, optional features, including: name and number caller ID; call waiting with long-distance distinctive ring and audible indicator tone; name and number caller ID on call waiting; visual indicator of a full voice mail box and audible message waiting indicators; automatic call forwarding; three-way conference calling; automatic recalling; and last incoming call identification and recall.

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        In keeping with our competitive strength of providing differentiated, bundled service offerings, we offer free installation of our new telephony service to existing cable television and/or Internet customers and to new bundled customers. We also offer discounts to our bundled customers, when compared to the sum of the prices of the individual services provided to these customers. In addition, we offer discounts for a second telephone line subscription.

Video Stores

        Through Le SuperClub Vidéotron, we also own the largest chain of video and game rental stores in Québec and among the largest of such chains in Canada, with a total of 285 retail locations (of which 238 are franchised) and more than 1.65 million video club rental members. With approximately 154 retail locations located in our markets, Le SuperClub Vidéotron is both a showcase and a valuable and cost-effective distribution network for our growing array of advanced products and services, such as high speed Internet access and digital television.

Video-On-Demand Services

        Archambault Group, another subsidiary of Quebecor Media, was granted a video-on-demand service license by the CRTC in July 2002. Effective March 1, 2003, Vidéotron entered into an affiliation agreement with Archambault Group granting Vidéotron the non-exclusive right to offer Archambault Group's video-on-demand services to its customers. This agreement expires on August 31, 2008, which is also the expiration date of Archambault Group's CRTC license, but if Archambault Group obtains a renewed video-on-demand license from the CRTC, this agreement will be automatically renewed for a period equal to the length of this renewed license.

        In connection with this affiliation agreement, Vidéotron also entered into a video-on-demand services agreement with Archambault Group. Pursuant to this services agreement, Vidéotron has agreed to provide various technical services to Archambault Group to enable it to provide to Vidéotron's customers its video-on-demand services over Vidéotron's network.

Pricing of Our Products and Services

        Our revenues are derived principally from the monthly fees our customers pay for cable services. The rates we charge vary based on the market served and the level of service selected. Rates are usually adjusted annually. We also offer discounts to our bundled customers, when compared to the sum of the prices of the individual services provided to these customers. As of December 31, 2004, the average monthly fees for basic and extended basic service were $21.89 and $35.45, respectively, and the average monthly fees for basic and extended basic digital service were $11.08 and $38.84, respectively. A one-time installation fee, which may be waived in part during certain promotional periods, is charged to new customers. Monthly fees for rented equipment such as set-top boxes and cable modems, and administrative fees for delinquent payments for service, are also charged. Except in respect of our Internet access services, customers are typically free to discontinue service at any time without additional charge, but they may be charged a reconnection fee to resume service.

        The CRTC only regulates rates for basic cable service. The fees for services offered in discretionary packages, including Canadian and U.S. specialty television services, are based upon rates negotiated between us and the providers of programming services. In addition, fees for extended cable service (over and above basic cable service rates), pay-television and pay-per-view services, and rentals for set-top boxes are priced by us on a discretionary basis and are not regulated by the CRTC.

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        Although our service offerings vary by market, because of differences in the bandwidth capacity of the cable systems in each of our markets and competitive and other factors, our services are typically offered at monthly price ranges, which reflect discounts for bundled service offerings, as follows:

Our Network Technology

        As of December 31, 2004, our cable systems consisted of approximately 8,500 km of fiber optic cable and 28,500 km of coaxial cable, passing approximately 2.4 million homes and serving approximately 1.55 million customers. Our network is the largest broadband network in Québec covering over 80% of cable homes passed, and one of the most advanced broadband networks in North America, with over 97% two-way capability at present.

        The following table summarizes the current technological state of our systems, based on the percentage of our customers who have access to the bandwidths listed below and two-way capability:

        Our cable television networks are comprised of four distinct parts including signal acquisition networks, main headends, distribution networks and subscriber drops. The signal acquisition network picks up a wide variety of television, radio and multimedia signals. These signals and services originate from either a local source or content provider or are picked up from distant sites chosen for satellite or "off-air" reception quality and transmitted to the main headends by way of "off-air" links, coaxial links or fiber optic relay systems. Each main headend processes, modulates, scrambles and combines the signals in order to distribute them throughout the network. Each main headend is connected to the primary headend in order to receive the digital MPEG2 signals and the IP Backbone for the Internet services. This connection is provided by Videotron Telecom through its inter-city fiber network. The first stage of this distribution consists of either a fiber optic link or a very high capacity microwave link which distributes the signals to distribution or secondary headends. After that, the signal uses the hybrid fiber coaxial cable network made of wide-band amplifiers and coaxial cables capable of serving up to 30 km in radius from the distribution or secondary headends to the subscriber drops. The subscriber drop brings the signal into the customer's television set directly or, depending on the area or the services selected, through various types of customer equipment including set-top boxes.

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        Since 1995, we have invested over $304.7 million in a modernization program to upgrade our network to enable us to develop and deploy new advanced products and services. This modernization program was substantially completed as of December 31, 2001. As a result, we are now able to deliver simultaneously over 70 analog channels and up to 250 digital channels in the greater Montréal area and in western Québec, and up to 42 analog channels and over 200 digital channels in other urban areas in Québec, and provide two-way capability throughout most of our network. In December 2003, we decided to upgrade our two-way capability network in Quebec City to increase the bandwidth from 480 MHz to 750 MHz or greater, and we estimate that $26.8 million of capital expenditures over the next two years will be required. We are also currently contemplating similarly upgrading our two-way capability network in central Québec. If we were to proceed with such upgrade, we estimate that approximately $15 million of capital expenditures over two years would be required. After completion of these upgrades, we expect that approximately 95% of our network will have a bandwidth of 750 MHz or greater. Further increase in bandwidth, up to 860 Mhz, in the Montréal region may be required as demand for higher speed in Internet access services grows and new high definition television channels are introduced.

        We have adopted the hybrid fiber coaxial network architecture as the standard for our ongoing system upgrades. Hybrid fiber coaxial network architecture combines the use of fiber optic cable with coaxial cable. Fiber optic cable has excellent broadband frequency characteristics, noise immunity and physical durability and can carry hundreds of video and data channels over extended distances. Coaxial cable is less expensive and requires greater signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we deliver our signals via fiber optic cable from the headend to a group of nodes to the homes passed served by that node. Our system design provides for cells of approximately 1,000 homes each to be served by fiber optic cable. To allow for this configuration, secondary headends were put into operation in the greater Montréal area and in the greater Quebec City area. Remote secondary headends must also be connected with fiber optic links. The loop structure of the two-way networks brings reliability through redundancy, the cell size improves flexibility and capacity, while the reduced number of amplifiers separating the home from the headend improves signal quality and reliability. Our network design provides us with significant flexibility to offer customized programming to individual cells of 1,000 homes, which is critical to our ability to deploy certain advanced services in the future, including video-on-demand and the continued expansion of our interactive services. Our network design also allows for further segmentation to 500 or 250 homes where cable and Internet service penetration requires higher network capacity.

        We also believe that our network design provides high capacity and superior signal quality that will enable us to provide to our current and future customers new advanced products and services in addition to those currently offered by us.

Marketing and Customer Care

        Our long term marketing objective is to increase our cash flow through deeper market penetration of our services and continued growth in revenue per customer. We believe that customers will come to view their cable connection as the best distribution channel to the home for a multitude of services. To achieve this objective, we are pursuing the following strategies:

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continue to rapidly deploy advanced products and services such as high-speed Internet access and digital television;



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introduce new advanced products and services desired by customers;

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design product offerings that provide greater opportunity for customer entertainment and information choices;



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leverage the retail presence and other products offered within the Quebecor Media group, including the retail presence of Archambault Group, and within non-exclusive commercial retailers to cross-promote and distribute our cable and data services to our existing and future customers;



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target marketing opportunities based on demographic data and past purchasing behavior;



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develop targeted marketing programs to attract former customers, households that have never subscribed to our services and customers of alternative or competitive services; and



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leverage the relationship between customer service representatives and our customers by training and motivating customer service representatives to promote advanced products and services.

        We plan to invest increasing amounts of time, effort and financial resources in marketing new and existing services. To increase both customer penetration and the number of services used by our customers, we will use coordinated marketing techniques, including door-to-door solicitation, telemarketing, media advertising, e-marketing and direct mail solicitation.

        Maximizing customer satisfaction is a key element of our business strategy. In support of our commitment to customer satisfaction, we operate a 24-hour customer service hotline seven days a week for nearly all of our systems. We currently have five operational call centers and we are implementing various initiatives to improve customer service and satisfaction. For example, all of our customer service representatives and technical support staff are now trained to assist our customers with respect to all products and services offered by us, which in turn allows our customers to be served more efficiently and seamlessly. Our customer care representatives continue to receive extensive training to develop customer contact skills and product knowledge which are key contributors to high rates of customer retention as well as to selling additional products and services and higher levels of service to our customers. We have also implemented Web-based customer service capabilities. To assist us in our marketing efforts, we utilize surveys, focus groups and other research tools as part of our efforts to determine and proactively respond to customer needs.

Programming

        We believe that offering a wide variety of conveniently scheduled programming is an important factor in influencing a customer's decision to subscribe to and retain our cable services. We devote significant resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential customers. We rely on extensive market research, customer demographics and local programming preferences to determine our channel and package offerings. The CRTC currently regulates the distribution of foreign content in Canada and, as a result, we are limited in our ability to provide such programming to our customers. We obtain basic and premium programming from a number of suppliers, including TVA Group.

        Since September 2001, we have significantly expanded the programming available to our customers through the launch of over 55 English-language and eight French-language digital channels in digital format and 12 high definition digital channels. Furthermore, we believe the launch of these digital channels will help to increase the penetration of our digital television service among our customers.

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        Our programming contracts generally provide for a fixed term of up to seven years, and are subject to negotiated renewal. Programming tends to be made available to us for a flat fee per customer. Our overall programming costs have increased in recent years and may continue to increase due to factors including, but not limited to, additional programming being provided to customers as a result of system rebuilds that increase channel capacity, increased costs to produce or purchase specialty programming and inflationary or negotiated annual increases.

Competition

        We face competition in the areas of price, service offerings and service reliability. We compete with other providers of television signals and other sources of home entertainment. In addition, as we expand into additional services such as interactive services, we may face additional competition. We operate in a competitive business environment which can adversely affect our business and operations. Our principal competitors include off-air television and providers of other entertainment, direct broadcast satellite, digital subscriber line, private cable, other cable distribution and wireless distribution. We also face competition from illegal providers of cable television services and illegal access to foreign DBS and pirate systems that enable customers to access programming services from U.S. and Canadian direct broadcast satellite services without paying any fee.

•

Off-Air Television and Providers of Other Entertainment.   Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception compared to the services provided by the local cable system. Cable systems also face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theaters and home video products, including videotape recorders and DVD players. The extent to which a cable television service is competitive depends in significant part upon the cable system's ability to provide a greater variety of programming, superior technical performance and superior customer service than are available over the air or through competitive alternative delivery sources.



•

Direct Broadcast Satellite.   Direct broadcast satellite, or DBS, is a significant competitor to cable systems. DBS delivers programming via signals sent directly to receiving dishes from medium- and high-powered satellites, as opposed to broadcast, cable delivery or lower-powered transmissions. This form of distribution generally provides more channels than some of our television systems and is fully digital. DBS service can be received virtually anywhere in Canada through the installation of a small rooftop or side-mounted antenna. DBS systems use video compression technology to increase channel capacity and digital technology to improve the quality of the signals transmitted to their customers.



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DSL.   The deployment of digital subscriber line technology, known as DSL, provides customers with Internet access at data transmission speeds greater than that which is available over conventional telephone lines. DSL service is comparable to high-speed Internet access over cable systems. We also face competition from providers of DSL services.



•

VDSL.   The CRTC and Industry Canada have authorized video digital subscriber line, or VDSL, services. VDSL technology increases the capacity of DSL lines available, which permits the distribution of digital video. We expect that we will soon face competition from ILECs, which are in the process of securing licenses to launch video distribution services using this technology.

