A Print Heritage A Digital Future

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					…we’ve turned the page
to become…


                         YELLOW MEDIA INC. ANNUAL REPORT 2010   3
Online.                                    Mobile.                 Digital.
We reach more than 40% of                  Our smartphone apps     YellowPages.ca content is
the online population each                 for iPhone™, iPad™,     now available online and on
month and manage the online                BlackBerry®, Android™   mobile devices, complemented
presence of approximately                  and Windows Phone 7™    by photos, videos, interactive
240,000 advertisers,                       are among the most      maps, rating and reviews and
equal to 65% of our total                  popular productivity    endless possibilities to search,
advertisers.                               applications.           share and communicate.




4   YELLOW MEDIA INC. ANNUAL REPORT 2010
Canada’s #1
Internet company


                   YELLOW MEDIA INC. ANNUAL REPORT 2010   5
                                           “We’ve entered 2011 as a leader
                                            in the online and mobile search
                                            space. We’re well-positioned
                                            to reacquire growth as our digital
                                            transformation propels us forward. ”



                                                      MARC P. TELLIER
                                                      President and Chief Executive Officer




Message to our shareholders                          brand identity, better reflecting our reality as
                                                     a performance media and marketing solutions
The Yellow Pages brand has been waiting over         company. The new brand positions us as
100 years for digital. Over the decades, we’ve       resolutely modern, innovative, and above all,
built longstanding relationships with businesses.    digital. Yet, we kept our most important asset,
As a result, we are the hallmark of local search     our trademarked Walking Fingers™ – one of the
in the country. And now we’re a leading player in    most recognized icons worldwide – and made our
the digital sphere.                                  famous yellow colour bolder.

The past year was an important period in the         In one short year, we succeeded in
history of Yellow Pages Group. Long known as         complementing our century-long leadership in
a “print” company, we seized the proverbial bull     print with a commanding position in the digital
by the horns and began 2010 with a new               local search space.


6   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                        A more personal user experience

                                       • My Account: Ability to create
                                          user account
                                       • Ratings & reviews
                                       • Photos and HD videos
                                       • Optimized map-based search
                                       • Social media plug-ins




We enhanced our existing online services,              At the same time, we took prudent steps to
grew our mobile offering, conducted a number           further stabilize the business.
of strategic acquisitions, and developed key
partnerships, all of which contribute to our digital   Key among these actions was our successful
growth and expansion.                                  conversion to a dividend-paying public corporation
                                                       on November 1, 2010. Since January 2011, under
Our strategy remains simple: Leverage our              YPG’s new corporate structure, Yellow Media Inc.
multiplatform media and marketing solutions            pays an annual dividend of $0.65 per share.
thereby enhancing services to our advertisers;         Dividends continue to be paid on a monthly basis.
build traffic to our network of properties; and
improve the user experience.




                                                                               YELLOW MEDIA INC. ANNUAL REPORT 2010   7
                                                             • The destination of choice
                                                                for deals and discounts

                                                             • Canada’s largest
                                                                shopping community




Concurrent with the conversion to a corporate        For 2010, our consolidated revenues reached
structure, Yellow Media Inc. adopted a Dividend      $1.68 billion compared to $1.64 billion in 2009.
Reinvestment Plan which enables shareholders to      Online revenues represented a significant growth
automatically have their cash dividends reinvested   driver. For the year ended December 31, 2010,
in additional common shares of Yellow Media Inc.     online revenues reached $445.3 million,
                                                     representing organic growth of 16 percent, and
We also continued to maintain a best-in-class        27 percent of total revenues. EBITDA for the year
performance through strong EBITDA conversion.        before rebranding and conversion costs was
We are reinvesting these cost savings into new       $899 million compared to $893 million
products and services that will enable us to         in 2009.
reacquire growth in the short to medium term.




8   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                OF    TM



                                                  THE DAY
                                                  Daily deals to drive leads
                                                  to advertisers and savings
                                                  to consumers

                                                  • Serves Toronto, Montreal, Vancouver,
                                                    Calgary, Ottawa-Gatineau and
                                                    Quebec City shoppers
                                                  • Save up to 95% on local restaurants,
                                                    shopping, entertainment and events

                                                  • Purchase deals as gifts
                                                    or refer a friend for dollars




Acquisitions to accelerate transformation                Reinforcing our commitment to helping consumers
                                                         make smarter purchase decisions was the
To accelerate our ongoing digital transformation,        acquisition of RedFlagDeals.com, the largest
we made several strategic acquisitions in 2010,          source of discounts and coupons on the web and
expanding our online network reach and increasing        mobile with over 1.5 million unique visitors each
the traffic we drive to businesses.                      month. Online coupons and deals are capturing
                                                         an increasingly important share of consumer-
Restaurantica.com, one of the country’s largest          related traffic. Not only are users looking for deals
restaurant and dining communities, marked our            online, but retailers are using the Internet as a
foray into ratings and reviews and led to the            distribution channel for their sales items. With
implementation of this feature on our flagship           RedFlagDeals.com, we now have access to one
YellowPages.ca site.                                     of the major online destinations where smart
                                                         Canadians shop, allowing us to tap directly into
                                                         the consumer market.

                                                                                    YELLOW MEDIA INC. ANNUAL REPORT 2010   9
                                                               • Local search company with
                                                                  strong digital capabilities
                                                               • Mobile apps
                                                                  for iPhone™,
                                                                  BlackBerry®
                                                                  and Android™
                                                                  smartphones




Building on the brand strength and consumer           power of savings to consumers and generate
loyalty to our shopping properties, we launched a     greater visibility and traffic for participating
group buying service hosted by RedFlagDeals.com       businesses.
and LesPAC.com, the leading French-language
online classifieds ads site. Deal of the Day and      Another significant acquisition was that of Canadian
Promo du jour each feature one deal a day offering    Phone Directories Holdings Inc. (“Canpages”),
up to 95% savings on goods and services.              finalized in June for a purchase price consideration
Subscribers can take advantage of these savings       of approximately $225 million.
by purchasing a given deal which activates once
a minimum number of subscribers have agreed           The addition of Canpages enables us to further
to buy. With our group buying service, we bring the   expand our sales force, online capabilities,




10   YELLOW MEDIA INC. ANNUAL REPORT 2010
                             Digital marketing solutions for
                             national advertisers and agencies

                             • Access to approximately 70%
                               of the online population
                             • Offices in Montreal, Toronto,
                               Kelowna, and Vancouver
                             • Clients include:
                               Future Shop, Wal-Mart
                               and Toys “R” Us




advertiser offerings, and to better compete in          businesses: Enquiro, a leading search engine
the digital world.                                      marketing company; Ad Splash Media, a national
                                                        retail advertising leader; and UPTREND Media,
Additional investment in late 2010 further solidified   a leading independent online advertising
our position as a leading performance media and         representation firm. We also entered into an
marketing solutions company and culminated in           exclusive licensing agreement with Acquisio, a
the launch of Mediative, a company dedicated to         world-leading performance marketing platform,
serving national agencies and advertisers.              giving Mediative customers access to Acquisio’s
                                                        search, social and display advertising services in
Mediative was built out of the existing national        this country.
services expertise of YPG, Canpages and TRADER
Corporation, bringing together three very successful



                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010   11
                                                  Canada’s largest automotive
                                                  selection now goes where you go

                                                  • Free app for iPhone™ and BlackBerry®
                                                  • 300,000 vehicles available
                                                    for consultation

                                                  • Offers comparison and
                                                    location-based
                                                    shopping




TRADER business recovering                        helping them manage their inventory and
                                                  promote their dealership.
While residual effects from the recent economic
downturn continue to impact portions of the       Building on this success, in 2010 we launched
TRADER business, notably the real estate and      a new version of Dealer Smart Solutions, tailored
generalist categories, the automotive business    to the needs of non-passenger vehicle (NPV)
demonstrated recovery in 2010. Now rolled         dealers. The market response was enthusiastic,
out nationally, Dealer Smart Solutions has        as we succeeded in up-selling many of these
been largely responsible for stabilizing TRADER   dealers from print to higher-performing digital
Corporation, as auto dealers embraced an online   solutions.
solution that generates sales leads while also




12   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                Integrated online approach
                                                to lead generation for dealers

                                               • Currently used by 46% of TRADER
                                                  dealers
                                               • Recently expanded to include non-
                                                  passenger vehicle (NPV) segment
                                               • Scalable, search engine optimized
                                                  websites

                                               • Analytics, tracking and performance
                                                  management




Trusted source of consumer
information for vehicle purchases

• Award-winning online publication
• Most comprehensive
  “Buyer’s Guide” in Canada




Also in 2010, TRADER strengthened its hold on the       enthusiastic and committed as we redefine
automotive category by acquiring CanadianDriver.com,    ourselves in the media world. Change has come
an award-winning and highly respected online            to our business and our employees have helped
magazine for car enthusiasts and buyers featuring       drive our digital shift every step of the way,
over 11,000 articles, reviews, test drives and          forming the engine of our transformation.
breaking news.
                                                        Our achievements to date and our future successes
The road ahead                                          are in large part due to the strengths and talents of
                                                        the individuals who make up our companies. Their
While we’ve expanded with the additions of new          level of dedication reinforces our confidence and
properties and expertise, at the core of our            strengthens our determination as we begin a brand
companies remains our employees. They remain            new chapter in our history.



                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010   13
              Making waves in mobile search

            • Leading local search application
            • Available on iPhone™, BlackBerry®,
                Android™, iPad™ and
                Windows Phone 7™
            • 20% of all YellowPages.ca
                online searches come from
                our mobile apps




We entered 2011 buoyed by a healthier economic      growing product portfolio, we are well-positioned
environment, growing advertiser activity and new    to regain growth in 2011 and to continue the
additions to our advertiser product offering such   changes we’ve begun.
as website creation and management services.
                                                    We’ve turned a page as a company and
Our transformation is far from over. With our       as an industry leader, we are now writing
dedicated workforce, our digital innovations and    our future.




14   YELLOW MEDIA INC. ANNUAL REPORT 2010
Our future is digital.
That future has arrived.

MARC L. REISCH   MARC P. TELLIER
Chairman         President and
of the Board     Chief Executive Officer

                                           YELLOW MEDIA INC. ANNUAL REPORT 2010   15
We’re committed to healthy
environments both inside our
operations and outside our walls.

Taking active steps to reduce our environmental impact

• Offering consumers choice
     - Opt-out of receiving print directory                              The real impact of a print directory
       at ypg.com/delivery                                               in carbon emissions (kg CO2e)
     - Opt-in of residential directories in seven cities

• Approximately 25% reduction in paper
     consumption in just two years through                               2 loads       Lifecycle     250 g         Producing   Weekly
     distribution, sizing and page count initiatives                     of laundry,
                                                                         washed
                                                                                       of a Yellow
                                                                                       Pages
                                                                                                     pack of
                                                                                                     blueberries
                                                                                                                   one pair
                                                                                                                   of jeans
                                                                                                                               commute
                                                                                                                               (72 km/
                                                                         and           directory     from Chile                week)
                                                                         cleaned

• Approximately 50% reduction in paper                                   1.7           2.2           2.4           6           10
     consumption in our office operations over                           kg CO2e       kg CO2e       kg CO2e       kg CO2e     kg CO2e

     the last two years




Sustainable                                 Renewable energy                           Fully recyclable
choice of paper                             paper production                           directory
Our directory paper is made                 All our directory paper is                 85% of used directories are
from post-consumer recycled                 produced using 80% renewable               recycled, one of the highest
fibre and waste wood from                   energy sources such as hydro-              material recycling rates in
responsibly-managed forests                 electricity and biomass energy.            Canada.
(FSC-, SFI- or CSA-certified).




16   YELLOW MEDIA INC. ANNUAL REPORT 2010
Among Canada’s
Top Employers

• Inducted into Canada’s
  10 Most Admired
  Corporate Cultures
  Hall of Fame

• Recognized as one
  of Canada’s Top
  100 Employers
• TRADER named one of
  Greater Toronto’s
  Top Employers




We work with environmental
organizations such as Équiterre
and Green Communities Canada
                                  Partnerships that
to improve our ecological
performance. We also support      make a difference
causes important to our
employees such as the Canadian
Cancer Society.




                                               YELLOW MEDIA INC. ANNUAL REPORT 2010   17
                                                            Y            a
                                                            YellowPages.ca™




                               Mobile Apps                                                   Websites




                                                                                                  Y
                                                                                                  Yellow Pages™
                                                                                                    Directory
               Search Engine
                 Solutions




                                            Digital Media                     Performance
                                               Advice                           Reports




Meeting                                                             Marketing a business in today’s world has become
                                                                    increasingly complex - with search engines, mobile
                                                                    smart phones, social media, word of mouth,
the marketing                                                       daily deals, videos, websites and much more
                                                                    to consider. We know business owners need

needs of today’s                                                    effective and simple advertising solutions that
                                                                    let them focus on what they do best.

businesses                                                          After more than 100 years of experience
                                                                    connecting buyers and sellers, what we do
                                                                    hasn’t changed. But how we do it has evolved
                                                                    tremendously.



18   YELLOW MEDIA INC. ANNUAL REPORT 2010
2010
Financial Review




Table of contents
Management’s Discussion and Analysis ....................................20
Management’s Report .................................................................56
Independent Auditor’s Report ..................................................... 57
Consolidated Balance Sheets .....................................................58
Consolidated Statements of Earnings ........................................59
Consolidated Statements of Comprehensive Income ...............60
Consolidated Statements of Equity....................................... 61-62
Consolidated Statements of Cash Flows ....................................63
Notes to the Consolidated Financial Statements ..............64-100




                                         YELLOW MEDIA INC. ANNUAL REPORT 2010        19
Management’s Discussion and Analysis



Management’s Discussion and Analysis
February 10, 2011

This management’s discussion and analysis (MD&A) is intended to help the reader understand and assess trends and significant
changes in the results of operations and financial condition of Yellow Media Inc. (previously Yellow Pages Income Fund or the
Corporation) and its subsidiaries for the years ended December 31, 2010 and 2009 and should be read in conjunction with our
audited consolidated financial statements and accompanying notes. Quarterly reports, the annual report and supplementary
information can be found under the Financial Reports section of our corporate web site: www.ypg.com. Additional information,
including our annual information form (AIF), can be found on SEDAR at www.sedar.com. In this MD&A, the words “we”, “us”, “our”,
“the Company”, and “YPG” refer to Yellow Media Inc., and its subsidiaries (including Yellow Pages Group Co., Canpages Inc., YPG
(USA) Holdings, Inc. and Yellow Pages Group, LLC (collectively YPG USA), Trader Corporation, LesPAC s.e.n.c. (LesPAC), and Dealer
Dot Com Inc.), which are reported under the following segments:

           “Directories,” which refers to our print and online directories as well as performance marketing solutions; and
           “Vertical Media,” which refers to our print and online vertical publications as well as performance marketing solutions, which
           are targeted to specific audiences (or verticals) based on topic or area of interest – such as automotive or real estate.

Yellow Media Inc. was incorporated under the laws of Canada as a wholly-owned subsidiary of Yellow Pages Income Fund (the
Fund). The Company entered into a plan of arrangement, which became effective on November 1, 2010.

On November 1, 2010, the Plan of Arrangement became effective resulting in the conversion of YPG’s income trust structure
into a dividend paying publicly-traded corporation named Yellow Media Inc. Unitholders of the Fund received, for each unit of
the Fund held, one common share of Yellow Media Inc.

On that same date, the units of the Fund were delisted from the Toronto Stock Exchange and trading of the common shares of
Yellow Media Inc. on the Toronto Stock Exchange under the symbol “YLO”.

The conversion was treated as a change in business form and was accounted for as a continuity of interests; as such the carrying
amounts of assets, liabilities and unitholders’ equity in the consolidated financial statements of the Company immediately before
the conversion was the same as the carrying values of Yellow Media Inc. immediately after the conversion. Comparative amounts in
this MD&A and future MD&A and financial statements are those of the Fund. Yellow Media Inc. will refer to common shares,
shareholders and dividends which were formerly referred to as units, unitholders and distributions under the Fund. Yellow Media Inc.’s
conversion from a trust to a corporation had no effect on its strategic or operational objectives.

As part of the conversion, YPG LP was liquidated and dissolved and its assets were distributed to and assumed by YPG General
Partner Inc. (YPG GP) and YPG Trust (the Trust) on a pro rata basis. The Trust was then liquidated and dissolved and its assets and
liabilities were distributed and assumed by the Fund. The Fund was wound up into Yellow Media Inc. Yellow Media Inc.
amalgamated with YPG GP, YPG Holdings Inc., Canpages Holdings and another numbered company (Trusteeco) to form the current
Yellow Media Inc.

Forward-looking information
Our reporting structure reflects how we manage our business and how we classify our operations for planning and for measuring
our performance. This MD&A contains assertions about the objectives, strategies, financial condition, results of operations and
businesses of YPG. These statements are considered “forward-looking” because they are based on current expectations of our
business, on the markets we operate in, and on various estimates and assumptions.

These forward-looking statements describe our expectations on February 10, 2011.

           Our actual results could be materially different from our expectations if known or unknown risks affect our business, or
           if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking
           statements will materialize.
           Forward-looking statements do not take into account the effect that transactions or non-recurring items, announced or
           occurring after the statements are made, may have on our business.
           We disclaim any intention or obligation to update any forward-looking statements, except as required by law, even if
           new information becomes available through future events or for any other reason. Consistent with our historical
           practice, we do not intend to provide quarterly guidance for key performance metrics. Our preference remains to
           review on a periodic basis, through our MD&A, our progress in reaching our stated objectives for the full year taking
           into account changes in the economic environment, local operating and economic conditions, direct and indirect
           competition for our products and other relevant factors.
           Risks that could cause our actual results to differ materially from our current expectations are discussed in Section 8 – Risks
           and Uncertainties.


20   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                     Management’s Discussion and Analysis



Definitions relative to understanding our results
Income from Operations before Depreciation and Amortization, Acquisition-related Costs, Impairment of Goodwill and
Restructuring and Special Charges (EBITDA)
We report on our EBITDA (Income from operations before depreciation and amortization, acquisition-related costs, impairment of
goodwill and restructuring and special charges). EBITDA is not a calculation based on GAAP and is not considered an alternative to
income from operations or net (loss) earnings in the context of measuring YPG’s performance. EBITDA does not have a
standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies.
For a reconciliation with GAAP, please refer to Consolidated Operating and Financial Results in Section 3 of this MD&A. EBITDA
should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes,
capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed on page 44 of this MD&A.

Adjusted Earnings
Adjusted earnings is a non-GAAP measure. It is defined as the net income available to shareholders excluding amortization of
intangible assets attributable to shareholders, conversion and rebranding costs, acquisition-related costs, restructuring and special
charges, other non-recurring items and non-cash financial charges and future income taxes. All adjustments except future income
taxes are net of the income tax effect thereon calculated at the statutory income tax rate. Adjusted Earnings is defined as an
indicator of financial performance. It should not be seen as a measurement of liquidity or as a substitute for comparable metrics
prepared in accordance with GAAP. Adjusted earnings is used by investors, management and other stakeholders to evaluate the
ongoing performance of YPG. Adjusted earnings may differ from similar calculations as reported by other companies and should
not be considered comparable. For a reconciliation with GAAP, please refer to Section 5 – Adjusted earnings of this MD&A.

Free cash flow
Free cash flow is a non-GAAP measure generally used as an indicator of financial performance. It should not be seen as a
substitute for cash flow from operating activities. Free cash flow is defined as cash flow from operating activities, as reported in
accordance with GAAP less adjustment for capital expenditures.

Dividends per Common Share
We report dividends per share because it is a measure of return used by investors. Dividends per common share depend on our
adjusted earnings and YPG’s dividend policy. We make monthly cash dividends to holders of common shares of record on the
last business day of each month. For a description of our cash dividend policy, please refer to Section 5 of this MD&A.

This MD&A is divided into the following sections:

1.       Our Business, Mission, Strategy and Capability to Deliver Results
2.       Conversion From an Income Trust to a Corporation
3.       Results
4.       Liquidity and Capital Resources
5.       Adjusted Earnings
6.       Outlook
7.       Critical Assumptions
8.       Risks and Uncertainties
9.       Controls and Procedures

1. Our Business, Mission, Strategy and Capability to Deliver Results
Our Business
Yellow Media Inc. is a leading media and marketing solutions company through its network of companies that include
Yellow Pages Group (YPG), Trader Corporation (Trader) and Canpages Inc. (Canpages). YPG is Canada’s leading performance
media and marketing solutions company, serving Canadian businesses and consumers nationwide under its Yellow Pages and
Canpages brands. Canpages is Canada’s fastest growing local search company. Trader is a national leader offering integrated
media and performance solutions in the automotive, real estate and generalist verticals. This section provides an overview of
our business, our current priorities and how we strive to manage our operations.

Directories
This business segment is composed of YPG and Canpages.

YPG is Canada’s leading digital and print local commercial search provider while Canpages is Canada’s fastest growing local
search company.




                                                                                                 YELLOW MEDIA INC. ANNUAL REPORT 2010   21
Management’s Discussion and Analysis



We serve approximately 365,000 local businesses excluding Canpages, through our nation-wide sales force of over 1,460 media
consultants. YPG also caters to the country’s largest national agencies and advertisers through Mediative, its digital advertising and
marketing solutions division.

We own and operate some of Canada’s leading properties and publications including Yellow Pages™ directories, Canpages™
directories, YellowPages.ca™, Canada411.ca™ and RedFlagDeals.com. Our online destinations reach over 11 million unique
visitors monthly. YellowPages.ca™ can be accessed on mobile devices, at mobile.yp.ca on cellular phones and through mobile
applications on BlackBerry™, Apple iPhone™, iPad™ and Google™’s Android™. Our mobile applications for finding local
businesses, deals and vehicles have been downloaded over 2 million times.

In addition, we are the official directory publisher for Bell Canada (Bell), TELUS Communications Inc. (TELUS), Bell Aliant
Regional Communications LP (Bell Aliant), MTS Allstream Inc. and for a number of other incumbent telephone companies that
have a leading share in their respective markets. We publish annually more than 410 different telephone directories with a
total circulation of approximately 29 million copies.

Our directories are delivered into almost every household and business in our markets, and are available online and through a
variety of digital options. Our content is rich and diverse which draws consumers to our directories and in so doing generates
leads, calls, visits and clicks, and in turn attracts yet more advertisers.

YPG is the exclusive owner of the Yellow Pages™, Pages Jaunes™ Walking Fingers & Design™ and Canada411™ trademarks in Canada.

Vertical Media
Trader is a leader in print and digital vertical media in automotive, real estate and generalist verticals. Trader has over 140
publications and 20 web sites.

Trader is the leading Canadian new and used car destination with its AutoTrader.ca™ web site. Trader offers dealers a broad
set of services such as inventory management, web solutions, optimization of media spend and lead-generation campaigns. Its
flagship site AutoTrader.ca reaches over 2 million unique visitors monthly. Trader’s main brands include AutoTrader.ca™,
lesPAC.com, CanadianDriver.com, autoHEBDO.net™, BuySell.com™, and Renters Guide.

Mission
Bringing local consumers and businesses together via our network of mobile, web and print properties.

Strategy
We have implemented a business strategy to improve our operations and achieve sustainable growth in revenues and
profitability while pursuing two avenues for growth: organic and external.

Our strategy remains to leverage our multiplatform media and marketing solutions, to enhance services to our advertisers, build
traffic to our network of properties and improve user experience.

Organic Growth
Organic growth means creating new opportunities to extend and enhance our existing print, online, mobile product and service
offerings. This brings greater value to existing assets, provides new advertising opportunities to our advertisers and gives users
new capabilities to find what they need, when and where they need it.

We remain focused on the following areas to drive organic growth:
          Enhancing both YPG and Trader product offerings and solutions in response to evolving consumer and advertiser needs
          to generate additional revenue streams;
          Securing compelling online and mobile opportunities for our advertisers and users;
          Leveraging relationships with key portals; and
          Exploring new efficiencies in the sales process in both Directories and Vertical Media.

External Growth
External growth means acting on opportunities to create new sources of revenue, largely through acquiring or developing new
assets. During the past several years, we have acted decisively and effectively in this area through the acquisition of new
directory operations and through our entry into Vertical Media. More recently, with the creation of Mediative, we have made
more targeted, smaller scale acquisitions and investments to enhance our capability to launch and deliver new products and
solutions or increase the depth and breadth of our content to improve consumer experience and therefore increase web traffic
to our properties.


22   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                  Management’s Discussion and Analysis



Sustainable Profitability
We achieve profitability by maximizing our operating efficiency and constantly reviewing all of our operations with a view to
ensuring we maintain a competitive cost structure. Improving our cost structure remains a key priority and will continue to be
achieved through:
          Business process redesign;
          Cost containment initiatives; and
          Investment in technology to better support our operations and customer service.

Directories
For a review of developments and performance relative to key priorities identified for 2010, see Section 3 – Results.

Our key priorities for 2011 in our directory business are:
          Effective go to market, commercialization and support of our recent product introductions;
          Enhancement of our product and service offering to improve advertiser and user experience.

Effective go to market, commercialization and support of our recent product introductions
In 2011, we will remain focused on the support and roll-out of our recent product introductions. This will require continued
investment in sales force training and support operations, as well as customer service.

Enhancement of Product Services
The 2011 growth plan entails building upon the drivers listed below:
          Websites – In 2011, we will begin selling Website solutions to advertisers. We believe this will answer a significant
          need in the market place. We will help small and medium enterprises (SMEs) to create a quality showcase of their
          business which will offer an engaging experience for their customers online. Advertisers will be able to select from a
          range of website options and tools flexible enough to fit their business needs;
          National strategy – In 2010, we created Mediative, a company dedicated to serving national agencies and advertisers.
          Mediative offers unique digital marketing solutions and expertise to national agencies and advertisers. It is the next
          step in YPG’s digital growth strategy and our objective to grow our share of the national advertising market;
          Mobile – YellowPages.ca mobile applications have now been downloaded more than 2 million times. During the
          month of December, over 20% of our online searches were performed using a mobile device. In 2011, we will
          continue to focus and invest in the mobile user experience both by continuing to improve the mobile applications and
          by further leveraging and enhancing our deep local content;
          Customer Acquisition – In 2011, focus will remain on customer acquisition efforts as strategies, offers and processes
          are further refined and optimized;
          Canpages – The acquisition of Canpages positions us to better compete in the digital world, expand online capabilities,
          user features and advertiser offerings and enables us to expand our sales force, improving our sales coverage.

Vertical Media
For a review of developments and performance relative to key priorities identified for 2010, see Section 3 – Results.

Our key priorities for 2011 in Vertical Media are:
          Enhancement and expansion of our product and service offerings; and
          Improve user experience.

Enhancement and expansion of our product and service offerings
          Dealer Smart Solutions – Passenger and non-passenger Vehicles. Trader will continue to extend and leverage Dealer
          Smart Solutions (DSS) through continued customer conversion and acquisition, package upgrades and increased
          customer spend (product and service extensions e.g. additional print, SEM, etc). Acquisition of new customers is
          expected to occur through extension of the approach whereby dealer group principals are approached as opposed to
          the individual dealerships. Improved acquisition and conversion is expected to occur through a new servicing model
          that has been developed for the sales organization that better aligns service with customer needs. Finally, a new
          compensation plan that is effective in January will award sales reps who are able to acquire and migrate customers
          toward DSS. In addition to these initiatives, other extensions to the DSS solution set are also being evaluated with
          potential implementation in 2011;

                                                                                               YELLOW MEDIA INC. ANNUAL REPORT 2010   23
Management’s Discussion and Analysis



           Real Estate Smart Solution – The real estate vertical has remained largely a print business focused on new homes and
           condominiums as well as rental categories. In collaboration with Dealer.com, a web site solution has been developed
           to target the resale category and the agent-broker-banner community, more specifically. The product and price point
           have been developed on the basis of the needs of this user group and the preliminary plans are to sell this product
           directly through the Trader sales force as well as through a team of new sales representatives in the Canpages
           organization who will specialize in real estate.

Improve User and Advertiser Experience
           Website and mobile enhancements are continuing to be developed in order to improve the search engine and user
           experience through a clean up of the search data and filters.

Capability to Deliver Results
This section of our MD&A explains how we are positioned to continue to operate our business on a financially viable and
progressive basis.

Capital Resources
YPG generates sufficient cash flow from its operations to fund its dividends to shareholders, to support required capital
expenditures and to service its debt obligations. Its cash flow, along with its ability to access external capital if necessary, and
the availability under its long term committed bank facilities provide sufficient resources to finance its cash requirements in the
foreseeable future while maintaining adequate liquidity. Please refer to Section 4 – Liquidity and Capital Resources of this
MD&A for an analysis of the company’s ability to generate sufficient cash and to access financial resources to meet operating
needs in the current market environment.

Non-capital Resources
YPG’s critical intangible resources include:
           Strong brands;
           Established relationships with customers;
           Breadth and depth of local content;
           Dedicated and experienced employees; and
           Culture and values that characterize our organization.

Strong Brands
YPG is the exclusive owner of a number of leading brands which have high-recognition value among our various audiences
including Yellow Pages, Pages Jaunes, Walking Fingers Design and Canada411 trademarks in Canada.

Established Relationships with Customers
We employ a sales force of approximately 2,000 people across our two segments, including sales support staff. This large and
primarily face-to-face sales force is broken down into various customer segments allowing a more dedicated relationship
between the sales force and the SMEs resulting in 88% of our advertisers renewing their advertising with us each year.

Print and Online Content
The quality of our print and online content generates usage which in turn encourages local and national advertisers to advertise
in our print and online properties in both our Directory and our Vertical Media segments.

Employees
Our employees have consistently improved our operations. Despite economic challenges, our employees have executed on the
initiatives needed to build an impressive track record and we are confident that they will continue to remain focused on our
common objectives.

Culture and Values
We have a performance-based culture. That culture is defined by all of our values and influences our thinking and our actions
which drive our desire to compete to win. This focus on performance also dictates the competencies and skills we seek to
attract and retain. All our employees are expected to value teamwork and be focused on our customers; they should act with
integrity, respect and passion for the job at hand while maintaining open communications.

We believe that our culture and our values form the foundation of this organization and are critical to its sustained success.

24   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                Management’s Discussion and Analysis



2. Conversion From an Income Trust to a Corporation
Path to Conversion
During the first quarter of 2010, the Company announced the details of the Plan of Arrangement which was intended to lead to
the conversion of the Company from an income trust to a traditional dividend paying public corporation.

As part of this Plan of Arrangement, the Company obtained an interim order on March 24, 2010 from the Superior Court of Québec.

The interim order of the Court confirmed the calling of an annual and special meeting (the Meeting) of YPG’s unitholders on
Thursday, May 6, 2010 for the purpose of considering the Plan of Arrangement.

In order to become effective, the Plan of Arrangement required the receipt of all necessary court, regulatory and Toronto Stock
Exchange approvals and other customary conditions, along with the approval by at least 66 2/3% of the votes cast by YPG
unitholders voting in person or by proxy at the Meeting. This approval was obtained on May 6, 2010, when YPG unitholders
adopted by a vote of 99.8% the Plan of Arrangement.

On October 1, 2010, YPG appeared before the Superior Court of Québec in order to obtain a final order with respect to the Plan
of Arrangement. A final order approving YPG’s Plan of Arrangement was then issued.

On November 1, 2010, the Plan of Arrangement became effective resulting in the conversion of YPG’s income trust structure
into a dividend paying publicly-traded corporation named Yellow Media Inc. Unitholders of YPG received, for each unit of YPG
held, one common share of Yellow Media Inc.

On that same date, the units of the Fund were delisted from the Toronto Stock Exchange and trading of the common shares of
Yellow Media Inc. on the Toronto Stock Exchange commenced under the symbol “YLO”.

Dividend payments and dividend policy

The monthly dividend for the months of November and December 2010 were maintained at $0.0667 ($0.80 annually) per
common share of Yellow Media Inc. November and December 2010 dividends were payable to holders of record of common
shares on November 30, 2010 and December 31, 2010, respectively, and were paid on December 15, 2010 and January 17, 2011,
respectively.

Starting in January 2011, Yellow Media Inc. will pay a monthly dividend of $0.0542 ($0.65 annually) per common share of
Yellow Media Inc. The first monthly dividend was declared in January for the holders of record as of January 31, 2011 and will
be paid on February 15, 2011.

The dividend policy in respect of the common shares of Yellow Media Inc. will be subject to the discretion of the board of
directors of Yellow Media Inc. and may vary depending on, among other things, Yellow Media Inc.'s earnings, financial
requirements, the satisfaction of solvency tests imposed by the Canada Business Corporations Act for the declaration of
dividends and other conditions existing at such future time.

Accounting impact of the conversion

The Company followed the guidelines included in Abstract 170 of the Emerging Issues Committee, Conversion of an
unincorporated entity to an incorporated entity (EIC-170) to reflect the impact of the conversion.

The conversion was treated as a change in business form and was accounted for as a continuity of interests; as such the
carrying amounts of assets, liabilities and unitholders’ equity in the consolidated financial statements of the Company
immediately before the conversion will be the same as the carrying values of Yellow Media Inc. immediately after the
conversion. The comparative figures are those of the Fund. The stated capital of Yellow Media Inc. in respect of the common
shares was reduced by an amount of $2 billion and contributed surplus was increased by the same amount.




                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010   25
Management’s Discussion and Analysis



3. Results
This section provides an overview of our financial performance in 2010 compared to 2009 and 2009 compared to 2008. It is
also important to note that in order to help investors better understand our performance we rely on several metrics, some of
which are not measures recognized by GAAP. Definitions of these financial metrics are provided on page 21 of this MD&A and
are important aspects which should be considered when analyzing our performance.

Overall Performance
                Revenues increased by $40 million or 2.4% over the previous year to $1,679.9 million.
                Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill and
                restructuring and special charges decreased by $43.1 million or 4.8% to $850.3 million over the previous year.