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Private Cable.   Additional competition is posed by satellite master antenna television systems known as "SMATV systems" serving multi-dwelling units, such as condominiums, apartment complexes, and private residential communities.



•

Other Cable Distribution.   Currently, a second cable operator offering analog television distribution and providing high speed Internet access service is serving multi-unit dwellings in the greater Montréal area.



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Wireless Distribution.   Cable television systems also compete with wireless program distribution services such as multi-channel multipoint distribution systems. This technology uses microwave links to transmit signals from multiple transmission sites to line-of-sight antennas located within the customer's premises.



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Grey and Black Market DBS Providers.   Cable and other distributors of television signals continue to face competition from the use of access codes and equipment that enable the unauthorized decoding of Canadian and foreign encrypted satellite signals, from unauthorized access to our analog and digital cable signals (black market) and from the reception of foreign signals through subscriptions to foreign satellite television providers that are not lawful distributors in Canada (grey market).



•

Telephony Service.   Our new telephony service competes against other telephone companies, including both the incumbent telephone service provider in Québec, which controls a significant portion of the telephony market in Québec, as well as other Voice over IP telephony service providers and cellular telephone service providers.

Newspapers

        Through our newspaper publishing operations, we are the largest newspaper publisher in Québec based on total paid and unpaid circulation. Sun Media Corporation is also the second largest newspaper publisher in Canada, with a 21.6% market share in terms of weekly paid circulation, according to statistics published by the Canadian Newspaper Association. We publish 17 paid daily newspapers and serve eight of the top ten urban markets in Canada. Each of Sun Media Corporation's eight urban daily newspapers ranks either first or second in its market in terms of paid circulation. We also publish 167 weekly newspapers and shopping guides and 18 other specialty publications, including two free daily commuter newspapers. We publish the second and third largest non-national dailies in Canada based on weekly paid circulation: Le Journal de Montréal , with a paid circulation of 1.9 million copies, and The Toronto Sun , with a paid circulation of 1.5 million copies. The combined weekly paid circulation of our daily newspapers is approximately 6.7 million copies.

        In addition, we provide a range of commercial printing and other related services to third parties through our national network of production and printing facilities and distribute newspapers and magazines for other publishers across Canada.

        Effective October 12, 2004, Sun Media Corporation's credit facility was amended to reduce the interest rates applicable on U.S. dollar advances made under the term loan B credit facility by 0.25% per annum, with the possibility for a further reduction under certain circumstances. Similarly, the financial instruments used by Sun Media Corporation to hedge foreign exchange fluctuations related to the credit facility were amended, resulting in a reduction of approximately 0.21% per annum on the equivalent debt in Canadian dollars. As at December 31, 2004, the aggregate amount outstanding under the term loan B credit facility was US$201.0 million or Cdn$305.0 million converted at the applicable hedging foreign exchange rate. This reduction in interest rates is expected to result in annual savings of approximately $0.6 million.

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        On December 2, 2004, Sun Media Corporation acquired 25% of the outstanding shares of Toronto 1, a television station in Toronto, Canada for total consideration, including acquisition costs, of $10.8 million, consisting of $2.8 million in cash and Sun Media Corporation's 29.9% interest in CP24, a 24-hour local news channel in Toronto, valued at $8.0 million. Sun Media Corporation recorded a net gain of $8.0 million on the disposal of CP24. TVA Group, also a subsidiary of Quebecor Media, acquired the other 75% of Toronto 1 for $32.4 million in cash.

        As of December 31, 2004, we own a 100% voting and a 100% equity interest in Sun Media Corporation.

        For the year ended December 31, 2004, our newspaper operations generated revenues of $888.1 million and an operating income of $227.8 million. For this same period, Sun Media Corporation derived 69.7% of its revenues from advertising, 19.2% from circulation, and 11.1% from commercial printing, distribution and operations.

Canadian Newspaper Publishing Industry Overview

        Newspaper publishing is the oldest segment of the advertising-based media industry in Canada. The industry is dominated by a small number of major newspaper publishers, of which we are the second largest with a combined average weekly circulation (paid and unpaid) of approximately 12 million copies. According to the Canadian Newspaper Association, our 21.6% market share of paid weekly circulation for Canadian daily newspapers is exceeded only by CanWest Media Inc., with a 28.3% market share, and followed by Torstar Corporation (13.8%), Power Corporation (9.5%), Bell Globemedia (6.1%), and Osprey Media (6.0%).

        The newspaper market consists primarily of two segments, broadsheet and tabloid newspapers, which vary in format. With the exception of the broadsheet The London Free Press , all of Sun Media Corporation's urban paid daily newspapers are tabloids.

        Newspaper companies derive revenue principally from advertising and circulation. According to industry sources, in 2003, the total Canadian daily newspaper industry revenue was $3.2 billion, with 79% derived from advertising and the remaining 21% coming from circulation. Total advertising revenue for the Canadian daily newspaper industry was $2.5 billion in 2003, which represented approximately 22.0% of total Canadian advertising spending according to the Television Bureau of Canada. From 1994 to 2003, advertising revenues for daily newspapers increased at an average annual rate of 4.2%.

Advertising and Circulation

        Advertising revenues and, to a lesser extent, circulation revenues are cyclical and are generally affected by changes in national and regional economic conditions. Recent statistics indicate that economic growth in Canada increased in 2004 relative to 2003. In addition, recent forecasts by the Bank of Canada project that economic growth will average approximately 3% in 2005 and 2006. The improvement in the Canadian economy is expected to result in increased advertising revenues for Sun Media Corporation.

        Advertising revenue is Sun Media Corporation's largest source of revenue and represented 69.7% of Sun Media Corporation's total revenues in 2004. Advertising rates are based upon the size of the market in which each newspaper operates, circulation, readership, demographic composition of the market and the availability of alternative advertising media. Sun Media Corporation's strategy is to maximize advertising revenue by providing advertisers with a range of pricing and marketing alternatives to better enable them to reach their target audience. Sun Media Corporation's newspapers offer a variety of advertising alternatives, including full-run advertisements in regular sections of the newspaper targeted to different readers (including automotive, real estate and travel), geographically-targeted inserts, special interest pullout sections and advertising supplements.

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        Sun Media Corporation's principal categories of advertising revenues are classified, retail and national advertising. Classified advertising has traditionally accounted for the largest share of our advertising revenues in our urban daily newspapers (46% in the year ended December 31, 2004) followed by retail advertising (35% in the same period) and national advertising (17% in the same period). Classified advertising is made up of four principal sectors: automobiles, private party, recruitment and real estate. Automobile advertising is the largest classified advertising category, representing about 46% of all of our classified advertising in terms of revenue for the year ended December 31, 2004. Retail advertising is display advertising principally placed by local businesses and organizations. Our retail advertisers are principally department stores, electronics stores and furniture stores. National advertising is display advertising primarily from advertisers promoting products or services on a national basis. Our national advertisers are principally in the retail automotive sector.

        In the smaller community papers, substantially all of the advertising revenues are derived from local retailers and classified advertisers. These newspapers publish advertising supplements with specialized themes such as agriculture, tourism, home improvement and gardening to encourage advertisers to purchase additional linage in these special editions.

        We believe our advertising revenues are diversified not only by category (classified, retail and national), but also by customer and geography. For the year ended December 31, 2004, our top ten national advertisers accounted for approximately 7% of the total advertising revenue and approximately 5% of our total revenue. In addition, because we sell advertising in numerous regional markets in Canada, the impact of a decline in any one market can be offset by strength in other markets.

        Circulation sales are the second-largest source of revenue for Sun Media Corporation and represented 19.2% of total revenues in 2004. In the large urban markets, newspapers are available through newspaper boxes and retail outlets Monday through Sunday. We offer daily home delivery in every market, except Toronto, where The Toronto Sun is home-delivered only on Sunday and in certain designated areas on Saturday. We derive our circulation revenues from single copy sales and subscription sales. Our strategy is to increase circulation revenue by adding newspaper boxes and point-of-sale locations, as well as expanding home delivery. In order to increase readership, we are expanding coverage of local news in our newspapers and targeting editorial content to identified groups through the introduction of niche products.

        The majority of the community newspaper publications are distributed free of charge through a controlled distribution system. This enables the publisher to better identify the clientele targeted by advertisers.

Newspaper Operations

        Sun Media Corporation operates its newspaper businesses in urban and community markets. A majority of its newspapers in the Community Newspaper Group are clustered around its eight paid urban dailies in the Urban Daily Group. Through our newspapers segment, we have strategically established our community newspapers near our regional printing facilities in suburban and rural markets across Canada. This geographic clustering enables us to realize operating efficiencies and economic synergies through sharing of management, production, printing, and distribution, as well as accounting and human resources functions.

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The Urban Daily Group

        On a combined weekly basis, the eight paid daily newspapers in our Urban Daily Group circulate approximately 6.4 million copies. These newspapers hold either the number one or number two position in each of their respective markets in terms of circulation. In addition, on a combined basis, over 50% of our readers do not read our principal competitor's newspaper in each of our urban daily markets, according to data from the NADbank® 2003 Study.

        Our Urban Daily Group is comprised of eight paid daily newspapers, two free daily commuter publications, and four free weekly publications. With the exception of the broadsheet The London Free Press , the paid daily newspapers are tabloids published seven days a week. These are mass circulation newspapers that provide succinct and complete news coverage with an emphasis on local news, sports and entertainment. The tabloid format makes extensive use of color, photographs and graphics. Each newspaper contains inserts that feature subjects of interest such as fashion, lifestyle and special sections. In addition, the Urban Daily Group includes two distribution businesses, Messageries Dynamiques and Dynamic Press Group .

        Circulation is defined as average sales of a newspaper per issue. Readership (as opposed to paid circulation) is an estimate of the number of people who read or looked into an average issue of a newspaper and is measured by a continuous independent survey conducted by NADbank Inc. According to the NADbank® 2003 Study, the estimates of readership are based upon the number of people responding to the Newspaper Audience Databank survey circulated by NADbank Inc. who report having read or looked into one or more issues of a given newspaper during a given period equal to the publication interval of the newspaper.

        The following chart lists Sun Media Corporation's paid daily newspapers and their respective readership in 2003 as well as their market position by paid circulation during that period:

(1)

Based on paid circulation data published by the Audit Bureau of Circulations in March 2004 with respect to non-national newspapers in each market.

         Le Journal de Montréal . Le Journal de Montréal is published seven days a week and is widely distributed by Messageries Dynamiques, which specializes in the distribution of publications. According to the Audit Bureau of Circulations, Le Journal de Montréal ranks second in paid circulation, among non-national Canadian dailies and first among French-language dailies in North America. The average daily circulation of Le Journal de Montréal exceeds the circulation of each of its main competitors in Montréal, La Presse , The Gazette and Le Devoir , according to the Audit Bureau of Circulations.

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        The following chart reflects the average daily circulation of Le Journal de Montréal for the periods indicated:

        Le Journal de Québec.      Le Journal de Québec is published seven days a week and is widely distributed by Messageries Dynamiques . Le Journal de Québec is the number one newspaper in its market. The average daily circulation of Le Journal de Québec exceeds the circulation of its main competitor, Le Soleil , according to the Audit Bureau of Circulations.

        The following chart reflects the average daily paid circulation of Le Journal de Québec for the periods indicated:

        The Ottawa Sun.      The Ottawa Sun is published seven days a week and is distributed throughout the Ottawa region through its own distribution network. The Ottawa Sun is the number two newspaper in its market, according to the Audit Bureau of Circulations, and competes daily with the English language broadsheet, The Ottawa Citizen , and also with the French language paper, Le Droit .

        The following chart reflects the average daily paid circulation of The Ottawa Sun for the periods indicated:

         The Ottawa Sun also publishes The Ottawa Pennysaver , a free weekly community shopping guide with circulation of approximately 180,000.

        The Toronto Sun.      The Toronto Sun is published seven days a week and has its own distribution network to serve the greater metropolitan Toronto area. The Toronto Sun is the third largest non-national daily newspaper in Canada in terms of circulation, according to the Audit Bureau of Circulations.

         The Toronto Sun is unique in that Monday to Friday circulation sales are solely from vending boxes and retail outlets and not from home delivery, as compared to its competitors. Home delivery is available on Sunday and in some designated areas on Saturday.