Highlights by Segment1,2
(in thousands of Canadian dollars– except share information)
                                                                                                                                           Years ended December 31,
                                                                                  Directories                      Vertical Media                               Consolidated
                                                                  2010                    2009              2010           2009                  2010                   2009
Revenues                                                  $1,365,276            $1,392,029              $314,584      $247,855         $1,679,860               $1,639,884
Income from operations before depreciation
   and amortization, acquisition-related costs,
   impairment of goodwill and restructuring
   and special charges (EBITDA)                              $759,333              $821,904              $90,982        $71,534            $850,315               $893,438
Basic earnings per share3 attributable to
                                                                                                                                                 $0.53                  $0.40
  common shareholders of Yellow Media Inc.
Cash flow from operating activities                                                                                                        $646,536               $750,187
Free cash flow4                                                                                                                            $573,666               $706,622
EBITDA before conversion and
                                                                                                                                           $898,844               $893,438
  rebranding costs
1    The 2009 comparative figures are those of the Fund. Included in the 2010 figures are the results of the Fund for the period from January 1 to October 31, 2010.
2    We closed the acquisitions of Dealer Dot Com Inc. (Dealer.com) on January 5, 2010, Restaurantica.ca (Restaurantica) on January 8, 2010, Clear Sky Media Inc.
     (RedFlagDeals.com) on February 9, 2010, Canpages Inc. (Canpages) on May 25, 2010, CanadianDriver Communications Inc. (CanadianDriver) on July 9, 2010,
     Mediative Performance LP (Mediative LP), previously Enquiro Search Solutions Inc. on September 21, 2010, Uptrend Media Inc. (Uptrend Media) on October 20, 2010
     and AdSplash Inc. on October 28, 2010. As such, included in the 2010 results are the results of each acquired business from their respective dates of acquisition.
3    Comparative amounts are per Trust unit.
4    Please refer to Section 5 for a reconciliation of Adjusted Earnings and free cash flow.



     Revenues                                                       EBITDA                                                          EBITDA before conversion
     (in millions of dollars)                                       (in millions of dollars)                                        and rebranding costs
                                                                                                                                    (in millions of dollars)

                                2.4%                                                           (4.8%)
     2,000                                                                                                                                               0.6%
                                       1,679.9                     1000           893.4
                   1,639.9                                                                              850.3                       1000        893.4           898.8
                                                                                   71.5
     1,500           247.9             314.6                        800                                  91
                                                                                                                                     800

                                                                    600                                                              600
     1,000
                                                                                   821.9                 759.3
                    1,392              1,365.3                      400                                                              400
      500
                                                                    200                                                              200

         0                                                             0                                                               0
                     2009               2010                                       2009                  2010                                   2009             2010
                     Vertical Media                                             Vertical Media
                     Directories                                                Directories




26     YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                   Management’s Discussion and Analysis



Performance Relative to Business Strategy
Organic growth
As we position Yellow Media Inc. as Canada’s #1 Internet Company and a leading performance media and marketing solutions
provider our focus in 2010 was:
         To improve the user experience;
         To grow traffic to our network of properties; and
         To expand our advertiser offering and value proposition.

Directories
         User Experience – In 2010, significant effort was invested in enhancing the user experience. Following four releases
         of upgrades to our flagship online properties, consumers are enjoying an enhanced experience on yellowpages.ca.
         Early in the year YPG re-launched YellowPages.ca to better reflect the Company’s new brand image. The improved site
         provides consumers with a personalized user interface and local search functionality to help them make more
         informed buying decisions. Improvements also include the integration of ratings and reviews, video features enhanced
         with high-definition format and a redesigned full-screen video player with a photo gallery, and the integration of
         Facebook Social Plugins and YellowPages.ca account that make the user experience more personalized and social on
         YellowPages.ca;
         Mobile – We continue to focus and invest in the mobile user experience both by continuing to improve the mobile
         applications and by further leveraging and enhancing our deep local content. In March, YPG launched four newly
         upgraded and rebuilt applications for iPhone™, Blackberry™ and Google™ Android™ smartphones and completed an
         overhaul of our mobile website http://m.yp.ca. YellowPages.ca mobile application has now been downloaded more
         than 2 million times. In 2010, YPG created an application programming interface (API). YellowAPI.com is open to
         developers across all platforms, allowing them to stream local search content directly from one of Canada’s largest
         and most robust business and person databases. YellowAPI.com is a natural tool of choice for developers as it
         addresses a real need for relevant and dynamic local content. This in turn allows us to increase the amount of visibility
         and business leads our advertisers receive because of the relationship they have with us. Also in 2010, YPG and
         TELUS announced a partnership to optimize the mobile local search experience for millions of Canadians. TELUS will
         provide a co-branded version of the YellowPages.ca mobile applications to its customers. This partnership not only
         positively impacts the mobile user experience but benefits businesses advertising within the Yellow Pages Group
         network by increasing their visibility and growing their client acquisition programs;
         Enhancement and expansion of products – YPG’s Search Engine Solutions (SES) were launched in 2010. SES is
         composed of two core offerings: Search Engine Marketing (SEM) and Search Engine Optimization (SEO). YPG’s team
         will work closely with new and existing advertisers to build effective paid-search advertising campaigns tailored to their
         business needs, objectives and budgets. YPG will also manage these campaigns and keywords across multiple search
         engines including Google, Yahoo! and Bing. In addition, YPG’s SEO solutions will ensure advertisers choose the most
         cost-effective search phrases for their business to improve their website rankings and ultimately attract new
         customers right to their door.

Also in 2010, we developed new online placement and content products on yp.ca. The launch of the enhanced YellowPages.ca
platform has enabled the development of new online placement and content products that provide greater potential to target
local markets. These products were developed with a view to delivering the appropriate user experience and providing value to
the advertiser in this context.

During the year YPG launched Deal of the Day on RedFlagDeals.com, representing YPG’s entry in the group buying market. This
new initiative features a free daily group buying newsletter, offering savings on various products or services. This new online
shopping product benefits both deal-savvy consumers and participating businesses that can take advantage of the visibility that
our network of properties brings them.

Vertical Media
Enhancement and expansion of our product and service offerings
         Continued deployment of Dealer Smart Solutions – In 2010, the roll-out efforts continued for customers not targeted
         on our initial implementation. There was also an opportunity to continue to grow the customer account through
         package upgrade and additional components, such as video and SEM;
         Expansion of Dealer Smart Solutions to non-passenger vehicles (NPV) – This product expansion leverages all the
         successful components of Dealer Smart Solutions but will customize the offering to the specificities of the different
         NPV segments. The initial focus was on targeting existing Trader customers to up-sell from the current print media
         offerings to the integrated solutions.




                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010   27
Management’s Discussion and Analysis



Improve User and Advertiser Experience
           During the first quarter of 2010, we completed the roll-out of the digital ad-taking system across the country. We now
           have one national platform that will allow for standardization and productivity gains, optimizing our ad workflow.
           A new search engine was launched at the beginning of 2010 on AutoTrader.ca and was a key step in differentiating
           the user experience. Enhancements were developed in order to improve the search engine and user experience
           through a clean up of the search data and filters. Trader launched a new algorithm on autoTRADER.ca. Vehicle search
           results are now sorted by “quality” of the ad listing. Each ad is scored against multiple factors ranging from the
           number of photos to richness of vehicle description, and the most relevant results will be presented to users;
           The autoTRADER.ca iPhone and BlackBerry™ mobile application which was launched during the year has now been
           downloaded approximately 220,000 times. The application provides browsing by make and model, search by keyword
           and sort by location, price and most recent content. The application also allows viewing of all listings based on the
           user’s location, a dealer location by postal code or proximity-based search using GPS. In September, Trader launched
           the Blackberry™ version of autoTRADER.ca. Just like the iPhone application it provides over 200,000 used vehicle
           inventory to a new consumer audience. The new applications leverage the power of autoTRADER.ca listings.

External growth
Dealer.com
In 2010, Trader acquired an additional 12% equity interest in Dealer.com bringing its total equity interest to approximately 32%.
The results of Dealer.com are now consolidated with those of Trader. Dealer.com is a leading provider of online marketing
solutions to the vehicle industry.

RedFlagDeals.com
In February 2010, YPG completed the acquisition of RedFlagDeals.com, a leader in providing online promotions and shopping
tools to Canadians. Online coupons and deals are capturing an increasingly important share of consumer-related traffic. Not
only are users looking for deals online, but retailers are increasingly using the Internet as a distribution channel for their sales
items. With this transaction, YPG is tapping into this market with websites that have established traction in the marketplace,
loyal communities, and promotional content to build on. It also offers YPG additional growth potential on mobile devices with an
iPhone™ application already available for coupon clipping and price comparison. In September 2010, YPG launched Deal of the
Day on RedFlagDeals.com and LesPAC.com, representing YPG’s entry in the group buying market. This new initiative features a
free daily group buying newsletter, offering savings on various products or services.

411.ca
Also in 2010, YPG purchased the 411.ca URL and domain names and acquired a 30% ownership interest in 411 Local Search
Corp. The agreement enables both companies to leverage the online traffic between YPG’s leading Canada411.ca™ and
YellowPages.ca™ properties, and 411.ca, a fast-growing online directory. This agreement provides enhanced online reach for
advertisers

Divestiture of YPG Directories LLC
In addition, on April 15, 2010, a subsidiary of the Company contributed its interest in YPG Directories LLC, publisher of Your
Community PhoneBook (YCB) in selected Mid-Atlantic and Southeast American markets in exchange for a 35% minority
ownership in a new entity resulting from the business combination of YPG Directories LLC and Ziplocal, LP (previously Phone
Directories, LP). The combined entities will now reach over 300 markets across the United States.

CanadianDriver
On July 9, 2010, Trader acquired all of the assets of CanadianDriver.com, an award-winning online automotive magazine that
features over 11,000 automotive articles including new car reviews, test drives and automotive news as well as other automotive
topics. This acquisition will enable YPG to provide Canadians with a valuable resource to research their automotive purchases. It
will also help YPG grow its content and audience as well as provide new advertising opportunities for its national advertisers.

Canpages Inc.
On May 25, 2010 YPG acquired Canpages Inc. (Canpages). This acquisition has given YPG the opportunity to expand its sales
force, online capabilities and customer offerings. The integration of this acquisition is progressing as planned.

Mediative
On October 26, 2010, the Company announced the launch of Mediative, a digital advertising and marketing solutions provider for
national agencies and advertisers. Concurrent with the launch of Mediative, the Company announced it had acquired a controlling
interest in Enquiro Search Solutions Inc., a leading search engine solutions company, AdSplash Inc., a national retail advertising
leader, and Uptrend Media, Canada's leading independent online advertising representation firm. These companies will be
integrated into Mediative. YPG also entered into a licensing agreement with Acquisio Inc. for the Canadian rights to the company’s


28   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                              Management’s Discussion and Analysis



flagship search, social and display advertising software platform. YPG holds a 24% ownership interest in Acquisio Inc. since
April 2009. Mediative has approximately 150 employees across four Canadian offices: Montreal, Toronto, Kelowna and Vancouver.

Ziplocal
On November 1, 2010, YPG finalized an outsourcing agreement with Ziplocal LP for a period of three years. Under this
agreement, YPG will provide publishing, manufacturing and distribution services enabling Ziplocal to benefit from YPG’s
technology. The agreement may be extended for a period of up to two years under certain conditions.

Consolidated Operating and Financial Results

Consolidated Results1
(in thousands of Canadian dollars – except share information)
                                                                                                                                   Years ended December 31,
                                                                                                                          2010           20092           20082
Revenues                                                                                                        $1,679,860         $1,639,884      $1,696,713
Operating costs                                                                                                     781,016           746,446          764,007
Conversion and rebranding costs                                                                                      48,529                   –                  –
Income from operations before depreciation and amortization, acquisition-related
   costs, impairment of goodwill and restructuring and special charges (EBITDA)                                     850,315           893,438          932,706
Depreciation and amortization                                                                                       270,117           142,414          186,065
Acquisition-related costs                                                                                            30,539                   –                  –
Impairment of goodwill                                                                                                        –       315,000                    –
Restructuring and special charges                                                                                    33,903             40,316          36,225
Income from operations                                                                                              515,756           395,708          710,416
Financial charges, net                                                                                              144,796           114,600          142,261
Impairment of available for-sale-investment                                                                                   –                –          4,775
Gain on deemed disposition of equity investment                                                                          (2,374)               –                 –
Gain on disposal of subsidiary                                                                                           (2,338)               –                 –
Earnings before dividends on Preferred shares, series 1 and 2, income taxes, and
   share of losses from equity investees                                                                            375,672           281,108          563,380
Dividends on Preferred shares, series 1 and 2                                                                        21,171             22,427          22,750
Earnings before income taxes and share of losses from equity investees                                              354,501           258,681          540,630
Provision for income taxes                                                                                           60,527             42,710          30,664
Share of losses from equity investees                                                                                19,939              7,089                   –
Net earnings                                                                                                      $274,035           $208,882        $509,966
Basic earnings per share4 attributable to common shareholders of Yellow Media Inc.                                       $0.53           $0.40            $0.97
Diluted earnings per share4 attributable to common shareholders of Yellow Media Inc.                                     $0.47           $0.36            $0.89
Income from operations before depreciation and amortization, acquisition-related
   costs, impairment of goodwill and restructuring and special charges (EBITDA)                                   $850,315           $893,438        $932,706
Conversion and rebranding costs                                                                                      48,529                   –                  –
EBITDA before conversion and rebranding costs3                                                                    $898,844           $893,438        $932,706
Total assets                                                                                                    $9,300,248         $8,941,606      $9,366,219
Long-term debt                                                                                                  $2,218,203         $2,225,720      $2,420,049
Exchangeable and convertible instruments                                                                          $319,029            $83,886        $285,470
Preferred Shares Series 1 and 2                                                                                   $446,725           $472,777        $489,072
1   The 2009 and 2008 comparative figures are those of the Fund. Included in the 2010 figures are the results of the Fund up for the period from January 1 to
    October 31, 2010.
2   As adjusted per adoption of new accounting policies as discussed in Section 7 – Critical Assumptions of this MD&A.
3   We remove costs associated with the conversion from an income trust to a corporation and the related rebranding costs as they do not reflect the ongoing
    operations of the business.
4   Comparative amounts are per Trust unit.




                                                                                                                          YELLOW MEDIA INC. ANNUAL REPORT 2010   29
Management’s Discussion and Analysis



Analysis of Consolidated Operating and Financial Results
Each year, we set targets to advance our goals and drive results. In addition to macroeconomic factors, we consider competitive
activity in some of our localized markets and our ability to respond to changing market conditions while offering our advertisers
new products and services that are intended to position both our print and online business in both segments. We also consider
third party expectations such as the Kelsey Group and the Interactive Advertising Bureau of Canada regarding Canadian
advertising trends and changing consumer trends affecting local commercial search.

In the current environment, we expect revenue growth from our online product offerings to continue, but also expect revenue
pressure to remain in our traditional print offerings. Accordingly, our focus remains to position our Directories and Vertical
Media platforms through investment in new product introduction and improved market coverage.

Fiscal 2010 versus 2009                                                                                 Online Usage
                                                                                                        (in millions)
Revenues                                                                                                12
                                                                                                                              10.3
Revenues increased to $1,679.9 million during 2010 compared with $1,639.9 million for 2009.                             8.9
                                                                                                        10
The additional contribution of revenues from Canpages during the year ended December 31, 2010
was partly offset by the loss of revenues resulting from the divestiture of YPG USA. Dealer.com          8
contributed approximately $78 million of revenues in 2010. If we exclude the results from
Dealer.com, organic revenues declined due to lower print revenues in both segments. The                  6
continuing shift in the media and publishing industries towards more online content continues
to place pressure on our traditional print offerings. Organic online revenue growth for 2010             4
reached 15.8%. Online revenues from the Directories and Vertical Media segments combined
reached $445.3 million in 2010. Our network of web sites in Directories and Vertical Media               2
attracted 10.3 million unduplicated unique visitors1 on average during the fourth quarter of 2010,
                                                                                                         0
representing a reach of 41.4%1 of the Canadian internet population.
                                                                                                                  Q4 2009     Q4 2010

EBITDA
EBITDA decreased by $43.1 million to $850.3 million compared to $893.4 million in 2009. During the year, we incurred conversion
and rebranding costs of $48.5 million associated with our conversion from an income trust to a corporation. If we exclude these
costs, EBITDA increased by $5.4 million compared to 2009.

Cost of sales increased by $15.3 million to $479.5 million compared to $464.2 million in 2009. The increase for the year ended
December 31, 2010 results mainly from the increased costs associated with Dealer.com acquired in the first quarter of 2010.
Canpages also contributed additional costs during the year when compared to 2009 as it was acquired in May 2010. This was offset
by the lower costs resulting from the divestiture of YPG USA.

Gross profit margin remained stable at 71.5% in 2010 compared to 71.7% in 2009.

General and administrative expenses increased by $67.7 million to $350 million compared to $282.3 million in 2009. The
increases in general and administrative expenses for 2010 are mainly attributable to conversion and rebranding costs, as well
as, higher costs in the Vertical Media segment following the acquisition of Dealer.com on January 5, 2010, and the higher costs
following the acquisition of Canpages on May 25, 2010.

Depreciation and amortization
Depreciation and amortization increased to $270.1 million during 2010 compared with $142.4 million in 2009. The increase is
mainly attributable to higher amortization of certain intangible assets related to the acquisitions of Dealer.com and Canpages.

Acquisition-related costs
During the year we recorded acquisition-related costs of $30.5 million as a result of our acquisitions of Canpages, RedFlagDeals.com,
Restaurantica, Mediative LP, Uptrend Media, AdSplash, 411.ca and CanadianDriver. This includes $18.8 million of transaction costs
and $11.7 million of restructuring and other charges.

Restructuring and special charges
During 2010 and in connection with the acquisition of Canpages, we recorded restructuring and special charges relating to
internal reorganization, workforce reduction, the acceleration of business process changes in our centres of excellence and
other items amounting to $33.9 million. Similar initiatives amounting to $40.3 million were undertaken in 2009.




1    Source: comScore Media Metrix Canada.


30    YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                   Management’s Discussion and Analysis



Financial charges
Financial charges increased by $30.2 million to $144.8 million compared to $114.6 million in 2009. The increase is due in part
to a lower gain on the repurchase of preferred shares, Medium Term Notes, credit facilities and Exchangeable Debentures of
$4.2 million in 2010 compared to a net gain of $42.8 million in 2009. The effective average interest rate on our debt portfolio
as of December 31, 2010 was 5.4% compared to 5.8% as of December 31, 2009.

Gain on deemed disposition of equity investment
The previously held equity interest of Trader in Dealer.com, which was accounted for under the equity method up to
January 5, 2010, was re-measured at its fair value of $40.6 million and the gain on deemed disposition was recognized in net
earnings. The unrealized cumulative loss on translating the financial statements of Dealer.com to Canadian dollars was also
recognized in net earnings on the same basis as would be required if Trader had disposed directly of its previously held equity
interest. The above transactions generated a net gain of $2.4 million which was recorded in the first quarter of 2010.

Gain on disposal of subsidiary
During 2010, the Company contributed its interest in YPG Directories, LLC in exchange for a 35% minority interest in a new
entity resulting from the combination of YPG Directories, LLC and Ziplocal LP. The transaction closed on April 15, 2010, which
resulted in a gain on sale of $2.3 million.

Dividends on preferred shares, Series 1 and 2
Dividends on the two series of redeemable preferred shares amounted to $21.2 million compared to $22.4 million in 2009.

Provision for income taxes
The combined statutory provincial and federal tax rate was 29.9% and 31.4% in 2010 and 2009 respectively. The Company
recorded an expense of 17.1% of earnings in 2010 compared to 16.5% in 2009. Prior to the conversion from an income trust,
the Fund’s subsidiary, YPG LP was a limited partnership, and as such, was not subject to income taxes whereas YPG LP’s
subsidiaries were subject to income tax. The difference between the statutory and the effective tax rates was primarily due to
inter-company revenues which were not taxable when received by YPG LP.

Share of losses from equity investees
In 2010 we recorded our share of losses from our equity investments in the amount of $19.9 million compared to $7.1 million in
2009. These losses include the amortization of intangible assets amounting to $22 million (2009 - $12.9 million) in connection
with these equity investments.

Net earnings
Net earnings increased by $65.2 million to $274 million in 2010. The increase is mainly due to the impairment of goodwill that
occurred in 2009 partly offset by higher depreciation and amortization following the business acquisitions in 2010 as well as the
expenses incurred in connection with our conversion and rebranding efforts and the acquisition-related costs incurred in connection
with the acquisitions of Canpages, RedFlagDeals.com, Restaurantica, Mediative LP, Uptrend Media, AdSplash, 411.ca and
CanadianDriver in 2010.

Fiscal 2009 versus 2008
Revenues

Revenues decreased by $56.8 million to $1,639.9 million compared to $1,696.7 million in 2008. The economic slowdown and
related reduction in advertising spending in Canada impacted our revenues, especially in the Vertical Media segment. As such, our
revenues in Vertical Media decreased by $72.8 million from $320.7 million in 2008. Organic online revenue growth reached 24%
for the year below our growth target of 30% mainly due to the Vertical Media performance where overall revenue pressure had a
dampening effect online. Online revenues from the Directories and Vertical Media segments combined reached $304.4 million in
2009. Our network of web sites in Directories and Vertical Media attracted 8.9 million unduplicated unique visitors1 on average
during the fourth quarter of 2009.

EBITDA

EBITDA decreased by $39.3 million to $893.4 million compared to $932.7 million in 2008. The decrease for the year was directly
attributable to lower revenues in the Vertical Media segment, which accounted for $36.7 million of the decrease in EBITDA. The
Directories EBITDA decreased by $2.6 million for the year.




1   Source: comScore Media Metrix Canada.


                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010   31
Management’s Discussion and Analysis



Cost of sales decreased by $10.9 million to $453.1 million compared to $464 million in 2008. Direct costs decreased as a result
of the decline in revenues in the Vertical Media segment while indirect costs were impacted by cost containment initiatives. The
cost reduction was partly offset by the costs incurred by YPG USA which was acquired on September 5, 2008.

Gross profit margin was relatively stable at 72.4% in 2009 compared to 72.7% in 2008.

General and administrative expenses decreased by $6.7 million to $293.3 million compared to $300 million in 2008. The
decrease in general and administrative expenses was mainly attributable to lower employee-related expenses in the Directories
segment and lower costs in both segments following the implementation of our cost containment initiatives. The cost reduction
resulting from cost containment initiatives in the Directories segment was offset by costs at YPG USA which was acquired in the
third quarter of 2008.

Depreciation and amortization
Depreciation and amortization decreased by $43.7 million to $142.4 million in 2009 compared to $186.1 million in 2008. The
decrease was attributable to lower amortization of certain intangible assets related to the acquisitions of Trader and Aliant which
have been fully amortized, partly offset by the amortization related to the acquisition of YPG USA.

Impairment of goodwill
During the year ended December 31, 2009, we recorded a charge of $315 million related to the impairment of goodwill in our
Vertical Media segment. The charge was recorded following the Company’s two-step impairment test which concluded that the
carrying value of the goodwill exceeded its implied fair value of the reporting unit under the second step of the impairment test.

Summary of Consolidated Quarterly Results
Quarterly Results
(in thousands of Canadian dollars – except share information)
                                                                                                       2010                                           20091
                                                                 Q4           Q3            Q2            Q1              Q4        Q3         Q2        Q1
Revenues                                                $422,777 $428,570 $420,382 $408,131 $405,679 $408,318 $417,534 $408,353
Operating costs                                           197,564       202,612       192,490      188,350       186,382       182,109     193,465   184,490
Conversion and rebranding costs                            32,487          4,441         7,950        3,651                –          –          –         –
Income from operations before
  depreciation and amortization,
  acquisition-related costs, impairment of
  goodwill and restructuring and special
  charges (EBITDA)                                        192,726       221,517       219,942      216,130       219,297       226,209     224,069   223,863
Depreciation and amortization                             101,170        70,139        53,095       45,713        35,010        35,282      34,005    38,117
Acquisition-related costs                                    4,952         2,038       19,934         3,615                –          –          –         –
Impairment of goodwill                                            –             –             –             –              –   315,000           –         –
Restructuring and special charges                            7,461       17,465          8,977              –     19,732              –     20,584         –
Income (loss) from operations                              79,143       131,875       137,936      166,802       164,555       (124,073)   169,480   185,746
Net (loss) earnings                                         (2,333)      74,705        79,906      121,757       128,405       (168,515)   116,905   132,087
Basic (loss) earnings per share
 attributable to common shareholders
 of Yellow Media Inc.                                       $(0.01)        $0.15         $0.16        $0.24         $0.25        $(0.33)     $0.23     $0.26
Diluted (loss) earnings per share
 attributable to common shareholders
 of Yellow Media Inc.                                       $(0.01)        $0.12         $0.14        $0.21         $0.21        $(0.33)     $0.19     $0.21
Income from operations before
  depreciation and amortization,
  acquisition-related costs, impairment of
  goodwill and restructuring and special
  charges (EBITDA)                                      $192,726 $221,517 $219,942 $216,130 $219,297 $226,209 $224,069 $223,863
Conversion and rebranding costs                            32,487          4,441         7,950        3,651                –          –         –         –
EBITDA before conversion and rebranding
 costs                                                  $225,213 $225,958 $227,892 $219,781 $219,297 $226,209 $224,069 $223,863
EBITDA before conversion and rebranding
 costs margin                                               53.3%         52.7%         54.2%         53.9%        54.1%         55.4%      53.7%     54.8%
1    As adjusted per adoption of new accounting policies as discussed in Section 7 – Critical Assumptions of this MD&A.




32    YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                Management’s Discussion and Analysis



Revenues throughout 2009 were lower quarter over quarter due to lower revenues in both segments being negatively impacted
by adverse economic conditions and continued pressure on our print products with the exception of the second quarter of 2009
where revenues increased quarter over quarter due to the contribution from YPG USA and the seasonality in the Vertical Media
segment. During 2010, revenues increased quarter over quarter with the exception of the fourth quarter, reflecting the
contribution of Dealer.com in our Vertical Media segment partly offset by lower print revenues in our Directories and Vertical
Media segments. The revenues contributed by Canpages were partly offset by the reduction in revenues following our
divestiture of YPG USA in the second quarter of 2010. The lower revenues in the fourth quarter are attributable to lower print
revenues in the Directories segment.
                                   .

In 2009, our EBITDA margins remained relatively stable despite the protracted economic downturn which affected our business.
During 2010, we incurred conversion and rebranding costs resulting in a reduced EBITDA margin. If we exclude these costs, our
EBITDA margin was slightly below that of 2009 resulting from lower revenues in both segments. Our cost containment
initiatives offset these lower revenues.

Net earnings (loss) were affected by the adverse economic conditions during the four quarters of 2009. In addition, internal
reorganizations and cost containment initiatives resulted in restructuring and special charges impacting some of our quarterly
results in 2009 and 2010. Impairment of goodwill in our Vertical segment also impacted the third quarter of 2009 as well as
the gain on repurchase of preferred shares Series 1 and 2, and the loss on the repurchase of Exchangeable Debentures. Net
earnings for 2010 were affected by depreciation and amortization of intangibles related to the acquisitions of Dealer.com and
Canpages. Lastly, net earnings throughout 2010 were impacted by conversion and rebranding costs associated with our
conversion from an income trust to a corporation as well as acquisition related costs.

Analysis of fourth quarter results 2010 results

Revenues
Revenues increased to $422.8 million during the fourth quarter of 2010 compared with $405.7 million for the same period last
year. The additional contribution of revenues from Canpages during the quarter ended December 31, 2010 was partly offset by
the loss of revenues resulting from the divestiture of YPG USA. Dealer.com contributed approximately $23 million of revenues in
the three-month ended December 31, 2010. If we exclude the results from recent acquisitions, organic revenues declined due
to lower print revenues in both segments. The continuing shift in the media and publishing industries towards more online
content continues to place some pressure on our traditional print offerings. Organic online revenue growth for the fourth
quarter reached approximately 13%. Online revenues from the Directories and Vertical Media segments combined reached
$123.4 million in the fourth quarter of 2010 or $493.6 million annualized.

EBITDA
EBITDA decreased by $26.6 million to $192.7 million during the fourth quarter of 2010 compared with the same period last year.
During the quarter, we incurred conversion and rebranding costs of $32.5 million mainly associated with our conversion from an
income trust to a corporation. If we exclude these costs, EBITDA increased by $5.9 million for the three-month period ended
December 31, 2010 compared with the same period last year.

Cost of sales increased by $5.6 million to $120.4 million during the fourth quarter of 2010 compared with the same period last
year. The increase for the quarter ended December 31, 2010 results mainly from the increased costs associated with Dealer.com
acquired in the first quarter of 2010. Canpages also contributed additional costs during the quarter when compared to the same
period last year as it was acquired in May 2010.

Gross profit margin was stable at 71.5% for the fourth quarter of 2010 compared to 71.7% for the fourth quarter of 2009.

General and administrative expenses increased by $38.1 million to $109.6 million during the fourth quarter of 2010 compared
with the same period last year. The increase in general and administrative expenses for the three-month period ended
December 31, 2010 is mainly attributable to conversion and rebranding costs, higher costs in the Vertical Media segment
following the acquisition of Dealer.com on January 5, 2010, and the higher costs following the acquisition of Canpages on
May 25, 2010.

Depreciation and amortization
Depreciation and amortization increased to $101.2 million during the fourth quarter of 2010 compared with $35 million during
the same period last year. The increase is attributable to higher amortization of certain intangible assets related to the
acquisitions of Dealer.com and Canpages.

Acquisition-related costs
During the fourth quarter we recorded acquisition-related costs of $5 million as a result of our acquisitions of Canpages,
AdSplash, Uptrend Media and Mediative LP. This includes $3.4 million of transaction costs and $1.6 million of restructuring
and other charges for the three-month period ended December 31, 2010.



                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010   33
Management’s Discussion and Analysis



Restructuring and special charges
During the fourth quarter of 2010, we recorded restructuring and special charges relating to internal reorganization, workforce
reduction, the acceleration of business process changes in our publishing centres of excellence and other items amounting to
$7.5 million.

Financial charges
Financial charges increased by $17 million to $45.5 million during the fourth quarter of 2010. The increase is due in part to a
lower loss on repurchase of preferred shares, Medium Term Notes, credit facilities and Exchangeable Debentures of $4.7 million
for the three-month period ended December 31, 2010 compared to a net gain of $12.3 million for the three-month period ended
December 31, 2009.

Dividends on preferred shares, Series 1 and 2
Dividends on the two series of redeemable preferred shares amounted to $5.1 million for the fourth quarter of 2010 compared
to $5.5 million for the same period last year.

Provision for income taxes
The combined statutory provincial and federal tax rate was 29.9% and 31.0% for the three-month periods ended December 31, 2010
and 2009 respectively. The Company recorded an expense of 88.7% of earnings and 0.02% of the loss for the three-month periods
ended December 31, 2010 and 2009 respectively. In connection with the disposal of YPG Directories, LLC, Yellow Media Inc
reviewed the status of its future tax assets as of December 31, 2010. As a result, a valuation allowance of $22.9 million was
recorded during the fourth quarter. Prior to the conversion from an income trust, the Fund’s subsidiary, YPG LP was a limited
partnership, and as such, was not subject to income taxes whereas YPG LP’s subsidiaries were subject to income tax. The
difference between the statutory and the effective tax rates was primarily due to inter-company revenues which were not taxable
when received by YPG LP.

Share of losses from equity investees
During the fourth quarter we recorded our share of losses from our equity investments in the amount of $8.3 million compared to
$2.2 million for the same period last year. These losses include the amortization of intangible assets amounting to $8.7 million in
connection with these equity investments.

Net earnings
Net earnings decreased by $130.7 million to a net loss of $2.3 million during the fourth quarter of 2010. The decrease is mainly
due to the higher depreciation and amortization following the business acquisitions in 2010 as well as the expenses incurred in
connection with our conversion and rebranding efforts and the acquisition-related costs incurred in connection with the acquisitions
of Canpages, RedFlagDeals.com, Restaurantica, 411.ca, Mediative LP and CanadianDriver in 2010 partly offset by lower
restructuring and special charges.




34   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                            Management’s Discussion and Analysis



Segmented Information – Directories
Operating and Financial Results

Operating Results1
(in thousands of Canadian dollars)
                                                                     Three-month periods ended December 31,                           Years ended December 31,
                                                                                         2010               2009                      2010                         2009
Revenues                                                                        $340,611                 $345,376           $1,365,276                        $1,392,029
Operating costs                                                                   141,805                 142,154                560,314                        570,125
Conversion and rebranding costs                                                     29,587                     –                   45,629                             –
Income from operations before depreciation and
  amortization, acquisition-related costs and
  restructuring and special charges (EBITDA)                                      169,219                 203,222                759,333                        821,904
Depreciation and amortization                                                       61,022                 24,130                163,240                        109,846
Acquisition-related costs                                                               5,200                  –                   30,709                             –
Restructuring and special charges                                                       5,902              18,574                  30,724                        33,735
Income from operations                                                            $97,095                $160,518              $534,660                        $678,323
Income from operations before depreciation and
  amortization, acquisition-related costs and
  restructuring and special charges (EBITDA)                                    $169,219                 $203,222              $759,333                        $821,904
Conversion and rebranding costs                                                   29,587                        –                45,629                               –
EBITDA before conversion and rebranding costs                                   $198,806                 $203,222              $804,962                        $821,904
1    See Note 28 - Segmented Information of the audited consolidated financial statements of the Company for the year ended December 31, 2010.

    Revenues                                                 EBITDA                                                 EBITDA before conversion
    (in millions of dollars)                                 (in millions of dollars)                               and rebranding costs
                                                                                                                    (in millions of dollars)

    2,000                                                    1000                       (7.6%)                      1200
                               (1.9%)                                                                                                          (2.1%)
                                                                             821.9
                                                                                                 759.3
                   1,392.0              1,365.3               800                                                   1000          821.9
    1,500                                                                                                                                               805
                                                                                                                    800
                                                              600
    1,000                                                                                                           600
                                                              400
                                                                                                                    400
      500
                                                              200
                                                                                                                    200

         0                                                       0                                                      0
                     2009                2010                                 2009                2010                             2009                 2010


Analysis of Operating and Financial Results – Year end and Fourth Quarter
Revenues
Revenues decreased slightly to $340.6 million compared with $345.4 million for the quarter and decreased by 1.9% to
$1,365.3 million for the year ended December 31, 2010 due in part to a lower number of advertisers. As at December 31, 2010,
the number of advertisers, excluding Canpages, was 365,000 compared to 385,000 as at December 31, 2009 reflecting a decrease
of approximately 5%. Advertiser renewal was unchanged at 88% as at December 31, 2010 compared to the same period last year.
During the last 12 months, YPG acquired 28,000 new advertisers. Although there was a reduction in the number of advertisers, the
average revenue per advertiser (ARPA) remained stable at $3,400 compared to 2009. As at December 31, 2010, our Revenue
Generating Units1 per advertiser was 1.70 compared to 1.68 for the same period last year. The decrease in revenues for the quarter
is due to lower print revenues in our Canadian operations and lower revenues resulting from the sale of YPG USA offset by the
contribution of Canpages. The decline for the year ended December 31, 2010 is due to the impact of lower advertising sales in our
print directories. The level of revenues reflects challenging economic and market conditions which impacted the selling efforts over
the last 12 months as well as a shift in advertiser spending and print directory usage. Our objective of providing our customers with
high quality leads through attractive print and online bundles continues to support increased online penetration of the print advertiser
base and to drive internet revenue growth.

As of December 31, 2010, the number of advertisers, excluding Canpages, choosing to advertise online was 65.2% across
Canada compared to 63.3% for the corresponding period last year.

1    Revenue Generating Units (“RGU”) measure the number of product groups selected by advertisers.


                                                                                                                      YELLOW MEDIA INC. ANNUAL REPORT 2010            35
Management’s Discussion and Analysis



EBITDA
EBITDA decreased by $34 million to $169.2 million during the fourth quarter of 2010 and decreased by $62.6 million to
$759.3 million during the year ended December 31, 2010 compared with the same periods last year. If we exclude the costs
associated with our conversion and rebranding, EBITDA decreased by 2.2% in the fourth quarter due to lower revenues. For the year
ended December 31, 2010 EBITDA decreased by 2.1% when we exclude conversion and rebranding costs due to lower revenues.

Cost of sales amounted to $83.7 million in the fourth quarter of 2010 compared to $84.5 million for the same period last year. For
the year ended December 31, 2010, costs of sales amounted to $335.6 million compared to $343.7 million for the same period
last year. The decrease in the fourth quarter and for the year ended December 31, 2010 is mainly attributable to lower revenues
combined with the results of our cost containment efforts including the creation of a centre of excellence in our publishing
operations and savings from our supply chain.

Gross profit margin was stable at 75.4% in the fourth quarter of 2010 compared to 75.5% for the same period last year. Gross
profit for the year ended December 31, 2010 was also stable at 75.4% compared to 75.3% for the same period last year.

General and administrative expenses in the fourth quarter of 2010 increased by $30 million to $87.7 million compared with the
same period last year and increased by $43.9 million to $270.3 million during the year ended December 31, 2010 compared
with the same period last year. The conversion and rebranding costs amounted to $29.6 million and $45.6 million during the
three-month and the year ended December 31, 2010, respectively. For the quarter and the year ended December 31, 2010,
Canpages contributed additional expenses as it was acquired in May 2010.

Depreciation and amortization
Depreciation and amortization increased from $24.1 million in the fourth quarter of 2009 to $61 million in the fourth quarter of
2010. For the year ended December 31, 2010 compared to the same period last year, depreciation and amortization increased
to $163.2 million from $109.8 million. The increase for the fourth quarter and for the year ended December 31, 2010 compared
to the same periods last year is due to the amortization related to the acquisition of Canpages and Mediative LP.

Acquisition-related costs
During the fourth quarter of 2010 we recorded acquisition-related costs of $5.2 million and $30.7 million for the year ended
December 31, 2010. During 2010 we acquired Canpages, RedFlagDeals.com, Restaurantica, Mediative LP, Uptrend Media,
AdSplash and 411.ca. This includes $3.6 million of transaction costs and $1.6 million of restructuring and other charges for the
three-month period ended December 31, 2010 and $19 million of transaction costs and $11.7 million of restructuring and
other charges for the year ended December 31, 2010.

Restructuring and special charges
During the fourth quarter of 2010, we recorded restructuring and special charges relating to internal reorganization, workforce
reduction, and business process changes mainly associated with our newly created publishing centres of excellence amounting
to $5.9 million. During the year ended December 31, 2010, we incurred $30.7 million of restructuring and special charges.




36   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                       Management’s Discussion and Analysis



Segmented Information – Vertical Media
Operating and Financial Results

Operating Results1
(in thousands of Canadian dollars)
                                                                       Three-month periods ended December 31,                 Years ended December 31,
                                                                                       2010            2009                      2010           2009
Revenues                                                                              $82,166              $60,303           $314,584           $247,855
Operating costs                                                                        55,759               44,228            220,702            176,321
Conversion and rebranding costs                                                         2,900                    –              2,900                  –
Income from operations before depreciation and amortization,
  impairment of goodwill, recovery of acquisition-related costs
  and restructuring and special charges (EBITDA)                                        23,507               16,075             90,982             71,534
Depreciation and amortization                                                           40,148               10,880           106,877              32,568
Impairment of goodwill                                                                       –                    –                  –            315,000
Recovery of acquisition-related costs                                                     (248)                   –               (170)                 –
Restructuring and special charges                                                        1,559                1,158              3,179              6,581
Income (loss) from operations                                                         $(17,952)              $4,037           $(18,904)         $(282,615)
Income from operations before depreciation and amortization,
  impairment of goodwill, recovery of acquisition-related costs
  and restructuring and special charges (EBITDA)                                      $23,507              $16,075             $90,982           $71,534
Conversion and rebranding costs                                                         2,900                    –               2,900                 –
EBITDA before conversion and rebranding costs                                         $26,407              $16,075             $93,882           $71,534
1   See Note 28 – Segmented Information of the audited consolidated financial statements of the Company for the year ended December 31, 2010.

Analysis of Operating and Financial Results – Year end and fourth quarter
Revenues
Revenues from our Vertical Media segment increased by $21.9 million to $82.2 million during the fourth quarter of 2010 and
increased by $66.7 million to $314.6 million during the year ended December 31, 2010 compared with the same periods last
year. Prior to the increase in our investment in Dealer.com on January 5, 2010, the results of Dealer.com were not consolidated.
Dealer.com contributed approximately $23 million of revenues for the quarter and $78 million for the year ended
December 31, 2010. If we exclude the contribution from Dealer.com, revenues decreased by 1.8% in the fourth quarter and 4.6% for
the year ended December 31, 2010 due to lower print revenues. In our largest vertical, automotive, representing in excess of two-
thirds of this segment’s revenues, excluding Dealer.com, we continue to see positive trends in the marketplace as a result of the
Dealer Smart Solutions offering. As at December 31, 2010, 3,400 unique advertisers had subscribed to our Dealer Smart Solutions
out of a total of 7,500 commercial vehicle advertisers. Market conditions do, however, remain challenging in the real estate and
generalist categories, which represent 19% and 10%, respectively of the segment’s revenues, excluding Dealer.com. Revenues
generated by our commercial vehicle advertisers excluding Dealer.com were slightly higher at $33.8 million and $131.2 million for
the three-month and year ended December 31, 2010, respectively, compared to $33.1 million and $130.2 million for the same
periods last year. The ARPA in the commercial vehicle segment was $4,500 as at December 31, 2010 compared to approximately
$4,200 as at December 31, 2009, representing a growth of 7% as a result of the roll-out of Dealer Smart Solutions.

EBITDA
EBITDA increased by $7.4 million to $23.5 million during the fourth quarter of 2010 and increased by $19.4 million to $91 million
during the year ended December 31, 2010 compared with the same periods last year as a result of the contribution of Dealer.com.

Cost of sales increased by $6.4 million to $36.7 million during the fourth quarter of 2010 and increased by $23.3 million to
$143.9 million during the year ended December 31, 2010 compared with the same periods last year. The increases are directly
related to the contribution in revenues associated with Dealer.com.

Gross profit margin increased to 55.3% for the fourth quarter of 2010 compared to 49.6% for the same period last year and
54.3% for the year ended December 31, 2010 compared to 51.4% for the same period last year reflecting the benefits
associated with our optimization of business processes.

General and administrative expenses increased to $21.9 million in the fourth quarter of 2010 compared to $13.9 million for the
same period last year. For the year ended December 31, 2010, general and administrative expenses were $79.7 million compared
to $55.8 million for the same period last year. The increases for the three-month and year ended December 31, 2010 are mainly
attributable to the acquisition of Dealer.com.

Depreciation and amortization
Depreciation and amortization amounted to $40.1 million in the fourth quarter of 2010 compared to $10.9 million for the same
period last year and to $106.9 million in the year ended December 31, 2010 compared to $32.6 million for the same period

                                                                                                                   YELLOW MEDIA INC. ANNUAL REPORT 2010   37
Management’s Discussion and Analysis



last year. The increase for the quarter and the year ended December 31, 2010 relates to the amortization of certain intangible
assets related to the acquisition of Dealer.com.

Acquisition-related costs
We recorded a recovery of acquisition-related costs of $170 thousand for the year ended December 31, 2010.

Restructuring and special charges
During the year ended December 31, 2010, we recorded restructuring and special charges relating to internal reorganization
and workforce reduction amounting to $1.6 million for the three-month period ended December 31, 2010 and $3.2 million for
the year ended December 31, 2010.

4. Liquidity and Capital Resources
This section examines the Company’s capital structure, sources of liquidity and various financial instruments including debt and
preferred shares.

Financial Position
Capital Structure
(in thousands of Canadian dollars)
                                                                                                  As at December 31, 2010                 As at December 31, 2009
Cash and cash equivalents                                                                                                $33,848                           $36,170
Restricted cash                                                                                                           35,477                                     –
Medium Term Notes                                                                                                       1,656,200                         2,044,947
Credit facilities                                                                                                        250,000                           100,000
Commercial paper                                                                                                         295,000                            74,000
Obligations under capital leases and other                                                                                20,672                              9,027
Net debt (net of cash and cash equivalents and restricted cash)                                                        $2,152,547                        $2,191,804
Exchangeable and convertible instruments                                                                                 319,029                            83,886
Preferred shares, series 1 and 2                                                                                         446,725                           472,777
Equity attributable to shareholders of Yellow Media Inc.4                                                               5,450,691                                    –
Equity attributable to owners of the Fund1                                                                                        –                       5,224,740
Equity attributable to non-controlling interests1,4                                                                       52,653                           324,130
Total capitalization                                                                                                   $8,421,645                        $8,297,337
Net debt3 to total capitalization                                                                                           27.7%                            27.4%


                Net Debt to Latest Twelve                                                   Capital Structure
                Months Adjusted EBITDA                                                      (in millions of dollars)
                Ratio2,3
                                                                                            10,000
                                                                                                                27.4%            27.7%
                3.8
                                                                                              8,000

                3.0                         2.6 x
                          2.5 x                                                               6,000
                                                                                                                5,549            5,504
                2.3
                                                                                              4,000
                1.5                                                                                                                       137
                                                                                                                         473              447
                0.8                                                                           2,000
                                                                                                                2,276            2,335

                0.0                                                                                  0
                      Dec. 31, 2009     Dec. 31, 2010                                                       Dec. 31, 2009      Dec. 31, 2010
                                                                                                 Total Equity                         Preferred Shares
                                                                                                 Exchangeable Promissory Notes        Net Debt3


1    As adjusted for 2009 per adoption of new accounting policies as discussed in Section 7 – Critical Assumptions of this MD&A.
2    Latest twelve month Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill, restructuring and special
     charges and conversion and rebranding costs, giving effect to the acquisitions (“Latest Twelve Month EBITDA before conversion and rebranding costs”).
3    Net debt including Exchangeable and Convertible Debentures.
4    The preferred shares, Series 3 and 5 were classified as non-controlling interest on the 2009 balance sheet as they were shares issued by a subsidiary. As a
     result of the conversion from an income trust to a corporation on November 1, 2010, the preferred shares, Series 3 and 5, along with the Series 7 issued during
     the year are now classified in shareholders’ equity.


38    YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                             Management’s Discussion and Analysis




As at December 31, 2010, YPG had approximately $2.2 billion of net debt, or $2.9 billion including preferred shares, Series 1 and
2, and Exchangeable and Convertible instruments which was higher than the positions as at December 31, 2009. The increase
during the year results from the completion of acquisitions and investments made in the Directories and Vertical segments
throughout the year offset by positive operating free cash flow. The net debt1 to Latest Twelve Month EBITDA before conversion and
rebranding2 costs ratio as of December 31, 2010 was 2.6 times compared to 2.5 times as of December 31, 2009. The net debt1
to total capitalization was 27.7% compared to 27.4% as of December 31, 2009.

Credit facilities
As at February 10, 2011, Yellow Media Inc. has in place a senior unsecured credit facility consisting of:

             A $1 billion facility, which is composed of two tranches (the Principal Facility):
                   a $750 million revolving tranche maturing in February 2013;
                   a $250 million non-revolving tranche maturing in February 2013;

On February 19, 2010, the Company increased its sources of liquidity by amending and extending the Principal Facility from
$700 million to $1 billion. The Principal Facility is composed of a $750 million revolving tranche and a $250 million non-
revolving tranche. The non-revolving tranche was available by way of single draw only on or before November 1, 2010. The
Principal Facility now matures on February 18, 2013. As of December 31, 2010, $250 million was drawn on the principal credit
facility. Proceeds were used to fully repay the $100 million 5-year term loan (the Private Facility), to fund acquisitions related to
the Mediative initiative as well as for general corporate purposes.

Medium Term Notes
Yellow Media Inc. had a total of $1.7 billion of notes outstanding under its Medium Term Note program as of December 31, 2010
with varying maturity dates between 2013 and 2036.

On January 15, 2010, Yellow Media Inc. redeemed all of its outstanding $150 million 4.65% Medium Term Notes, Series 6
which were due February 28, 2011. Yellow Media Inc. financed the purchase with drawings under the commercial paper
program. Yellow Media Inc. redeemed the Series 6 Medium Term Notes at a redemption price of $1,041.681 per $1,000
principal amount in accordance with the terms of the Series 6 Notes and the provisions of the trust indenture dated
April 21, 2004 for a total cash consideration of $156.3 million. A loss of $5.2 million was recorded in net earnings.

During 2010, Yellow Media Inc. repurchased for cancellation an amount of $56 million of the Series 3 Medium Term Notes,
$106.4 million of the Series 4 Medium Term Notes, and $79.4 million of the Series 5 Medium Term Notes for a total cash
consideration of $227.1 million. A gain of $15 million was recorded in net earnings in financial charges.

Exchangeable Debentures
The remaining balance of Exchangeable Debentures was redeemed by Yellow Media Inc. on August 2, 2010. As of December 31, 2010
no Exchangeable Debentures were outstanding.

Convertible Debentures
On July 8, 2010, Yellow Media Inc. announced the completion of the public offering of $200 million principal amount of 6.25%
convertible unsecured subordinated debentures (Convertible Debentures). The Convertible Debentures pay interest semi-
annually on April 1 and October 1 of each year commencing October 1, 2010. The Convertible Debentures have a maturity date
of October 1, 2017 and are convertible, at the option of the holder, for common shares of Yellow Media Inc. at an exchange
price of $8.00 per common share. An amount of $10.1 million was classified as a separate component of equity attributable to
owners of the Company. Net proceeds resulting from the offering were used to fund the redemption of the outstanding
Exchangeable Debentures, and to repay indebtedness under the credit facilities and commercial paper program. The
Convertible Debentures have been given a rating of BB+ by S&P and a rating of BBB by DBRS.

YPG was in compliance with all of its debt covenants as at December 31, 2010.

Exchangeable Promissory Notes
In connection with the Canpages acquisition, Yellow Media issued $141.6 million of Mandatory Exchangeable Promissory Notes
(the Notes).



1   Net debt including Exchangeable and Convertible Debentures.
2
    Latest twelve month Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill, restructuring and special
    charges and conversion and rebranding costs giving effect to the acquisitions (“Latest Twelve Month EBITDA before conversion and rebranding costs”).


                                                                                                                         YELLOW MEDIA INC. ANNUAL REPORT 2010       39
Management’s Discussion and Analysis



Starting in the first quarter of 2011, the Notes are exchangeable into a number of common shares of Yellow Media Inc. based
upon a price equal to 95% of the price of the Yellow Media Inc. shares at the time of exchange. Each quarter, holders of the
Notes will have the right to exchange 25% of the principal amount representing a maximum of $35.4 million of the Notes. Until
December 31, 2014, YPG may at its option at any time, redeem all or a portion of the Notes for cash together with accrued and
unpaid interest. The Notes rank subordinate to the senior debt of Yellow Media Inc. and bear interest at a fixed initial rate of 5%,
payable quarterly in cash, subject to step up provisions over time. The Notes have a final maturity of December 31, 2014. Any
remaining Notes will be automatically exchanged into common shares of Yellow Media Inc. on December 31, 2014.
On October 15, 2010, the holders of the Notes monetized their investment through a resale of the Notes to a third-party
financial institution. In order to facilitate this resale transaction and the orderly conversion of the Notes into common shares
during the course of 2011, Yellow Media Inc. entered into a total return swap (TRS) transaction referencing the Notes with the
same counterparty for a period ending December 15, 2011. Pursuant to the terms of the TRS, the 5% fixed interest rate under
the Notes was converted to the floating rate of interest equal to the three-month Banker’s Acceptance plus 1.75%. In addition,
under the TRS, the counterparty as a holder of the Notes is expected to exchange 25% of the principal amount into underlying
Yellow Media Inc. common shares at 95% of the prevailing market price, to be calculated using a volume weighted average price
over a period of up to 20 days. In addition, Yellow Media Inc. may receive or pay under the TRS an adjustment amount to the
extent that the value realized by the TRS counterparty on the exchange or redemption of the Notes exceeds or is less than the
$141.6 million principal amount of the Notes.

Cumulative Redeemable Preferred Shares
Yellow Media Inc. has two series of cumulative redeemable first preferred shares outstanding. On March 6, 2007, 12,000,000
cumulative redeemable preferred shares, Series 1 (Preferred Shares Series 1) were issued for gross proceeds of $300 million.
A dividend of $1.0625 per share per annum is payable quarterly on the Preferred Shares Series 1, yielding 4.25% per annum.
The Preferred Shares Series 1 are redeemable by the issuer at par for cash on or after March 31, 2012, or by the issuance of
shares of Yellow Media Inc. between March 31, 2012 and December 31, 2012. The Preferred Shares Series 1 are also
retractable for cash at the holder's option on or after December 31, 2012 at a price equal to $25.00 per share plus any accrued
and unpaid dividends in arrears.

On June 8, 2007, 8,000,000 cumulative redeemable preferred shares, Series 2 (the Preferred Shares Series 2) were issued for
gross proceeds of $200 million. A dividend of $1.25 per share per annum is payable quarterly, yielding 5.0% per annum. The
Preferred Shares Series 2 are redeemable by the issuer at a decreasing premium for cash on or after June 30, 2012, or by the
issuance share of Yellow Media Inc. between June 30, 2012 and June 30, 2017. The Preferred Shares Series 2 are also
retractable for cash at the holder’s option on or after June 30, 2017 at a price equal to $25.00 per share plus any accrued and
unpaid dividends in arrears.

On June 8, 2010, Yellow Media Inc. received approval from the Toronto Stock Exchange on its notice of intention to renew its
normal course issuer bid for its preferred shares, Series 1 and preferred shares, Series 2 through the facilities of the Toronto
Stock Exchange from June 11, 2010 to no later than June 10, 2011, in accordance with applicable rules and regulations of the
Toronto Stock Exchange.

Under its normal course issuer bid, Yellow Media Inc. intends to purchase for cancellation up to but not more than 1,174,691
and 720,000 of its outstanding preferred shares, Series 1 and preferred shares, Series 2, respectively, representing 10% of the
public float of each series of preferred shares outstanding on June 8, 2010.

During 2010, Yellow Media Inc. purchased for cancellation 635,714 preferred shares, Series 1 for a total cash consideration of
$15.8 million including brokerage fees at an average price of $24.78 per share and 501,490 preferred shares, Series 2 for a
total cash consideration of $10.4 million including brokerage fees at an average price of $20.79 per share. The carrying value
of these preferred shares, Series 1 and Series 2 was $15.7 million and $12.3 million, respectively. A gain of $1.8 million was
recorded in net earnings in financial charges.

Since June 11, 2009, the total cost of repurchasing preferred shares amounted to $39.9 million, including brokerage fees.

Rate Reset Preferred Shares
Yellow Media Inc. has two series of rate reset first preferred shares outstanding.

On September 23, 2009, 7,500,000 cumulative rate reset preferred shares, Series 3 (the Preferred Shares Series 3) were issued
for gross proceeds of $187.5 million. On September 28, 2009, an additional 800,000 cumulative rate reset preferred shares,
Series 3 (the Preferred Shares Series 3) were issued for gross proceeds of $20 million. A dividend of $1.6875 per share per
annum is payable quarterly, yielding 6.75% per annum for the initial five year period ending December 31, 2014. The dividend rate
will be reset on September 30, 2014 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield
plus 4.17%. The Series 3 Preferred Shares will be redeemable by the Issuer on or after September 30, 2014, in accordance with
their terms. Holders of the Series 3 Preferred Shares will have the right, at their option, to convert their shares into cumulative
floating rate preferred shares, series 4, (the Series 4 Preferred Shares) subject to certain conditions, on September 30, 2014 and
every five years thereafter. Holders of the Series 4 Preferred Shares will be entitled to receive cumulative quarterly floating
dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.17%.

40   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                           Management’s Discussion and Analysis



On December 22, 2009, 5,000,000 cumulative rate reset preferred shares, Series 5 (the Preferred Shares Series 5) were
issued for gross proceeds of $125 million. A dividend of $1.7250 per share per annum is payable quarterly, yielding 6.90% per
annum for the initial five and one-half year period ending June 30, 2015. The dividend rate will be reset on June 30, 2015 and
every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 4.26%. The Series 5 Preferred
Shares will be redeemable by the Issuer on or after June 30, 2015, in accordance with their terms. Holders of the Series 5
Preferred Shares will have the right, at their option, to convert their shares into cumulative floating rate preferred shares, series
6, (the Series 6 Preferred Shares) subject to certain conditions, on June 30, 2015 and on June 30 every five years thereafter.
Holders of the Series 6 Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the
three-month Government of Canada Treasury Bill yield plus 4.26%.

Net proceeds resulting from the sale of the Series 3 and 5 Preferred Shares were used to repay indebtedness under the
Principal Revolving Facility and commercial paper program, and for general corporate purposes.

Cumulative Exchangeable Preferred Shares
On February 9, 2010, in connection with the acquisition of RedFlagDeals.com, Yellow Media Inc. issued 1,300,000 Series 7
shares at a price of $7.50 per Series 7 share as payment to the vendors for the acquisition by way of a private placement. The
holders of the Series 7 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by
the Board of Directors of Yellow Media Inc. in an amount equal to $0.375 per Series 7 share per annum, yielding 5% per
annum, payable quarterly on the third last business day of March, June, September and December of each year. The Series 7
shares are exchangeable into common shares of Yellow Media Inc., at the option of the holders of the Series 7 shares and at a
ratio of one preferred share for one common share of Yellow Media Inc., regardless of the market price of the common shares of
Yellow Media Inc. On or after January 1, 2012, 300,000 Series 7 shares may be exchanged subject to certain time-based and
performance conditions.

As at February 10, 2011, 766,667 of the Series 7 shares were exchanged into common shares of Yellow Media Inc. at a ratio of
one preferred share for one common share of Yellow Media Inc. There are 533,333 Series 7 shares currently outstanding.

Credit Ratings

DBRS Limited                                            Standard and Poor’s Rating Services
BBB (High) credit rating                                BBB-/Stable long-term corporate credit rating
R-1 (low) commercial paper rating                       BBB- credit rating for existing credit facilities and medium term notes
BBB convertible subordinated debentures rating          BB+ convertible subordinated debentures rating
Pfd-3 (high) preferred shares rating                    P-3 preferred shares rating


In December 2010, credit rating agencies Standard and Poor’s and DBRS reconfirmed Yellow Media Inc.’s credit ratings.

Liquidity
As part of its financial policy capital structure guidelines, YPG remains committed to maintaining adequate liquidity at all times.
To this end, YPG has access to committed bank lines, and has been proactive in increasing its liquidity and capital resources.
As at December 31, 2010, YPG maintained a credit facility containing two tranches totalling $1.0 billion, providing sufficient
liquidity to fund its operations.

On December 31, 2010, cash and cash equivalents amounted to $33.8 million. In addition to cash and cash equivalents,
Yellow Media Inc. may issue additional notes amounting to $205 million under its commercial paper program and access
another $250 million under its Principal Facility. Alternatively, if additional notes are not issued under the commercial paper
program, Yellow Media Inc. may access the full $455 million available under its Principal Facility.

In addition to cash and cash equivalents amounting to $33.8 million, Yellow Media Inc. had $35.5 million of restricted cash as
at December 31, 2010. The amounts were placed in trust in relation with the total return swap (“TRS”) entered into on
October 15, 2010




                                                                                                        YELLOW MEDIA INC. ANNUAL REPORT 2010   41
Management’s Discussion and Analysis



Share and Unit data
As at February 10, 2011 outstanding share and unit data was as follows:

Outstanding Share and Unit Data
                                                          As at February 10, 2011               As at December 31, 2010               As at December 31, 2009
Common shares outstanding                                             516,017,984                             516,017,984                                         –
Units outstanding                                                                   –                                      –                        513,044,685
Preferred shares Series 3, 5 and 7
     outstanding1                                                       13,833,333                             13,933,333                                         --
Options outstanding                                                         380,882                                380,882                               383,986
1    The preferred shares, Series 3 and 5 were classified as non-controlling interest on the 2009 balance sheet as they were shares issued by a subsidiary. As a
     result of the conversion from an income trust to a corporation on November 1, 2010, the preferred shares, Series 3 and 5, along with the Series 7 issued during
     the year are now classified in shareholders’ equity.


On November 1, 2010, the Plan of Arrangement became effective resulting in the conversion of YPG’s income trust structure into a
dividend paying publicly traded corporation named Yellow Media Inc. Upon completion of the Plan of Arrangement, unitholders of
YPG have received, for each unit of YPG held, one common share of Yellow Media Inc.

At November 3, 2010, no Exchangeable Units of YPG LP remain outstanding. YPG LP was liquidated and dissolved in accordance
with the Plan of Arrangement.

On November 11, 2010, the Board of Directors of Yellow Media Inc. adopted a new stock option plan (the 2010 Plan). The
2010 Plan is subject to approval by the Shareholders and by the TSX. If approved, the 2010 Plan will permit the Board of
Directors to select eligible employees. A maximum of 25 million options may be granted under the 2010 Plan.

The Board of Directors granted, subject to approval, 15,850,000 options from the 2010 Plan. The significant terms and
conditions of the options granted are as follows:
              The exercise price is equal to the weighted-average trading prices on the TSX during the five trading days preceding
              the date on which the options were granted.
              The options vest at the expiration of the third year following the grant date.
              The options expire five years after the grant date.

As at February 10, 2011, Yellow Media Inc. also has a total of $200 million of Convertible Debentures which are convertible at
any time, at the option of the holder into common shares of the Company at an exchange price of $8.00 per common share.

As at February 10, 2011, Yellow Media Inc. also has Notes that are exchangeable at the option of the holder into common
shares of Yellow Media Inc. at the then prevailing market price starting January 1, 2011 and subject to certain conditions.

As at February 10, 2011, there were 11,278,820 preferred shares, Series 1 and 6,840,284 preferred shares, Series 2
outstanding. Both series of preferred shares are redeemable by the issuer under certain conditions through the issuance of
shares of the Company.

As at February 10, 2011, there were 533,333 Series 7 preferred shares outstanding. This series of shares are exchangeable
into shares of the Corporation, at a ratio of one preferred share for one common share subject to certain conditions.




42    YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                 Management’s Discussion and Analysis



Contractual Obligations and Other Commitments
Contractual obligations
(in thousands of Canadian dollars)
                                                                                  Payments due for the periods ending December 31
                                                      Total         1 – 3 years        4 – 5 years                      After 5 years
Long-term debt1                                 $2,206,586           $800,000           $557,500                          $849,086
Obligations under capital leases1                    8,414               7,788                626                                    –
Preferred shares1                                  452,978            281,971                   –                           171,007
Notes payable1                                      12,258               1,873              1,115                              9,270
Exchangeable and convertible instruments1          341,562                   –           141,562                            200,000
Operating leases                                   171,344             76,161              46,283                            48,900
Purchase obligations                                91,744             88,745                 249                              2,750
Total contractual obligations                   $3,284,886         $1,256,538           $747,335                        $1,281,013
1   Principal amount


Obligations under capital leases
We enter into capital lease agreements for office equipment and software. As of December 31, 2010, minimum payments
under these capital leases up to 2015 totalled $8.4 million.

Operating leases
We rent our premises and office equipment under various operating leases. As of December 31, 2010, minimum payments
under these operating leases up to 2021 totalled $171.3 million.

Purchase obligations
We use the services of outside suppliers to distribute our directories and have entered into long-term agreements with a number
of these suppliers. These agreements expire between 2010 and 2038. As at December 31, 2010, we have an obligation to
purchase services for $91.7 million over the next five years and thereafter. Cash from operations will be used to meet these
purchase obligations.

Pension Obligations
YPG sponsors a registered pension plan with a defined benefit component and a defined contribution component covering
substantially all employees of Yellow Pages Group (the YPG Pension Plan). The Company also sponsors a separate defined
contribution pension plan covering substantially all employees of Trader (the Trader Pension Plan).

As at December 31, 2010, the plan assets totalled $413 million and were invested in a diversified portfolio of Canadian fixed
income securities and Canadian and international equity securities. The plan’s rate of return on assets for 2010 was 10.9%,
0.2% higher than that of our benchmark portfolio, reflecting the capital market returns and the performance of our pension
managers in 2010. The return of our plan also exceeded its benchmark portfolio by 1.5% in 2009.

The most recent actuarial valuation of the YPG Pension Plan for funding purposes was performed as at December 31, 2008.
This valuation established the amount of contributions the Company is required to make under the YPG Pension Plan from the
valuation date until the next valuation, which is due no later than December 31, 2011. The December 2008 valuation resulted
in a going concern surplus of $25 million and a solvency surplus of $22 million. For 2011, Yellow Media Inc. will have to make
annual contributions to the Plan equivalent to the current service contributions of approximately $7 million for the defined
benefit component based on new pension regulations enacted in 2009.




                                                                                              YELLOW MEDIA INC. ANNUAL REPORT 2010   43
Management’s Discussion and Analysis



Sources and Uses of Cash
Consistent with other directories and media companies active in vertical media, the Company has relatively minimal capital
spending requirements combined with relatively low operating costs.

Sources and Uses of Cash
(in thousands of Canadian dollars)
                                                                                                        Years ended December 31,
                                                                                                       2010               2009
Cash flow from operating activities
 Cash flow from operations                                                                         $618,805           $690,349
 Change in operating assets and liabilities                                                          27,731              59,838
                                                                                                   $646,536           $750,187
Cash flow used in investing activities
 Business acquisitions, net of cash acquired and bank indebtedness assumed                         $(124,257)          $(25,189)
 Acquisition of equity investments                                                                    (6,856)           (47,698)
 Acquisition of intangible assets                                                                    (24,307)              (246)
 Acquisition of fixed assets                                                                         (67,408)           (44,428)
 Increased interest in a subsidiary                                                                   (4,901)                 –
 Proceeds from lease inducements                                                                           –                863
 Restricted cash                                                                                     (35,477)                 –
                                                                                                   $(263,206)         $(116,698)
Cash flow used in financing activities
 Issuance of long-term debt                                                                        $847,918          $1,621,300
 Repayment of long-term debt                                                                        (469,855)        (1,443,844)
 Dividends to shareholders                                                                          (395,522)          (488,386)
 Repurchase of units                                                                                       –            (40,905)
 Repurchase of Preferred shares, series 1 and 2, Exchangeable Debentures, credit facilities, and
   Medium Term Notes                                                                                (501,812)          (538,492)
 Issuance of convertible debentures                                                                 200,000                   –
 Issuance of Preferred shares, series 3 and 5                                                              –            332,500
 Other                                                                                               (64,852)           (63,591)
                                                                                                   $(384,123)         $(621,418)

Cash flow from operating activities
Cash flow from operating activities decreased from $750.2 million in the year ended December 31, 2009 to $646.5 million in
2010. Cash flow from operations decreased by $71.5 million for the year ended December 31, 2010. During the year, we
incurred $48.5 million relating to conversion and rebranding. In addition, our margins were slightly lower as a result of
acquisitions made during the year. The decrease in operating assets and liabilities for the year ended December 31, 2010 was
$32.1 million compared to last year. This change is mainly due to the timing of the payment of certain accounts payable and
accrued liabilities as reflected on our balance sheet.

The Company generates sufficient cash flow from operations to fund capital expenditures, dividends, working capital
requirements and to service its debt obligations.

Cash flow used in investing activities
Cash used in investing activities increased from $116.7 million in 2009 to $263.2 million in the same period this year. In
2009, the Company made an investment in Dealer.com, representing a total cash outflow of $44.9 million. It also exercised an
option to acquire the remaining 50% interest in LesPAC in which the Company already had a 50% interest representing a total
cash outflow of $25.2 million.

In 2010, the Company acquired an additional 10% interest in Dealer.com, a 60% interest in Mediative LP, all of the shares of
Canpages and Uptrend Media and acquired all of the operations of Restaurantica, RedFlagDeals.com, CanadianDriver and
AdSplash Inc. for a cash consideration of $124.3 million. In addition, the Company made equity investments in Ziplocal, 411.ca
and Bignition for $6.9 million. We also acquired the 411.ca brand for an amount of $12.5 million in connection with the
investment we made in 411.ca.




44   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                    Management’s Discussion and Analysis



Acquisition of Capital Assets, Net of Lease Inducements
(in thousands of Canadian dollars)
                                                                                                          Years ended December 31,
                                                                                                     2010                        2009
Sustaining                                                                                        $29,046                    $16,333
Transition                                                                                           9,011                      8,263
Growth                                                                                              37,321                     21,613
Total                                                                                             $75,378                    $46,209
Adjustment to reflect expenditures on a cash basis                                                  (2,508)                     (2,644)
Acquisition of capital assets, net of lease inducements                                           $72,870                    $43,565


Sustaining capital expenditures amounted to $29 million for the year ended December 31, 2010 compared to $16.3 million for
the previous year.