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        The Toronto newspaper market is very competitive. The Toronto Sun competes with Canada's largest newspaper, The Toronto Star and to a lesser extent with The Globe & Mail and The National Post , which are national newspapers. As a tabloid newspaper, The Toronto Sun has a unique format compared to these broadsheet competitors. The competitiveness of the Toronto newspaper market is further increased by several free publications, including Metro , a free weekday commuter newspaper, and niche publications relating to, for example, entertainment and television.

        The following chart reflects the average daily circulation of The Toronto Sun for the periods indicated:

        The London Free Press.      The London Free Press , one of Canada's oldest daily newspapers, emphasizes national and local news, sports and entertainment and is distributed throughout the London area through its own network. It is the only local daily newspaper in its market.

        The following chart reflects the average daily circulation of The London Free Press for the periods indicated:

        During 2002, The London Free Press launched London This Week , a free weekly community newspaper with a circulation of approximately 105,000 copies, according to internal statistics. The London Free Press also publishes The London Pennysaver , a free weekly community shopping guide with circulation of approximately 146,000, according to internal statistics.

        The Winnipeg Sun.      The Winnipeg Sun is published seven days a week. It serves the metropolitan Winnipeg area and has its own distribution network. The Winnipeg Sun operates as the number two newspaper in the Winnipeg market according to the Audit Bureau of Circulations and competes with The Winnipeg Free Press .

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        The following chart reflects the average daily circulation of The Winnipeg Sun for the periods indicated:

        The Edmonton Sun.      The Edmonton Sun is published seven days a week and is distributed throughout Edmonton through its own distribution network. The Edmonton Sun is the number two newspaper in its market, according to the Audit Bureau of Circulations, and competes with Edmonton's broadsheet daily, The Edmonton Journal .

        The following chart reflects the average daily circulation of The Edmonton Sun for the periods indicated:

        The Calgary Sun.      The Calgary Sun is published seven days a week and is distributed throughout Calgary through its own distribution network. The Calgary Sun is the number two newspaper in its market, according to the Audit Bureau of Circulations and competes with Calgary's broadsheet daily, The Calgary Herald .

        The following chart reflects the average daily circulation of The Calgary Sun for the periods indicated:

        24 Heures.     In October 2003, Sun Media Corporation re-launched its Montréal commuter paper, Montréal Métropolitain , changing the name to 24 Heures . The new publication is a free daily newspaper with an average weekday circulation of 118,200 copies, according to internal statistics. 24 Heures is a glossy, tabloid newspaper which competes with Metro , another free daily.

        24 Hours.     In November 2003, Sun Media Corporation launched a new commuter paper in Toronto, 24 Hours , a free daily newspaper with an average weekday circulation of 213,600 copies according to internal statistics. The editorial content of 24 Hours concentrates on the greater metropolitan Toronto area and competes with Metro . In December 2004, Sun Media launched Find-A-Rental , a free weekly residential rental guide, with an average weekly circulation of approximately 47,000 copies, according to internal statistics, to complement 24 Hours in Toronto.

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        Competition.     In addition to competing directly with other dailies published in their respective markets, each of our newspapers in the Urban Daily Group competes for advertising revenue with weekly newspapers, magazines, direct marketing, radio, television, Internet and other advertising media. The high cost associated with starting a major daily newspaper operation represents a barrier to entry to potential new competitors of our Urban Daily Group.

        Through Le Journal de Montréal and Le Journal de Québec , we have established market leading positions in Québec's two main urban markets, Montréal and Québec City. Le Journal de Montréal ranks second in circulation after The Toronto Star among non-national Canadian dailies and is first among French-language dailies in North America. Le Journal de Montréal competes directly with La Presse , owned by Power Corporation, The Gazette , owned by CanWest Publications Inc., The Metro , owned by Transcontinental and 24 Heures , owned by Sun Media.

         The London Free Press is one of Canada's oldest daily newspapers and our only daily broadsheet newspaper. It is the only local daily newspaper in its market, although it competes with daily newspapers from surrounding markets.

         The Toronto Sun is the third largest non-national daily newspaper in Canada in terms of circulation. The Toronto newspaper market is very competitive. The Toronto Sun competes with The Toronto Star and to a lesser extent with The Globe & Mail and The National Post . There are also two free daily newspapers in Toronto: The Metro , which is owned by Torstar Corp., and 24 Hours , which is owned by Sun Media Corporation. As a tabloid newspaper, The Toronto Sun offers readers and advertisers an alternative format to the broadsheet format of other newspapers in the Toronto market.

        Each of Sun Media Corporation's dailies in Edmonton, Calgary, Winnipeg and Ottawa competes against a broadsheet newspaper and has established a number two position in its market.

The Community Newspaper Group

        In total, the Community Newspaper Group consists of nine daily community newspapers, 163 community weekly newspapers and shopping guides, and 16 agriculture and other specialty publications. The Community Newspaper Group also includes NetMedia , its distribution sales arm.

        The total average weekly circulation of the publications in our Community Newspaper Group for the year ended December 31, 2004 was approximately 2.8 million free copies and approximately 639,000 paid copies. The table below sets forth the average daily paid circulation and geographic location of the daily newspapers published by the Community Newspaper Group in 2004:

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        The weekly and specialty publications of the Community Newspaper Group are distributed throughout Canada. The number of weekly publications on a regional basis is as follows:

        Our community newspaper publications generally offer news, sports and special features, with an emphasis on local information. These newspapers cultivate reader loyalty and create franchise value by emphasizing local news, thereby differentiating themselves from national newspapers.

        Competition.     A majority of the Community Newspaper Group's publications maintain the number one positions in the markets that they serve. Our community publications are generally located in small towns and are typically the only daily or weekly newspapers of general circulation published in their respective communities, although some face competition from daily or weekly publications published in nearby locations and circulated in markets where we publish our daily or weekly publications. Historically, the Community Newspaper Group's publications have been a consistent source of cash flow.

Other Operations

Commercial Printing and Distribution

        Sun Media Corporation's national network of production and printing facilities enables it to provide printing services for web press (coldset and heatset) and sheetfed products, and graphic design for print and electronic medium. Web presses utilize rolls of newsprint, whereas sheetfed presses use individual sheets of paper. Heatset web presses, which involve a more complex process than coldset web presses, are generally associated with printing on glossy paper. We own 25 web press and 10 sheet fed press operations located throughout Canada. These operations provide commercial printing services for both our internal printing needs and for third parties. Our printing facilities include 14 printing facilities for the daily publications, and 15 other printing facilities operated by the Community Newspaper Group in five provinces.

        Our third-party commercial printing provides us with an additional revenue source that utilizes existing equipment with excess capacity. In our third-party commercial printing operations, we compete with other newspaper publishing companies as well as with commercial printers. Our competitive strengths in this area include our modern equipment, our status in some of our markets as the only local provider of commercial printing services and our ability to price projects on a variable cost basis, as our core newspaper business covers overhead expenses.

        The Urban Daily Group includes the distribution businesses of Messageries Dynamiques and Dynamic Press Group . Messageries Dynamiques distributes dailies, magazines and other electronic and print media and reaches approximately 250,000 households and 13,500 retail outlets through its operations in Québec. We hold Dynamic Press Group in partnership with a division of The Jim Pattison Group of Vancouver. Dynamic Press Group distributes English-language printed matter to more than 400 outlets in Québec.

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        Similarly, the Community Newspaper Group operates the distribution business of NetMedia , which distributes catalogues, flyers, product samples and other direct mail promotional material. Through its own branch system and its associated distributors, the Community Newspaper Group currently has the potential to provide advertising customers with distribution to over nine million Canadian households.

Television Station

        On December 2, 2004, Sun Media Corporation acquired 25% of the outstanding shares of Toronto 1, a television station in Toronto, Canada. In addition to cash, this transaction involved the sale of its 29.9% interest in CP24, a 24-hour local news channel in Toronto, to the vendor of Toronto 1. TVA Group, a subsidiary of Quebecor Media, acquired the other 75% of Toronto 1. The addition of Toronto 1 is expected to generate numerous opportunities for cross-promotions and for leveraging the brands of both Sun Media Corporation and Toronto 1 with consumers and advertisers in Canada's largest market place.

Seasonality and Cyclicality

        Canadian newspaper publishing company operating results tend to follow a recurring seasonal pattern with higher advertising revenue in the spring and in the fall. Accordingly, the second and fourth fiscal quarters are typically our strongest quarters, with the fourth quarter generally being the strongest. Due to the seasonal retail decline and generally poor weather, the first quarter has historically been our weakest quarter.

        Our newspaper business is cyclical in nature. Our operating results are sensitive to prevailing local, regional and national economic conditions because of our dependence on advertising sales for a substantial portion of our revenue.

Raw Materials

        Newsprint is our second-largest expense, after salaries, and represents our largest raw material expense. Newsprint expense represented 15.9% of our total operating expenses for the year ended December 31, 2004. The newsprint industry is highly cyclical, and newsprint prices have historically experienced significant volatility. We seek to manage the effects of newsprint price increases through a combination of, among other things, technology improvements, including web width reduction, inventory management, controlling the mix of editorial versus advertising content, incentive programs and, when possible, advertising and circulation price increases.

        In addition, to obtain more favorable pricing and to provide for a more secure newsprint supply, we have entered into a long-term agreement expiring December 31, 2005 with a newsprint manufacturer for the supply of substantially all of our newsprint purchases. This agreement enables us to obtain a discount to market prices, as well as providing additional volume rebates for purchases above certain thresholds by combining our purchases with the Canadian purchases of Quebecor World, an affiliated company. This agreement is expected to satisfy most of our anticipated newsprint requirements through the end of 2005.

        Aside from newsprint, the only raw materials of significance to us are ink and press plates, which together accounted for approximately 2.4% of the total operating expenses from our newspaper publishing operation in 2004.

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Broadcasting

        We are the largest privately-owned broadcaster of French-language entertainment, information and public affairs programs in North America. According to data published by the Bureau of Broadcast Measurement (BBM) People Meters (which data are based on a new measurement methodology using audimetry instead of surveys), we had a 29% market share of French-speaking viewers in the Province of Québec in 2004 and according to the Canadian TVB Report for the same period, we had approximately 45% of television advertising spending for French-speaking viewers in Québec in 2004. In 2004, we aired seven of the ten most popular TV programs in the Province of Québec, including Star Académie , Occupation Double , Gala Metrostar and Fortier . In 2004, we had 25 of the top 30 French-language television shows during prime time according to BBM People Meters data. Since May 1999, the TVA network, which consists of ten stations, has been included in the basic channel line-up of most cable providers across Canada, enabling us to reach a significant portion of the French-speaking population in Canada.

        Through various subsidiaries, we control or participate in the following six satellite to cable or analog specialty programming services: Le Canal Nouvelles , or LCN, a French-language headline news service, Canal Évasion , a French-language travel and tourism service, Canal Indigo , a French-language pay-per-view service, illico ™ sur Demande , a multilingual video-on-demand service, CPAC (Canadian Public Affairs Channel) also known as Canada's Political Channel, a national bilingual public affairs programming service, and Canal TVAchats , a French-language infomercial and tele-shopping channel. The CRTC allows "analog specialty services" to be distributed both via conventional analog cable and digital set-top-boxes.

        The CRTC has authorized almost 300 Category Two digital specialty services for which carriage is optional, and 21 Category One digital specialty services that cable and satellite service operators are required to carry. "Digital speciality services" are television, essentially thematic, services for which the CRTC has restricted distribution to the public via digital set top boxes only. Cable operators cannot distribute these services on conventional analog cable. We and our subsidiaries obtained control over 12 of the new digital specialty services and equity participation in one digital service. TVA Group has a dominant position in each service. As of December 31, 2004, approximately 46 English-language services and three of the French-language services had been launched. Two of the three French-language services were launched by TVA Group: Argent and Mystère (Rue 13) .