Transition capital expenditures relate to the development and implementation of new technology and software aimed at new
initiatives as we continue our transformation to a leading internet company. During the year, these amounted to $9 million
compared to $8.3 million for the previous year.

Total capital expenditures for year amounted to $75.4 million and were in line with expectations.

Cash flow used in financing activities
Cash used in financing activities decreased by $237.3 million during 2010 from $621.4 million for the same period last year as we
repaid less debt during the year ended December 31, 2010 compared to the same period last year. The lower level of dividends
per share compared to 2009, combined with a reduced number of shares outstanding, resulted in a decrease in dividends to
shareholders of $92.9 million for the year ended December 31, 2010 compared to the same period last year. In addition, the
Company repurchased Preferred Shares Series 1 and 2, Medium Term Notes, redeemed the remaining Exchangeable Debentures,
and repaid and cancelled private facility for $501.8 million during the year ended December 31, 2010 compared to $538.5 million
for the same period last year.

Financial and Other Instruments
(See Note 25 of the Consolidated Financial Statements of the Company for the year ended December 31, 2010).
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, investments,
accounts payable, dividends payable, short-term and long-term debt, convertible and exchangeable instruments, preferred
shares and interest rate derivatives.

Derivative Instruments
In August 2009, the Company entered into three interest rate swaps totalling $130 million to hedge the Series 9 Medium Term
Notes. The Company receives interest on these swaps at 6.5% and pays a floating rate equal to the three-month Banker’s
Acceptance plus a spread of 4.3%. The swaps mature July 10, 2013, matching the maturity date of the underlying debt.

In February 2010, the Company also entered into two interest rate swaps totalling $125 million to hedge the Series 8 Medium
Term Notes. The Company receives interest on these swaps at 6.85% and pays a floating rate equal to the three-month
Banker’s Acceptance plus a spread of 4.3%. The swaps mature December 3, 2013, matching the maturity date of the
underlying debt.

As at December 31, 2010, the interest rate swaps met the criteria for hedge accounting.

Taking into consideration the debt instruments outstanding, the preferred shares and the cash, our fixed-to-floating ratio was
70% fixed rate as at December 31, 2010. While the counterparties of these agreements expose YPG to credit losses in the
event of non-performance, we believe that the possibility of incurring such losses is unlikely. This is due to the creditworthiness
of all counterparties, all of whom are highly-rated Canadian chartered banks.

On October 15, 2010, the holders of the Notes monetized their investment through a resale of the Notes to a third-party
financial institution. In order to facilitate this resale transaction and the orderly conversion of the Notes into common shares
during the course of 2011, Yellow Media Inc. entered into a total return swap (TRS) transaction referencing the Notes with the
same counterparty for a period ending December 15, 2011. Pursuant to the terms of the TRS, the 5% fixed interest rate under
the Notes was converted to the floating rate of interest equal to the three-month Banker’s Acceptance plus 1.75%. In addition,
under the TRS, the counterparty as a holder of the Notes is expected to exchange 25% of the principal amount into underlying
Yellow Media Inc. common shares at 95% of the prevailing market price, to be calculated using a volume weighted average price
over a period of up to 20 days. In addition, Yellow Media Inc. may receive or pay under the TRS an adjustment amount to the


                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010   45
Management’s Discussion and Analysis



extent that the value realized by the TRS counterparty on the exchange or redemption of the Notes exceeds or is less than the
$141.6 million principal amount of the Notes The TRS is measured at fair value and is marked-to-market through net earnings
at each balance sheet date.

The terms and conditions of Preferred Shares Series 1 and 2 provide for redemption at the option of the Company under certain
circumstances. These options meet the definition of an embedded derivative. They are recorded at their fair value on the
consolidated balance sheet with changes in fair value recognized in earnings.

The carrying value of outstanding interest rate derivatives was an asset of $1.8 million, the carrying value of the TRS was an
asset of $2.8 million and the carrying value of embedded derivatives was an asset of $1.5 million on December 31, 2010. The
carrying value is calculated as is customary in the industry using discounted cash flows with quarter-end market rates. For the
year ended December 31, 2010, we reported an unrealized gain of $1 million (2009 – $1.5 million) on derivatives, excluding
the loss on derivatives designated as cash flow hedges in prior periods transferred to earnings in the period, payments on
interest rate swaps that have discontinued hedge accounting and payments on TRS.

Accounts receivable
YPG is exposed to credit risk with respect to accounts receivable from customers. Through our billing and collection services
agreements, Bell, TELUS, MTS Allstream Inc. and Bell Aliant receive money from customers on behalf of YPG. There are no
individual customers that accounted for 1% or more of revenues and there are no accounts receivable from any one individual
customer and certified marketing representative that exceeded 5% of the total balance of accounts receivable at any point in
time during the year. Included in trade accounts receivable of $216.8 million at December 31, 2010 is $39.3 million
(2009 - $43.7 million) to be remitted by Bell, $23.1 million (2009 – $24.6 million) to be remitted by TELUS, $3.0 million
(2009 - $3.1 million) to be remitted by MTS Allstream Inc. and $4.3 million (2009 - $4.5 million) to be remitted by Bell Aliant
under their respective billing and collection services agreements.

5. Adjusted Earnings
The Company’s primary source of cash for dividends is Adjusted Earnings. A reconciliation between net income attributable to
shareholders and adjusted earnings is provided below:

Adjusted Earnings
(in thousands of Canadian dollars)
                                                                                                                      Three-month period ended December 31,
                                                                                                                                                               2010
Net loss attributable to shareholders                                                                                                                         $(483)
Amortization of intangible assets1,6                                                                                                                         65,107
Acquisition-related costs2,6                                                                                                                                  3,471
Conversion and rebranding costs4,6                                                                                                                           22,773
Restructuring and special charges3,6                                                                                                                          5,230
Other5,6                                                                                                                                                      6,560
Future income taxes                                                                                                                                          16,777
Adjusted earnings                                                                                                                                         $119,435
Weighted average number of shares outstanding                                                                                                         502,452,392
Adjusted earnings per share6,7                                                                                                                                $0.24
Dividends on common shares                                                                                                                                $100,631
Dividends declared per share                                                                                                                                  $0.20
1    Represents amortization of intangible assets attributable to shareholders.
2    Acquisition-related costs are excluded from the calculation as they do not reflect the ongoing operations of the business. Prior to the Company’s early adoption of
     Section 1582, Business Combinations on January 1, 2010, these expenses would have been included in the purchase price of such acquisitions.
3    Restructuring and special charges are excluded from the calculation as they do not reflect the ongoing operations of the business.
4    Conversion and rebranding costs are excluded from the calculation as they do not reflect the ongoing operations of the business.
5    Includes amounts relating to other non-recurring items and non-cash financial charges.
6    Items are net of income taxes using the combined statutory provincial and federal tax rate of 29.9%.
7    Please refer to Section 3 – Highlights by Segment for the calculation of Basic earnings per share.




46     YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                  Management’s Discussion and Analysis




Free cash flow

Free cash flow
(in thousands of Canadian dollars)
                                                                   Three-month periods ended December 31,               Years ended December 31,
                                                                                     2010              2009                2010                2009
Cash flow from operating activities                                             $180,919           $198,734            $646,536           $750,187
Capital expenditures, net of lease inducements                                     27,916            11,285              72,870              43,565
Free cash flow                                                                  $153,003           $187,449            $573,666           $706,622

Dividends

Dividends
(in thousands of Canadian dollars)
                                                                   Three-month periods ended December 31,               Years ended December 31,
                                                                                     2010              2009                2010                2009
Accumulated dividends, beginning of period        1                          $3,334,551           $2,931,134       $3,032,463           $2,560,566
Dividends on common shares                                                      $100,631           $101,329            $402,719           $471,897
Accumulated dividends, end of period1                                        $3,435,182           $3,032,463       $3,435,182           $3,032,463
Accumulated dividends per share, beginning of period                                $7.00              $6.20              $6.40                $5.48
Dividends declared per share                                                        $0.20              $0.20              $0.80                $0.92
Accumulated dividends per share, end of period                                      $7.20              $6.40              $7.20                $6.40
1.   Amounts prior to November 1, 2010 were distributions of Yellow Pages Income Fund.
Dividends
During the fourth quarter of 2010, Yellow Media Inc. declared and paid its first cash dividend in the amount of $27.1 million or
$0.80 per common share annually. Dividends payable by Yellow Media Inc. to its shareholders are recorded when declared.
Starting in January 2011, the dividend policy of Yellow Media Inc. has been set at $0.65 annually.

The dividend policy in respect of the common shares of Yellow Media Inc. will be subject to the discretion of the board of
directors of Yellow Media Inc. and may vary depending on, among other things, Yellow Media Inc.'s earnings, financial
requirements, the satisfaction of solvency tests imposed by the Canada Business Corporations Act for the declaration of
dividends and other conditions existing at such future time.

On October 21, 2010, Yellow Media Inc. announced its adoption of a Dividend Reinvestment Plan (the Plan). The Plan came into
effect concurrently with the Company’s previously announced conversion from an income trust to a corporate structure which
was completed on November 1, 2010. Under the Plan, holders of common shares of Yellow Media Inc. who are residents of
Canada may elect to have cash dividends paid on their common shares reinvested into additional common shares of Yellow
Media Inc. commencing with the dividends declared after November 1, 2010. The Plan allows the Company to elect to have the
common shares purchased on the open market or issued from treasury. The Plan allows the Company to issue common shares
from treasury with a discount from prevailing market prices ranging from 2% to 5%. As at February 10, 2011, under the Plan,
the Company intends to have the common shares issued from treasury at a 5% discount from the average market price (as
defined under the Plan) of the common shares on the applicable dividend payment date. As of December 31, 2010,
participation in the Plan offered by Yellow Media Inc. was at 19%.

6. Outlook
Consolidated – Key Performance Indicators
                                                                         Revised 2010 Target                   Year ended December 31, 2010
Revenues                                                                 approx. $1,650 million                $1,679.9 million
EBITDA before conversion and rebranding costs                            approx. $895 million                  $898.8 million
Online Revenue Growth                                                    approx. 20%                           15.8%
Distributable cash per share                                             $1.40 to $1.43                        $1.41

The development and execution of our corporate strategy and operating plans continue to be guided by our vision of being
Canada’s #1 internet company and a leading performance media and marketing solutions company, bringing local consumers
and businesses together via our network of mobile, web and print properties. Each year, we establish targets to advance our
goals and drive results through the execution of initiatives to maximize revenue growth and cash flow generation.



                                                                                                               YELLOW MEDIA INC. ANNUAL REPORT 2010   47
Management’s Discussion and Analysis



Our objectives for the fiscal year ending December 31, 2011 were established in August 2010 based on our economic and
business outlook at that time. This continues to be our operating framework for 2011 and we will measure our progress in
achieving these full year objectives on a quarterly basis. As we do each year, we considered Canadian macroeconomic
conditions, the expected evolution of the Canadian GDP, competitive activity in some of our localized markets and our ability to
respond to changing market conditions while offering our advertisers new products and services. We also considered third party
expectations regarding Canadian advertising trends and changing consumer trends affecting local commercial search.

We believe the growing funnel of new products in Directories and the roll-out of Dealer Smart Solution at Trader should enable
us to grow our share of advertiser budgets. In light of the results for 2010, and in developing an updated operating framework
going into 2011, we maintain a cautious outlook in terms of the potential strength and sustainability of the economic recovery.

Financial Policy
Yellow Media Inc.’s objectives when managing capital are to ensure sufficient liquidity to cover financial obligations and
investment requirements, preserve access to low-cost funding, maintain or improve investment grade credit ratings, and deliver
stable returns to investors.

To achieve the above objectives, Yellow Media Inc. intends to continue improving its consolidated financial profile with further
debt reduction, pursue a prudent financial policy, and maintain a structure that provides flexibility and diversity of funding
sources and timing of debt maturities.

7. Critical Assumptions
When we prepare our financial statements in accordance with Canadian GAAP, we must make certain estimates and
assumptions about our business. These estimates and assumptions in turn affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements.

In this section we provide detailed information on these important estimates and assumptions which are under continuous
evaluation by the Company.

Critical Accounting Estimates
We base our estimates and assumptions on past experience and other factors that are deemed reasonable under normal
business practices. This involves varying degrees of judgement and uncertainty, thus the amounts currently reported in the
financial statements – which we believe to be valid at this time – could prove to be inaccurate in the future.

Business combinations
YPG’s acquisitions have been accounted for using the purchase method of accounting. Under the purchase method, the
acquiring company adds to its own balance sheet the estimated fair values of the acquired company’s assets and liabilities.

There are various assumptions made by YPG in determining the fair values of the acquired companies’ assets and liabilities. The
most significant assumptions, and those requiring the most judgment, involve the estimated fair values of trademarks. To
determine the fair value of these trademarks, we adopted the “relief from royalty approach”, a valuation technique based on the
concept that the Company owns the trademark, and is therefore not required to pay royalties for its use. The amount of the
notional royalty payment is used as a surrogate for income attributable to the trademark. The fair value of the trademark is based
upon the present value of the expected after-tax royalty or cash flow stream. Among others, significant assumptions include the
determination of royalty rates, discount rate, weighted average cost of capital and anticipated average income tax rates.

Intangibles and goodwill
Intangibles and goodwill represented 22.8% and 70% respectively (2009 – 22.5% and 70.9%), of YPG’s consolidated assets as at
December 31, 2010. If the Company’s estimated useful lives of these assets were incorrect, we could experience increased or
reduced charges for amortization of intangible assets that have finite lives in the future. If the future was to adversely differ from
management’s best estimate of key economic assumptions, and if associated cash flows were to materially decrease, YPG could
potentially experience future material impairment charges related to its intangible assets that have indefinite lives. If intangible
assets with indefinite lives were determined to have finite lives at some point in the future, YPG could experience increased charges
for amortization of intangible assets. Such charges do not result in a cash outflow and would not affect YPG’s liquidity.

Recoverability of intangible assets
Any potential intangible asset impairment is identified by comparing the fair value of the indefinite life intangible asset with
value as stated – or carried – on our books. If the fair value of the intangible asset exceeds its carrying value, the intangible
asset is not considered to be impaired. However, if the reverse is true and the carrying value of the intangible asset exceeds its
fair value, it is considered to be impaired. This impairment is defined as the difference between the fair value and the carrying


48   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                     Management’s Discussion and Analysis



value. This will result in a reduction in the carrying value of the intangible assets on the consolidated balance sheet and in the
recognition of a non-cash impairment charge in our operating income metric. Consistent with current industry-specific valuation
methods, YPG uses a “discounted expected future cash flow” model in determining the fair value of its intangible assets.

The most significant assumptions underlying the recoverability of intangible assets with indefinite lives include projected
revenues and EBITDA, anticipated market share and projected renewal rates. We perform annual impairment tests of our
indefinite life intangible assets. In light of the current economic conditions and a decrease in our share price, we performed an
in-depth review of all assumptions used in our models. We also considered the prevailing conditions in our industries. Based
on our analysis, we concluded that no impairment charge was required.

Recoverability of goodwill
Goodwill is not amortized. It is assessed for impairment annually and sometimes more frequently if a change in circumstances
indicates that the asset might be impaired. We identify potential goodwill impairment by comparing the fair value of the
business to its carrying value on our books. If the carrying value exceeds its fair value, a more detailed goodwill impairment
assessment must be undertaken. However, if the reverse is true and the fair value exceeds its carrying value, goodwill is
considered not to be impaired. A goodwill impairment loss would be recognized to the extent that the carrying value of goodwill
exceeds its implied fair value.

Fair value of goodwill is estimated in the same manner as goodwill is determined at the date of acquisition in a business
acquisition. Specifically, goodwill is defined as the excess of the fair value of the business over the fair value of the identifiable
net assets of the reporting unit. Any goodwill impairment will result in a reduction in the carrying value of goodwill on the
consolidated balance sheet and in the recognition of a non-cash impairment charge in our operating income metric. The
Company determines fair value by using a “discounted expected future cash flow” model in accordance with recognized
valuation methods. The process of determining these fair values requires management to make a number of estimates and
assumptions such as projected future sales, cost of sales, earnings, market conditions and discount rates.

During the year ended December 31, 2009, Yellow Media Inc. determined that the deterioration of the economic environment
and its continuing negative impact on our Vertical Media segment revenues was an indicator that the goodwill related to the
Vertical Media segment should be tested for potential impairment.

The impairment testing was completed during the year. As a result, an impairment loss of $315 million was recorded in net
earnings for the year ended December 31, 2009.

The goodwill impairment charge is an accounting adjustment only and does not affect our ongoing operations; it is a non-cash
write-down having no impact on liquidity, cash flows from operating activities, bank credit agreements, bond indentures or
future operations.

Allowance for doubtful accounts
We expect that a certain portion of required customer payments will not be made – what we refer to as “doubtful accounts”. To
account for this, we maintain an allowance in our books for these doubtful accounts based on our estimate of the likelihood of
recovering certain accounts receivable. It incorporates current and expected collection trends. Accounts receivable represented
approximately 32.5% (2009 – 36.5%) of our consolidated tangible assets as at December 31, 2010. If economic conditions
change, or actual results or specific industry trends differ from our expectations, we will adjust our allowance for doubtful
accounts and our bad debt expense accordingly.

Employee future benefits
YPG provides its eligible employees with pension benefits under various pension plans. Certain actuarial and economic assumptions
used in determining pension costs, accrued pension benefit obligations, and pension plan assets require significant judgment.

The accrued benefit obligation and expense are determined by independent actuaries on an annual basis, using the “projected
benefit method” pro-rated for service. They are also based on management’s best economic and demographic estimates, and
on significant actuarial assumptions, including employees’ expected years of service, retirement age, and specified benefit
levels. The discount rate, which is used to determine the accrued benefit obligation, is based on market interest rates on high-
quality, long-term bonds. Market changes could have an impact on the discount rate, resulting in an obligation for YPG to make
future contributions to its pension plan that could differ significantly from the current estimates. Future increases in
compensation to employees are based on current benefit policies and on economic forecasts. Defined benefit pension costs are
also affected by the quantitative methods used to determine estimated returns on pension plan assets.

The expected return on the plan assets is determined by considering long-term historical returns, future estimates of long-term
investment returns, and asset allocation. There is no assurance that the plan will be able to earn the assumed rate of return.




                                                                                                  YELLOW MEDIA INC. ANNUAL REPORT 2010   49
Management’s Discussion and Analysis



The significant actuarial assumptions adopted are consistent with what we have used in the past. They reflect the long-term
nature of employee future benefits. Significant changes in assumptions could materially affect our employee benefit obligations,
future expenses, and overall financial performance. These changes could be caused, for example, by updated historical
information or changes in market conditions.

Any immediate impact is lessened, however, as the net actuarial gains and losses in excess of 10% of the greater of the benefit
obligation and the fair value of the plan assets would be amortized over the average remaining service period of active
employees covered by the plan.

Change in Accounting Policies
a) Section 1582, Business Combinations. Section 1582 provides the Canadian equivalent to IFRS 3 "Business Combinations".
The new recommendations require measuring business acquisitions at the fair value of the acquired business, including the
measurement at fair value of items such as non-controlling interests and contingent payment considerations. In addition,
business acquisition-related costs including transaction costs and restructuring costs are expensed rather than capitalized.

b) Section 1601, Consolidated Financial Statements and Section 1602, Non-Controlling Interests. Section 1601, together with
Section 1602, replace Section 1600. Section 1601 establishes standards for the preparation of consolidated financial
statements. The requirements in this Section are substantially converged with the portion of Section 1600 which establishes
standards for the preparation of consolidated financial statements. Section 1602 is substantially converged with the portion of
IAS 27, “Consolidated and Separate Financial Statements” that establishes standards for accounting for non-controlling
interests in a subsidiary subsequent to a business combination. Section 1602 introduces a number of changes, including:
           in the consolidated balance sheets and consolidated statements of equity, non-controlling interests are now presented
           as a separate component of equity as opposed to a separate item on the balance sheet outside of equity;
           non-controlling interests are no longer recorded as a deduction in calculating net earnings and total comprehensive
           income. Instead, net earnings and each component of other comprehensive income are attributed to the shareholders
           of the Company and to the non-controlling interests;
           shares owned prior to a change in control on a step acquisition have to be valued at their fair value on the date of
           acquisition and any gain or loss on those shares needs to be recognized in net earnings.

Basic earnings per share is computed by dividing net earnings available to common shareholders of Yellow Media Inc. by the
weighted average number of shares outstanding during the year. This calculation is consistent with the calculation of the Basic
earnings per share before adopting this Section. Therefore, basic earnings per share did not change.

The above sections were not mandatorily applicable for Yellow Media Inc. before the fiscal year beginning on January 1, 2011.
However, Yellow Media Inc. has elected to early adopt these sections, as of January 1, 2010, in order to more closely align itself
with IFRS and mitigate the impact of adopting IFRS at the changeover date. In accordance with the transitional provisions, these
sections have been applied prospectively, with the exception of the presentation requirements for non-controlling interests,
which must be applied retrospectively. The adoption of these sections modified the accounting of business combinations
realized during the year for which acquisition-related costs amounting to $30.5 million were recorded directly in the
consolidated statement of earnings. Furthermore, the adoption of these sections gave rise to the above-mentioned
reclassifications of non-controlling interests, including the reclassification as at January 1, 2010 of an amount of $324.1 million
from non-controlling interests to equity.

Effect of New Accounting Standards Not Yet Implemented
International Financial Reporting Standards (IFRS)

In February 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable enterprises will be
required to adopt IFRS in place of Canadian Generally Accepted Accounting Principles (Canadian GAAP) for interim and annual
reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, Yellow Media Inc. will issue its last
financial statements prepared in accordance with Canadian GAAP in 2010. Starting from the first quarter of 2011, Yellow
Media Inc.’s financial statements will be prepared in accordance with IFRS with 2010 comparative figures and January 1, 2010
(date of transition) opening balance sheet restated to conform to IFRS.

Financial reporting under IFRS differs from Canadian GAAP in a number of respects, some of which are significant. IFRS on the
date of adoption could differ from current IFRS due to new IFRS standards and pronouncements that are expected to be issued
before the changeover date.

The Company has established a changeover plan in order to transition its financial statement reporting, presentation and disclosure
under IFRS to meet the January 1, 2011 deadline. The implementation project consists of three primary phases: Phase 1: Scoping
and Diagnostic Phase, Phase 2: Impact Analysis and Design Phase, and Phase 3: Implementation and Review Phase.




50   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                    Management’s Discussion and Analysis



Current status of our IFRS changeover plan
We have completed Phase 1 and Phase 2 of our conversion project. As a result of this work, we have identified a number of
differences and policy alternatives between Canadian GAAP and IFRS that will modify our financial statements at the date of
conversion.

The following describes the major identified differences that could be presented in our reconciliation of net earnings and equity
upon transition if the conversion was done as of December 31, 2009 with currently applicable standards. Key IFRS exemption
options are subsequently presented.

Notwithstanding the above, the current International Accounting Standards Board (IASB) and International Financial Reporting
Interpretations Committee (IFRIC) projects may modify some of the actual IFRS requirements which might therefore ultimately
impact the following identified major differences.

Major differences with current accounting policies
Employee Benefits – Past service cost
Canadian GAAP – Past service costs arising from plan amendments are amortized on a straight-line basis over the average
remaining service period of active employees expected to benefit from the amendment.

IFRS – These costs are amortized on a straight-line basis over the average period until the benefits become vested. To the
extent that the amended benefits are already vested, past service costs are recognized immediately.

Impact on the Company – As at December 31, 2009, Yellow Media Inc. had an unamortized plan amendment balance of
$4.9 million attributable to amended benefits already vested after modification to the other benefits plan made in 2005. This
balance will need to be reversed against opening retained earnings on date of transition.

Income Taxes – Temporary differences on intangible assets
Canadian GAAP – Future income taxes are calculated from temporary differences that are differences between the tax basis of
an asset or liability and its carrying amount in the balance sheet. Under the current Canadian Income Tax Act, "eligible capital
expenditures" are deductible for tax purposes to the extent of 75 percent of the cost incurred; Section 3465 – Income taxes
addresses this specific situation and specifies that for these assets, at any point in time, the tax basis represents the balance in
the cumulative eligible capital pool plus 25 percent of the carrying amount.

IFRS – The definition of temporary differences under IFRS is generally consistent with Canadian GAAP. However, IFRS does not
provide specific guidance in relation to the determination of the tax basis of eligible capital expenditures such as the one
described above. As such, the tax basis of these assets, without taking into consideration the 25 percent adjustment of the
carrying amount as allowed under Canadian GAAP, should be compared with the carrying amount in the balance sheet to
determine the temporary difference relating to these assets.

Impact on the Company – As at December 31, 2009, in order to comply with IFRS, Yellow Media Inc. would have had to increase
future income tax liabilities by approximately $76.8 million to account for temporary differences currently excluded on the 25
percent adjustment of the carrying amount of eligible capital expenditures. This increase will be recorded through an opening
retained earnings adjustment on date of transition.

Impairment – Grouping of assets
Canadian GAAP – When a long-lived asset does not have identifiable cash flows that are largely independent of those from other
assets, that asset must be grouped with other related assets for impairment. This is referred to as the asset group.

IFRS – Grouping of assets should be done when an asset does not have identifiable cash inflows, as opposed to net cash flows,
that are independent of those from other assets.

Impact on the Company – As a result of the different asset grouping required under IFRS, intangible assets in the Vertical Media
segment were deemed to be impaired by an amount of $2.1 million as at December 31, 2009. The impairment described
above will be recorded through an opening retained earnings adjustment on date of transition. No other impairment of either
goodwill or other long-lived assets subject to impairment testing will need to be recorded in the opening balance for both
Directories and Vertical Media segments.




                                                                                                 YELLOW MEDIA INC. ANNUAL REPORT 2010   51
Management’s Discussion and Analysis



Key IFRS 1 Exemption Options
1. Business combinations – IFRS 3, Business Combinations, may be applied retrospectively or prospectively. The retrospective
basis would require restatement of all business combinations that occurred prior to the transition date. We will not elect to
retrospectively apply IFRS 3 to business combinations that occurred prior to the date of transition and such business
combinations will not be restated. Any goodwill arising on such business combinations before the date of transition will not be
adjusted from the carrying value previously determined under Canadian GAAP as a result of applying these exemptions except
as required under IFRS 1.

2. Fair value as deemed cost – IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at
the date of transition and using those amounts as deemed cost or on a depreciated cost basis in accordance with IAS 16,
Property, plant and equipment. We will continue to apply the cost model for property, plant and equipment and will not restate
property, plant and equipment to fair value under IFRS. No significant adjustments are expected.

3. Employee benefits – IAS 19, Employee Benefits, allows certain actuarial gains and losses to be either deferred and
amortized, subject to certain provisions (corridor approach), or immediately recognized through equity. Retrospective application
of the corridor approach for recognition of actuarial gains and losses in accordance with IAS 19 would require us to determine
actuarial gains and losses from the date benefit plans were established. We will elect to recognize all cumulative actuarial gains
and losses that existed at the date of transition in opening retained earnings for all of our employee benefit plans.

Impact on the Company – As at December 31, 2009, Yellow Media Inc. had unamortized net actuarial losses of $24.4 million
for pension benefits and gains of $9.1 million for other benefits. These balances will be recognized in opening retained
earnings at the date of transition.

4. Cumulative translation differences – Retrospective application of IFRS would require us to determine cumulative currency
translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary
or associate was formed or acquired. IFRS 1 permits cumulative translation gains and losses to be reset to zero at the date of
transition after consideration of all other transition adjustments. We will elect to reset all cumulative translation gains and
losses to zero in opening retained earnings at the date of transition.

Impact on the Company – As at December 31, 2009, Yellow Media Inc. had accumulated unrealized losses on translating
financial statements of self-sustaining operations and foreign investees of $3.9 million. These balances will be recognized in
opening retained earnings at the date of transition.

In light of the actual differences identified relative to our conversion to IFRS, no significant changes to our design of disclosure
controls and procedures (DC&P) and internal control over financial reporting (ICFR) are expected.

8. Risks and Uncertainties
The following section examines the major risks and uncertainties that could materially affect YPG’s future business results and
explains how these risks are managed.

Understanding and managing risks are important parts of YPG’s strategic planning process. The Board requires that our senior
management identify and properly manage the principal risks related to our business operations. To understand and manage
risks at YPG, our Board and senior management analyze risks in three major categories:
      1.    Strategic risks – which are primarily external to the business;
      2.    Financial risks – generally related to matters addressed in the Financial Risk Management Policy and in the Pension
            Statement of Investment Policy and Procedures; and,
      3.    Operational risks – related principally to risks under the control of management across key functional areas of the
            organization.

YPG has put in place certain guidelines in order to manage the risks to which it may be exposed. Please refer to the Annual
Information Form for a complete description of these risk factors. Despite these guidelines, the Company cannot provide
assurances that any such efforts will be successful.

Competition
YPG competes with other directory and classified advertising businesses and with other forms of advertising media. This includes
newspapers, television, radio, the Internet, mobile telecommunication devices, magazines, billboards and direct mail advertising.

These competitors may reduce their prices to increase their market share or may be able to offer their services at lower costs
than we can. In either case, YPG could be forced to reduce prices or offer and perform other services in order to remain
competitive. YPG’s failure to compete effectively with its current or future competitors could have a number of impacts such as,
a reduction in its advertiser base, lower rates and increased costs. This could have a material adverse effect on our financial
condition and on our results of operations.

52   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                                             Management’s Discussion and Analysis



A significant portion of YPG’s organic growth resulted from increased prices for its products and services on an annual basis.
There can be no assurance that YPG will be able to continue to increase prices in the future. Entry of competitors into YPG's
markets may make it more difficult for us to maintain growth at historical rates through price increases.

The Vertical Media business also faces substantial online competition due to the lower barriers to entry on the Internet. In
addition, increased online penetration and the resulting increase in the availability of free classified advertising opportunities
may cause a decrease in the total revenues for classified advertising, particularly if the Vertical Media business is unable to find
a way to effectively generate revenue from online activities.

We actively monitor and assess our competition and determine our competitiveness within each of our markets. We address
this competition by ensuring we best meet customer needs through targeted offers and pricing.

We continuously enhance our value proposition in both segments with initiatives targeting the following objectives:

             Enhancement of our product offerings and extension of our services to customers;

             Improvement of user experience; and

             Growth of traffic to our network of properties.

We also use multimedia campaigns to promote our brand and deliver our message to the market reinforcing the value our
segments offer.

The Vertical Media business faces competition for advantageous retail display placement. In the retail environment, the Vertical
Media business competes with all print publications that are co-displayed at any time. Local distribution managers, through
frequent contact with third party distributors, retailers and wholesalers, closely monitor the flow of publications to ensure that
an adequate number of copies are available for sale or distribution, while minimizing the number of unsold or undistributed
copies. In many of Trader’s regions, this process has been automated through the use of planning software. The failure of our
Vertical Media business to remain competitive and maintain favourable placement of its publications on retailer display racks
could have a material adverse effect on the circulation of its publications. We are developing innovative product placement
practices, such as the free supply of attractive display racks to retailers, long-term display arrangements with retailers and third-
party maintenance of retail display racks.

Decline in overall usage of print directories and vertical media
YPG could be materially adversely affected if the usage of printed telephone directories or vertical publications continues to
decline. The development of new technologies and the widespread use of Internet is causing changes in preferences and
consumer habits. In particular, this could eventually have a significant influence on printed products, and the decrease in usage
will ultimately lead to lower advertising revenues. Since YPG derives a substantial portion of its advertising revenues from
printed publications, the new revenues that YPG could draw from online products may not necessarily offset any decline in print
revenues, which could have a material adverse effect on our business. The continuing transition in the media and publishing
industries towards more online and targeted content is driving us to develop new products that leverage the demand for new
media while ensuring that our print products remain a key component of our advertisers’ media mix.

Availability of Capital
We may need to refinance our available credit facilities or other debt obligations in the future. In addition, future capital
expenditures and potential acquisitions may require additional financing. Economic conditions may further constrain our ability to
meet our future financing requirements, increase our weighted average cost of capital and cause other cost increases from
counterparties also faced with liquidity problems and higher cost of capital. Disruptions and high volatility in the capital markets
could reduce the amount of capital available or increase the cost of such capital. These risks are mitigated to the extent that we
currently maintain committed long term bank facilities for a total amount of $1 billion, continue to benefit from investment grade
credit ratings, and due to our strong financial position (with a net indebtedness1 to Latest Twelve Month EBITDA before conversion
and rebranding costs2 ratio of 2.6 times as at December 31, 2010) and the liquidity provided by cash generated from our
operations. Despite such factors, no assurances can be given as to the future availability of capital. If we are unable to obtain such
additional financing, when and if required, or to refinance our credit facilities or other debt obligations, or we are only able to obtain
such additional financing or refinance these credit facilities or other debt obligations on less favorable and/or more restrictive
terms, this could have a material adverse effect on our financial position and on our future growth by limiting acquisitions and
capital expenditures, and may also indirectly limit or negatively impact our ability to pay cash distributions.




1   Including exchangeable and convertible debentures
2   Latest twelve month Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill, restructuring and special
    charges and conversion and rebranding costs, giving effect to the acquisitions (“Latest Twelve Month EBITDA before conversion and rebranding costs”).


                                                                                                                         YELLOW MEDIA INC. ANNUAL REPORT 2010       53
Management’s Discussion and Analysis



Interest rate fluctuations
YPG is exposed to fluctuations in short term interest rates on some of its financial obligations bearing variable interest rates.
YPG is also exposed to fluctuations in long term interest rates and credit spreads relative to the refinancing of its debt
obligations upon their maturity. The interest rate on new long term debt issuances will be based on the prevailing market rates
at the time of the refinancing and will depend on the tenor of the new debt issued. Increases in short term interest rates and
increases in interest rates on new debt issuances may have a material adverse effect on our earnings.

We manage interest rate exposure by maintaining a balanced schedule of debt maturities, and through a combination of fixed
and floating interest rate obligations. YPG monitors market conditions and the impact of interest rate fluctuations on our fixed-
to-floating interest rate exposure mix. From time to time, we enter into interest rate swap agreements and other interest rate
derivatives in order to manage this exposure.

Pension Contributions
We may be required to make contributions to our pension plans in the future depending on various factors including future
returns on pension plan assets, long-term interest rates and changes in pension regulations, which may have a negative effect
on our liquidity and results of operations.

The funding requirements of our pension plans, resulting from valuations of our pension plan assets and liabilities, depend on a
number of factors, including actual returns on pension plan assets, long-term interest rates, plan demographic and pension
regulations. Changes in these factors could cause actual future contributions to significantly differ from our current estimates
and could require us to make contributions to our pension plans in the future and, therefore, could have a negative effect on our
liquidity and results of operations.

There is no assurance that our pension plans will be able to earn their assumed rate of return. A material portion of our pension
plans' assets is invested in public equity securities. As a result, the ability of our pension plans to earn the rate of return that we
have assumed significantly depends on the performance of capital markets. The market conditions also impact the discount
rate used to calculate our solvency obligations and thereby could also significantly affect our cash funding requirements.

YPG's reliance on outsourcing for billing, collection, printing and binding and other services
We have a Billing and Collection Services Agreement with Bell Canada and a Master Billing and Collection Services Agreement
with TELUS, a Billing and Collection Services Agreement with MTS Allstream Inc. and a Billing and Collection Service Agreement
with Bell Aliant. Through these agreements, our billing is included as a separate line item on the telephone bills of Bell, TELUS,
MTS Allstream Inc. and Bell Aliant customers who use our services respectively. Bell Canada, TELUS, MTS Allstream Inc. and
Bell Aliant (the Telco Partners) contract with third parties to conduct monthly billing of customers who use them as their local
telephone service providers. In addition, the Telco Partners provide collection services for YPG with those advertisers who are
also their customers. Additionally, YPG has entered into publishing agreements with each Telco Partner. If YPG fails to perform
its obligations under these agreements and the agreements are consequently terminated by such Telco Partner, other
agreements with such Telco Partners may also be terminated, including the Bell Canada Trademark License Agreement, the
TELUS Trademark License Agreement, the MTS Allstream Inc. Branding and Trademark Agreement and the Bell Aliant Branding
and Trademark Agreement, as well as non-competition covenants we benefit from with such Telco Partners.

We have agreements with outside service suppliers to print and distribute our directories and publications. These agreements
are for services that are integral to our business.

The failure of the Telco Partners or any of the other suppliers to fulfill their contractual obligations under these agreements
could result in a material adverse effect on our business until we could find a replacement supplier for those services.

Advertisers who do not use the Telco Partners as their local telephone provider are billed directly by YPG. Our internal billing
and collection services are cost-effective and can be grown as our customer base expands.

Reliance on key brands and trademarks and failure to protect intellectual property rights
YPG relies heavily on its existing brands and trademarks for a significant portion of its revenues. Failure to adequately maintain
the strength and integrity of these brands and trademarks, or to develop new brands and trademarks, could adversely affect our
results from operations and our financial condition.

It is possible that third parties could infringe upon, misappropriate or challenge the validity of YPG’s trademarks or our other
intellectual property rights. This could have a material adverse effect on our business, our financial condition or our operating
results. The actions that YPG takes to protect its trademarks and other proprietary rights may not be adequate. Litigation may be
necessary to enforce or protect YPG's intellectual property rights, its trade secrets or to determine the validity and scope of the
proprietary rights of others. We cannot ensure that we will be able to prevent infringement of our intellectual property rights or
misappropriation of our proprietary information.




54   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                                        Management’s Discussion and Analysis



Any such infringement or misappropriation could harm any competitive advantage we currently derive, or may derive, from our
proprietary rights. Third parties may assert infringement claims against YPG. Any such claims and any resulting litigation could
subject YPG to significant liability for damages. An adverse judgement arising from any litigation of this type could require YPG to
design around a third party's patent or to license alternative technology from another party. In addition, litigation may be time-
consuming and expensive to defend against and could result in the diversion of YPG's time and resources. Any claims from third
parties may also result in limitations on YPG's ability to use the intellectual property subject to these claims.

We devote significant resources to the development and protection of our trademarks and take a proactive approach to
protecting our brand exclusivity.

Labour relations
Certain non-management employees of YPG are unionized. Current union agreements range between two to four years in
duration and are subject to expiration at various dates in the future. If YPG is unable to renew these agreements as they come
up for renegotiation from time to time, it could result in work stoppages and other labour disturbances which could have a
material adverse effect on our business.

We manage labour relations risk by ensuring that collective agreements’ expiration dates are strategically positioned to minimize
potential disruptions on both a regional (geographic) or on a functional (sales and clerical) basis. Also, every negotiation process to
renew a collective agreement includes a cross-functional team in which all business units are represented. This team has the
responsibility to develop and ultimately implement an effective contingency plan that would allow YPG to continue its day to day
operations with minimal disruptions in the event of a labour dispute.

Income Tax Matters
In the normal course of the Company's activities, the tax authorities are carrying out ongoing reviews. In that respect, Yellow Media Inc.
is of the view that all expenses claimed by the different entities of the group are reasonable and deductible and that the cost
amount and capital cost allowance claims of such entities' depreciable properties have been correctly determined. There is no
assurance that the tax authorities may not challenge these positions. Such challenge, if successful, may have an adverse effect on
our earnings and may affect the return to shareholders.

9. Controls and Procedures
As a public entity we must take every step to ensure that material information regarding our reports filed or submitted under
securities legislation fairly presents the financial information of YPG. Responsibility for this resides with management, including
the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer.
Management is responsible for establishing, maintaining and evaluating disclosure controls and procedures, as well as internal
control over financial reporting.

Disclosure Controls and Procedures (DC&P)
The evaluation of the effectiveness of DC&P as defined in National Instrument 52-109 was performed under the supervision of
the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer.
They concluded that these disclosure controls and procedures were adequate and effective, as at December 31, 2010. YPG’s
management can therefore provide reasonable assurance that it receives material information relating to the company in a
timely manner so that it can provide investors with complete and reliable information.

Internal Control over Financial Reporting (ICFR)
Management has designed ICFR to provide reasonable assurance that our financial reporting is reliable and that our
consolidated financial statements were prepared in accordance with GAAP. The design and effectiveness of ICFR were
evaluated as defined in National Instruments 52-109 under the supervision of the President and Chief Executive Officer and the
Executive Vice President – Corporate Services and Chief Financial Officer. Based on the evaluations, they concluded that the
ICFR is adequate and effective to provide such assurance as at December 31, 2010.

Management also concluded that during the fourth quarter ended December 31, 2010, no changes were made to ICFR that
would have materially affected, or would be reasonably considered to materially affect, these controls.




                                                                                                     YELLOW MEDIA INC. ANNUAL REPORT 2010   55
Management’s Report
The accompanying financial statements of Yellow Media Inc. and all information in this annual report are the responsibility of
management and have been approved by the Board of Directors. The financial statements are based upon management’s best
estimates and judgements and have been prepared in conformity with generally accepted accounting principles in Canada.
Financial information used elsewhere in the annual report is consistent with that in the financial statements.

To ensure the integrity and objectivity of the data, management maintains internal accounting controls and established policies
and procedures designed to ensure reasonable assurance that transactions are recorded and executed in accordance with its
authorization, that assets are properly safeguarded and that reliable financial records are maintained. The internal control
systems and financial records are subject to review by the external auditors during the examination of the financial statements.

The responsibility of the Board of Directors is pursued principally through the Audit Committee. The Audit Committee, which is
composed exclusively of outside directors, meets regularly with the external auditors and with management, to discuss
accounting policies and practices, internal control systems, the scope of audit word and to assess reports on audit work
performed. The external auditors have direct access to the Audit Committee, with or without the presence of management, to
discuss results of their audits and any recommendations they have for improvements in internal controls, the quality of financial
reporting and any other matters of interest. The financial statements have been reviewed and approved by the Board of
Directors on the recommendation of the Audit Committee.




          M.
Christian M Paupe
Executive Vice President,
Corporate Services and Chief Financial Officer




Ginette Maillé
Gi
Chief Accounting Officer




Daniel Verret
Vice President and Corporate Controller




56   YELLOW MEDIA INC. ANNUAL REPORT 2010
Independent Auditor’s Report
To the shareholders of Yellow Media Inc.

We have audited the accompanying consolidated financial statements of Yellow Media Inc. (previously Yellow Pages Income
Fund), which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements
of earnings, comprehensive income, equity and cash flows for the years then ended, and a summary of significant accounting
policies and other explanatory information.

Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with Canadian generally accepted accounting principles and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud
or error.

Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Yellow Media Inc.
as at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.




February 9, 2011
Montréal, Québec
____________________
1
    Chartered accountant auditor permit No. 10800




                                                                                                      YELLOW MEDIA INC. ANNUAL REPORT 2010   57
Consolidated Balance Sheets
As at December 31,
(in thousands of Canadian dollars)
                                                                                              2010                2009
                                                                                                          (as adjusted1)
ASSETS
CURRENT ASSETS
       Cash and cash equivalents                                                      $     33,848    $         36,170
       Restricted cash (Note 4)                                                             35,477                    –
       Accounts receivable                                                                 216,768             215,356
       Prepaid expenses                                                                      7,298               6,480
       Deferred publication costs and other assets                                         109,322             130,844
       Future income taxes (Note 16)                                                        40,657              28,812
                                                                                           443,370             417,662
DEFERRED PUBLICATION COSTS                                                                   9,701               8,358
FIXED ASSETS (Note 6)                                                                      112,445              95,425
OTHER ASSETS                                                                                 6,845               3,111
INVESTMENTS IN EQUITY ACCOUNTED INVESTEES (Note 7)                                          64,503              34,977
DERIVATIVE FINANCIAL INSTRUMENTS (Note 25)                                                   6,145               2,612
INTANGIBLES (Note 8)                                                                      2,123,776          2,008,499
GOODWILL (Note 9)                                                                         6,508,984          6,342,580
FUTURE INCOME TAXES (Note 16)                                                               24,479              28,382
                                                                                      $   9,300,248   $      8,941,606
LIABILITIES AND EQUITY
CURRENT LIABILITIES
       Accounts payable and accrued liabilities (Note 10)                             $    263,170    $        210,065
       Dividends payable                                                                    27,820              34,220
       Deferred revenues                                                                   112,839             104,662
       Derivative financial instruments (Note 25)                                                –                   76
       Future income taxes (Note 16)                                                        71,064              34,248
       Current portion of long-term debt (Note 12)                                           3,669               2,254
                                                                                           478,562             385,525
DEFERRED CREDITS                                                                            21,165              23,452
FUTURE INCOME TAXES (Note 16)                                                              197,179             106,253
ACCRUED BENEFIT LIABILITIES (Note 11)                                                      101,474              94,404
DERIVATIVE FINANCIAL INSTRUMENTS (Note 25)                                                       –                 719
DEFERRED CONSIDERATION (Note 3)                                                             14,567                    –
LONG-TERM DEBT (Note 12)                                                                  2,218,203          2,225,720
EXCHANGEABLE AND CONVERTIBLE INSTRUMENTS (Note 13)                                         319,029              83,886
PREFERRED SHARES (Note 14)                                                                 446,725             472,777
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF YELLOW MEDIA INC.                                  5,450,691                   –
EQUITY ATTRIBUTABLE TO OWNERS OF THE FUND                                                        –           5,224,740
EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS (Note 15)                                  52,653             324,130
                                                                                      $   9,300,248   $      8,941,606
1   As adjusted per adoption of new accounting policies - see Note 2


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



Approved on behalf of Yellow Media Inc. by




Marc L. Reisch, Director                                Stuart H.B. Smith, Director


58     YELLOW MEDIA INC. ANNUAL REPORT 2010
Consolidated Statements of Earnings
For the years ended December 31,
(in thousands of Canadian dollars, except per share information)
                                                                                                           2010                                             2009
                                                                                                                                                   (as adjusted1)


Revenues                                                                                    $        1,679,860                            $           1,639,884
Operating costs                                                                                        781,016                                          746,446
Conversion and rebranding costs                                                                          48,529                                                  –
Income from operations before depreciation and
    amortization, acquisition-related costs, impairment of
    goodwill and restructuring and special charges                                                     850,315                                          893,438
Depreciation and amortization                                                                          270,117                                          142,414
Acquisition-related costs (Note 24)                                                                      30,539                                                  –
Impairment of goodwill                                                                                          –                                       315,000
Restructuring and special charges (Note 24)                                                              33,903                                           40,316
Income from operations                                                                                 515,756                                          395,708
Financial charges, net (Note 23)                                                                       144,796                                          114,600
Gain on deemed disposition of equity investment (Note 3)                                                  (2,374)                                                –
Gain on disposal of subsidiary (Note 5)                                                                   (2,338)                                                –
Earnings before dividends on Preferred shares,
    series 1 and 2, income taxes, and share of losses
    from equity investees                                                                              375,672                                          281,108
Dividends on Preferred shares, series 1 and 2                                                           21,171                                           22,427
Earnings before income taxes and share of losses
    from equity investees                                                                              354,501                                          258,681
Provision for income taxes (Note 16)                                                                     60,527                                           42,710
Share of losses from equity investees                                                                    19,939                                            7,089
Net earnings                                                                                $          274,035                            $             208,882
Net earnings attributable to:
       Shareholders of Yellow Media Inc.2                                                   $          271,042                            $             204,255
       Non-controlling interests related to investments                                                 (16,190)                                              552
       Holders of Preferred shares, series 3, 5 and 7                                                    19,183                                            4,075
                                                                                            $          274,035                            $             208,882


Basic earnings per share attributable to common
    shareholders of Yellow Media Inc.                                                       $               0.53                          $                   0.40


Weighted average number of shares outstanding used in
   computing earnings per share (Note 19) 3                                                       503,111,679                                      510,658,375


Diluted earnings per share attributable to common
     shareholders of Yellow Media Inc.                                                      $               0.47                          $                   0.36
Weighted average number of share outstanding used in
   computing diluted earnings per share (Note 19)3                                                640,050,287                                      612,387,219
1   As adjusted per adoption of new accounting policies - see Note 2
2   Included in the net earnings attributable to shareholders of Yellow Media Inc. for the year ended December 31, 2010 are net earnings attributable to Owners of
    the Fund for the period from January 1 until October 31, 2010.
3   Comparative amounts presented are trust units.


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




                                                                                                                       YELLOW MEDIA INC. ANNUAL REPORT 2010    59
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(in thousands of Canadian dollars)
                                                                                                          2010                                        2009
                                                                                                                                             (as adjusted1)


Net earnings                                                                                 $        274,035                          $          208,882
Other comprehensive income (loss), net of related income taxes:
       Net gain on derivatives designated as cash flow hedges2                                                –                                        151
       Net loss on derivatives designated as cash flow hedges in
          prior periods transferred to earnings in the year3                                               348                                       3,507
Change in gains and losses on derivatives designated as
   cash flow hedges                                                                                        348                                       3,658


       Unrealized (loss) gain on available–for–sale investment
          in the year4                                                                                     (193)                                       418
Change in unrealized (loss) gain on available–for–sale
   financial asset                                                                                         (193)                                       418


       Unrealized loss on translating financial statements of self-
          sustaining foreign operations and foreign investees                                           (7,922)                                    (15,941)
       Unrealized cumulative translation loss on disposition of
          self-sustaining foreign operations transferred to earnings
          in the year                                                                                    1,172                                            –
       Unrealized cumulative translation loss on deemed
          disposition of foreign equity investment transferred
          to earnings in the year                                                                        5,633                                            –
Change in unrealized gains on translating financial statements of
   self-sustaining foreign operations and foreign investees                                             (1,117)                                    (15,941)
Other comprehensive loss                                                                                   (962)                                   (11,865)
Total comprehensive income                                                                   $        273,073                          $          197,017
Total comprehensive income attributable to:
     Shareholders of Yellow Media Inc.5                                                      $        272,705                          $          192,390
       Non-controlling interests related to investments                                                (18,815)                                        552
       Holders of Preferred shares, series 3, 5 and 7                                                   19,183                                       4,075
                                                                                             $        273,073                          $          197,017
1   As adjusted per adoption of new accounting policies - see Note 2
2   Net of income taxes of nil (2009 – $66)
3   Net of income taxes of $164 (2009 – $1.4 million)
4   Net of income taxes of nil (2009 – nil)
5   Included in the total comprehensive income attributable to shareholders for the year ended December 31, 2010 is total comprehensive income attributable to
    Owners of the Fund until October 31, 2010.


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




60     YELLOW MEDIA INC. ANNUAL REPORT 2010
Consolidated Statements of Equity
For the years ended December 31, 2010 and 2009
(in thousands of Canadian dollars)
                                                                                                                                                   2010
                                       Share Capital
                                                              Equity                                                                               Equity
                                                      Component of                               Accumulated                          Equity Attributable
                                                      Exchangeable                              Other Compre-                Attributable to      to Non-
                                Common      Preferred           and                                    hensive                Shareholders controlling
                                  shares      Shares     Convertible   Restricted   Contributed Income (Loss)                      of Yellow    interests
                               (Note 17)    (Note 17)   Instruments       shares       Surplus      (Note 18)        Deficit      Media Inc.   (Note 15)
Balance,
    December 31, 2009       $ 6,062,039 $           -    $    3,618 $ (72,898) $ 128,226 $           (2,734) $   (893,511) $ 5,224,740 $                 -
Effect of adopting new
    accounting policy
    (Note 2)                           -            -              -            -              -            -              -               -    324,130
Balance, January 1, 2010,
    as adjusted           $ 6,062,039 $             -    $    3,618 $ (72,898) $ 128,226 $           (2,734) $   (893,511) $ 5,224,740 $ 324,130
Issuance of preferred
    shares, Series 7
    (Note 17)                        -              -              -            -              -            -              -               -       9,750
Reclassification arising
    from the conversion
    to a corporation
    (Note 17)                          -    333,880                -            -              -            -              -      333,880      (333,880)
Reduction of capital
   (Note 17)                 (2,000,000)            -              -            -   2,000,000               -              -               -             -
Issuance (exchange)
    of shares                   17,799       (5,000)               -            -          810              -              -       13,609                -
Obligations under stock
    options granted                    -            -              -            -          442              -              -           442               -
Restricted shares
    (Note 20)                          -            -              -    (14,491)        19,352              -              -         4,861               -
Restricted shares -
    vested (Note 20)                   -            -              -      9,254         (9,254)             -              -               -             -
Redemption of
   exchangeable
   debentures (Note 13)                -             -       (3,618)            -        3,618              -               -              -             -
Option on exchangeable
    and convertible
    instruments (Note 13)              -            -        10,139             -              -            -               -      10,139                -
Business acquisitions
    (Note 3)                           -            -              -            -              -             -             -               -     73,054
Increased interest in a
    subsidiary                         -            -              -            -       (3,315)              -             -        (3,315)       (1,586)
Other comprehensive
    income                             -            -              -            -              -      1,663                -         1,663        (2,625)
Dividends on
    common shares                      -            -              -            -              -             -   (402,719)       (402,719)               -
Net earnings for the year              -            -              -            -              -             -    274,035         274,035                -
Net loss attributable to
    non-controlling
    interests related to
    investments                        -            -              -            -              -             -      16,190         16,190       (16,190)
Dividends on Preferred
    shares, Series 3, 5
    and 7                              -            -              -            -              -             -     (22,834)       (22,834)               -
Balance,
    December 31, 2010 $       4,079,838 $ 328,880        $   10,139 $ (78,135) $ 2,139,879 $ (1,071) $ (1,028,839) $ 5,450,691 $                 52,653




                                                                                                                 YELLOW MEDIA INC. ANNUAL REPORT 2010   61
Consolidated Statements of Equity
For the years ended December 31, 2010 and 2009
(in thousands of Canadian dollars)
                                                                                                                                      2009
                                                                                                                                      Equity
                                                                                  Accumulated                                   Attributable
                                                    Equity                               Other                         Equity        to Non-
                                Unitholders’ Component of                       Comprehensive                    Attributable    controlling
                                     Capital Exchangeable Restricted Contributed Income (Loss)                  to Owners of       interests
                                  (Note 17)    Debentures      Units    Surplus      (Note 18)        Deficit       the Fund      (Note 15)
Balance,
    December 31, 2008         $ 6,144,416        $ 12,542 $ (58,303) $ 79,575        $     9,131 $ (625,869) $ 5,561,492        $          -
Issuance of units                           43            -           -          -              -           -             43               -
Restricted units (Note 20)                   -            -    (29,786)     1,946               -           -       (27,840)               -
Restricted units vested
    (Note 20)                                -             -   15,191     (15,191)              -           -               -              -
Repurchase of units
   (Note 17)                       (82,420)                -          -   52,972                -           -       (29,448)               -
Redemption of
   exchangeable
   debentures                                -       (8,924)          -     8,924               -           -               -              -
Distributions                                -             -          -          -              -   (471,897)     (471,897)                -
Other comprehensive
    income                                   -             -          -          -       (11,865)           -       (11,865)               -
Net earnings for the year                    -             -          -          -              -   204,255        204,255                 -
Balance,
    December 31, 2009         $ 6,062,039        $   3,618 $ (72,898) $128,226       $    (2,734) $ (893,511) $ 5,224,740       $          -
Effect of adopting
    new accounting
    policy (Note 2)                          -            -           -          -              -           -               -       324,130
Balance, January 1, 2010,
    as adjusted               $ 6,062,039        $   3,618 $ (72,898) $128,226       $    (2,734) $ (893,511) $ 5,224,740       $ 324,130


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




62   YELLOW MEDIA INC. ANNUAL REPORT 2010
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of Canadian dollars)
                                                                                             2010                             2009
                                                                                                                      (as adjusted1)
OPERATING ACTIVITIES
  Net earnings                                                                    $       274,035                    $     208,882
  Items not affecting cash and cash equivalents:
     Depreciation and amortization                                                        270,117                          142,414
     Impairment of goodwill                                                                      –                         315,000
     Amortization and write-off of deferred financing costs                                  9,903                           9,279
     Accretion on exchangeable and convertible instruments                                     983                           2,444
     Gain on deemed disposition of equity investment                                        (2,374)                              –
     Gain on disposal of subsidiary before disposition costs                                (5,545)                              –
     Net benefit plan costs                                                                  7,070                          16,207
     Non-cash derivative financial instruments                                                (739)                           (368)
     Stock compensation expense                                                            21,851                            1,946
     Gain on purchase of Preferred shares, series 1 and 2, Exchangeable
        Debentures, credit facilities and Medium Term Notes, net                            (4,187)                         (42,763)
     Future income taxes                                                                   31,253                            29,774
     Share of losses from equity investees                                                 19,939                             7,089
     Other non-cash items                                                                   (3,501)                             445
  Change in operating assets and liabilities                                               27,731                            59,838
                                                                                          646,536                          750,187
INVESTING ACTIVITIES
   Business acquisitions, net of cash acquired and bank
      indebtedness assumed (Note 3)                                                       (124,257)                         (25,189)
   Acquisition of equity investments                                                        (6,856)                         (47,698)
   Acquisition of intangible assets                                                        (24,307)                            (246)
   Acquisition of fixed assets                                                             (67,408)                        (44,428)
   Increased interest in a subsidiary                                                       (4,901)                               –
   Proceeds from lease inducements                                                               –                              863
   Restricted cash (Note 4)                                                                (35,477)                               –
                                                                                          (263,206)                       (116,698)
FINANCING ACTIVITIES
   Issuance of long-term debt                                                              847,918                        1,621,300
   Repayment of long-term debt                                                            (469,855)                      (1,443,844)
   Dividends to shareholders                                                              (395,522)                        (488,386)
   Distributions to non-controlling interest                                                     –                            (1,634)
   Proceeds from exercise of options                                                            12                                43
   Repurchase of Preferred shares, series 1 and 2, Exchangeable Debentures,
      credit facilities and Medium Term Notes                                             (501,812)                       (538,492)
   Dividends on Preferred shares, series 3, 5 and 7                                         (22,834)                         (3,722)
   Issuance of Preferred shares, series 3 and 5                                                   –                        332,500
   Issuance of convertible debentures (Note 13)                                            200,000                                 –
   Repurchase of units                                                                            –                         (40,905)
   Restricted shares (Note 20)                                                              (16,548)                        (29,786)
   Payments made on derivative financial instruments                                         (1,748)                          (3,403)
   Debt and preferred share issuance and other costs                                        (23,734)                        (25,089)
                                                                                          (384,123)                       (621,418)
Effect of exchange rates changes on cash and cash
  equivalents denominated in foreign currencies                                             (1,529)                           (955)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                            (2,322)                         11,116
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                               36,170                           25,054
CASH AND CASH EQUIVALENTS, END OF YEAR                                           $         33,848                    $      36,170
Supplemental disclosure of cash flow information (Note 21)
1.   As adjusted per adoption of new accounting policies - see Note 2


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

                                                                                              YELLOW MEDIA INC. ANNUAL REPORT 2010   63
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



1. Description
On November 1, 2010, Yellow Pages Income Fund (the “Fund”) and Yellow Media Inc. (the “Company”) entered into a Plan of
arrangement pursuant to which, the parties proposed to implement an arrangement under the Canada Business Corporations Act
(the “Plan of Arrangement”). The Plan of Arrangement involved the exchange, on a one-for-one basis of units of Fund for common
shares of Yellow Media Inc. As a result of the Plan of Arrangement, the holders of units of the Fund became the sole shareholders
of Yellow Media Inc. The effective date of the Plan of Arrangement was November 1, 2010.

As part of the reorganization, YPG LP was wound up and its assets were distributed to YPG General Partner Inc, (“YPG GP”) and
YPG Trust (the “Trust”) on a pro rata basis. The Trust and the Fund were then wound up and their assets were ultimately distributed
to the Fund. YPG GP amalgamated with Yellow Media Inc. and other entities of the group. The conversion was treated as a change
in business form and was accounted for as a continuity of interests; as such the carrying amounts of assets, liabilities and
unitholders’ equity in the consolidated financial statements of the Fund immediately before the conversion were the same as the
carrying values of Yellow Media Inc. immediately after the conversion. Yellow Media Inc. refers to common shares, shareholders
and dividends which were formerly referred to as units, unitholders and distributions under the Fund. Comparative amounts in
these and future financial statements are those of the Fund.

Yellow Media Inc., through subsidiaries, operates print and online directories, classified advertising and performance marketing
solutions in all the Provinces of Canada. Also, Yellow Media Inc. operates Dealer.com, a leading provider of online marketing
solutions in the United States.

References herein to Yellow Media Inc. represent the financial position, results of operations, cash flows and disclosures of
Yellow Media Inc. and its subsidiaries on a consolidated basis.

2. Significant accounting policies
Basis of presentation
These consolidated financial statements (the “financial statements”) have been prepared by management in accordance with
Canadian generally accepted accounting principles (“GAAP”).

Adoption of new accounting policies
The following standards were adopted effective January 1, 2010.

a) Section 1582, Business Combinations. Section 1582 provides the Canadian equivalent to International Financial Reporting
Standards (“IFRS”) 3 Business Combinations. The new recommendations require measuring business acquisitions at the fair
value of the acquired business, including the measurement at fair value of items such as non-controlling interests and
contingent payment considerations. In addition, business acquisition-related costs including transaction costs and restructuring
costs are expensed rather than capitalized.

b) Section 1601, Consolidated Financial Statements and Section 1602, Non-Controlling Interests. Section 1601, together with
Section 1602, replace Section 1600. Section 1601 establishes standards for the preparation of consolidated financial
statements. The requirements in this Section are substantially converged with the portion of Section 1600 which established
standards for the preparation of consolidated financial statements. Section 1602 is substantially converged with the portion of
IAS 27, Consolidated and Separate Financial Statements that establishes standards for accounting for non-controlling interests
in a subsidiary subsequent to a business combination. Section 1602 introduces a number of changes, including:
              in the consolidated balance sheets and consolidated statements of equity, non-controlling interests are now presented
              as a separate component of equity as opposed to a separate item on the balance sheet outside of equity;
              non-controlling interests are no longer recorded as a deduction in calculating net earnings and total comprehensive
              income. Instead, net earnings and each component of other comprehensive income are attributed to the shareholders
              of the Company and to the non-controlling interests; and
              shares owned prior to a change in control on a business acquisition achieved in stages have to be valued at their fair
              value on the date of acquisition and any gain or loss on those shares needs to be recognized in net earnings.

Basic earnings per share is computed by dividing net earnings available to common shareholders of Yellow Media Inc. by the
weighted average number of shares outstanding during the year. This calculation is consistent with the calculation of the Basic
earnings per share before adopting this Section. Therefore basic earnings per share did not change.

The above sections were not mandatorily applicable for Yellow Media Inc. before the fiscal year beginning on January 1, 2011.
However, Yellow Media Inc. has elected to early adopt these sections, as of January 1, 2010, in order to more closely align itself with
IFRS and mitigate the impact of adopting IFRS at the changeover date. In accordance with the transitional provisions, these sections
have been applied prospectively, with the exception of the presentation requirements for non-controlling interests, which must be

64   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)


applied retrospectively. The adoption of these sections modified the accounting of business combinations realized during the year for
which acquisition-related costs amounting to $30.5 million were recorded directly in the consolidated statement of earnings.
Furthermore, the adoption of these sections gave rise to the above-mentioned reclassifications of non-controlling interests, including
the reclassification as at January 1, 2010 of an amount of $324.1 million from non-controlling interests to equity.

Certain comparative figures have been reclassified to conform to the current period’s presentation and adoption of new accounting
policies.

Principles of consolidation
Yellow Media Inc.’s consolidated financial statements include the accounts of Yellow Pages Group Co. (“YPG Co.”), Trader
Corporation (“Trader”), LesPAC s.e.n.c. (“LesPAC”), Dealer Dot Com Inc. (“Dealer.com”), Canadian Phone Directories Holdings Inc.
(“Canpages”), Mediative Performance LP (“Mediative LP”), UpTrend Media Inc. (“Uptrend”), and those of YPG (USA) Holdings, Inc.,
and Yellow Pages Group, LLC, (collectively “YPG USA”). All intercompany transactions and balances have been eliminated.

Cash and cash equivalents
Cash and cash equivalents consist of unrestricted funds on deposit and, from time to time, highly liquid investments with a
purchased maturity of three months or less. Cash and cash equivalents are presented at fair value and changes are recorded in
Financial Charges.

Investments in equity accounted investees
The equity method is used to account for investments in companies in which Yellow Media Inc. has significant influence.
Yellow Media Inc.’s share of earnings is recorded separately net of income taxes in the Consolidated Statement of Earnings.

Investments
Investment – available–for–sale

The investment is recorded at fair value, with changes reported through other comprehensive income in each period.
Yellow Media Inc. monitors its investment for other than temporary declines in fair value and charges impairment losses to net
earnings when other than a temporary decline in estimated fair value occurs. These investments are presented in Other Assets.

Revenues
Yellow Media Inc. recognizes revenue for both reporting segments based on the principles below only when fees charged are
fixed or determinable, Yellow Media Inc.’s customers understand the specific nature and terms of the agreed-upon transactions
and collectibility is reasonably assured.

Directories
Revenues are earned through the sale of directory advertising and performance marketing solutions. Advertising revenues are
generally billed, in accordance with the contractual terms with advertisers, and recognized on a monthly basis over the
estimated life of the print directory or online directory advertising, not exceeding twelve months, or in the case of certain
alphabetical directories, not exceeding twenty-four months, commencing with the delivery or display date. Amounts billed up
front for the directories are deferred and recognized over the estimated life of the corresponding directories in circulation, not
exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twenty-four months.

Vertical Media
Private and commercial classified advertisements, display advertisements and performance marketing solutions are published
on a weekly and monthly basis for which revenues are recognized at the time the advertisements are published or displayed.
Revenues related to advertisements appearing on multiple occasions are deferred and recognized during the period the
advertisements are displayed.

Circulation revenues, net of returns, are recognized on a weekly basis at the time the publications are delivered to customers.
Circulation revenues are earned primarily upon the delivery of magazines by independent distributors to retail outlets.

Deferred publication costs
Direct and incremental costs incurred for sales, manufacturing and distribution of directories not yet published or displayed are
deferred. Upon publication or display, these costs are amortized over the same period in which the related revenues are
recognized.




                                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010           65
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



Fixed assets
Fixed assets are recorded at cost and are depreciated over their expected useful lives using the straight-line method as follows:

Office equipment                                                                                                                           10 years
Computer equipment                                                                                                                           3 years
Other equipment                                                                                                                         3 - 12 years
Leasehold improvements                                                                                         Over the terms of the various leases
Building                                                                                                                                   40 years

Assets under development consist primarily of internally developed software that is not amortized until the assets are available for
use at which time they will be reclassified in software and amortized over their expected useful life.

Intangibles
Intangible assets developed internally (consisting of software used by the Company) are recognized to the extent the criteria in
CICA Section 3064, Goodwill and Intangible Assets are met. Development costs for internally generated intangible assets are
recognized at cost if and only if Yellow Media Inc. can demonstrate:
               the technical feasibility of completing the asset so that it will be available for use or sale;
               the intention to complete the intangible asset and use or sell it;
               the ability to use or sell the intangible asset;
               how the intangible asset will generate probable future economic benefits;
               the availability of adequate technical, financial and other resources to complete the development and to use or sell
               the intangible asset; and
               the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-developed intangible assets is the sum of the expenditures incurred from the date
when the intangible asset first meets the recognition criteria listed above. Where no internally-developed intangible asset can be
recognized, development expenditures are charged to the statement of earnings in the period in which they are incurred.

Internally-developed intangibles include the cost of software tools and licenses used in the development of Yellow Media Inc.’s
systems, as well as all directly attributable payroll and consulting costs. These items are not amortized until the assets are
available for use.

Intangible assets acquired separately are reported at cost less accumulated amortization and accumulated impairment losses.
Intangible assets acquired in a business combination are identified and recognized separately from goodwill where they satisfy
the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their
fair value at the date of acquisition.

Intangible assets are amortized, unless their useful lives are indefinite. Intangibles with finite lives are amortized as follows:

Non-competition agreements and logos                                                                             Straight-line over life of agreement
Customer contracts                                                                     Pro rata based on related revenues, not exceeding 12 months
Customer relationships                                                                 Pro rata based on related revenues, not exceeding 24 months
Trademarks with finite lives                                                                                             Straight-line over 1-6 years
Domain names with finite lives                                                                                           Straight-line over 18 years
Software                                                                                                                   Straight-line over 3 years

Certain trademarks and domain names are considered intangible assets with indefinite lives and are not amortized; however,
they are assessed for impairment annually or more frequently if circumstances change, on the basis of their fair values. Fair
value is determined using discounted expected future cash flows.