        On December 2, 2004, TVA Group acquired 75% of the outstanding shares of Toronto 1, a television station in Toronto, Canada for $32.4 million in cash. Sun Media, also a subsidiary of Quebecor Media, acquired the other 25% of Toronto 1 for $2.8 million in cash and Sun Media's 29.9% interest in CP24, a 24-hour local news channel in Toronto. Toronto 1 was launched by Craig Media Inc. in September 19, 2003 under the first English-language conventional television license granted for Toronto in almost 30 years. The license was granted on April 8, 2002 with an expiration date of August 31, 2008. Toronto 1's signal is broadcast from a main transmitter on the CN Tower and a rebroadcast transmitter in Hamilton. In addition, Toronto 1 is distributed on cable by Rogers Communications Inc. throughout Toronto on the coveted dial position of channel 15. Toronto 1 is also available on satellite across Canada on ExpressVu and Star Choice.

        As of December 31, 2004, we own a 99.9% voting interest and a 39.7% equity interest in TVA Group.

        For the twelve-month period ended December 31, 2004, our television operations generated revenues of $358.0 million and operating income of $80.5 million.

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Canadian Television Industry Overview

        Canada has a well-developed cable television market that provides viewers with a range of viewing alternatives.

        There are four French-language broadcast networks in the Province of Québec: Societé Radio-Canada, Réseau TQS, Télé-Québec and TVA Group. In addition to French-language programming, there are three English-language national broadcast networks in the Province of Québec: the Global Television Network, CTV and the Canadian Broadcasting Company, known as CBC. Global Television Network and CTV are privately held commercial networks. CBC and Societé Radio-Canada are government-owned and financed by a combination of federal government grants and advertising revenue. French-language viewers in the Province of Québec also have access to U.S. networks, either directly over the air or via broadcast distributors.

        Drama and comedy programming is the most popular genre with French-speaking viewers, with news and other information programming being the second most popular. Viewing trends by French-speaking viewers are predominantly to French Canadian programs in all genres, with the exception of drama and comedy programs where the viewing has remained evenly split between Canadian and foreign programs. According to the Bureau of Broadcast Measurement and the CRTC and based on a new measurement methodology using audimetry instead of surveys, viewing of Canadian programs by French-speaking viewers was approximately 66% in 2002-2003.

        The following table sets forth the relative audience share of French-language viewers in the Province of Québec in 2004:

Source: BBM People Meters 2004 (data is based on a new measurement methodology using audimetry instead of surveys).

New Television Policy since 2002: Digital TV

        On June 12, 2002 the CRTC announced a framework (Public Notice CRTC 2002-31) for the broadcast of digital, over-the-air television services and the transition of over-the-air television broadcasting from analog to digital. The CRTC is prepared to give fast-track consideration to applications for broadcasting licenses to carry on digital television (DTV) based on the Advanced Television Systems Committee transmission standard (A/53). The transition from analog to digital television in Canada will be voluntary, market-driven and without mandated deadlines. Licensees who wish to use digital television facilities to provide programming consisting essentially of a simulcast of their existing analog services will qualify for licensing. The CRTC will give fast track consideration to applications by existing over-the-air broadcasters. Should an existing broadcaster fail to apply for a transitional digital television license within a reasonable period, or otherwise demonstrate that it is not prepared to move to digital broadcasting on a timely basis, the CRTC may consider applications by prospective new entrants predicated on the Department of Industry's spectrum allotment. In the coming months, TVA Group intends to apply for a digital television license and is currently converting its operating facilities to digital technology.

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        All programming produced in the 16:9 aspect ratio will have to be broadcast in that ratio on transitional DTV undertakings. It is expected that, by the end of 2007, two thirds of each broadcaster's schedule, and two thirds of new Canadian content productions, should be available in the HDTV format. All of the programming on the digital service that is not duplicated on the analog service must be in the HDTV format. All Canadian programs aired during the evening broadcast period by the licensee of a transitional DTV undertaking, whether duplicated or not, are to be broadcast in the HDTV version.

Television Broadcasting

        Our network of ten stations, which consists of six owned and four affiliated stations, is available to a significant portion of the French-speaking population in Canada.

        Our owned and operated stations include: CFTM-TV in Montréal, CFCM-TV in Québec City, CHLT-TV in Sherbrooke, CHEM-TV in Trois-Rivières, CFER-TV in Rimouski-Matane-Sept-Iles and CJPM-TV in Saguenay (formerly Chicoutimi-Jonquière). Our four affiliated stations are CFEM-TV in Rouyn-Noranda, CHOT-TV in Gatineau (formerly Hull), CHAU-TV in Carleton and CIMT-TV in Rivière-du-Loup, of which we own a 45% interest of the latter two. Approximately 85% to 95% of our network's broadcast schedule is originated from our main station in Montréal. Our signal is transmitted from transmission and retransmission sites authorized by the CRTC and is also retransmitted elsewhere in Canada as a distant signal by various modes of authorized distribution: cable, direct-to-home satellite distribution and multi-channel multipoint distribution services. We have the number one market share in each of our ten Québec markets.

Programming

        We produce a variety of French-language programming, including a broad selection of entertainment, news and public affairs programming. We actively promote our programming and seek to develop viewer loyalty by offering a consistent programming schedule.

        A majority of our programming is produced by our wholly-owned subsidiary, JPL Production Inc. Through JPL Production Inc., we produced approximately 1,500 hours of original programming in 2004. Its programming consists primarily of soap operas, variety shows and quiz shows.

        The remainder of our programming is comprised of foreign and independently produced programming.

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(1)

QMI controls TVA Group, which controls most of the programming services.

(2)

QMI controls Videotron, which controls most of the programming services.

(3)

QMI controls Archambault Group, which controls most of the programming services.

Le Canal Nouvelles LCN

         Le Canal Nouvelles , or LCN, is a 24-hour broadcast format of 15-minute information segments comprised of news, sports and weather components, updated on a regular basis. LCN went on the air on September 8, 1997 and had 1.7 million customers as of August 31, 2004. LCN's revenues are primarily derived from affiliate agreements and sale of air-time to national advertisers.

Canal Évasion

         Canal Évasion is a national French-language television specialty service that is dedicated exclusively to tourism, adventure and travel.

MenTV

         MenTV is a national English-language Category 1 specialty television service dedicated to the Canadian man's lifestyle with programming related to the luxury market, the gourmet market, men's beauty and fitness, the book and music market, outdoor adventures and leisure sports.

Mystery TV

         Mystery TV (formerly called 13th Street) is a national English-language Category 1 specialty television service devoted to mystery and suspense programming. The service nurtures and encourages short form Canadian mysteries. It provides a wide assortment of genre-specific programs including movies, television series, short films and documentaries that focus exclusively on the delivery of entertaining programming relating to suspense, espionage and classic mysteries. This newly implemented channel started broadcasting in fall 2004.

Mystère

         Mystère (formerly called 13ieme rue) is a national French-language Category 1 specialty television service devoted to mystery and suspense programming. This programming service is a French-language equivalent of "Mystery TV". However, it also offers reruns of well known indigenous Quebec series.

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Argent

         Argent officially started broadcasting on February 21, 2005. Argent broadcasts economic, business and personal finance news. This channel benefits from the expertise and knowledge of TVA Group's news team, as well as TVA Group's presence in every Québec region. Argent is developing a unique niche by offering a business-focused product that has never before been attempted in Québec's television market. Argent is providing an essential service in Québec's economy by promoting businesses of all sizes and explaining and commenting on the business and financial news that will impact Québec's economic future.

Canal Indigo

         Canal Indigo is a pay-per-view television service that offers mainly blockbuster feature films which have been exhibited in theatres as well as Canadian-based events targeting the French-language market.

Canadian Public Affairs Channel (CPAC)

        Through a consortium of cable operators, QMI has a 21.7% equity interest in the Canadian Public Affairs Channel (CPAC), a national bilingual public affairs programming service showing House of Commons debates and consisting exclusively of long-form programming focusing on local, regional, national and international civic affairs.

Home Shopping Service/Infomercials

        TVA Group also owns 100% of Home Shopping Service Canada, a programming service that the CRTC has exempted from licensing requirements. In April 1998, we signed an agreement with Home Shopping Service S.A., a subsidiary of Groupe M6 of France, to pursue a joint venture called Home Shopping Service Canada. Through this agreement, we operate La Boutique TVA , a daily one-hour home tele-shopping service broadcast on the TVA Network. We also operate Canal TVAchats , a 24-hour infomercial and tele-shopping channel. On March 18, 2003, TVA Group purchased from Home Shopping Service S.A. its 50% interest in Home Shopping Service Canada.

Authorized Digital Specialty Services

        In December 2000, TVA Group became authorized to operate three Category One Digital Specialty Services: Argent (LCN Affaires) , a national French-language specialty service devoted to the economy, business and personal finance; Télé Ha! Ha! , a national French-language service devoted to humor and comedy; and Mystère (13e rue) , a national French-language service consisting of mystery, fantasy, suspense and horror. TVA Group also obtained five Category Two services: Digipix, a national English-language service dedicated to experimental digital audio-visual productions; Front Row, a national English-language pay television service comprising of a mix of documentaries, mini-series, music specials / shows, and feature films; Game One , a national French-language service dedicated exclusively to video games; Game One, a national English-language service dedicated exclusively to video games; and Première Loge , a national French-language pay television service including documentaries, shows, mini-series and movies. Another subsidiary of Quebecor Media also obtained authorization to operate three digital Category Two programming services: Téléservice , a national French-language service providing practical advice and useful information on do-it-yourself projects, home maintenance and related topics; Canal F , a national French-language service devoted to the life and interests of women; and Le Canal Nature , a national French-language service devoted to animals and their environment.

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        As of December 31, 2004, Mystère and Argent have been launched. We intend to offer another already licensed Category Two service in 2005. However, the CRTC may not renew its December 2000 authorizations for those other programming services that were not launched after November 24, 2004.

Advertising Sales and Revenue

        We derive a majority of our revenues from the sale of air-time to national, regional and local advertisers. For the twelve-month period ended December 31, 2004, we derived approximately 70% of our advertising revenues from national advertisers and 30% from regional and local advertisers. Based on information provided by the TVB Time Sales Report, we estimate our share of the Province of Québec French-language broadcast television advertising market was 45% in 2004.

Book and Magazine Publishing

        In connection with the acquisition of Groupe Vidéotron, we also acquired TVA Publishing, a subsidiary of TVA Group that was formed when TVA Group acquired Trustar Limited, or Trustar, in January 2000. In May 2002, Publicor, a subsidiary of Quebecor Media that publishes primarily interior design, home improvement and women's magazines, including well known French-language titles such as Les idées de ma maison , Décoration Chez-Soi , Rénovation-Bricolage , Clin d'oeil , Filles d'aujourd'hui and Femmes Plus , and other special editions and seasonal publications, was combined with TVA Publishing. Publicor was also involved in contract publishing and collaborated with other members of the Quebecor Media group of companies combining traditional print with new media to offer clients additional alternatives to reach their target audience effectively. TVA Publishing, which now includes all of the operations of Publicor, represents approximately 88% of newsstand sales of French-language magazines in Québec and owns and operates 43 weekly and monthly publications. TVA Publishing is the leading publisher in Québec and we expect to leverage its focus on arts and entertainment across our television and Internet programming.

Leisure and Entertainment

        Our activities in the Leisure and Entertainment segment consist primarily of retailing CDs, books, videos, musical instruments and magazines through the Archambault chain of stores and the archambault.ca e-commerce site, online sales of downloadable music through the archambaultzik.ca service, distribution of CDs and videos (through Select, a division of Archambault Group), and music recording (through Musicor, a division of Archambault Group) as well as book publishing in the academic, literary and general literature categories (through seven publishing houses: Éditions Libre Expression, Éditions Internationales Alain Stanké, Éditions Logiques, Éditions du Trécarré, Éditions Quebecor, TVA Publishing and CEC Publishing) and book distribution (through Québec-Livres). Our Leisure and Entertainment segment generated revenues of $241.7 million and operating income of $22.7 million for the twelve-month period ended December 31, 2004.

Music, Book, Software and Magazine Retail

        Archambault Group is the largest chain of music and book stores in Québec with 17 retail locations, consisting of 13 Archambault megastores, three Camelot-Info stores and one Paragraphe bookstore. Archambault Group is also one of the largest computer books and software retailers, through Camelot-Info Inc. Archambault Group's products are also distributed through its websites archambault.ca , camelot.ca and paragraphbooks.com . In January 2004, Archambault Group launched a new music downloading service, known as archambaultzik.ca , with per-track fees.

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        Archambault Group through Select, is also the largest independent music distributor in Canada. Select has over 850 artists, mostly French- speaking. Archambault Group is a wholesaler serving approximately 500 locations in Québec through its Trans-Canada division. In 2004, Musicor, the music recording division of Archambault Group, sold more than 650,000 CDs, including approximately 207,000 Star Academie 2004 CDs and approximately 275,000 CDs of Marie Élaine Thibert, the 2003 Star Academie runner-up.

        On November 1, 2004, Archambault Group launched Groupe Archambault France S.A.S., a new producer, publisher and distributor of cultural content in Europe, and announced a contract with Warner Music France.

        We are also involved in book publishing and distribution through several publishing houses forming Québec's largest book publishing group. In 2004, we published, reissued and reprinted a total of 636 titles and sold over 2.5 million copies. Through Québec-Livres, our book distribution division, we operate one of the largest book distributors in Québec and represent several Québec-based publishers. We distribute French-language books to approximately 1,400 retail outlets in Canada.

Video-On-Demand Services

        Archambault Group owns a video-on-demand service licensed by the CRTC. Vidéotron and Archambault Group have established both an affiliation agreement, pursuant to which Vidéotron was granted the non-exclusive right to offer Archambault Group's video-on-demand services to customers of Vidéotron, and a video-on-demand services agreement, pursuant to which Vidéotron provides administrative services to Archambault Group. See "— Cable."

Ownership

        We own 100% of the issued and outstanding shares of Archambault Group.

Business Telecommunications

        Videotron Telecom is a provider of a full range of business telecommunications services, including local switch dial tone service, long distance, high speed data transmission, Internet connectivity and Internet hosting, to customers that include businesses and governmental end users and other telecommunications service providers in Canada. Videotron Telecom's regional network has over 9,000 km/cable in Québec and 2,000 km/cable in Ontario and reaches most large and medium sized users of telecom services in the metropolitan areas of Québec and Ontario. Videotron Telecom's extensive network supports direct connectivity with networks in Ontario, eastern Québec, the Maritimes and the United States.

        Videotron Telecom is focusing its development efforts on its core customer base, i.e. telecommunications local and long distance carriers, wholesalers of long distance telecommunications services, wireless operators and Internet service providers, and other high-end users of business telecommunication services. In addition, Videotron Telecom has entered into several contracts with Vidéotron for the provision of telecommunications services. In 2004 Videotron Telecom was awarded a major outsourcing contract for computer hosting and telecommunication managed services of Quebecor World Inc.'s North American infrastructure.

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        In July 2004, Videotron Telecom and Vidéotron announced their intention to launch a telephony service using voice over IP technology in Québec. The service was officially launched in January 2005 following a trial period. For more information on this service, see "— Cable."

        In November 2004, Quebecor Media announced its plans to integrate the operations of Videotron Telecom into Vidéotron in 2005. The integration is intended to accelerate the deployment of Vidéotron's new residential telephone service (Voice over IP).

        Our business telecommunications segment generated revenues of $78.6 million and operating profit of $22.6 million for the twelve-month period ended December 31, 2004.

Ownership

        We own a 100% voting and a 100% equity interest in Videotron Telecom.

New Media Services

Interactive Technologies and Communications

        Through our ownership interest in Nurun, we provide interactive communication and technology services in North America and Europe. Nurun employs more than 480 professionals, and helps companies and other organizations develop interactive strategies, including without limitation strategic planning and interface design, technical platform implementation, online marketing programs and client relationships. Nurun's clients include organizations and multi-national corporations, such as L'Oréal, the Groupe DANONE, Cingular Wireless, Club Med, Pfizer, SkyTeam, Thomas Cook, Pleasant Holidays, Telecom Italia, Europcar, Wanadoo, Canal+, the Government of Quebec and the State of Georgia. Our Interactive Technologies and Communications segment generated revenues of $51.9 million and operating income of $2.3 million for the twelve-month period ended December 31, 2004, in each case excluding the revenues from the discontinued operations of Mindready Solutions.

        On April 28, 2004, Nurun acquired Ant Farm Interactive, an interactive marketing agency located in Atlanta, Georgia, for a cash consideration of $5.4 million, plus additional payments contingent on the achievement of performance targets in the next three years and, subject to certain conditions, the issuance of Nurun Common Shares in 2007 or an equivalent cash consideration, at Nurun's option. The transaction strengthened Nurun's positioning in the U.S. market and enhanced its capabilities in the fields of interactive marketing and online customer relationship management. Ant Farm Interactive serves a prestigious customer list.

        In response to a partial takeover bid for Mindready Solutions shares, a total of 6.75 million Common Shares held by Nurun were sold for a cash consideration of $7.8 million, of which $4.4 million was received on May 27, 2004, the closing date of the bid. The balance was paid on February 23, 2005. The transaction left Nurun with a 9.6% interest in Mindready Solutions, which interest was subsequently sold in March 2005.

Ownership

        We own approximately 57.3% of the issued and outstanding shares of Nurun. In separate transactions in May 2004 and March 2005, Nurun sold its interest in Mindready Solutions. As of December 31, 2003, Nurun had a 66.7% interest in Mindready Solutions.

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Internet/Portals

        Canoe (formerly Netgraphe Inc. or Netgraphe) is an integrated company offering e-commerce, information, communication and IT consulting. Canoe owns the CANOE portals network, which, according to comScore Media Metrix issued in September 2004, is accessed by over 6.2 million Internet users per month. Canoe also owns Jobboom Publishing, Quebec's leader in employment and career publishing, and the IT-consulting firm Progisia Informatique. Brought together, Canoe's complementary operations form one of the most complete portfolios of Internet-related properties in Canada. Our Internet/Portals segment generated revenues of $34.5 million (approximately $8.1 million relating to Canoe's consulting services operations and $26.4 million relating to its Internet services operations) and operating income of $4.5 million for the year ended December 31, 2004.

        The CANOE network includes all of Canoe's information and service sites for the general public. As such, it is one of the most popular Internet destinations in Canada, in both the English- and French-speaking markets, and a key vehicle for Internet users and advertisers alike. Advertising revenues constitutes a large portion of Canoe's annual revenues.

Media Properties

        Canoe's media properties include the following portals and destination sites:

•

CANOE ( canoe.qc.ca and canoe.ca ), a bilingual, integrated media and Internet services network and one of Canada's leading Internet portals with more than 340 million page views per month;



•

La Toile du Québec ( toile.com ), the first French-language navigational guide in Canada and Québec's leading portal with approximately 75,000 indexed sites and more than 60 guides;



•

Webfin Argent and Canoe Money ( argent.canoe.com and money.canoe.ca ), a financial Web site which offers, among other things, a variety of services ranging from financial information to portfolio management tools (the Webfin Argent website was redesigned in early 2005 in partnership with TVA's new financial channel Argent );



•

TVA Group and LCN ( tva.canoe.com and lcn.canoe.com ), dedicated Web sites for the TVA television network and the LCN all-news channel; and



•

Several Web sites for popular TVA Group programs, such as Occupation Double ( occupationdouble.com ) and Star Académie ( staracademie.ca ).

E-commerce Properties

        Canoe's e-commerce properties include the following sites:

•

Jobboom.com , a unique Web-based employment site with over 1.3 million members, which also includes Jobboom Formation, an Internet directory of continuing education services;



•

Autonet.ca , Canada's leading sites devoted entirely to cars;



•

ReseauContact.com and flirt.canoe.ca , a bilingual dating and friendship site with one million unique visitors per month, over 800,000 registered members and 100,000 active members generating more than 100 million page views per month; and

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•

Classifiedextra.ca and Classeesextra.ca , Canada's largest classified ad sites, through which visitors can view classified ads from 150 Canadian newspapers.

Ownership

        In 2004, Quebecor Media offered to acquire, through a wholly owned subsidiary, all of the outstanding Multiple Voting Shares and Subordinate Voting Shares of Netgraphe at a price of $0.63 per share. In the course of a number of transactions carried out in 2004, minority interests in Netgraphe directly owned by minority shareholders were acquired for an aggregate consideration of approximately $25.2 million. Netgraphe shares were delisted from the Toronto Stock Exchange shortly thereafter. In the wake of these transactions, the subsidiary changed its name to Canoe Inc., as of December 31, 2004.

        As of December 31, 2004, we hold, directly and indirectly, a 100.0% voting interest (97.8% as of December 31, 2003) and a 91.7% (75.5% as of December 31, 2003) equity interest in Canoe.

Intellectual Property

        We use a number of trademarks for our products and services. Many of these trademarks are registered by us in the appropriate jurisdictions. In addition, we have legal rights in the unregistered marks arising from their use. We have taken affirmative legal steps to protect our trademarks and we believe our trademarks are adequately protected.

        Television programming and motion pictures are granted legal protection under the copyright laws of the countries in which we operate, and there are substantial civil and criminal sanctions for unauthorized duplication and exhibition. The content of our newspapers and Web sites is similarly protected by copyright. We own copyright in each of our publications as a whole, and in all individual content items created by our employees in the course of their employment, subject to very limited exceptions. We have entered into licensing agreements with wire services, freelancers and other content suppliers on terms that are sufficient to meet the need of our publishing operations. We believe we have taken appropriate and reasonable measures to secure, protect and maintain our rights or obtain agreements from licensees to secure, protect and maintain copyright protection of content produced or distributed by us.

        We have registered a number of domain names under which we operate Web sites associated with our television, publishing and Internet operations. As every Internet domain name is unique, our domain names cannot be registered by other entities as long as our registrations are valid.

Environment

        Our operations are subject to federal, provincial, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous materials, the recycling of wastes and the cleanup of contaminated sites. Laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances in the workplace, also govern our operations.

        Compliance with these laws has not had, and management does not expect it to have, a material effect on our capital expenditures, net income or competitive position. Environmental laws and regulations and their interpretation, however, have changed rapidly in recent years and may continue to do so in the future. Our properties, as well as areas surrounding our properties, may have had historic uses, including uses related to historic publishing operations, or may have current uses (in the case of surrounding properties) that may affect these properties and require further study or remedial measures. No material studies or remedial measures are currently anticipated or planned by us or required by regulatory authorities with respect to our properties. However, we cannot assure you that all environmental liabilities have been determined, that any prior owner of our properties did not create a material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any such property.

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Regulation

Ownership and Control of Canadian Broadcast Undertakings

        Subject to any directions issued by the Governor in Council (effectively the Federal Cabinet), the CRTC regulates and supervises all aspects of the Canadian broadcasting system.

        The Governor in Council, through an Order-in-Council referred to as the Direction to the CRTC ( Ineligibility of Non-Canadians ), has directed the CRTC not to issue, amend or renew a broadcasting license to an applicant that is a non-Canadian. Canadian, a defined term in the Direction, means, among other things, a citizen or a permanent resident of Canada, a qualified corporation, a Canadian government, a non-share capital corporation of which a majority of the directors are appointed or designated by statute, regulation or specified governmental authorities, or a qualified mutual insurance company, qualified pension fund society or qualified cooperative of which not less than 80% of the directors or members are Canadian. A qualified corporation is one incorporated or continued in Canada, of which the chief executive officer (or if there is no chief executive officer, the person performing functions similar to those performed by a chief executive officer) and not less than 80% of the directors are Canadian, and not less than 80% of the issued and outstanding voting shares and not less than 80% of the votes are beneficially owned and controlled, directly or indirectly, by Canadians. In addition to the above requirements, Canadians must beneficially own and control, directly or indirectly, not less than 66.6% of the issued and outstanding voting shares and not less than 66.6% of the votes of the parent company that controls the subsidiary, and neither the parent company nor its directors may exercise control or influence over any programming decisions of the subsidiary if Canadians beneficially own and control less than 80% of the issued and outstanding shares and votes of the parent corporation, if the chief executive officer of the parent corporation is a non-Canadian or if less than 80% of the parent corporation's directors are Canadian. There are no specific restrictions on the number of non-voting shares which may be owned by non-Canadians. Finally, an applicant seeking to acquire, amend or renew a broadcasting license must not otherwise be controlled in fact by non-Canadians, a question of fact which may be determined by the CRTC in its discretion. Control is defined broadly in the Direction to mean control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of a corporation or otherwise. Vidéotron and TVA Group are qualified Canadian corporations.