Impairment of long-lived assets
Long-lived assets with finite lives are reviewed when events or changes in circumstances cause their carrying value to exceed
the total undiscounted cash flows expected from their use and eventual disposition. The impairment loss is calculated by
deducting the fair value of the asset from its carrying value.




66   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                    Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                            (all tabular amounts are in thousands of Canadian dollars, except share information)



Goodwill
Goodwill arising on the acquisition of a subsidiary is recognized as an asset at the date that control is acquired (the acquisition
date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling
interest in the acquired enterprise and the fair value of the acquirer’s previously-held equity interest (if any) in the entity over the
net fair value of the identifiable net assets recognized.

Goodwill is not amortized and is assessed for impairment annually on December 31 for the Directories segment and June 30 for
the Vertical Media segment or more frequently should an event or change in circumstances indicate that the asset might be
impaired. Goodwill impairment is assessed based on a comparison of the fair value of a reporting unit to the underlying carrying
value of the reporting unit’s net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value,
a more detailed goodwill impairment assessment must be undertaken. A goodwill impairment loss is recognized to the extent
that the carrying value of goodwill exceeds its implied fair value.

Employee benefit plans
Yellow Media Inc. maintains pension plans with defined benefit and defined contribution components which cover substantially
all of the employees of the Company. Yellow Media Inc. also maintains unfunded supplementary defined benefit pension plans
for certain executives and other retirement and post-employment benefits plans which cover substantially all employees of
Yellow Media Inc.

Yellow Media Inc. accrues its obligations for employee benefit plans. The cost of pensions and other retirement benefits earned
by employees is actuarially determined using:
           the projected benefit method, pro rated on service;
           a discount rate based on market interest rates on high-quality debt instruments with cash flows that match the timing
           and amounts of expected benefit payments; and
           management’s best estimate of expected plan investment performance, salary escalation, retirement ages of
           employees and expected healthcare costs.

The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is
amortized over the remaining service period of active employees with a weighted average of 13 years at year end. The expected
return on plan assets is based on the expected long-term rate of return on plan assets which are measured at fair value.
 Yellow Media Inc. uses a December 31 measurement date for the plans. A valuation is performed at least every three years to
determine the actuarial present value of the accrued pension and other employee future benefits for funding purposes. The latest
actuarial valuations were performed as at December 31, 2008 for the pension benefit plans, and as at December 31, 2007 for
other retirement and post-employment benefit plans. The next valuations for funding purposes will be performed no later than
December 31, 2011 for the pension benefit plan. The next valuation for other retirement and post-employment benefit plans will
be performed as at December 31, 2010.

Stock-based compensation plans
Yellow Media Inc. uses the fair value method of accounting for all Restricted shares and stock options granted, as described in
Note 20, whereby a compensation expense is recognized over the vesting period of all stock-based compensation awards and
where applicable, based on the best available estimates of the outcome of the performance conditions.

Foreign currency translation
Transactions in foreign currencies are translated into Canadian dollars at rates in effect at the date of the transaction. At the
balance sheet date, monetary foreign currency assets and liabilities are translated at exchange rates then in effect. The
resulting translation gains or losses are recognized in the determination of earnings.

In addition, Yellow Media Inc. complies with section 1651, Foreign Currency Translation for its US operations. This section
establishes standards for the translation of transactions of a reporting company that are denominated in a foreign currency and
financial statements of a foreign operation for incorporation in the financial statements of a reporting company. The self-sustaining
operations, with economic activities largely independent of the parent company, are accounted for using the current rate method.
Under this method, assets and liabilities of subsidiaries denominated in a foreign currency are translated into Canadian dollars at
exchange rates in effect at the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing
during the year. Resulting unrealized gains or losses are accumulated and reported as a net change in unrealized gain on
translating financial statements of self-sustaining foreign operations in the Consolidated Statements of Comprehensive Income.
The accounts of the foreign operation, which is financially or operationally dependent on the parent company, is accounted for
using the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rates in effect at the
balance sheet date, and non-monetary assets and liabilities are translated at historical exchange rates. Revenue and expenses
(other than depreciation and amortization, which are translated at the corresponding asset rates) are translated at average rates
for the year. Translation exchange gains or losses of such subsidiaries are reflected in net earnings.

                                                                                                              YELLOW MEDIA INC. ANNUAL REPORT 2010           67
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


Income taxes
Yellow Media Inc. uses the liability method of tax allocation in accounting for income taxes of its subsidiaries. Under this
method, temporary differences between the carrying amount of balance sheet items and their corresponding tax basis result in
either future income tax assets or liabilities. Future income taxes are computed using substantively enacted tax rates applicable
to the years in which the differences are expected to reverse. Future income tax assets are only recognized to the extent that, in
the opinion of management, they will more likely than not be realized.

Leases
Leases are classified as either capital or operating in nature. Capital leases are those which substantially transfer the benefits
and risks of ownership to the lessee. Assets acquired under capital leases are amortized over their expected useful lives using
the straight-line method. Obligations recorded under capital leases are reduced by the principal portion of lease payments. The
imputed interest portion of lease payments is charged to expense.

Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reported period. Significant items
requiring the use of management estimates relate to the determination of collectibility of accounts receivable, valuation of
intangibles, impairment of assets, pension and other employee benefits, useful lives for amortization, income taxes, long-term
incentive plans, the restructuring and special charges provision, the fair value of financial instruments and purchase price
allocations. These estimates are revised periodically. Actual results may differ from the above estimates.

Financial Instruments
Financial assets and liabilities are initially recorded at fair value. Subsequently, financial instruments classified as financial
assets available for sale, held for trading and derivative financial instruments, part of a hedging relationship or not, have to be
measured at fair value on the balance sheet at each reporting date, whereas other financial instruments are measured at
amortized cost using the effective interest method. When financial instruments are not part of a hedging relationship, they are
measured at fair value and the mark-to-market is recorded in net earnings.

Yellow Media Inc. has made the following classifications:
              Cash and cash equivalents and restricted cash are classified as financial assets held for trading and are measured at
              fair value. Changes in fair value are recorded in net earnings;
              Other than temporary investments will be classified as either financial assets held to maturity and will be measured at
              amortized cost or as available–for–sale and will be marked–to–market through comprehensive income at each
              balance sheet date;
              Accounts receivable are classified as loans and receivables and are recorded at amortized cost; and
              Accounts payable and accrued liabilities, dividends payable, long-term debt, notes payable, convertible and exchangeable
              instruments and Preferred shares, Series 1 and 2 are classified as other liabilities and measured at amortized cost.

Transaction costs
Transaction costs are comprised primarily of legal, accounting, underwriters’ fees and other costs directly attributable to the
issuance of the respective financial liabilities. Transaction costs are capitalized to the cost of financial liabilities and are
amortized based on the effective interest method over the term of the instrument.

Hedging
Yellow Media Inc. uses interest rate derivatives to manage the combination of fixed to floating interest rates on its long-term
debt and to manage the interest rate risk for future planned issuances.
              Fair value hedge
              The carrying value of the hedged item is adjusted based on the gains or losses attributable to the hedged risk with a
              corresponding amount in net earnings. The hedging derivative is carried at fair value on the balance sheet with changes
              in fair value recorded in net earnings.
              Cash flow hedge
              The effective portion of the changes in fair value of the hedging item is recognized in “Accumulated Other Comprehensive
              Income”, whereas the ineffective portion is recognized in “Financial Charges”. The amounts recognized in “Accumulated
              Other Comprehensive Income”, with respect to cash flow hedges, are reclassified in net earnings in the period or periods
              during which the hedged item affects net earnings.

68   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                     Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                             (all tabular amounts are in thousands of Canadian dollars, except share information)


Hedging relationships
Yellow Media Inc. uses derivative financial instruments to manage its interest risk exposures on debt financing. Yellow Media Inc.’s
policy is not to utilize derivative financial instruments for trading or speculative purposes. When hedge accounting is applied,
Yellow Media Inc. formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Yellow Media Inc. generally classifies cash flows from its derivative financial instruments in the same manner as the cash flows
from the item that the derivative is hedging. Typically, this is included in cash flows from (used in) operating activities in the
consolidated statement of cash flows.

Future accounting changes
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable enterprises would
be required to adopt IFRS in place of Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) for interim and
annual reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, the December 31, 2010 financial
statements of Yellow Media Inc.’s are the last financial statements prepared in accordance with Canadian GAAP. Starting from
the first quarter of 2011, our financial statements will be prepared in accordance with IFRS with 2010 comparative figures and
January 1, 2010 (date of transition) opening balance sheet restated to conform to IFRS.

IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement
and disclosure requirements. Yellow Media Inc. has completed Phase 1 and Phase 2 of our conversion plan and is currently
completing Phase 3, the implementation and review phase of the conversion.

3. Business acquisitions
2010
Directories
On January 8, 2010, Yellow Media Inc. completed the acquisition of all the assets related to the operations of the website
Restaurantica.ca (“Restaurantica”), one of Canada’s largest restaurant and dining communities. Restaurantica was established
in 2003 and lists restaurants, bars and cafés’ information, with user-generated reviews on these establishments in North
America.

On February 9, 2010, Yellow Media Inc. acquired all of the shares of Clear Sky Media Inc. (“Clear Sky Media”), owner of
RedFlagDeals.com (“Red Flag Deals”). Red Flag Deals is a leader in providing online promotions and shopping tools to Canadians.

The acquisitions were financed with drawings under existing credit facilities, issuance of preferred shares, series 7 (“Series 7 shares”)
and cash on hand.

On May 25, 2010, Yellow Media Inc. acquired all of the shares of Canpages for a purchase price consideration of $226.4 million,
which includes working capital and other adjustments. The purchase price consideration was comprised of $84.8 million payable
in cash at closing to settle third party debt obligations and the issuance of $141.6 million of Mandatory Exchangeable Promissory
Notes (“Exchangeable Notes”) of Yellow Media Inc.

On September 21, 2010, Yellow Media Inc. acquired a 60% equity interest in Mediative LP, formerly Enquiro Search Solutions
Inc. (“Enquiro”), a leading search engine solutions company. The non-controlling interest in Enquiro was measured at the non-
controlling interest's proportionate share of the fair value of Enquiro’s identifiable net assets.

On October 20, 2010 Yellow Media Inc. acquired all of the shares of Uptrend, Canada’s leading independent online advertising
representation firm and on October 28, 2010, Yellow Media Inc. acquired all of the assets of AdSplash Inc. (“Adsplash”) a national
retail advertising leader.

These acquisitions position Yellow Media Inc. to better compete in the digital world and will enable Yellow Media Inc. to expand
the sales force, online capabilities and advertiser offerings.

Vertical Media
On January 5, 2010 Trader acquired an additional 10% equity interest in Dealer.com bringing its total equity interest to
approximately 30%. Trader has an option to increase its ownership in the privately held company that is currently exercisable.
If exercised, this option would provide Yellow Media Inc. with a majority voting interest and the continuing ability to elect
the majority of the members of the board of directors of Dealer.com. As such, Trader effectively controls Dealer.com and


                                                                                                               YELLOW MEDIA INC. ANNUAL REPORT 2010           69
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


accordingly the financial position and results of Dealer.com are now consolidated in Yellow Media Inc.’s financial statements
from the date of acquisition.

The previously held equity interest of Trader in Dealer.com, which was accounted for under the equity method up to that date,
was re-measured at its fair value of $40.6 million and the gain on deemed disposition was recognized in net earnings. The
unrealized cumulative loss on translating the financial statements of Dealer.com to Canadian dollars of $5.6 million was also
recognized in net earnings on the same basis as would be required if Trader had disposed directly of its previously held equity
interest. The above transactions generated a net gain of $2.4 million.

The non-controlling interest in Dealer.com was measured at the non-controlling interest's proportionate share of the fair value of
Dealer.com’s identifiable net assets. At December 31, 2010, Yellow Media Inc.’s interest in equity of Dealer.com was 32%.

On July 9, 2010, Trader acquired all of the assets of CanadianDriver Communications Inc. (“Canadian Driver”). Canadian Driver
is the operator of CanadianDriver.com, an award-winning online automotive magazine that features over 11,000 automotive
articles including new car reviews, test drives and automotive news as well as other automotive topics. This acquisition will
enable Yellow Media Inc. to provide Canadians with a valuable resource to research their automotive purchases. It will also help
Yellow Media Inc. grow its content and audience as well as provide new advertising opportunities for its national advertisers.

Yellow Media Inc. accounted for all of the acquisitions using the acquisition method of accounting. The purchase prices were
allocated to the identifiable assets acquired and the liabilities assumed on the basis of their fair values.

The fair values of the identifiable assets acquired and liabilities assumed were allocated as follows:

                                                                                           Canpages        Dealer.com         Other           Total
 Current assets and liabilities
      Cash and cash equivalents                                                        $      3,912    $      19,681     $    1,170    $    24,763
      Accounts receivable                                                                     2,524            6,459          5,858         14,841
      Prepaid expenses                                                                          65               925           108           1,098
      Future income taxes                                                                         –              348             –            348
      Accounts payable and accrued liabilities                                              (29,385)           (5,406)       (5,128)       (39,919)
      Deferred revenues                                                                     (40,407)           (2,997)           –         (43,404)
 Fixed assets                                                                                 1,328            9,028           419          10,775
 Intangibles
      Trademarks                                                                            40,000            21,747         15,950         77,697
      Customer relationships                                                                55,000            40,059          3,012         98,071
      Customer contracts                                                                    42,500            25,284          8,116         75,900
      Domain names                                                                                –                –            77              77
      Non-competition agreements and logos                                                    1,670                –         11,700         13,370
      Software                                                                                3,500           52,025            42          55,567
 Long-term debt                                                                                   –            (5,352)           –          (5,352)
 Future income tax liabilities                                                                   –           (57,049)        (7,561)       (64,610)
 Non-controlling interest                                                                         –          (71,514)        (1,540)       (73,054)
 Net identifiable assets acquired                                                           80,707            33,238         32,223        146,168
 Reversal of previously owned equity investment                                                   –          (40,614)            –         (40,614)
 Goodwill ($65.9 million tax deductible)                                                   145,702            28,186         37,512        211,400
 Purchase price                                                                        $   226,409     $      20,810     $   69,735    $   316,954

Consideration:

                                                                                           Canpages        Dealer.com         Other           Total
 Cash                                                                                  $    84,847     $      20,810     $   43,363    $   149,020
 Series 7 shares (Note 17)                                                                        –                –          9,750          9,750
 Exchangeable Notes (Note 13)                                                              141,562                 –             –         141,562
 Deferred consideration                                                                           –                –         16,622         16,622
 Total                                                                                 $   226,409     $      20,810     $   69,735    $   316,954

Deferred consideration includes payments that are contingent on the basis of time and others that are based on the
achievement of specific performance objectives. The amount recorded represents the acquisition-date fair value of the deferred
consideration and could reach $19 million if all performance objectives are met.



70   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)


Impact of acquisitions on the results of Yellow Media Inc.
Had these business combinations been effected January 1, 2010, the revenue of Yellow Media Inc. would have been $1,728.6 million
and the net earnings for the year would have been $221.9 million. The net earnings include approximately $49 million of amortization
of intangibles. Excluding amortization of intangibles, management of Yellow Media Inc. considers these proforma numbers to
represent an approximate measure of the performance on an annualized basis and to provide a reference point for comparison in
future periods.

2009
a) Acquisition of LesPAC
On April 30, 2009, Yellow Media Inc. exercised its option to acquire the remaining 50% interest in LesPAC in which Yellow Media
Inc. already had a 50% interest for a cash consideration of $25.2 million (including acquisition related costs of $0.2 million).
The acquisition of LesPAC was financed with cash on hand.

Yellow Media Inc. accounted for the acquisition of non-controlling interest as a step-purchase. The excess of the purchase price
over the net book value of the non-controlling interest acquired was allocated to the net identifiable assets acquired on the
basis of their fair value. Yellow Media Inc.’s share in the fair value increments of the underlying net identifiable assets of LesPAC
acquired was allocated as follows:

Current liabilities
        Accounts payable and accrued liabilities                                                                                         $             (296)
Intangibles
        Trademark                                                                                                                                    1,500
        Customer contracts                                                                                                                              145
Future income tax liabilities                                                                                                                          (526)
Net identifiable assets acquired                                                                                                                        823
Non-controlling interest acquired                                                                                                                    7,462
Goodwill                                                                                                                                           16,904
Purchase price                                                                                                                           $         25,189

Consideration:
Cash                                                                                                                                     $         25,000
Transaction costs                                                                                                                                       189
Total                                                                                                                                    $         25,189


4. Restricted cash
Restricted cash consists of bank account balances held in trust bearing interest at 1.2% as at December 31, 2010. The amounts
were placed in trust in relation with the total return swap (“TRS”) entered into on October 15, 2010 as described in Note 25.

5. Disposal of subsidiary
On March 29, 2010, Yellow Media Inc. entered into a definitive agreement with HM Capital whereby Yellow Media Inc. would
contribute its interest in YPG Directories, LLC in exchange for a 35% minority ownership in a new entity resulting from the
combination of YPG Directories, LLC and Ziplocal, LP. The fair value of Yellow Media Inc.’s minority ownership was $75.2 million
on the date of acquisition. The investment in Ziplocal, LP is accounted for using the equity method.

The transaction closed on April 15, 2010. The carrying value of the assets and liabilities disposed on April 15, 2010 was
$68.7 million. In relation to this transaction, an unrealized cumulative translation loss of $1.2 million was realized and
transferred to earnings. In addition, Yellow Media Inc. incurred incremental direct costs of $3 million in relation to the disposal,
resulting in a gain of $2.3 million recorded in the consolidated statement of earnings.




                                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010           71
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


The carrying value of assets and liabilities disposed are summarized below:

    Current assets1                                                                                                                $      7,789
    Fixed assets                                                                                                                            285
    Intangibles                                                                                                                          18,634
    Goodwill                                                                                                                             41,767
    Future income taxes                                                                                                                   6,314
    Current liabilities                                                                                                                  (6,047)
    Total                                                                                                                          $     68,742
1   Includes cash of $0.2 million.


6. Fixed assets
                                                                                                                            December 31, 2010
                                                                                          Cost   Accumulated Depreciation       Net Book Value
    Building                                                                       $    18,264        $              173       $          18,091
    Office equipment                                                                    25,562                    11,137                  14,425
    Office equipment under capital lease                                                 8,400                     4,719                   3,681
    Computer equipment                                                                  42,463                    33,395                   9,068
    Computer equipment under capital lease                                               6,269                     3,927                   2,342
    Other equipment                                                                      7,305                     4,812                   2,493
    Leasehold improvements                                                              50,402                    23,172                  27,230
    Assets under development                                                            35,115                         –                  35,115
                                                                                   $   193,780        $           81,335       $        112,445


                                                                                                                            December 31, 2009
                                                                                          Cost   Accumulated Depreciation          Net Book Value
    Office equipment                                                               $    18,411        $            8,333       $          10,078
    Office equipment under capital lease                                                 8,325                     3,345                   4,980
    Computer equipment                                                                  35,822                    25,060                  10,762
    Computer equipment under capital lease                                               6,353                     3,081                   3,272
    Other equipment                                                                      7,078                     3,840                   3,238
    Leasehold improvements                                                              46,416                    17,338                  29,078
    Assets under development                                                            34,017                         –                  34,017
                                                                                   $   156,422        $           60,997       $          95,425

During the year, fixed assets with a cost of nil (2009 – $9.8 million) and an accumulated amortization of nil (2009 – $9.8 million)
were written off. During 2009, as part of the restructuring and special charges described in Note 24, Yellow Media Inc. also
recorded a write down of certain fixed assets having a cost of $11.9 million and accumulated depreciation of $7.8 million. In
addition, internally developed software included in assets under development with a cost of $42.3 million (2009 - $29.9 million)
were reclassified to software once they became available for use. Depreciation for the year ended December 31, 2010, was
$20.6 million (2009 – $20.3 million).

7. Investments in equity accounted investees
On January 5, 2010, Trader acquired an additional 10% equity interest in Dealer.com, as described in Note 3.

On March 9, 2010, YPG Co. acquired a 30% equity interest in 411 Local Search Corp. In connection with this investment, YPG Co.
also acquired the 411.ca brand. This brand is included in trademarks. The acquisition was financed with cash on hand.

As a result of the transaction discussed in Note 5, Yellow Media Inc. received a 35% minority ownership in a new entity resulting
from the combination of YPG Directories, LLC and Ziplocal, LP.

On September 21, 2010, Trader acquired a 30% equity interest in Bignition Services Inc. (“Bignition”). Bignition is a dealer
inventory network designed for franchise automobile dealers. Bignition enables dealers to buy, sell and trade vehicles with each
other through a real-time dealer inventory network. The acquisition was financed with cash on hand.



72     YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)


These acquisitions were accounted for using the equity method.

The difference between the acquisition cost and Yellow Media Inc.’s share of the underlying net book value of the investees’ net
assets for the equity method investments, at the date of purchase amounted to $76.8 million and was assigned to the acquired net
identifiable assets based on their fair values. As such, the difference was preliminarily assigned to intangible assets (consisting
mainly of trademarks, website and software, non-compete agreements, customer contracts and customer relationships) in the
amount of $53.7 million and will be amortized over their expected useful lives and future income tax liabilities of $21.2 million. The
remaining difference between the acquisition cost and the assigned value in the amount of $44.3 million is similar to goodwill
(equity method goodwill) and is not amortized. The assigned difference between the acquisition costs and the underlying net book
values is preliminary and is subject to change once the final evaluation is completed.

8. Intangibles
                                                                                                                                   December 31, 2010
                                                                          Cost        Accumulated Amortization                            Net Book Value
 Trademarks                                                    $    1,369,744                         $                 –                  $ 1,369,744
 Trademarks with finite lives                                          83,600                                   39,479                              44,121
 Non-competition agreements and logos                                 646,859                                 134,195                             512,664
 Customer contracts                                                    74,930                                   59,691                              15,239
 Customer relationships                                                96,503                                   35,341                              61,162
 Domain names                                                           8,743                                           –                             8,743
 Domain names with finite lives                                         5,700                                     1,267                               4,433
 Software                                                             312,391                                 204,721                             107,670
                                                               $    2,598,470                         $       474,694                      $ 2,123,776


                                                                                                                                   December 31, 2009
                                                                          Cost         Accumulated Amortization                           Net Book Value
 Trademarks                                                    $    1,354,817                         $                 –                  $ 1,354,817
 Trademark with finite lives                                           24,500                                   12,250                              12,250
 Non-competition agreements and logos                                 630,393                                 108,526                             521,867
 Customer contracts                                                     7,382                                     7,334                                   48
 Customer relationships                                                18,943                                   18,848                                    95
 Domain names                                                          19,050                                   10,500                                8,550
 Domain names with finite lives                                         5,700                                       950                               4,750
 Software                                                             211,388                                 105,266                             106,122
                                                               $    2,272,173                         $       263,674                      $ 2,008,499

During the year, intangibles with a cost of $15.6 million (2009 – $246.2 million) and an accumulated amortization of $15.6 million
(2009 – $246.2 million) were written off. In addition, intangibles with a cost of $39.3 million and accumulated amortization of
$20.7 million were disposed of in relation to the transaction described in Note 5. Amortization for the year ended December 31, 2010,
was $249.5 million (2009 – $122.1 million, including $10.5 million related to certain domain names).




                                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010           73
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



9. Goodwill
The changes in the book value of goodwill are as follows:

                                                                                                                                  December 31, 2010
                                                                                           Directories           Vertical Media                Total
Balance, beginning of year                                                             $   5,678,328        $        664,252         $    6,342,580
Business acquisitions (Note 3)                                                              180,665                   30,735               211,400
Disposal (Note 5)                                                                            (41,767)                       –               (41,767)
Foreign currency translation adjustment                                                       (1,986)                  (1,243)               (3,229)
Balance, end of year                                                                   $   5,815,240        $        693,744         $    6,508,984


                                                                                                                                  December 31, 2009
                                                                                           Directories           Vertical Media                Total
Balance, beginning of year                                                             $   5,685,280        $        963,387         $    6,648,667
Business acquisitions (Note 3)                                                                      –                  16,904               16,904
Impairment                                                                                          –               (315,000)             (315,000)
Other                                                                                               –                  (1,039)               (1,039)
Foreign currency translation adjustment                                                       (6,952)                        –               (6,952)
Balance, end of year                                                                   $   5,678,328        $        664,252         $    6,342,580

During the year ended December 31, 2009, Yellow Media Inc. determined that the deterioration of the economic environment in
the vehicle and real estate industries and its continuing negative impact on Vertical Media segment revenues was an indicator that
the goodwill related to the Vertical Media segment should be tested for potential impairment.

The impairment testing was completed during the year and Yellow Media Inc. determined that the goodwill of the Vertical Media
segment was impaired by $315 million. As a result, an impairment loss was recorded in the consolidated statement of earnings for
the year ended December 31, 2009.

10. Accounts payable and accrued liabilities
                                                                                                         December 31, 2010        December 31, 2009
Trade                                                                                                        $         84,257         $      58,511
Deposits                                                                                                               15,428                 5,740
Deferred consideration                                                                                                  2,055                     –
Payroll related accruals                                                                                               26,258                18,864
Publishing related accruals                                                                                            17,917                16,156
Accrued interest                                                                                                       38,172                38,891
Other accrued liabilities                                                                                              21,811                15,295
Income and commodity taxes                                                                                             15,826                15,746
Restructuring and special charges (Note 24)                                                                            41,446                40,862
                                                                                                             $       263,170          $    210,065


11. Employee benefit plans
The Corporation maintains pension plans with defined benefit and defined contribution components which cover substantially
all of the employees of Yellow Media Inc. Yellow Media Inc. maintains unfunded supplementary defined benefit pension plans
for certain executives and also maintains other retirement and post-employment benefits (“other benefits”) plans which cover
substantially all employees of Yellow Media Inc.




74   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                    Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                             (all tabular amounts are in thousands of Canadian dollars, except share information)


The changes in the accrued benefit obligations and in the fair value of assets and the reconciliation of funded status of the
defined benefit plans to the amount recorded on the consolidated balance sheets for the years ended December 31, 2010 and
2009 were as follows:

                                                                                                 December 31, 2010                                 December 31, 2009
                                                                                            Pension                  Other                 Pension                     Other
                                                                                           Benefits              Benefits                  Benefits                Benefits


Fair value of plan assets, beginning of year                                           $ 400,955          $               –      $       378,141         $                  –
Actual return on plan assets                                                                36,300                        –                54,079                           –
Benefit payments                                                                            (31,464)               (2,276)                 (29,622)                  (2,145)
Transfers from defined benefit to defined contribution component of the
   plan                                                                                        (276)                      –                 (2,963)                         –
Employer contributions                                                                        7,674                 2,276                       611                   2,145
Employee contributions                                                                          566                       –                     709                         –
Fair value of plan assets, end of year                                                     413,755                        –              400,955                            –


Accrued benefit obligation, beginning of year                                              460,785                45,006                 394,438                     38,079
Current service cost                                                                        12,492                  1,061                  10,797                        806
Employee contributions                                                                          566                       –                     709                         –
Interest cost                                                                               29,829                  2,923                  29,436                      2,834
Actuarial losses                                                                            79,499                  4,211                  55,027                      5,432
Benefit payments                                                                            (31,464)               (2,276)                (29,622)                   (2,145)
Accrued benefit obligation, end of year                                                    551,707                50,925                 460,785                    45,006


Funded status - plan deficit                                                               (137,952)              (50,925)                (59,830)                  (45,006)
Unamortized plan amendment1                                                                         –              (4,344)                         –                 (4,923)
Unamortized net actuarial losses (gains)                                                    95,994                 (4,247)                 24,460                    (9,105)
Accrued benefit liabilities, end of year                                               $    (41,958)       $      (59,516)        $       (35,370)         $        (59,034)
1   A modification to the other benefits plan in 2005 resulted in a gain of approximately $7.5 million which is amortized over the expected average remaining service
    life of the employees at that time, which was 13 years.


Pension benefits and other benefits are shown as accrued benefit liabilities on the consolidated balance sheets. While all the
plans are not considered fully funded for financial reporting purposes, registered plans are funded in accordance with the
applicable statutory funding rules and regulations governing the particular plans.

The significant assumptions adopted in measuring Yellow Media Inc.’s pension and other benefit obligations as at December 31, 2010
and 2009, were as follows:

                                                                                                   December 31, 2010                                 December 31, 2009
                                                                                             Pension                  Other                 Pension                     Other
                                                                                             Benefits              Benefits                 Benefits                 Benefits
At December 31
Accrued benefit obligation
    Discount rate, end of year                                                                 5.50%                 5.50%                    6.50%                    6.50%
    Rate of compensation increase                                                              3.25%                 3.50%                    3.25%                    3.50%


For the years ended December 31
Net benefit plan costs
    Discount rate, end of preceding year                                                       6.50%                 6.50%                    7.50%                    7.50%
    Rate of compensation increase                                                              3.25%                 3.50%                    3.25%                    3.50%
    Expected long-term rate of return on plan assets                                            7.0%                        –                 7.25%                           –
    Expected average remaining service life                                                 13 years              15 years                 16 years                 15 years




                                                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010          75
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


For measurement purposes, a 8.50% annual increase in the per capita cost of covered health care benefits (the health care
cost trend rate) was assumed in 2010. The rate of increase of the cost of medication was assumed to gradually decline to
4.50% by 2018 and to remain at that level thereafter. A 4.50% annual increase in per capita cost of covered dental care
benefits was assumed in 2010.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-
percentage-point change in assumed healthcare cost trend rates would have the following effects:

                                                                                                    One-Percentage-                       One-Percentage-
                                                                                                    Point - Increase                      Point - Decrease
Effect on other benefits – total service and interest costs                                              $       232                           $     (251)
Effect on other benefits – accrued benefit obligation                                                    $     1,831                           $ (1,941)

The net benefit plan costs for the years included the following components:

                                                                                                                        For the years ended December 31,
                                                                                                               2010                                  2009
                                                                                        Pension                Other          Pension                Other
                                                                                        Benefits             Benefits         Benefits             Benefits
Current service cost                                                                   $ 12,492         $      1,061        $ 10,797           $      806
Interest cost                                                                            29,829                2,923           29,436                2,834
Actual return on plan assets                                                             (36,300)                  –           (54,079)                  –
Actuarial losses                                                                         79,499                4,211           55,027                5,432
Benefit costs before adjustments                                                         85,520                8,195           41,181                9,072
Adjustments to recognize long-term nature of employee benefit plan
     costs:
          Actual loss over expected return on plan assets                                 7,965                    –           27,673                    –
          Difference between annual amortization and plan amendment                           –                 (579)                –                (579)
          Difference between annual amortization and actuarial losses
               on obligation                                                             (79,499)             (4,858)          (55,148)             (6,199)
Net benefit plan costs for the YPG Co. defined benefit plans                           $ 13,986         $      2,758        $ 13,706           $     2,294
Net benefit plan costs for the YPG Co. defined contribution plans                         2,857                    –            2,963                    –
Net benefit plan costs for the Trader defined contribution plans                          2,489                    –            2,193                    –
Total net benefit plan costs                                                           $ 19,332         $      2,758        $ 18,862           $     2,294

Plan assets are represented primarily by Canadian and foreign equities, government and corporate bonds, debentures and
secured mortgages. Plan assets are held in trust and the asset allocation was as follows as at December 31:

(in percentages - %)                                                                                          2010                                  2009
                                                                                                                  %                                     %
Pension Plan
Asset categories in the Master Trust:
     Cash and other short-term investments                                                                        3                                     4
     Publicly traded equity securities                                                                           62                                    60
     Publicly traded fixed income securities                                                                     35                                    32
     Pending MTS transfer                                                                                         –                                     4

The expected return on plan assets is determined by considering long-term historical returns, future estimates of long-term
investment returns and asset allocations.

The total cash payments for pension and other benefit plans made by Yellow Media Inc. amounted to $15 million for 2010
(2009 – $5 million).

As at December 31, 2010 and December 31, 2009, the publicly traded equity securities did not directly include any shares of
Yellow Media Inc.

Yellow Media Inc.’s funding policy is to make contributions to its pension plans based on various actuarial cost methods as
permitted by pension regulatory bodies. Yellow Media Inc. is responsible to adequately fund the plans. Contributions reflect
actuarial assumptions concerning future investment returns, salary projections and future service benefits.

76    YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)



12. Long-term debt
                                                                                                                                                  December 31, 2010
                                                                                               Fair value adjustment                     Deferred
                                                                     Principal amount                 of hedged item               financing costs                     Total
 Medium Term Notes                                                     $    1,661,586                            $ 8,439               $     1
                                                                                                                                            (13,825)        $ 1,656,200
 Credit facilities                                                              250,000                                   –                           –          250,000
 Commercial paper                                                               295,000                                   –                           –          295,000
 Notes payable                                                                   12,258                                   –                           –            12,258
 Obligations under capital leases1                                                8,414                                   –                           –              8,414
                                                                            2,227,258                               8,439                    1
                                                                                                                                            (13,825)           2,221,872
 Less current portion of long-term debt                                           3,669                                   –                           –              3,669
                                                                       $    2,223,589                            $ 8,439               $    (13,825)        $ 2,218,203


                                                                                                                                                  December 31, 2009
                                                                                               Fair value adjustment                      Deferred
                                                                     Principal amount                 of hedged item                financing costs                    Total
 Medium Term Notes                                                     $    2,053,345                        $    10,703               $    (19,101)        $ 2,044,947
 Credit facilities                                                              100,000                                   –                           –           100,000
 Commercial paper                                                                74,000                                   –                           –            74,000
 Obligations under capital leases1                                                9,027                                   –                           –              9,027
                                                                            2,236,372                             10,703                    (19,101)           2,227,974
 Less current portion of long-term debt                                           2,254                                   –                           –              2,254
                                                                       $    2,234,118                        $    10,703               $    (19,101)        $ 2,225,720
1.   Less imputed interest at varying rates not exceeding 15.6% (2009- 15.6%)


Medium Term Notes
Medium Term Notes were issued in various series between April 2004 and November 2009. The terms and conditions of these
notes are governed by a Trust indenture dated April 2004. Medium Term Notes outstanding as at December 31, 2010 are as
follows:
           - $297.5 million of 5.71% Series 2 Notes maturing on April 21, 2014 priced at $99.985, for an initial yield to the
             noteholders of 5.71% compounded semi-annually
           - $121.2 million of 5.85% Series 3 Notes maturing on November 18, 2019 priced at par, for an initial yield to the
             noteholders of 5.85% compounded semi-annually
           - $387.4 million of 5.25% Series 4 Notes maturing on February 15, 2016 priced at $99.571, for an initial yield to the
              noteholders of 5.31% compounded semi-annually
           - $40.5 million of 6.25% Series 5 Notes maturing on February 15, 2036 priced at $100.933, for an initial yield to the
              noteholders of 6.181% compounded semi-annually
           - $260 million of 7.3% Series 7 Notes maturing on February 2, 2015 priced at par, for an initial yield to the noteholders
              of 7.3% compounded semi-annually
           - $125 million of 6.85% Series 8 Notes maturing on December 3, 2013 priced at par, for an initial yield to the
             noteholders of 6.85% compounded semi-annually
           - $130 million of 6.50% Series 9 Notes maturing on July 10, 2013 priced at par, for an initial yield to the noteholders of
              6.50% compounded semi-annually and
           - $300 million of 7.75% Series 10 Notes maturing on March 2, 2020 priced at par, for an initial yield to the noteholders
              of 7.75% compounded semi-annually

During the year, Yellow Media Inc. repurchased for cancellation an amount of $56 million of the Series 3 Medium Term Notes,
$106.4 million of the Series 4 Medium Term Notes, and $79.4 million of the Series 5 Medium Term Notes for a total cash
consideration of $227.1 million. A gain of $15 million was recorded in net earnings in financial charges.