        Regulations made under the Broadcasting Act (Canada) require the prior approval of the CRTC of any transaction that directly or indirectly results in (i) a change in effective control of the broadcasting distribution undertaking of a licensee, (ii) a person or a person and its associates acquiring control of 30% or more of the voting interests of a licensee or of a person who has, directly or indirectly, effective control of a licensee, or (iii) a person or a person and its associates acquiring 50% or more of the issued common shares of the licensee or of a person who has direct or indirect effective control of a licensee. In addition, if any act, agreement or transaction results in a person or a person and its associates acquiring control of at least 20% but less than 30% of the voting interests of a licensee, or of a person who has, directly or indirectly, effective control of the licensee, the CRTC must be notified of the transaction. Similarly, if any act, agreement or transaction results in a person or a person and its associates acquiring control of 40% or more but less than 50% of the voting interests of a licensee, or a person who has directly or indirectly effective control of the licensee, the CRTC must be notified.

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        In November 2002, the federal Minister of Industry initiated a review of the existing foreign ownership restrictions applicable to telecommunications carriers. In April 2003, the House of Commons Standing Committee on Industry, Science and Technology released a report of its study of the issue of foreign direct investment restrictions applicable to telecommunications common carriers. The House of Commons Standing Committee on Industry, Science and Technology recommended, among other things, that the Government of Canada remove the existing foreign ownership restrictions in the telecommunications industry and ensure that any changes made to the Canadian ownership and control requirements applicable to telecommunications common carriers be applied equally to broadcasting distribution undertakings. In June 2003, the House of Commons Standing Committee on Canadian Heritage released a report of its review of the Broadcasting Act (Canada) and, among other things, recommended that the current restrictions on foreign ownership relating to broadcasting, cable and telecommunications remain. In September 2003, the Canadian government announced it intended to launch an expedited analysis of these reports and this issue, but to date the results of that analysis have not been publicly announced and no changes have been made or proposed. We cannot predict what, if any, changes will result from these reports.

Jurisdiction Over Canadian Broadcasting Undertakings

        Vidéotron's cable distribution undertakings and TVA Group's programming activities are subject to the Broadcasting Act (Canada) and regulations made under the Broadcasting Act (Canada) that empower the CRTC, subject to directions from the Governor in Council, to regulate and supervise all aspects of the Canadian broadcasting system in order to implement the policy set out in that Act. Certain of Vidéotron's and TVA Group's undertakings are also subject to the Radiocommunication Act (Canada), which empowers Industry Canada to establish and administer the technical standards that networks and transmission must respect, namely, maintaining the technical quality of signals.

        The CRTC has, among other things, the power under the Broadcasting Act (Canada) and regulations to issue, subject to appropriate conditions, amend, renew, suspend and revoke broadcasting licenses, approve certain changes in corporate ownership and control, and establish and oversee compliance with regulations and policies concerning broadcasting, including various programming and distribution requirements, subject to certain directions from the Federal Cabinet.

Canadian Broadcast Programming (Television Stations)

Programming of Canadian Content

        CRTC regulations require licensees of television stations to maintain a specified percentage of Canadian content in their programming. Television broadcasters are subject to regulations requiring that, over the broadcast year and over any six-month period specified in the license, a minimum of 60% of the aggregate programming shown during the broadcast day (a continuous 18-hour period between 6:00 a.m. and 1:00 a.m. the following day) must be of Canadian origin. Canadian origin is most commonly achieved on the basis of a points system requiring that a number of creative and production staff be Canadian and that specified Canadian production expenditure levels be met. In addition, not less than 50% of the aggregate programming between the hours of 6:00 p.m. and 12:00 midnight over the broadcast year must be of Canadian origin. Specialty cable television channels also have to maintain a specified percentage of Canadian content in their programming, generally set forth in the conditions of their license.

        On September 1, 2000, the CRTC introduced a new policy regarding Canadian television. While the overall Canadian content requirements remain the same, the new policy required broadcasters to broadcast a minimum of eight hours per week of priority programming during prime time, from 7:00 p.m. to 11:00 p.m. To permit greater flexibility in meeting these requirements, the definitions of priority programs and prime time have been expanded. Priority programming now includes Canadian-produced drama, music and dance, variety and long-form documentaries, but does not include news and information or sports programming. Quantitative commitments and fixed spending requirements have been eliminated. In addition, the CRTC has invited television broadcasting companies to request the removal of any spending requirements pertaining to specific Canadian programming categories embodied in the conditions of their respective licenses.

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Advertising

        The CRTC also regulates the quantity and content of television advertising. A television licensee shall not broadcast more than 12 minutes of advertising during any hour subject to certain exceptions for unpaid public service announcements and promotions for upcoming Canadian programs. Advertising content is regulated by various federal and provincial statutes and regulations, as well as by standards in the Canadian television broadcasting industry.

Broadcasting License Fees

        Broadcasting licensees are subject to annual license fees payable to the CRTC. The license fees consist of two fees. One fee allocates the CRTC's regulatory costs for the year to licensees based on a licensee's proportion of the gross revenue derived during the year from the licensed activities of all licensees whose gross revenues exceed specific exemption levels. The other fee, also called the Part II license fee, for a broadcasting distribution undertaking, is 1.365% of the amount by which its gross revenue derived during the year from its licensed activity exceeds $175,000. Our broadcasting distribution activities are subject to both fees. In January 2004, we filed a claim before the Federal Court on the basis that the Part II license fee is similar to a tax levy and that the CRTC has no jurisdiction to impose a tax. This claim has been merged with a similar claim from the Canadian Association of Broadcasters.

Canadian Broadcast Distribution (Cable Television)

Licensing of Canadian Broadcasting Distribution Undertakings

        The CRTC has responsibility for the issuance, amendment, renewal, suspension and revocation of Canadian broadcasting licenses, including licenses to operate a cable distribution undertaking. A cable distribution undertaking distributes broadcasting services to customers predominantly over closed transmission paths. A license to operate a cable distribution undertaking gives the cable television operator the right to distribute television programming services in its licensed service area. Broadcasting licenses may be issued for periods not exceeding seven years and are usually renewed, except in cases of a serious breach of the conditions attached to the license or the regulations of the CRTC. The CRTC is required to hold a public hearing in connection with the issuance, suspension or revocation of a license.

        Cable systems with 2,000 customers or less and operating their own local headend are exempted from the obligation to hold a license pursuant to an exemption order issued by the CRTC in 2001 and amended in 2002. These cable systems will continue to have to comply with a number of programming carriage requirements set out in the exemption order and comply with the Canadian ownership and control requirements in the Direction. We operate 16 of these small cable systems.

        Similarly, cable systems with between 2,000 and 6,000 customers (generally Class 2 cable systems or Class 3 cable systems not exempt under the CRTC's exemption for small cable undertakings) are also exempted from holding a license pursuant to a CRTC public notice issued in 2003. Cable distribution undertakings that are fully interconnected with other broadcasting distribution undertakings will be ineligible for this exemption unless the aggregate number of customers served by the interconnected broadcast distribution undertakings is less than 6,000. The CRTC has issued a proposed exemption order in June of 2004, and we have filed for revocation of license for three networks that will benefit from the exemption by having reduced administrative costs and regulatory burdens.

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        In September 2003, the CRTC adopted amendments to the Broadcasting Distribution Regulations that permit the CRTC to implement its regional licensing model for cable distribution undertakings (Broadcasting Public Notice CRTC 2003-48). The CRTC believes that the regional licensing approach will result in greater efficiencies for the licensees of cable distribution undertakings as well as for itself and reflects the current trend toward consolidation in the cable industry and growing interconnection between systems.

        In November 2003, the CRTC finalized the regulatory framework that will govern the distribution of digital signals by over-the-air television stations (Broadcasting Public Notice CRTC 2003-61). The CRTC requires broadcasting distribution undertakings to distribute the primary digital signal of a licensed over-the-air television service in accordance with the priorities that currently apply to the distribution of the analog version of the services. The CRTC expects all broadcasting distribution undertakings to implement the necessary upgrades. Analog carriage could be phased out once 85% of a particular broadcasting distribution undertaking's customers have digital receivers or set-top boxes that can convert digital signals to analog. Exempt undertakings will not be required to duplicate mandatory services in digital format. A further proceeding to establish a licensing framework governing the transition of pay and specialty services to high definition, or HD, signals was initiated in August 2004. It will also establish a framework to govern the distribution of such services by broadcasting distribution undertakings. It is expected that this policy will be made public after the first quarter of 2005. According to the CRTC, the time period during which broadcasters and distributors will have to provide services in both analog and digital formats will depend on the speed with which customers convert from analog to digital. A shorter transition period will reduce the overall costs of the transition for both broadcasters and distributors.

        In order to conduct our business, we must maintain our broadcasting distribution undertaking licenses in good standing. Failure to meet the terms of our licenses may result in their short-term renewal, suspension, revocation or non-renewal. We still hold a separate license for each of our 35 cable systems with greater than 2,000 customers and have never failed to obtain a license renewal for those cable systems.

Distribution of Canadian Content

        The Broadcasting Distribution Regulations made by the CRTC pursuant to the Broadcasting Act (Canada) mandate the types of Canadian and non-Canadian programming services respectively that can be distributed by broadcasting distribution undertakings, including cable television systems. In summary, each cable television system is required to distribute all of the Canadian programming services that the CRTC has determined are appropriate for the market it serves, which includes local and regional television stations, certain specialty channels and pay television channels, and a pay-per-view service, but does not include Category 2 digital services and video-on-demand services.

        As revised from time to time, the CRTC has issued a list of non-Canadian programming services eligible for distribution in Canada on a discretionary user-pay basis to be linked along with Canadian pay-television services or with Canadian specialty services. The CRTC currently permits the linkage of up to one non-Canadian service for one Canadian specialty service and up to five non-Canadian services for every one Canadian pay-television service. In addition, the number of Canadian services received by a cable television customer must exceed the total number of non-Canadian services received. The CRTC decided that it would not be in the interest of the Canadian broadcasting system to permit the distribution of certain non-Canadian pay-television movie channels and specialty programming services that could be considered competitive with licensed Canadian pay-television and specialty services. Therefore, pay-television movie channels and certain specialty programming services available in the United States and other countries are not approved for distribution in Canada.

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        Also important to broadcasting operations in Canada are the specialty (or thematic) programming service access rules, which require cable systems with more than 6,000 customers (Class 1 cable systems) operating in a French- language market to offer each analog French-language Canadian specialty service licensed, other than certain religious programming services, to the extent of availability of channels. Moreover, all Canadian specialty channels, other than Category 2 digital specialty channels, must be carried by broadcast distributors with more than 2,000 customers (Class 1 and Class 2 cable systems) when digital distribution is offered. These rules seek to ensure wider carriage for certain Canadian specialty channels than might otherwise be secured through negotiation. However, Category 2 digital specialty channels do not benefit from any regulatory assistance to guarantee distribution on cable or DTH satellite distribution undertakings apart from the requirement that a distributor offer at least five non-related Category 2 digital specialty channels for every Category 2 digital specialty channel it distributes in which it owns, directly or indirectly, more than 10% of the equity.

1998 Broadcasting Distribution Regulations

        The Broadcasting Distribution Regulations enacted in 1998, also called the 1998 Regulations, apply to distributors of broadcasting services or broadcasting distribution undertakings in Canada. The 1998 Regulations promote competition between broadcasting distribution undertakings and the development of new technologies for the distribution of such services while ensuring that quality Canadian programs are exhibited. The 1998 Regulations introduced important new rules, including the following:

•

Competition, Carriage Rules and Signal Substitution.   The 1998 Regulations provide equitable opportunities for all distributors of broadcasting services. Similar to the signal carriage and substitution requirements that are imposed on existing cable television systems, under the 1998 Regulations, new broadcasting distribution undertakings are also subject to carriage and substitution requirements. The 1998 Regulations prohibit a distributor from giving an undue preference to any person, including itself, or subjecting any person to an undue disadvantage. This gives the CRTC the ability to address complaints of anti-competitive behavior on the part of certain distributors.

A significant aspect of television broadcasting in Canada is simultaneous program substitution, or simulcasting, a regulatory requirement under which Canadian distribution undertakings, such as cable television systems with over 6,000 customers, are required to substitute the foreign programming service, with local Canadian signal, including Canadian commercials, for broadcasts of identical programs by a U.S. station when both programs are exhibited at the same time. These requirements are designed to protect the program rights that Canadian broadcasters acquire for their respective local markets. The CRTC, however, has suspended the application of these requirements to DTH satellite operators for a period of time, so long as they undertake certain alternative measures, including monetary compensation to a fund designed to help finance regional television productions.

•

Canadian Programming and Community Expression Financing Rules.   All distributors, except systems with less than 2,000 customers, are required to contribute at least 5% of their gross annual broadcast revenues to the creation and presentation of Canadian programming including community programming. However, the allocation of these contributions between broadcast and community programming can vary depending on the type and size of the distribution system involved.

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Inside Wiring Rules.   The CRTC determined that the inside wiring portion of cable networks creates a bottleneck facility that could affect competition if open access is not provided to other distributors. Incumbent cable companies may retain the ownership of the inside wiring but must allow usage by competitive undertakings to which the cable company may charge a just and reasonable fee for the use of the inside wire. Because the CRTC did not establish a fee for the use of the inside wire until September 2002, Vidéotron negotiated a fee for the use of inside wire owned by Câblage QMI in February 2002. On September 3, 2002, the CRTC established a fee of $0.52 per customer per month for the use of cable inside wire in MDUs. As a result, the CRTC, on October 9, 2002 ordered Câblage QMI and Vidéotron to comply with the inside wiring access rules. Vidéotron continues to operate under this order.

Rates

        Our revenue related to cable television is derived mainly from (a) monthly subscription fees for basic cable service; (b) fees for premium services such as specialty services, pay-television, pay-per-view television and video-on-demand; and (c) installation and additional outlets charges.

        The CRTC does not regulate the fees charged by non-cable broadcast distribution undertakings and does not regulate the fees charged by cable providers for non-basic services. The basic service fees charged by Class 1 (6,000 customers or more) cable providers are regulated by the CRTC until true competition exists in a particular service area, which occurs when:

(1)

30% or more of the households in the licensed service area have access to the services of another broadcasting distribution undertaking. The CRTC has advised that as of August 31, 1997, the 30% availability criterion was satisfied for all licensed cable areas; and



(2)

the number of customers for basic cable service has decreased by at least 5% since the date on which a competitor started offering its basic cable service in the particular area.

        For all but two of Vidéotron's service areas, the basic service fees for our customers have been deregulated.

        The CRTC further restricts installation fees to an amount that does not exceed the average actual cost incurred to install and connect the outlet to a household situated in a residential area.

        Subject to certain notice and other procedural requirements, for Class 1 cable systems still regulated, we may increase our basic service rates so as to pass through to customers increases in CRTC authorized fees to be paid to specialty programming services distributed on our basic service. However, the CRTC has the authority to suspend or disallow such an increase.

        In the event that distribution services may be compromised as a result of economic difficulties encountered by a Class 1 cable distributor, a request for a rate increase may be submitted to the CRTC. The CRTC may approve an increase if the distributor satisfies the criteria then in effect for establishing economic need.

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Winback Restrictions

        In a letter decision dated April 1, 1999, the CRTC established rules, referred to as the winback rules, that prohibit the targeted marketing by incumbent cable companies of customers who have cancelled basic cable service. These rules require us and other incumbent cable companies to refrain for a period of 90 days from: (a) directly contacting customers who, through an agent, have notified their cable company of their intention to cancel basic cable service; and (b) offering discounts or other inducements not generally offered to the public, in instances when customers personally initiate contact with the cable company for the purpose of canceling basic cable service. In August of 2004 (Public Notice CRTC 2004-62), the CRTC has decided that it will no longer require incumbent cable companies to adhere to winback rules with respect to customers who reside in single unit dwellings. However, the CRTC has also determined that the winback rules should continue to apply to incumbent cable companies with respect to their dealings with individual customers who reside in multiple unit dwellings. The CRTC has further determined that incumbent cable companies are prohibited from initiating communication with residents of a multiple unit dwelling for a period of 90 days from the date on which a new entrant enters into an access agreement to provide service in the multiple unit dwelling. Moreover, the CRTC now requires incumbent cable companies to refrain from the targeted marketing of all residents of a multiple unit dwelling, or from offering them discounts or other inducements not generally available to the public, for a period of 90 days following the date on which a new entrant enters into an access agreement to offer services in the multiple unit dwelling.

        In February 2001, the CRTC also announced similar "winback" restrictions on certain cable operators, including Vidéotron, in the Internet service market. These restrictions limit cable operators' ability to "win back" Internet service customers who have chosen to switch to another Internet service provider within 90 days of the customer's switch.

Copyright Board Proceedings

        Certain copyrights in radio, television and pay audio programming are administered collectively and tariff rates are established by the Copyright Board of Canada. Tariffs set by the Copyright Board are generally applicable until a public process is held and a decision of the Copyright Board is rendered for a renewed tariff. Renewed tariffs are often applicable retroactively.

Royalties for the Retransmission of Distant Signals

        Following the implementation in 1989 of the Canada-U.S. Free Trade Agreement, the Copyright Act (Canada) was amended to require retransmitters, including Canadian cable television operators, to pay royalties in respect of the retransmission of distant television and radio signals.

        Since this legislative amendment, the Copyright Act (Canada) empowers the Copyright Board of Canada to quantify the amount of royalties payable to retransmit these signals and to allocate them among collective societies representing the holders of copyright in the works thus retransmitted. Regulated cable television operators cannot automatically recover such paid retransmission royalties from their customers, although such charges might be a component of an application for a basic cable service rate increase based on economic need.

        Distant television signal retransmission royalties vary from $100 per year for Class 3 cable systems and from $0.30 to $0.65 per customer per month for Class 2 cable systems serving areas with fewer than 1,500 customers and to $0.70 per customer per month for more than 6,000 customers (Class 1 cable systems), except in French-language markets. In French-language markets, there is a 50% rebate for Class 1 and Class 2 cable systems, where the maximum rate is $0.35 per customer per month. The same pricing structure, with lower rates, applies for distant radio signal transmission. All of Vidéotron's undertakings operate in French-language markets. Recently, the collective societies representing copyright holders filed with the Copyright Board of Canada a tariff request to increase to $1.00 per customer per month the distant signal retransmission royalty applicable to systems of more than 6,000 customers for the years 2000 to 2008. In December 2003, the 2003 tariff was extended indefinitely on an interim basis until the Copyright Board rules on the proposed tariff, and a hearing in respect of the proposed tariff has been scheduled for October 2005.

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Royalties for the Transmission of Pay and Specialty Services

        In 1989, the Copyright Act (Canada) was amended, in particular, to define copyright as including the exclusive right to "communicate protected works to the public by telecommunication." Prior to the amendment, it was generally believed that copyright holders did not have an exclusive right to authorize the transmission of works carried on radio and television station signals when these signals were not broadcast but rather transmitted originally by cable television operators to their customers. In 1996, at the request of the Society of Composers, Authors and Music Publishers of Canada (SOCAN) the Copyright Board approved Tariff 17A, which required the payment of royalties by broadcasting distribution undertakings, including cable television operators, that transmit musical works to their customers in the course of transmitting television services on a subscription basis. Through a series of industry agreements, this liability was shared with the pay and specialty programming services.

        In February 2001, the Copyright Board rendered a decision that set the royalty rates payable pursuant to Tariff 17A for 1996 to 2000. The royalty payable by small transmission systems was $10 per year. The monthly royalty payable by transmission systems (other than small transmission systems) for the signals of Canadian and American pay services was 2.1% of the transmitter's affiliation payments to these services in 1996 and 1.8% for the remainder of the tariff period. For all other signals transmitted, the monthly royalty payable by a transmitter is based on the total number of premises served in the system's licensed area and varies from $0.028 to $0.095 for 1996 to $0.044 to $0.155 for 2000. Royalties payable by a system located in a French-language market are calculated at a rate equal to 85% of the rate otherwise payable. Starting in 2001, SOCAN requested substantial increases to the Tariff 17A royalty rates, while several objectors requested changes to the tariff structure and royalty calculations. Starting in 2001, the royalty rates that had been approved for 2000 were continued on an interim basis pending a decision of the Copyright Board on SOCAN's proposed Tariff 17A.

        In March 2004, the Copyright Board changed the name of this tariff from Tariff 17A to Tariff 17 and rendered its decision setting Tariff 17 royalty rates for 2001 through 2004. The Copyright Board changed the structure of Tariff 17 to calculate the royalties based on the revenues of the pay and specialty programming services (affiliation payments only in the case of foreign and pay services, and all revenues in the case of Canadian specialty services) and set a basic royalty rate of 1.78% for 2001 and 1.9% for 2002 through 2004. The basic royalty rate is subject to reductions in certain cases, although there is no French-language discount. SOCAN has agreed that the 2005 tariff will continue on the same basis as in 2004, except for a proposed royalty rate of 2.1%.

Royalties for Pay Audio Services

        The Copyright Board of Canada rendered a decision on March 16, 2002 regarding two new tariffs for the years 1997-1998 to 2002, which provide for the payment of royalties from programming and distribution undertakings broadcasting pay audio services. The tariffs fix the royalties payable to SOCAN and to the Neighbouring Rights Collective of Canada, or NRCC, respectively, during this period at 11.115% and 5.265% of the affiliation payments payable during a month by a distribution undertaking for the transmission for private or domestic use of a pay audio signal. The royalties payable to SOCAN and NRCC by a small cable transmission system, an unscrambled low or very low power television station or by equivalent small transmission systems during this period fixed by the Board at 5.56% and 2.63%, respectively, of the affiliation payments payable during a year by the distribution undertaking for the transmission for private or domestic use of a pay audio signal. Royalties payable by a system located in a French-language market during this period are calculated at a rate equal to 85% of the rate otherwise payable.

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        In February 2005, the Copyright Board rendered its decision setting pay audio services royalties for 2003 through 2006. The Copyright Board fixed the rate of royalties payable to SOCAN and NRCC during this period to 12.35% and 5.85%, respectively, of the affiliation payments payable during a month by a distribution undertaking for the transmission for private or domestic use of a pay audio signal. In addition, the Copyright Board established the rate of royalties payable to SOCAN and NRCC during this period at 6.17% and 2.95%, respectively, for a small cable transmission system, an unscrambled low or very low power television station or an equivalent small transmission system. The Copyright Board also eliminated the previously effective 15% discount to royalties payable by a system located in a French-language market. We have made interim royalty payments for 2003 and 2004 based on the lower royalty rate of the 2002 tariffs. Consequently, there are retroactive royalty obligations owed by us since 2003. Along with all of the other broadcasting distribution undertaking and programming services, we are in the process of settling and paying these retroactive obligations to SOCAN and NRCC.

Tariff in Respect of Internet Service Provider Activities

        In 1996, SOCAN proposed a tariff (Tariff 22) to be applied against Internet service providers in respect of composers'/publishers' rights in musical works communicated over the Internet to Internet service providers' customers.

        SOCAN's proposed tariff was challenged by a number of industry groups and companies. In 1999, the Copyright Board decided that Internet service providers should not be liable for the communication of musical works by their customers, although they might be liable if they themselves operated a musical website. In June 2004, the Supreme Court of Canada upheld this portion of the decision of the Copyright Board and determined that Internet service providers do not incur liability for copyright content when they engage in normal intermediary activities, including web hosting and caching. SOCAN's tariff proposal will, therefore, be subject to further consideration by the Copyright Board to determine what royalties should be paid by content providers in respect of music communicated over the Internet.