In addition, Yellow Media Inc. redeemed all of its outstanding $150 million Series 6 Medium Term Notes which were due
February 28, 2011. Yellow Media Inc. financed the purchase with drawings under its commercial paper program. Yellow Media Inc.
redeemed the Series 6 Medium Term Notes at a redemption price of $1,041.681 per $1,000 principal amount in accordance


                                                                                                                              YELLOW MEDIA INC. ANNUAL REPORT 2010          77
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


with the terms of the Series 6 Notes and the provisions of the trust indenture dated April 21, 2004 for a total cash consideration
of $156.3 million. A loss of $5.2 million was recorded in net earnings in financial charges.

All Series of Notes are unsecured and are unconditionally guaranteed by Yellow Media Inc., YPG Co., CanPages, Trader, YPG
(USA) Holdings Inc., and Yellow Pages Group, LLC. as to the payment of principal and interest.

Credit facilities
Yellow Media Inc. has in place a senior unsecured credit facility consisting of:

              A $1 billion facility (the “Principal Facility”) which is comprised of:

                            a $750 million revolving tranche maturing in February 18, 2013; and

                            a $250 million non-revolving tranche maturing in February 18, 2013.

       The Principal Facility can be used for general corporate purposes and as back-up for the commercial paper program.

On February 19, 2010, Yellow Media Inc. increased its sources of liquidity by amending and extending the Principal Facility from
$700 million to $1 billion. The Principal Facility now matures on February 18, 2013.

As at December 31, 2010, $250 million was drawn on the Principal Facility. The Principal Facility bears interest at BA rates plus a
spread of 2.5%. This spread is based on a ratings grid.

The Principal Facility is unsecured and is unconditionally guaranteed by Yellow Media Inc., YPG Co., CanPages, Trader, YPG (USA)
Holdings Inc., and Yellow Pages Group, LLC as to the payment of principal and interest.

The Principal Facility is subject to customary terms and conditions including limits on pledging assets without the consent of
lenders. This facility is also subject to the maintenance of a maximum ratio of funded debt to Latest Twelve Month EBITDA
before conversion and rebranding costs1 of 4.25 times and a minimum ratio of Latest Twelve Month EBITDA before conversion
and rebranding costs1 to cash interest expense on total debt of 3.5 times.

On July 23, 2009, Yellow Media Inc. entered into a $100 million five year term loan bearing interest at BA rates plus 5%. The
proceeds were used for general corporate purposes. On October 21, 2010, the private facility was fully repaid and cancelled.

Yellow Media Inc. was in compliance with all of its debt covenants as at December 31, 2010.

Interest rate swaps
Yellow Media Inc. has entered into interest rate derivative agreements described in Note 25 in order to manage its fixed and
variable rate ratio on its long-term debt.

Commercial paper
Yellow Media Inc. maintains a commercial paper program (the “Commercial Paper program”) with an authorized limit of
$500 million. The commercial paper matures up to but not exceeding 365 days from the date of the issue. As at
December 31, 2010, there was $295 million outstanding under the Commercial Paper program. The commercial paper bears
interest at approximately BA rates plus an applicable spread and commission.

Notes payable
Yellow Media Inc. has notes payable bearing interest at various rates not exceeding 6.9% which expire between 2017 and 2030.

Obligations under capital leases
Yellow Media Inc. entered into several lease agreements with third parties for office equipment and for software. The obligations
under capital leases are secured by a moveable hypothec on the office equipment leased.

Future repayments
Future principal repayments and minimum capital lease and notes payable payments to be made during the next five years and
thereafter, as of December 31, 2010, are as follows:


1   Latest twelve month Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill, restructuring and special
    charges and conversion and rebranding costs, giving effect to acquisitions (“Latest Twelve Month EBITDA before conversion and rebranding costs”)



78     YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                      Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                              (all tabular amounts are in thousands of Canadian dollars, except share information)



                                                                                   Long-term debt1                 Capital leases and Notes Payable
2011                                                                      $                           –                          $                     4,750
2012                                                                                                  –                                                4,519
2013                                                                                         800,000                                                   2,783
2014                                                                                         297,500                                                   1,907
2015                                                                                         260,000                                                      942
Thereafter                                                                                   849,086                                                   9,319
Total principal repayments and future minimum lease payments                              2,206,586                                                  24,220
Less imputed interest at varying rates not exceeding 15.6%                                             –                                               3,548
                                                                          $               2,206,586                              $                   20,672
1   Excludes exchangeable and convertible instruments (see Note 13)


13. Exchangeable and convertible instruments
                                                                              December 31, 2010                                       December 31, 2009
    Principal amount                                                      $                 341,562                               $                  86,549
    Equity component                                                                         (10,139)                                                 (3,618)
    Accretion                                                                                      533                                                 2,362
    Deferred financing costs                                                                 (12,927)                                                 (1,407)
                                                                          $                 319,029                               $                  83,886

The remaining balance of $86.5 million of Exchangeable Debentures was redeemed by Yellow Media Inc. on August 2, 2010 for
a total cash consideration of $86.5 million excluding accrued interest. The carrying value of the Exchangeable Debentures was
$84.8 million. A loss of $1.7 million was recorded in net earnings in financial charges. The remaining balance of the conversion
option amounting to $3.6 million related to the purchase was credited to contributed surplus.

In connection with the Canpages acquisition, Yellow Media Inc. issued Mandatory Exchangeable Promissory Notes (“Exchangeable
Notes”) for a principal amount of $141.6 million. The Exchangeable Notes bear interest, payable quarterly at an initial rate of
5% subject to step-up provisions up to 7% in 2012 and mature on December 31, 2014. Commencing on January 1, 2011, the
Exchangeable Notes can be exchanged at the option of the holder, for shares of Yellow Media Inc. Each quarter, the holders will
be entitled to exchange 25% of the principal amount of the Exchangeable Notes, representing a maximum of $35.4 million. In
addition, Yellow Media Inc. may at its option at any time, redeem the Exchangeable Notes in whole or in part at a price equal to
their principal amount plus accrued interest. Any remaining Exchangeable Notes will be automatically exchanged into shares of
Yellow Media Inc. on December 31, 2014. The number of common shares of Yellow Media Inc. the holder will receive in respect of
each Exchangeable Note will be determined by dividing the principal amount of the Exchangeable Notes that are to be exchanged
by 95% of the market price of the common shares of Yellow Media Inc.

On July 8, 2010, Yellow Media Inc. issued convertible unsecured subordinated debentures for a principal amount of $200 million
(“Convertible Debentures”). The Convertible Debentures bear interest payable semi-annually at a rate of 6.25% and mature on
October 1, 2017. The Convertible Debentures may be exchanged at any time, at the option of the holder, for common shares of
Yellow Media Inc. at an exchange price of $8 per share (the “Exchange price”). On and after October 1, 2013 and prior
to October 1, 2015, the Convertible Debentures may be redeemed in whole or in part from time to time at the option of
Yellow Media Inc. at a price equal to their principal amount plus accrued and unpaid interest, provided that the current market price
of the common shares preceding the date on which the notice of redemption is given is not less than 125% of the Exchange price.
On and after October 1, 2015, the Convertible Debentures may be redeemed in whole or in part from time to time at the option of
Yellow Media Inc. at a price equal to their principal amount plus accrued interest. Yellow Media Inc. may also, at its option and
subject to certain conditions, elect to satisfy its obligation to repay all or any portion of the principal amounts and interest of the
Convertible Debentures that are to be redeemed or repaid at maturity, by issuing common shares of Yellow Media Inc. The number
of shares a holder will receive in respect of each Convertible Debenture will be determined by dividing the principal amount of the
Convertible Debentures that are to be redeemed or repaid at maturity by 95% of the market price of the common shares.

The conversion option was valued at $10.1 million at the date of issuance and is included in Shareholders’ equity. The liability
portion is being accreted such that the liability at maturity will equal the gross proceeds less conversions.




                                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010           79
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



14. Preferred shares
                                                                                       December 31, 2010         December 31, 2009
 Shares issued, Series 1 and Series 2                                                         $ 452,978                 $   481,408
 Derivative component                                                                               962                       1,161
 Deferred financing costs                                                                         (7,215)                     (9,792)
                                                                                              $ 446,725                 $   472,777


a) Series 1
On March 6, 2007, Yellow Media Inc. issued 12,000,000 Series 1 cumulative redeemable first preferred shares (“Series 1
shares”) for net proceeds of $291 million after deducting underwriters’ fees in the amount of $8 million and other issuance
costs of $1 million.

Voting rights
All of the issued and outstanding Series 1 shares are non-voting, except under special circumstances when the holders are
entitled to one vote per share.

Entitlement to dividends
The holders of the Series 1 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared
by the Board of Directors, in an amount equal to $1.0625 per Series 1 share per annum, payable quarterly.

Redemption by the issuer
On or after March 31, 2012, Yellow Media Inc. may, at its option, redeem at par for cash the Series 1 shares, in whole or in part.
Also, on or after March 31, 2012, and prior to December 31, 2012, Yellow Media Inc. may, at its option, exchange the
outstanding Series 1 shares, in whole or in part, into shares of the Corporation. In addition, the Series 1 shares will be
redeemable at a premium in cash or exchangeable at the option of Yellow Media Inc., in whole into shares of the Corporation on
or after March 31, 2007 provided that any exchange prior to March 31, 2012 shall be limited to circumstances in which the
Series 1 shares are entitled to vote separately as a class or series by law or court order. This option meets the definition of an
embedded derivative under GAAP and is recorded at fair value on the consolidated balance sheet with changes in fair value
recognized in earnings.

Redemption by the holder
On or after December 31, 2012, each preferred share is redeemable, at the option of the holder, at a price equal to $25.00 per
share plus any accrued and unpaid dividends in arrears.

b) Series 2
On June 8, 2007, Yellow Media Inc. issued 8,000,000 Series 2 cumulative redeemable first preferred shares (“Series 2 shares”) for
net proceeds of $193 million after deducting underwriters’ fees in the amount of $6 million and other issuance costs of $1 million.

Voting rights
All of the issued and outstanding Series 2 shares are non-voting, except under special circumstances when the holders are
entitled to one vote per share.

Entitlement to dividends
The holders of the Series 2 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared
by the Board of Directors, in an amount equal to $1.25 per Series 2 share per annum, payable quarterly.

Redemption by the issuer
On or after June 30, 2012, Yellow Media Inc. may, at its option, redeem for cash the Series 2 shares, in whole or in part at a
decreasing premium until June 30, 2016 and at par thereafter. Also, on or after June 30, 2012, and prior to June 30, 2017,
Yellow Media Inc. may, at its option, exchange the outstanding Series 2 shares, in whole or in part, into shares of the Corporation at
a decreasing premium until June 30, 2016 and at par thereafter. In addition, the Series 2 shares will be redeemable at a premium
in cash or exchangeable at the option of Yellow Media Inc., in whole into shares of the Corporation on or after June 30, 2007
provided that any exchange prior to June 30, 2012 shall be limited to circumstances in which the Series 2 shares are entitled to
vote separately as a class or series by law or court order. This option meets the definition of an embedded derivative under GAAP
and is recorded at fair value on the consolidated balance sheet with changes in fair value recognized in earnings.

80   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                      Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                              (all tabular amounts are in thousands of Canadian dollars, except share information)



Redemption by the holder
On or after June 30, 2017, each preferred share is redeemable, at the option of the holder, at a price equal to $25.00 per share
plus any accrued and unpaid dividends in arrears

Normal course issuer bid
Yellow Media Inc. received approval from the Toronto Stock Exchange (“TSX”) on its notice of intention to make a normal course
issuer bid for its preferred shares through the facilities of the TSX initially from June 11, 2009 to June 10, 2010, and then from
June 11, 2010 to no later than June 10, 2011, in accordance with applicable rules and regulations of the TSX.

Under its normal course issuer bid, Yellow Media Inc. can purchase for cancellation up to 1,174,691 and 720,000 of its
outstanding preferred shares, series 1 (“Series 1 shares”) and preferred shares, series 2 (“Series 2 shares”), respectively. For the
year ended December 31, 2010, Yellow Media Inc. had purchased for cancellation 635,714 Series 1 shares of Yellow Media Inc.
for a total cash consideration of $15.8 million including brokerage fees at an average price of $24.78 per Series 1 share and
501,490 Series 2 shares of Yellow Media Inc. for a total cash consideration of $10.4 million including brokerage fees at an average
price of $20.79 per Series 2 share. The carrying value of these Series 1 and Series 2 shares was $15.7 million and $12.3 million,
respectively. A gain of $1.8 million was recorded in net earnings in financial charges.

15. Equity attributable to non-controlling interests
                                                                                     December 31, 2010                              December 31, 2009
                                                                                                                                              (as adjusted)
 Preferred shares issued, net of issuance costs and income taxes                                $             –                                $    324,130
 Non-controlling interest related to Dealer.com                                                       51,276                                                  –
 Non-controlling interest related to Mediative LP                                                       1,377                                                 –
                                                                                                $     52,653                                   $    324,130

The preferred shares, Series 3 and 5 were classified as non-controlling interest on the 2009 balance sheet as they were shares
issued by a subsidiary of the Fund. As a result of the conversion from an income trust to a corporation on November 1, 2010,
the preferred shares, Series 3 and 5 along with the Series 7 issued during the year are now classified in shareholders’
equity. Dividends declared on these preferred shares were included in net earnings attributable to the holder of the preferred
shares series 3, 5 and 7 up until the date of conversion.

16. Income taxes
On November 1, 2010, Yellow Media Inc. converted from a publicly traded income trust to a publicly traded corporation by way of
the Plan of Arrangement. As a result, for the year ended December 31, 2010, Yellow Media Inc.’s income tax expense was
calculated on the basis of it being a corporation from the date of the Plan of Arrangement. For the year ended December 31, 2009,
the income tax expense was calculated on the basis of it being a publicly traded income trust in accordance with legislation
applicable to certain trusts.

A reconciliation of income taxes at Canadian statutory rates with reported income taxes is as follows:

                                                                                                                   For the years ended December 31,
                                                                                                        2010                                            2009
Earnings before income taxes, share of losses from equity investees                           $     354,501                                   $     258,681
Combined Canadian federal and provincial tax rates                                                    29.91%                                         31.39%
Income tax expense at statutory rates                                                         $     106,031                                   $      81,200
Increase (decrease) resulting from:
      Intercompany interest income earned in non-taxable entities                                    (77,904)                                      (135,599)
      Valuation allowance                                                                             35,701                                                  –
      Other                                                                                            (6,005)                                         5,106
      Impairment of goodwill                                                                                  –                                      99,242
      Non-deductible dividend expense                                                                  8,503                                           7,415
      Net tax impact of foreign activities                                                             (6,445)                                         (6,960)
      Effect of enacted future rates on temporary differences                                             646                                          (7,694)
Provision for income taxes                                                                    $       60,527                                  $      42,710




                                                                                                                  YELLOW MEDIA INC. ANNUAL REPORT 2010         81
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



Provision for income taxes for the years ended:

                                                                                       December 31, 2010     December 31, 2009
Current                                                                                      $    29,274           $    12,936
Future                                                                                            31,253                29,774
                                                                                             $    60,527           $    42,710


Future income tax assets (liabilities) are attributable to the following items as at:

                                                                                       December 31, 2010     December 31, 2009
Deferred financing costs and redemption fees                                                 $     (5,556)         $     (1,778)
Non-capital losses carryforward                                                                   18,461                31,847
Deferred revenues                                                                                 20,986                26,715
Accrued benefit liabilities                                                                       28,635                31,817
Net deferred loss on hedging activities                                                              900                    53
Accrued liabilities                                                                                9,879                 9,598
Capital assets and lease inducements                                                               1,951                 1,088
Intangibles                                                                                      (278,363)             (182,647)
Future income tax liabilities, net                                                           $ (203,107)           $    (83,307)


Financial statement presentation as at:

                                                                                       December 31, 2010     December 31, 2009
Current future income tax assets                                                             $    40,657           $    28,812
Long-term future income tax assets                                                                24,479                28,382
Current future income tax liabilities                                                             (71,064)              (34,248)
Long-term future income tax liabilities                                                          (197,179)             (106,253)
Future income tax liabilities, net                                                           $ (203,107)           $    (83,307)

At December 31, 2010, the Corporation had foreign operating losses of $20.9 million which expire from 2028 to 2030. The
Corporation also had Canadian operating losses of $138.6 million which expire from 2027 to 2030 and capital losses of
$42.5 million which can be utilized indefinitely. Future income tax assets of $18.5 million were recognized in relation to
Canadian operating losses.

17. Share capital
Conversion to a corporation
During the first quarter of 2010, the Company announced the details of the Plan of arrangement entered into under the Canada
Business Corporations Act, which was intended to lead to the conversion of the Company from an income trust to a traditional
dividend paying public corporation.

As part of this Plan of Arrangement, the Company obtained an interim order on March 24, 2010, in connection with the
Company’s Plan of Arrangement from the Superior Court of Québec.

The interim order of the Court confirmed the calling of an annual and special meeting (the Meeting) of the Fund’s unitholders on
Thursday, May 6, 2010 for the purpose of considering the Plan of Arrangement.

In order to become effective, the Plan of Arrangement required the receipt of all necessary court, regulatory and TSX approvals
and other customary conditions, along with the approval by at least 66 2/3% of the votes cast by the Fund’s unitholders voting
in person or by proxy at the Meeting. This approval was obtained on May 6, 2010, when the Fund’s unitholders adopted by a
vote of 99.8% the Plan of Arrangement.

On October 1, 2010, the Fund appeared again before the Superior Court of Québec in order to obtain a final order with respect
to the Plan of Arrangement. A final order approving the Fund’s Plan of Arrangement was then issued.

On November 1, 2010, the Plan of Arrangement became effective resulting in the conversion of the Fund’s income trust
structure into a dividend paying publicly-traded corporation named Yellow Media Inc. Unitholders of the Fund received, for each
unit of the Fund held, one common share of Yellow Media Inc. A total of 513,047,789 common shares were exchanged.

82   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                  Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)


On that same date, the units of the Fund were delisted from the TSX. Trading of the common shares of Yellow Media Inc. on the
TSX has commenced on November 1, 2010, under the symbol “YLO”.

The Company followed the guidelines included in Abstract 170 of the Emerging Issues Committee, Conversion of an
unincorporated entity to an incorporated entity (EIC-170) to reflect the impact of the conversion.

The conversion was treated as a change in business form and was accounted for as a continuity of interests; as such the
carrying amounts of assets, liabilities and unitholders’ equity in the consolidated financial statements of the Company
immediately before the Conversion were the same as the carrying values of Yellow Media Inc. immediately after the conversion.
The stated capital of Yellow Media Inc. in respect of the common shares was reduced by an amount of $2 billion and
contributed surplus was increased by the same amount.

Common shares
An unlimited number of common shares are authorized to be issued.

                                                                                                                                                                     2010
                                                                                                    Number of Shares                                              Amount
Balance November 1, 2010                                                                                                  –                           $                    –
Exchange of the Fund’s units for Yellow Media Inc. shares pursuant to the
 Plan of Arrangement                                                                                      513,047,789                                         6,062,051
Capital reduction pursuant to the Arrangement                                                                             –                                  (2,000,000)
Exchange of Preferred shares, Series 7                                                                          666,667                                             4,190
Shares issued pursuant to the dividend reinvestment plan                                                     1,201,327                                              7,072
                                                                                                          514,915,783                                 $       4,073,313
To be issued pursuant to the dividend reinvestment plan                                                      1,102,201                                              6,525
Balance December 31, 20101                                                                                516,017,984                                 $       4,079,838


Units
                                                                                                                                                                     2010
                                                                                                      Number of Units                                             Amount
Balance, December 31, 2009                                                                                513,044,685                                  $      6,062,039
Units issued                                                                                                        3,104                                                12
Balance November 1, 2010                                                                                  513,047,789                                         6,062,051
Exchange of the Fund’s units for Yellow Media Inc. shares pursuant to
 the Plan of Arrangement                                                                                 (513,047,789)                                       (6,062,051)
Unitholders’ capital – closing balance                                                                                     –                           $                    –


                                                                                                                                                                     2009
                                                                                                       Number of Units                                            Amount
Balance, December 31, 2008                                                                                518,301,059                                  $     6,144,416
Units issued                                                                                                      10,926                                                43
Repurchase of units                                                                                         (5,267,300)                                          (82,420)
Balance December 31, 2009 1                                                                               513,044,685                                  $     6,062,039
1   Includes 10,300,605 Restricted shares (2009 – 8,455,650 units) pursuant to the Restricted Share Plan.


Normal course issuer bid
During the year ended December 31, 2009, the Fund purchased for cancellation 267,300 Units of the Fund for a total cost of
$1.9 million including brokerage fees at an average price of $7.20 per unit. The average carrying value of these Units was
$11.86 per unit. The difference between the purchase price and the carrying value of the Units of $1.2 million was credited to
Contributed Surplus. There were no such transactions in 2010.

Repurchase of Units
During the year ended December 31, 2009, 5,000,000 Exchangeable Units of YPG LP issued as partial consideration of the TMC
acquisition were purchased and cancelled by Yellow Media Inc. for a total cash consideration of $27.5 million. The Exchangeable
Units of YPG LP were presented as part of Unitholders’ capital. These units had a carrying value of $15.85 per unit. The difference
between the purchase price and the carrying value of the units of $51.7 million was credited to Contributed Surplus.


                                                                                                                               YELLOW MEDIA INC. ANNUAL REPORT 2010         83
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


Exercise of options
During the year ended December 31, 2010, optionholders exercised 3,104 (2009 – 10,926) options at an exercise price of
$3.92 per option for cash consideration of $12 thousand (2009 – $43 thousand). These options were exercised into 3,104
(2009 – 10,926) shares of Yellow Media Inc. at an average stated value of approximately $3.92 (2009– $3.92) per share.

Dividend reinvestment plan
During the year, Yellow Media Inc. announced a dividend reinvestment plan (“Drip”) which became effective November 1, 2010.
 Under the plan, holders of common shares of Yellow Media Inc. who are residents of Canada may elect to have cash dividends
paid on their common shares reinvested into additional common shares of Yellow Media Inc. The Drip allows Yellow Media Inc.
to purchase the common shares on the open market or elect to have the common shares issued from treasury. Yellow Media Inc.
can issue the common shares from treasury with a discount from prevailing market prices ranging from 2% to 5%.
As at December 31, 2010, participation in the Drip offered by Yellow Media Inc. was at 19%.

Preferred shares

Authorized:
              8,625,000 Series 3 cumulative rate reset preferred shares
              8,625,000 Series 4 cumulative floating rate preferred shares
              5,000,000 Series 5 cumulative rate reset preferred shares
              5,000,000 Series 6 cumulative floating rate preferred shares
              1,300,000 Series 7 cumulative exchangeable preferred shares

Issued:

                                                                                       Number of shares                 Amount
Balance, December 31, 2009                                                                           –            $          –
Reclassified from non-controlling interest                                                 14,600,000                  333,880
Exchange of Preferred shares, series 7                                                       (666,667)                   (5,000)
Balance December 31, 2010                                                                  13,933,333             $    328,880


Series 3
On September 23, 2009, Yellow Media Inc. issued 7,500,000 Series 3 cumulative rate reset preferred shares (“Series 3
shares”) at a purchase price of $25.00 per share. On September 28, 2009, Yellow Media Inc. issued an additional 800,000
Series 3 shares pursuant to the exercise of the over allotment option granted to the underwriters for combined net proceeds of
$200.5 million after deducting underwriters’ fees in the amount of $6 million and other issuance costs of $1 million and
excluding income tax recovery of $2 million on the fees.

Voting rights
All of the issued and outstanding Series 3 shares are non-voting, except under special circumstances when the holders are
entitled to one vote per share.

Entitlement to dividends
The holders of the Series 3 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared
by the Board of Directors, in an amount equal to $1.6875 per Series 3 share per annum, payable quarterly, for the initial five
year period ending September 30, 2014. The dividend rate will be reset on September 30, 2014 and every 5 years thereafter.

Redemption by the issuer
On September 30, 2014, and on September 30 every five years thereafter, Yellow Media Inc. may, at its option, redeem at par
for cash the Series 3 shares, in whole or in part.

Conversion at the option of the holder
On September 30, 2014, each preferred share is convertible, at the option of the holder, into Series 4 preferred shares (“Series
4”) on a one to one basis. The Series 4 shares will be entitled to floating rate cumulative preferential cash dividends, as and
when declared by the Board of Directors, payable quarterly. The floating quarterly dividend rate will be equal to the sum of the
three-month government of Canada Treasury bill yield plus 4.17% per annum.


84   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                     Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                              (all tabular amounts are in thousands of Canadian dollars, except share information)
Series 5
On December 22, 2009, Yellow Media Inc. issued 5,000,000 Series 5 cumulative rate reset preferred shares (“Series 5
shares”) at a purchase price of $25.00 per share for net proceeds of $120.3 million after deducting underwriters’ fees in the
amount of $3.7 million and other issuance costs of $1 million and excluding income tax recovery of $1.4 million on the fees.

Voting rights
All of the issued and outstanding Series 5 shares are non-voting, except under special circumstances when the holders are
entitled to one vote per share.

The holders of the Series 5 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared
by the Board of Directors, in an amount equal to $1.725 per Series 5 share per annum, payable quarterly, for the initial five year
period ending June 30, 2015. The dividend rate will be reset on June 30, 2015 and every 5 years thereafter.

Redemption by the issuer
On June 30, 2015, and June 30 every five years thereafter, Yellow Media Inc. may, at its option, redeem at par for cash the
Series 5 shares, in whole or in part.

Entitlement to dividends
The holders of the Series 5 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared
by the Board of Directors, in an amount equal to $1.725 per Series 5 share per annum, payable quarterly, for the initial five year
period ending June 30, 2015. The dividend rate will be reset on June 30, 2015 and every 5 years thereafter.

Conversion at the option of the holder
On June 30, 2015, each preferred share is convertible, at the option of the holder, into Series 6 preferred shares (“Series 6”) on
a one to one basis. The Series 6 shares will be entitled to floating rate cumulative preferential cash dividends, as and when
declared by the Board of Directors, payable quarterly. The floating quarterly dividend rate will be equal to the sum of the three-
month government of Canada Treasury bill yield plus 4.26% per annum.

Series 7
On February 9, 2010, in connection with the acquisition of Red Flag Deals, Yellow Media Inc. issued 1,300,000 Series 7 shares at a
price of $7.50 per Series 7 share as payment to the vendors for the acquisition by way of a private placement. The holders of the
Series 7 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of
Directors of Yellow Media Inc. in an amount equal to $0.375 per Series 7 share per annum, yielding 5% per annum, payable
quarterly on the third last business day of March, June, September and December of each year. The Series 7 shares are
exchangeable into shares of Yellow Media Inc. at a ratio of one preferred share for one share of Yellow Media Inc. On or after
January 1, 2012, 300,000 Series 7 shares may be exchanged subject to certain time-based and performance conditions (Note 3).

During the year, 666,667 Series 7 were exchanged into 666,667 common shares of Yellow Media Inc. At December 31, 2010,
there were 633,333 Series 7 shares outstanding.

The Series 3, 5 and 7 shares were initially classified as non-controlling interest on the balance sheet as they were issued by a
subsidiary of the Fund. As a result of the conversion from an income trust to a corporation on November 1, 2010, the Series 3,
5, and 7 are now classified in Shareholders’ equity.

18. Accumulated other comprehensive income
The components of Accumulated other comprehensive income are as follows:

                                                                                                                                                    December 31, 2010
    Net gain on derivatives designated as cash flow hedges, net of income taxes1                                                                           $           1,077
    Unrealized losses on translating financial statements of self-sustaining foreign operations and foreign
    investees                                                                                                                                                         (2,373)
    Unrealized gain on available–for–sale investment                                                                                                                      225
    Balance December 31, 2010                                                                                                                              $          (1,071)
1   The net gain on derivatives designated as cash flow hedges in prior periods will be transferred to net earnings over the term of the underlying debt which matures
    on May 2011, February 2016 and February 2036.




                                                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010           85
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



                                                                                                                                             December 31, 2009
    Net gain on derivatives designated as cash flow hedges, net of income taxes1                                                                    $           729
    Unrealized losses on translating financial statements of self-sustaining foreign operations and foreign
    investees                                                                                                                                               (3,881)
    Unrealized gain on available–for–sale investment                                                                                                           418
    Balance December 31, 2009                                                                                                                       $       (2,734)
1    The net gain on derivatives designated as cash flow hedges in prior periods will be transferred to net earnings over the term of the underlying debt which matures
     on May 2011, February 2016 and February 2036.


19. Earnings per share
The following table reconciles the net earnings attributable to shareholders and the weighted average number of shares
outstanding used in computing basic earnings per share to weighted average number of shares outstanding used in computing
diluted earnings per share:

                                                                                                                              For the years ended December 31,
                                                                                                                                          2010               20091,2
    Weighted average number of shares outstanding used in
     computing basic earnings per share                                                                                          503,111,679            510,658,375
    Dilutive effect of options                                                                                                        382,039              392,433
    Dilutive effect of Restricted Shares3                                                                                         10,016,622              6,602,795
    Dilutive effect of Exchangeable Notes                                                                                         15,292,171                        –
    Dilutive effect of Series 1 Preferred shares                                                                                  51,890,688             57,253,961
    Dilutive effect of Series 2 Preferred shares                                                                                  31,847,677             37,479,655
    Dilutive effect of Exchangeable Debentures                                                                                      8,819,220                       –
    Dilutive effect of Convertible Debentures                                                                                     17,564,620                        –
    Dilutive effect of Series 7 Preferred shares                                                                                    1,125,571                       –
    Weighted average number of shares outstanding used in
     computing diluted earnings per share                                                                                        640,050,287            612,387,219
1    The Exchangeable Units of YPG LP issued as partial consideration of the TMC acquisition described above are included in the number of units for both basic and
     diluted earnings per unit for the year ended December 31, 2009.
2.   Comparative amounts presented are trust units.
3    Subject to specific pay-out conditions.


                                                                                                                              For the years ended December 31,
                                                                                                                                          2010                 2009
    Net earnings attributable to shareholders of Yellow Media Inc.                                                           $        271,042 $            204,255
    Dividends to preferred shareholders                                                                                                  3,651                      –
    Net earnings available to common shareholders of Yellow Media Inc.                                                                267,391              204,255
    Impact of assumed conversion of Exchangeable Notes,
      net of applicable taxes                                                                                                            2,967                      –
    Impact of assumed conversion of Series 1 Preferred shares,
      net of applicable taxes                                                                                                          14,503                12,548
    Impact of assumed conversion of Series 2 Preferred shares,
      net of applicable taxes                                                                                                            8,591                 6,166
    Impact of assumed conversion of Exchangeable Debentures,
      net of applicable taxes                                                                                                            3,948                      –
    Impact of assumed conversion of Convertible Debentures,
      net of applicable taxes                                                                                                            5,065                      –
    Impact of assumed conversion of Series 7 Preferred shares,
      net of applicable taxes                                                                                                              461                      –
    Net earnings adjusted for dilutive effect                                                                                $        302,926 $            222,969

For the year ended December 31, 2009, the diluted earnings per share calculation did not take into consideration the
potentially dilutive effect of the Exchangeable debentures since their impact was anti-dilutive.




86      YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                  Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                          (all tabular amounts are in thousands of Canadian dollars, except share information)



20. Stock-based compensation plans
Yellow Media Inc.’s stock-based compensation plans consist of a Restricted Share Plan and a Stock Option Plan.

Restricted Share Plan
Pursuant to the Plan of Arrangement, all Restricted Units previously issued under the Restricted Unit Plan were amended such
that the holder thereof will have the right to receive common shares instead of units, on a one-to-one basis and on the same
terms and continue to be governed by the same terms under the Restricted Share Plan (the “RS Plan”).
Cash dividends received on all Restricted shares awarded to eligible employees and directors are reinvested in additional
Restricted Shares and vest according to the terms of the grant pursuant to which they are paid. Cash dividends received on all
Restricted Shares awarded to non-executive directors are not reinvested in additional Restricted Shares and will be paid
according to the terms of the grant pursuant to which they are paid. Unless instructed otherwise by a participant, upon the
vesting of the Restricted Shares, the plan custodian shall sell the Restricted Shares of the participant on the open market of the
TSX and remit to the participant the net proceeds from the sale thereof after deducting all applicable taxes and other costs
associated therewith.

Upon termination for cause or resignation, all Restricted Shares not vested shall be forfeited and cancelled. Upon a participant’s
retirement, termination without cause, death and long-term disability, the time-based Restricted Units will vest as a pro-rata of
the performance cycle completed versus the 36 month period. All performance-based Restricted Units that are not vested on
the date of the participant’s retirement, termination without cause, death or long-term disability shall be forfeited and cancelled
on such date.

The Restricted shares have vesting acceleration provisions under certain circumstances.