Canadian Telecommunications Services

Jurisdiction

        The provision of telecommunications services in Canada is regulated by the CRTC pursuant to the Telecommunications Act (Canada). With certain exceptions, companies that own or operate transmission facilities in Canada that are used to offer telecommunications services to the public for compensation are deemed "telecommunications common carriers" under the Telecommunications Act (Canada) administered by the CRTC and are subject to regulation. Cable operators offering telecommunications services are deemed "Broadcast Carriers."

        The Telecommunications Act (Canada), which came into force on October 25, 1993, as amended, provides for the regulation of facilities-based telecommunications common carriers under federal jurisdiction. Under the Telecommunications Act (Canada), the CRTC may exempt any class of Canadian telecommunications carriers from the application of the Telecommunications Act (Canada) if the CRTC is satisfied that such an exemption is consistent with implementation of the Canada telecommunications policy objectives. The CRTC must refrain from regulating certain telecommunications services or classes of services provided by Canadian carriers, if it finds that such service or class is or will be subject to competition sufficient to protect the interests of users. The CRTC is prohibited from making a determination to refrain if refraining from regulation could likely impair unduly the establishment or continuance of a competitive market for a particular service or class of services.

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        In the Canadian telecommunications market, Vidéotron Télécom operates as a Canadian telecommunications common carrier, while Vidéotron operates as a Canadian broadcast carrier.

Overview of the Telecommunications Competition Framework

        Competition in the Canadian long-distance and local telephony markets is guided to a large extent by the principles set out in Telecom Decision CRTC 92-12, which removed the telephone companies' monopoly in the provision of public long-distance voice telecommunications services, Review of Regulatory Framework , Telecom Decision CRTC 94-19, which sets out the principles for a new, pro-competitive regulatory framework, and Local Competition Telecom Decision CRTC 97-8, which establishes the policy framework for local exchange competition. This latter decision, along with four others (Telecom Decision CRTC 97-9, CRTC Telecom Orders 97-590 and 97-591, as well as CRTC Public Notice 1997-49) comprise the Local Competition Decisions (the "LC Decisions"), which set out many of the terms and conditions for competitive entry in the market for local telephony services. A number of technical, operating and other details are being established through subsequent proceedings and meetings of the CISC.

Application of Canadian Telecommunications Regulation

        In a series of decisions, the CRTC has determined that the carriage of "non-programming" services by cable companies results in the company being regulated as a carrier under the Telecommunications Act (Canada). This applies to a company serving its own customers, or allowing a third party to use its distribution network to provide non-programming services to customers, such as providing access to high-speed Internet services.

        In addition, the CRTC regulates the provision of telephony services in Canada. On May 1, 1997, the CRTC established the regulatory framework for the provision of competitive local telephony services in Canada. Among the key elements of this framework are: a technical form of interconnection based on a co-carrier ( i.e. , peer-to-peer) relationship between the ILEC and CLECs; mutual compensation for traffic termination (including Bill & Keep compensation at low levels of traffic imbalance); effective deregulation of CLEC retail service offerings with the exception of certain social obligations such as the provision of enhanced 911 service; and the imposition of a series of regulatory safeguards on the ILECs to protect against anti-competitive conduct on their part, including retail tariffing requirements, service bundling restrictions and winback restrictions.

        Videotron Telecom, which has been operating as a CLEC under the framework described above for several years, is providing the underlying local network interconnection services for our residential local telephony offering. In this capacity, Vidéotron is acting as a reseller of Videotron Telecom's CLEC services. In a series of rulings dating back to 1997, the CRTC has established that virtually all of the significant regulatory obligations imposed upon CLECs flow through to their resellers, and our residential local telephony offering has been designed on this basis.

        In early 2004, the CRTC launched a regulatory proceeding to consider the advent of local telephony services using Voice over IP technology, and more specifically whether the existing framework for local telephony competition needed to be modified to accommodate these services. A public hearing was conducted in September 2004, and a decision is pending. Because our recently launched telephony service satisfies the current requirements that are applied to the provision of conventional switched local telephone service, we do not believe that any new regulation imposed by the CRTC will prevent us from offering our Voice over IP telephony service. If, however, the CRTC forbears from the regulation of Voice over IP telephony service entirely, or substantially lessens the competitive safeguards applicable to the ILECs, or creates unduly favorable conditions for non-facilities-based Voice over IP service providers, then our Voice over IP offering may have to be substantially altered.

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Right to Access to Telecommunications and Hydro-Electric Support Structures

        The CRTC has concluded that some provisions of the Telecommunications Act (Canada) may be characterized as encouraging joint use of existing support structures of telephone utilities to facilitate efficient deployment of cable distribution undertakings by Canadian carriers. We access these support structures in exchange for a tariff that is regulated by the CRTC. The Supreme Court of Canada, however, has held on May 16, 2003 that the CRTC does not have jurisdiction under the Telecommunications Act (Canada) to establish the terms and conditions of access to the support structure of hydro-electricity utilities. Terms of access to the support structures of hydro-electricity utilities must therefore be negotiated with those utilities.

        We have entered into an agreement for access to the support structures of hydro-electricity utilities in Québec running through December 2005. This agreement is currently being renegotiated for the period commencing in 2006. In Ontario, in response to an application by the Canadian Cable Telecommunications Association, or the CCTA, the Ontario Energy Board, or the OEB, issued a decision on March 7, 2005 establishing uniform terms and conditions of access to electricity distribution structure for the purpose of transmitting cable services, including an annual pole rental charge of $22.35, retroactive to January 1, 1997. While we have limited facilities located in Ontario directly affected by the OEB's decision, the rates and terms and conditions for support structure access set therein will very likely influence negotiations with Québec electricity utilities for the period commencing in 2006.

Building Access

        On June 30, 2003, the CRTC issued Telecom Decision 2003-45 which stated that the provision of telecommunications services by a Local Exchange carrier ("LEC") in a Multi-Dwelling Unit ("MDU") is subject to the condition that all LECs wishing to serve end-users in that MDU be able to access end-users in that MDU on a timely basis, by means of resale, leased facilities or their own facilities, at their choice, under reasonable terms and conditions. By this decision, the CRTC provided the industry with general guidelines for establishing building access agreements between LECs and building owners, and clearly prohibited building owners from charging access fees or forming exclusive or preferred access arrangements with a LEC. The CRTC also indicated that it was prepared to issue orders to address situations where LECs are prevented from providing telecommunications services in an MDU, if, following an application, it was determined that access to an MDU was not or would not likely be provided on a reasonable basis. Contesting the CRTC's jurisdiction, on September 8, 2003, the Federal Court of Appeal granted leave to appeal of the CRTC's Decision 2003-45 to two Canadian building owners associations, namely the Canadian Institute of Public and Private Real Estate Companies ("CIPPREC") and the Building Owners and Managers Association ("BOMA").

Municipal Rights of Way

        In Decision CRTC 2001-23, the CRTC provided the industry with general guidelines for establishing new rights-of-way agreements between carriers and municipalities and other public administrations. Among other things, in this decision the CRTC stated that carriers should not pay annual access fees to municipalities and limited municipalities to recovery of their causal costs associated with carriers exercising their right of access. In December 2002, the Federal Court of Appeal dismissed the Federation of Canadian Municipalities ("FCM") appeal of Decision CRTC 2001-23, and on September 4, 2003, the Supreme Court dismissed the FCM's application for leave to appeal from the judgement of the Federal Court of Appeal. As a result, the jurisdiction of the CRTC over the municipal rights-of-way has been confirmed.

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Municipal Consent

        On December 4, 2003, the CRTC issued Telecom Decision CRTC 2003-82 in which it indicated that it was prepared to consider, on a case by case basis, applications from Canadian carriers seeking to establish that municipal consent was not obtained on terms acceptable to the carrier, if the applicant succeeds in demonstrating that the signed Municipal Access Agreement does not represent proof that the Canadian carrier has obtained, on terms acceptable to it, the consent of the municipality to construct a transmission line. On March 5, 2004, the Federal Court of Appeal dismissed the applications brought by the FCM and several municipalities for leave to appeal Telecom Decision 2003-82 and stated that the court, before deciding a regarding this issue, should wait until the CRTC has, in a CRTC decision, explained the legal basis for it decisions and the relevant regulatory context.

Competitive Digital Network Access Service

        In 2002, the CRTC issued Telecom Decision CRTC 2002-34 in which, among others things, it ordered ILECs to introduce a Competitive Digital Network Access (CDNA) service for the exclusive use of the ILEC competitors. The initial purpose of this service was to provide access between an end-customer premise to a competitor's switch within the same ILEC serving wire centre area or to the ILEC serving wire centre, at a reduced cost-based rates. The CRTC also initiated in 2002 a proceeding (Telecom Public Notice CRTC 2002-4) to examine the ILEC proposed CDNA tariffs and several issues related to the CDNA service.

        On February 3, 2005, the CRTC issued its decision (Telecom Decision CRTC 2005-6) on the outstanding issues related to the CDNA service, now renamed the Competitor Digital Network (CDN) service. This decision substantially expanded the range of network elements and configurations eligible for inclusion in the CDN service, for example to include intraexchange and certain interexchange channels, as well as access facilities terminating at locations other than end-customer premises. These CDN tariffs inevitably constitute a benchmark in the wholesale market as telecommunication service providers request that the equivalent digital network services provided to them be competitively priced to the new, lower CDN prices. Consequently, alternative suppliers of equivalent digital network services, like Vidéotron Télécom, are severely impacted.

Local Interconnection Regime

        In a decision issued on July 14, 2004 (Telecom Decision CRTC 2004-46), the CRTC approved a comprehensive rationalization on the interconnection regime between ILECs and CLECs. Among the significant changes are the creation of large Local Interconnection Regions (LIRs, each comprising many individual telephone exchanges) as the new elementary geographic unit for local interconnection, and the consolidation of various interconnection trunk groups between LECs. These changes are permitting Videotron Telecom to consolidate its points of interconnection, thereby saving interconnection costs and facilitating a more rapid geographic expansion in support notably of Videotron Telecom's local telephony deployment objectives.

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Access by Third Parties to Cable Networks

        In Canada, access to the Internet is a telecommunications service. While Internet access services are not regulated on a retail (price and terms of service) basis, Internet access for third-party Internet service providers is mandated and tariffed according to conditions approved by the CRTC for cable operators.

        On July 6, 1999, the CRTC required certain of the largest cable operators, including Vidéotron, to submit tariffs for high-speed Internet access services, known as open access or third party access, in order to allow competing retail Internet service providers, to offer such services over a cable infrastructure. Some of our tariff elements, most notably the per end-user rate we may charge to third-party Internet service providers, were approved by the CRTC on an interim basis in August 2002. A revised cost study for our per end-user rate was filed with the CRTC in August 2004 and is under consideration. Other tariff elements, most notably those related to our interconnection architecture and service charges, were approved by the CRTC on an interim basis in November 2004. Other technical, operational and business policies to implement access services have been addressed by the CRTC Interconnection Steering Committee, or CISC, and technical tests have been concluded.

        Final tariff rates for our per end-user charge to Internet service providers and our other third-party interconnection service charges will be established pursuant to CRTC follow-up proceedings currently under way. We expect that interconnection by third-party Internet service providers to our cable network will commence in 2005.

        Until third-party access to our cable network is provided, the CRTC requires certain of the largest cable operators, including Vidéotron, to allow third-party retail Internet service providers to purchase for the purpose of resale its retail high-speed Internet services at a discount of 25% off the lowest retail Internet service rate charged by Vidéotron to its cable customers during a one-month period. This resale obligation will cease to be mandated once facilities-based access is available to Internet service providers.

Foreign Ownership Restrictions

        In November 2002, the federal Minister of Industry initiated a review of the existing foreign ownership restrictions applicable to the telecommunications carriers. The House of Commons Standing Committee on Industry, Science and Technology issued a report on April 28, 2003 recommending the removal of foreign ownership restrictions in the telecommunications industry. However, the House of Commons Standing Committee on Canadian Heritage instead recommended the status quo regarding foreign ownership levels for broadcasting and telecommunications companies. Indicating in its response to the Industry Committee's report that it had the responsibility to determine how best to reconcile the committees' conflicting recommendations, the Canadian government undertook to launch an expedited analysis of this question, however, the process has not been formally initiated.

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