Employees who were awarded units under the RS Plan subsequent to 2008, were granted Restricted Shares in equal
proportions between time-based vesting and performance-based vesting criteria. During the years 2007 to 2009, Restricted
Shares awarded to eligible employees were performance-based and vest between 2010 and 2012. Yellow Media Inc. also
awarded Restricted Shares to non-executive directors of Yellow Media Inc., which are time-based vesting only. In the case of the
2009 grants, the number of Restricted Shares that vest could potentially reach up to two-and-a-half times the actual number of
Restricted Shares awarded if the actual performance reaches the maximum level of the objectives.

Upon the Fund’s conversion to a corporation, the plan was amended to allow for the purchase of Yellow Media Inc. common
shares (the “Restricted shares”) on the open market. In addition, participants of the plan will receive Yellow Media Inc. common
shares rather than units of the Fund upon vesting of their respective rights.

During the year ended December 31, 2010, an amount of $20.7 million (2009 – $16.9 million) representing 3,840,009
(2009 – 2,775,913) Restricted shares were granted at an average market price of $5.39 (2009 – $6.09). Half of these Restricted
Shares vested upon conversion of the Fund into a corporation and the other half would vest based on the achievement of targets
determined by the Board of Directors. Consequently, $17.6 million was used (2009 – $24.1 million) to purchase 2,689,203
(2009 – 3,849,791) Restricted Shares of Yellow Media Inc. on the open market of the TSX. In addition, an amount of $7.2 million
(2009 – $5.7 million) was used to reinvest in 1,196,851 (2009 – 1,008,595) Restricted Shares using the proceeds from the
distributions on the Restricted Shares held in escrow. This includes 319,915 (2009 – 479,001) Restricted Shares associated with
the portion which provides for up to a 250% pay-out.




                                                                                                            YELLOW MEDIA INC. ANNUAL REPORT 2010           87
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)


The following table summarizes the status of the grants:

                                                                                                                                December 31, 2010
                                                                                                                        Number of Restricted Shares
                                                                                                                               2008 to 2010 Grants
 Outstanding, beginning of year                                                                                                           4,558,668
 Granted                                                                                                                                  3,840,009
 Vested                                                                                                                                    (572,974)
 Forfeited                                                                                                                               (1,365,324)
 Cash distributions reinvested                                                                                                              876,936
 Outstanding, end of year                                                                                                                 7,337,315
 Weighted average remaining life                                                                                                          0.57 years


                                                                                                                                 December 31, 2009
                                                                                                                        Number of Restricted Shares
                                                                                                                                2007 to 2009 Grants
 Outstanding, beginning of year                                                                                                           2,221,443
 Granted                                                                                                                                  2,775,913
 Vested                                                                                                                                    (508,082)
 Forfeited                                                                                                                                 (460,200)
 Cash distributions reinvested                                                                                                              529,594
 Outstanding, end of year                                                                                                                 4,558,668
 Weighted average remaining life                                                                                                          1.96 years

During the year, Yellow Media Inc. sold 1,360,398 Restricted Shares which were not allocated to any specific employee at an
average market price of $6.09. As a result of this transaction, an amount of $2.1 million, representing the excess of the cost over
proceeds, was credited to contributed surplus.

As at December 31, 2010 there were 50,000 (2009 – 166,689) Restricted Shares which were not allocated to any specific
employee and 2,913,290 (2009 – 3,730,293) Restricted Shares representing the portion which provides up to a 250% pay-out.
An expense of $21.4 million (2009 - $1.9 million) was recorded in the consolidated net earnings.

Stock Options
YPG LP

Prior to the inception of the Fund, certain employees were issued options to purchase common shares of Yellow Media Inc.
Employees who participated in the equity plan were granted options in equal proportions between time-based vesting and
performance-based vesting criteria. Employees who did not participate in the equity plan only received performance-based options.
Time-based options were exercisable as to 20% to 33 1/3 % per year on the anniversary of the grant date in each of the three to
five subsequent years. Performance-based options were exercisable as to 20% per year on the anniversary of the grant date in each
of the five subsequent years provided that YPG Co. achieves specified performance targets. At December 31, 2007, YPG Co. had
achieved the performance targets identified at the time of establishment of the Stock Option Plan and all of the performance-based
options became exercisable in 2008.

The following table summarizes the status of the stock option program:

                                                                                                                                 December 31, 2010
                                                                                       Number of options   Weighted average exercise price per option
 Outstanding, beginning of year                                                                383,986                                       $ 3.92
 Exercised                                                                                       (3,104)                                        3.92
 Outstanding, end of year                                                                      380,882                                       $ 3.92
 Exercisable, end of year                                                                      380,882                                       $ 3.92




88   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                          Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                   (all tabular amounts are in thousands of Canadian dollars, except share information)



                                                                                                                                         December 31, 2009
                                                                   Number of options                       Weighted average exercise price per option
Outstanding, beginning of year                                               394,912                                                                      $ 3.92
Exercised                                                                     (10,926)                                                                        3.92
Outstanding, end of year                                                     383,986                                                                      $ 3.92
Exercisable, end of year                                                     383,986                                                                      $ 3.92

The following table summarizes information about the stock option program as of December 31, 2010.

                                                                                                                    Options outstanding and exercisable
  Exercise price per option   Number of options       Weighted average remaining life       Weighted average exercise price                 Number of options
                   $3.92                380,882                            1.54 years                                        $3.92                      380,882

Yellow Media Inc.

On November 11, 2010, the Board of Directors of Yellow Media Inc. adopted a new stock option plan (the “2010 Plan”). The
2010 Plan is subject to approval by the Shareholders and by the TSX. If approved, the 2010 Plan will permit the Board of
Directors to select eligible employees that will qualify for the 2010 Plan. A maximum of 25 million options may be granted
under the 2010 Plan.

On November 11, 2010, the Board of Directors granted subject to approval, 15,850,000 options from the 2010 Plan. The
significant terms and conditions of the options granted are as follows:

            The exercise price is equal to the weighted-average trading prices on the TSX during the five trading days preceding
            the date on which the options were granted.

            The options vest at the expiration of the third year following the grant date.

            The options expire five years after the grant date.

21. Supplemental disclosure of cash flow information
Change in operating assets and liabilities:

                                                                                                                       For the years ended December 31
                                                                                                                                 2010                        2009
Accounts receivable                                                                                                  $       12,273             $         33,908
Prepaid expenses                                                                                                                  145                       5,100
Deferred publication costs and other assets                                                                                  17,111                       12,226
Accounts payable                                                                                                             27,358                         8,342
Deferred revenues                                                                                                           (29,156)                           262
                                                                                                                     $       27,731             $         59,838

Supplemental information:

                                                                                                                       For the years ended December 31,
                                                                                                                                 2010                         2009
Interest paid                                                                                                        $     138,293              $        142,437
Dividends on Preferred shares, series 1 and 2 paid                                                                   $       21,179             $          22,434
Issuance of common shares pursuant to the Drip                                                                       $       13,597                                –
Issuance of Series 7 shares as partial consideration for a business acquisition                                      $         9,750            $                  –
Issuance of Exchangeable Notes as partial consideration for a business
    acquisition                                                                                                      $     141,562              $                  –
Contribution of Yellow Media Inc.’s interest in subsidiary for equity investment
   (Note 5)                                                                                                          $       75,248             $                  –
Income taxes and capital taxes paid                                                                                  $       33,903             $          10,551
Additions to fixed assets under capital leases                                                                       $         2,569            $            1,891
Additions to fixed assets included in accounts payable and accrued liabilities                                       $         6,233            $            6,183



                                                                                                                     YELLOW MEDIA INC. ANNUAL REPORT 2010           89
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



22. Commitments and contingencies
a) Yellow Media Inc. has commitments under various leases for premises, equipment and purchase obligations through long-
term distribution agreements for each of the next five years and thereafter, as of December 31, 2010, and in the aggregate of:

2011                                                                                                               $       114,796
2012                                                                                                                         25,783
2013                                                                                                                         24,327
2014                                                                                                                         23,553
2015                                                                                                                         22,979
Thereafter                                                                                                                   51,650
                                                                                                                   $       263,088

Under certain lease agreements, there are inducements for leasehold improvements. The lease inducements are accounted for
as part of deferred credits and amount to $21.2 million. These lease inducements are recorded as a reduction of rent expense
on a straight-line basis over the term of the lease.

b) Yellow Media Inc. has four billing and collection services Agreements. The term of the Billing & Collection Services
Agreement with Bell Canada (“Bell”) expires on December 31, 2014, with an automatic renewal of two successive one-year
periods thereafter unless Yellow Media Inc. provides prior notice not to renew. The agreement with TELUS Communications Inc.
(“TELUS”) includes automatic renewal for successive one-year periods. The agreement with MTS Allstream Inc. expires on
October 2, 2016, with two automatic renewal periods for ten years up to a maximum of 30 years. The agreement with Bell
Aliant Regional Communications LP (“Bell Aliant”) expires on April 30, 2017, with two automatic renewal periods for ten years.

Pursuant to publication agreements with each of Bell, TELUS, MTS Allstream Inc. and Bell Aliant, YPG Co. produces alphabetical
listing telephone directories for each of these companies in order for them to meet their regulatory obligations.

YPG Co. also entered into several other agreements with Bell, TELUS, MTS Allstream Inc. and Bell Aliant, providing for the use of
listing information and trademarks for the publications of directories. If YPG Co. materially fails to perform its obligations under
the publication agreements mentioned above and as a result they are terminated in accordance with their terms, these other
agreements with any of Bell, TELUS, MTS Allstream Inc. or Bell Aliant may also be terminated.

c) Yellow Media Inc. entered into directory printing agreements with its printing suppliers to print, bind and furnish alphabetical,
classified and combined directories as well as other publications. It also entered into distribution agreements. These
agreements will terminate in 2020.

d) Yellow Media Inc. is subject to various claims and proceedings which have been instituted against it during the normal
course of business for which certain of the claims are provided for and included in accounts payable and accrued liabilities
based on management’s best estimate of the likelihood of the outcome. Management believes that the disposition of the
matters pending or asserted is not expected to have any material adverse effect on the financial position, results of operations
or cash flows of Yellow Media Inc.




90   YELLOW MEDIA INC. ANNUAL REPORT 2010
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



25. Financial risk management
Credit Risk
Credit risk stems primarily from the potential inability of a customer or counterparty to a financial instrument to meet its
contractual obligations. Yellow Media Inc. is exposed to credit risk with respect to cash and cash equivalents, accounts receivable
from customers and derivative financial instruments. The carrying amount of financial assets represents Yellow Media Inc.’s
maximum exposure.

Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are
placed with creditworthy counterparties. An ongoing review is performed to evaluate changes in the status of counterparties.

Yellow Media Inc.’s extension of credit to customers involves considerable judgment. Yellow Media Inc. has established internal
controls designed to mitigate credit risk, including a formal credit policy managed by its credit department. New customers,
customers increasing their advertising spend by a certain threshold and customers not respecting payment terms are subject to
a specific vetting and approval process.

Yellow Media Inc. considers that it has limited exposure to concentration of credit risk with respect to accounts receivable from
customers due to its large and diverse customer base operating in numerous industries and its geographic diversity. There are
no individual customers that account for 1% or more of revenues and there are no accounts receivable from any one individual
customer and certified marketing representative that exceeds 5% of the total balance of accounts receivable at any point in
time during the period.

Bell, TELUS, MTS Allstream Inc. and Bell Aliant provide Yellow Media Inc. with customer collection services with respect to advertisers
who are also their customers. As such they receive money from customers on behalf of Yellow Media Inc. Yellow Media Inc. retains
the ultimate collection risks on these receivables.

Allowance for doubtful accounts and past due receivables are reviewed by management at each balance sheet reporting date.
Yellow Media Inc. updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of
accounts receivable balances of each customer taking into account historic collection trends of past due accounts. Accounts
receivable are written-off once determined not to be collectable.

Pursuant to their respective terms, accounts receivable are aged as follows as at December 31, 2010:



Current                                                                                                          $           140,095
Past due less than 180 days                                                                                                    63,639
Past due over 180 days                                                                                                         13,034
Accounts receivable                                                                                              $           216,768


Yellow Media Inc.’s accounts receivable are stated after deducting a provision of $48.9 million at December 31, 2010. The
movements in the provision for doubtful accounts were as follows:

                                                                                                                   December 31, 2010
Balance, beginning of year                                                                                       $            45,776
Bad debt expense, net of recovery                                                                                             48,196
Written-off                                                                                                                  (45,053)
Balance, end of year                                                                                             $            48,919


                                                                                                                   December 31, 2009
Balance, beginning of year                                                                                       $            40,449
Bad debt expense, net of recovery                                                                                             45,496
Written-off                                                                                                                  (40,169)
Balance, end of year                                                                                             $            45,776

In addition, Yellow Media Inc. is exposed to credit risk if counterparties to its derivative financial instruments fail to meet their
obligations. Yellow Media Inc. expects that its counterparties will meet their obligations because they are highly-rated financial
institutions that have strong credit ratings.



92   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                           (all tabular amounts are in thousands of Canadian dollars, except share information)



Interest Rate Risk
Yellow Media Inc. is exposed to interest rate risks through its financial obligations bearing variable interest rates. The
interest rates on Yellow Media Inc.’s bank facility, commercial paper issuances, and cash and short-term investments are
generally based on the Canadian Banker's Acceptance rate. As of December 31, 2010, including the impact of the financial
derivatives described below, the net amount exposed to short-term rates fluctuations was $872.2 million. Based on this
exposure as at December 31, 2010, an assumed 0.5 percentage point increase in the Banker's Acceptance rate would have
an unfavourable impact of $4.4 million on net earnings with an equal but opposite effect for an assumed 0.5 percentage
point decrease. Yellow Media Inc. is also exposed to fluctuations in long-term interest rates relative to the refinancing of its
debt obligations upon their maturity. The interest rate on new long-term debt issuances will be based on the prevailing rates
at the time of the refinancing, and will also depend on the tenor of the new debt issued. Yellow Media Inc. manages interest
rate risk exposure by having a balanced schedule of debt maturities, as well as a combination of fixed and floating interest
rate obligations and uses interest rate derivative products when appropriate to hedge interest rate risk.

Yellow Media Inc. uses derivative contracts to manage the combination of fixed and floating interest rates on its long-term debt
and to manage interest rate risk on planned debt issuances.

In August 2009, Yellow Media Inc. entered into three interest rate swaps totalling $130 million to hedge the Series 9 Medium
Term Notes. Yellow Media Inc. receives interest on these swaps at 6.5% and pays a floating rate equal to the three-month
Banker’s Acceptance plus a spread of 4.3%. The swaps mature July 10, 2013, matching the maturity date of the underlying
debt. As at December 31, 2010, the interest rate swaps met the criteria for hedge accounting.

In February 2010, Yellow Media Inc. also entered into two interest rate swaps totalling $125 million to hedge the Series 8
Medium Term Notes. Yellow Media Inc. receives interest on these swaps at 6.85% and pays a floating rate equal to the three-
month Banker’s Acceptance plus a spread of 4.3%. The swaps mature December 3, 2013, matching the maturity date of the
underlying debt. As at December 31, 2010, the interest rate swaps met the criteria for hedge accounting.

On October 15, 2010, the holders of the Exchangeable Notes monetized their investment through a resale of the Notes to a
third-party financial institution. In order to facilitate this resale transaction and the orderly conversion of the Exchangeable Notes
into common shares during the course of 2011, Yellow Media Inc. entered into a total return swap (“TRS”) transaction
referencing the Notes with the same counterparty for a period ending December 15, 2011. Pursuant to the terms of the TRS,
the 5% fixed interest rate under the Exchangeable Notes was converted to the floating rate of interest equal to the three-month
Banker’s Acceptance plus 1.75%. In addition, under the TRS, the counterparty as a holder of the Notes is expected to exchange
25% of the principal amount into underlying Yellow Media Inc. common shares at 95% of the prevailing market price, to be
calculated using a volume weighted average price over a period of up to 20 days. In addition, Yellow Media Inc. may receive or
pay under the TRS an adjustment amount to the extent that the value realized by the TRS counterparty on the exchange or
redemption of the Notes exceeds or is less than the $141.6 million principal amount of the Exchangeable Notes. The TRS is
measured at fair value and is marked-to-market through net earnings at each balance sheet date.

Foreign Exchange Risk
Yellow Media Inc. operates in the United States and is exposed to foreign exchange risk arriving from various currency
transactions. Foreign exchange transaction risk arises primarily from commercial transactions that are denominated in a
currency that is not the functional currency of Yellow Media Inc.’s business unit that is party to the transaction. Yellow Media Inc.
is exposed to fluctuations in the US dollar. The effect on net earnings and other comprehensive income from existing US dollar
exposures of a 1 point increase or decrease in the Canadian/US dollar exchange rate is not significant.

Liquidity Risk
Liquidity risk is the exposure of Yellow Media Inc. to the risk of not being able to meet its financial obligations as they become
due. Yellow Media Inc. manages liquidity risk through the management of its capital structure and financial leverage as outlined
in Note 26 - Capital Disclosures.




                                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010           93
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



The following are the contractual maturities of the financial liabilities and related capital amounts:

                                                                                                            Payments due for the years ending December 31
                                                                                             Total    1 – 3 years        4 – 5 years        After 5 years
Non-derivative financial liabilities1
Long-term debt                                                                         $2,206,586     $800,000           $557,500            $849,086
Obligations under capital leases                                                            8,414         7,788                626                    –
Notes payable                                                                             12,258          1,873              1,115               9,270
Exchangeable and convertible instruments                                                 341,562              –            141,562             200,000
Preferred shares, Series 1 and 2                                                         452,978       281,971                    –            171,007
                                                                                        3,021,798     1,091,632            700,803           1,229,363
Derivative financial liabilities
Interest rate swaps
     Inflows                                                                               (2,770)       (2,770)                  –                   –
     Outflows                                                                                919            919                   –                   –
Total Return Swaps
     Inflows                                                                               (2,513)       (2,513)                  –                   –
                                                                                           (4,364)       (4,364)                  –                   –


Total                                                                                  $3,017,434    $1,087,268          $700,803           $1,229,363
1   Principal amount


On December 31, 2010, cash and cash equivalents amounted to $33.8 million. In addition Yellow Media Inc. may issue
additional notes amounting to $205 million under its commercial paper program and access another $250 million under its
Principal Facility. Alternatively, if notes are not issued under the commercial paper program, Yellow Media Inc. may access the
full $455 million available under the Principal Facility. In addition to cash and cash equivalents amounting to $33.8 million,
Yellow Media Inc. had $35.5 million of restricted cash as at December 31, 2010.




94    YELLOW MEDIA INC. ANNUAL REPORT 2010
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



Fair value hierarchy
The three levels of fair value hierarchy are as follows:
               Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.
               Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
               directly or indirectly.
               Level 3 – inputs used in a valuation technique are not based on observable market data in determining fair values of
               the instruments.

Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The
classification of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the
measurement of fair value.

The following table summarizes the financial instruments measured at fair value in the consolidated balance sheet as at
December 31, 2010, classified using the fair value hierarchy:

                                                                                        Level 1   Level 2   Level 3          Total
Financial asset or liability
Cash and cash equivalents                                                              $33,848        $–        $–        $33,848
Restricted Cash                                                                         35,477         –         –         35,477
Investment – available for sale                                                            453         –         –            453
Interest rate swaps                                                                          –     1,771         –          1,771
Total Return swap                                                                            –     2,833         –          2,833
Redemption option on Preferred shares                                                        –     1,541         –          1,541
Total                                                                                  $69,778    $6,145        $–        $75,923


Yellow Media Inc.’s available-for-sale investment is comprised of an actively traded equity security and is carried at fair value
based on available quoted prices.

Yellow Media Inc.’s derivatives transactions are accounted for on a fair value basis and are comprised of non-speculative interest
rate swaps to hedge interest rate exposures and total return swaps. These derivatives are valued using either industry standard or
internally developed valuation models. Where applicable, these models use market-based observable inputs including interest-rate-
yield curves, volatility of certain prices or rates and credit spreads. In certain cases, market-based observable inputs are not
available and, in those cases, judgment is used to develop assumptions used to determine fair values. Yellow Media Inc. currently
does not use unobservable inputs that are significant to the fair value measurement in its entirety.




96   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                     Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                              (all tabular amounts are in thousands of Canadian dollars, except share information)



26. Capital disclosures
Yellow Media Inc.’s objective in managing capital is to:
              Ensure sufficient liquidity to cover financial obligations and investment requirements;
              Preserve access to low-cost funding;
              Maintain or improve investment grade credit ratings; and
              Deliver stable results to investors.

Yellow Media Inc. actively manages and monitors its capital structure and makes adjustments based on the objectives
described above in response to changes in economic conditions and the risk characteristics of the underlying assets.

The primary measure used by Yellow Media Inc. to monitor its financial leverage is its ratio of net debt3 to Latest Twelve Month
EBITDA before conversion and rebranding costs2. Yellow Media Inc. also uses other financial metrics to monitor its financial
leverage including net debt3 and preferred shares to Latest Twelve Month EBITDA before conversion and rebranding costs2,
Fixed Charges Coverage Ratio and Net Debt3 to Capitalization.

Yellow Media Inc.’s capital is comprised of Net debt, Preferred shares, series 1 and 2, Exchangeable and convertible
instruments and equity attributable to shareholders of Yellow Media Inc. as follows:

                                                                                                         December 31, 2010                          December 31, 2009
                                                                                                                                                              (as adjusted)
Cash and cash equivalents                                                                                        $        33,848                         $           36,170
Restricted cash                                                                                                           35,477                                              –
Medium Term Notes                                                                                                    1,656,200                                   2,044,947
Credit Facilities                                                                                                       250,000                                     100,000
Commercial paper                                                                                                        295,000                                      74,000
Obligations under capital leases and other                                                                                20,672                                       9,027
Net debt (net of cash and cash equivalents and restricted cash)                                                      2,152,547                                   2, 191,804
Exchangeable and convertible instruments                                                                                319,029                                      83,886
Preferred shares, Series 1 and 2                                                                                        446,725                                     472,777
Equity attributable to shareholders of Yellow Media Inc. 1                                                           5,450,691                                                –
Equity attributable to owners of the Fund                                                                                         –                              5,224,740
Equity attributable to non-controlling interests1                                                                         52,653                                    324,130
Total capitalization                                                                                             $ 8,421,645                             $       8,297,337
Net debt3 to total capitalization                                                                                          27.7%                                       27.4%
1   The Series 3 and 5 shares were classified as non-controlling interest on the 2009 balance sheet as they were shares issued by a subsidiary of the Fund. As a
    result of the conversion from an income trust to a corporation on November 1, 2010, the preferred shares 3 and 5 along with Series 7 issued during the year are
    now classified in shareholders’ equity.


                                                                                                                                                      For the year ended
                                                                                                         December 31, 2010                          December 31, 2009
Latest Twelve Month EBITDA before conversion and rebranding costs2                                               $      907,633                              $      898,355
Net Debt3 to Latest Twelve Month EBITDA before conversion and
     rebranding costs ratio2                                                                                                   2.6                                         2.5




2
    Latest twelve month Income from operations before depreciation and amortization, acquisition-related costs, impairment of goodwill, restructuring and special
    charges and conversion and rebranding costs, giving effect to acquisitions (“Latest Twelve Month EBITDA before conversion and rebranding costs”)
3
    Including Exchangeable and convertible debentures




                                                                                                                                YELLOW MEDIA INC. ANNUAL REPORT 2010           97
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



27. Guarantees
In the normal course of operations, Yellow Media Inc. has entered into agreements that contain certain features which meet the
definition of a guarantee under the guidance provided by CICA Accounting Guideline 14, Disclosure of Guarantees and which
are customary in the industry.

Yellow Media Inc. has entered into agreements which contain indemnification of its directors and officers indemnifying them
against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by them in
connection with any action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they
acted honestly and in good faith with a view to the best interests of Yellow Media Inc. Yellow Media Inc. benefits from directors’
and officers’ liability insurance which is purchased by Yellow Media Inc. No amount has been accrued in the consolidated
balance sheet as of December 31, 2010, with respect to this indemnity.

Pursuant to the acquisitions of Aliant, LesPAC, YPG USA, Dealer.com and the contribution of YPG Directories, LLC to Ziplocal,
LP in exchange for a 35% minority interest in such combined entity, Yellow Media Inc. has entered into agreements whereby
Yellow Media Inc. agrees to indemnify and hold harmless the other party from and against any and all claims, liabilities, costs
and expenses arising out of, based upon or related to (i) any breach by Yellow Media Inc. in the performance of its
obligations under these agreements and (ii) any breach of a representation contained herein. Furthermore, agreements
entered into by Trader and its predecessor companies prior to the acquisition contain indemnifications similar to the ones
just described. No amount has been accrued in the consolidated balance sheet as at December 31, 2010 with respect to
these indemnities.

The nature of these guarantees prevents Yellow Media Inc. from making a reasonable estimate of the maximum potential
amount it could be required to pay to counterparties.




98   YELLOW MEDIA INC. ANNUAL REPORT 2010
                                                                                   Notes to the Consolidated Financial Statements – December 31, 2010 and 2009
                                                                                            (all tabular amounts are in thousands of Canadian dollars, except share information)



28. Segmented information
Yellow Media Inc.'s reportable segments consist of strategic business units that offer different products. Management has
determined that Yellow Media Inc. operates in two reportable segments: Directories and Vertical Media. The Directories segment
operates in print and online directories, and performance marketing solutions. The Vertical Media segment operates in the
vertical print publications and web sites by topic or area of interest performance marketing solutions. The accounting policies of
the segments are the same as those used for the consolidated financial statements. Yellow Media Inc. or chief operating
decision maker analyzes the performance of its operating segments based on their income from operations which is not a
measure of performance under GAAP; however, management uses this performance measure for assessing the operating
performance of its reportable segments.

The tables below summarize the selected financial information by segment:

                                                                                                                        For the year ended December 31, 20101
                                                                                 Directories                        Vertical Media                             Consolidated
    Revenues                                                                 $ 1,365,276                            $      314,584                         $ 1,679,860
    Operating costs                                                                560,314                                 220,702                                781,016
    Conversion and rebranding costs                                                 45,629                                     2,900                                48,529
    Income from operations before depreciation
      and amortization, acquisition-related costs
      and restructuring and special charges                                        759,333                                  90,982                                850,315
    Depreciation and amortization                                                  163,240                                 106,877                                270,117
    Acquisition-related costs (recovery)                                            30,709                                      (170)                               30,539
    Restructuring and special charges                                               30,724                                     3,179                                33,903
    Income (loss) from operations                                            $     534,660                          $       (18,904)                       $      515,756


                                                                                                                        For the year ended December 31, 20091
                                                                                 Directories                       Vertical Media                              Consolidated
    Revenues                                                                 $ 1,392,029                           $      247,855                         $     1,639,884
    Operating costs                                                                570,125                                176,321                                  746,446
    Income from operations before depreciation
      and amortization, impairment of goodwill
      and restructuring and special charges                                        821,904                                  71,534                                 893,438
    Depreciation and amortization                                                  109,846                                  32,568                                 142,414
    Impairment of goodwill                                                                 –                              315,000                                  315,000
    Restructuring and special charges                                               33,735                                    6,581                                 40,316
    Income (loss) from operations                                            $     678,323                         $     (282,615)                        $       395,708
1   Included in the Directories segment are the results of YPG USA and in the Vertical Media segment are the results of Dealer.com. Consequently, $111.3 million of
    revenues are included for the year ended December 31, 2010 (2009 - $37.2 million) and were generated in the United States of America. Revenues are
    attributed to countries based on the location of the customer.




                                                                                                                              YELLOW MEDIA INC. ANNUAL REPORT 2010           99
Notes to the Consolidated Financial Statements - December 31, 2010 and 2009
(all tabular amounts are in thousands of Canadian dollars, except share information)



                                                                                                                                              December 31, 2010
                                                                                         Directories1              Vertical Media2                    Consolidated
    Intangibles                                                                        $ 1,738,078                 $      385,698                     $ 2,123,776
    Goodwill                                                                           $ 5,815,240                 $      693,744                     $ 6,508,984
    Total assets                                                                       $ 8,080,430                 $    1,219,818                     $ 9,300,248


                                                                                                                                              December 31, 2009
                                                                                        Directories1               Vertical Media2                    Consolidated
    Intangibles                                                                        $ 1,681,391                 $      327,108                      $ 2,008,499
    Goodwill                                                                           $ 5,678,328                 $      664,252                      $ 6,342,580
    Total assets                                                                       $ 7,799,723                 $ 1,141,883                         $ 8,941,606
1. Included    in the Directories segment is goodwill of $12.3 million (December 31, 2009 - $56 million) and capital assets of $36.6 million at December 31, 2010
     (December 31, 2009 - $86.2 million) relating to YPG USA. Included in the total assets of the Directories segment is $63 million (December 31, 2009 – $2.4 million)
     related to the equity investments.
2.   Included in the Vertical Media segment is goodwill of $26.9 million (December 31, 2009 - nil) and capital assets of $99.3 million at December 31, 2010
     (December 31, 2009 - $nil) relating to Dealer.com. Included in the total assets of the Vertical Media segment is $1.5 million (December 31, 2009 – $32.6 million)
     related to the equity investments.



                                                                                                                              For the years ended December 31,
                                                                                                                             2010                              2009
    Additions to fixed assets1
        Directories                                                                                               $        41,796                     $      32,767
        Vertical Media                                                                                            $        28,231                     $      13,276
    Additions to intangible assets
        Directories2                                                                                              $        18,940                     $         246
        Vertical Media                                                                                            $         5,367                     $             –
1    These amounts represent total expenditures for additions to fixed assets, whether they are paid or not. The additions include internally developed software which
     will be reclassified to intangible assets once they become available for use.
2    Excluding future income taxes of $1.7 million.




100 YELLOW MEDIA INC. ANNUAL REPORT 2010
Board of Directors
Michael T. Boychuk                         Michael R. Lambert                           Marc L. Reisch
President and Chief Executive              Chief Financial Officer,                      Chairman, President and Chief Executive
Officer, Bimcor Inc.                        The Forzani Group Ltd.                       Officer, Visant Corporation
Member of the Audit Committee              Chairman of the Human Resources              Chairman of the Board
and of the Corporate Governance            and Compensation Committee                   Member of the Human Resources
and Nominating Committee                                                                and Compensation Committee
                                           Anthony G. Miller
John R. Gaulding                           Corporate Director                           J. Heidi Roizen
Chairman, Gaulding & Co.                   Member of the Audit Committee                Chief Executive Officer,
Chairman of the Corporate Governance                                                    Skinny Little Things, LLC
and Nominating Committee and               Heather E.L. Munroe-Blum                     Member of the Corporate Governance
Member of the Human Resources              Professor, Principal and Vice-Chancellor,    and Nominating Committee
and Compensation Committee                 McGill University
                                           Member of the Corporate Governance           Stuart H. B. Smith
Paul Gobeil                                and Nominating Committee and of Human        Chairman, EPIC Realty Partners Inc.
Vice-Chairman of the Board of              Resources and Compensation Committee         Chairman of the Audit Committee
Directors, Metro Inc.
Member of the Audit Committee              Martin Nisenholtz                            Marc P. Tellier
and of the Corporate Governance            Senior Vice-President, Digital Operations,   President and Chief Executive Officer,
and Nominating Committee                   The New York Times Company                   Yellow Pages Group Co.
                                           Member of the Audit Committee




Leadership Team
Corporate Services                         Directories                                  Vertical Media
Marc P. Tellier                            Stéphane Marceau                             Douglas A. Clarke
President and Chief Executive Officer       Chief Marketing Officer                       President
Christian M. Paupe                         Douglas A. Clarke                            Stéphane Marceau
Executive Vice-President, Corporate        Senior Vice-President – Sales                Chief Marketing Officer
Services and Chief Financial Officer
                                           Nicolas Gaudreau                             Jamie Blundell
François D. Ramsay                         Vice-President, Digital Media                Vice-President, Operations
Senior Vice-President,
General Counsel and Secretary              Jeff Knisley                                 Jacky Hill
                                           Vice-President, Sales, Western Region        Vice-President, National Real Estate
Catherine Caplice
Vice-President, Corporate Development      Patrick Lauzon                               Mark O’Brien
                                           Vice-President and General Manager,          Vice-President - Commercial Sales,
Josée Dubuc                                National Markets                             Automotive & Generalist
Chief Talent Officer                        President, Mediative
                                                                                        Normand Théberge
Ginette Maillé                             Lise R. Lavoie                               Vice-President, Business Development
Chief Administration Officer                Vice-President, Sales, Québec
                                           and Atlantic Canada
Barbara E. Oberleitner
Vice-President, Finance & Treasurer        Chris Long
                                           Vice-President, Sales, Central Region
Stephen Port
Vice-President, Corporate Performance      Gregory S. Shearer
                                           Vice-President, Business Solutions
Yvan Proteau
Chief Information Officer                   Tracy Smith
                                           Vice-President, Performance Marketing
D. Lorne Richmond
Vice-President, Supply Chain & Logistics   Edward D. Valentine
President, Canpages                        Vice-President, Publishing & Sales Support
Daniel Verret                              Dominique Vallée
Vice-President, Corporate Controller       Vice-President, Sales, Advantage Group
                                           and Call Centres Initiative



                                                                                             YELLOW MEDIA INC. ANNUAL REPORT 2010 101
Corporate Information


16 Place du Commerce                         401 The West Mall                       2700 Production Way, Suite 500
Verdun, Québec H3E 2A5                       Etobicoke, Ontario M9C 5J5              Burnaby, British Columbia V5A 0C2
www.ypg.com                                  www.tradercorporation.com               corporate.canpages.ca




Investor Relations
1 877 YLO-2003 (1 877 956-2003)
ir.info@ypg.com

Auditors
Deloitte & Touche LLP

Shares and Other Securities Listed on the Toronto Stock Exchange
YLO                   Common Shares
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YLO.PR.A              Series 1 Cumulative Redeemable First Preferred shares
YLO.PR.B              Series 2 Cumulative Redeemable First Preferred shares
YLO.PR.C              Series 3 Cumulative Rate Reset First Preferred shares
YLO.PR.D              Series 5 Cumulative Rate Reset First Preferred shares

Transfer Agent
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2001 University Street
Suite 1600
Montréal, Québec H3A 2A6
Telephone: 1 800 387-0825
E-Mail Inquiries: inquiries@cibcmellon.com




Annual Report
To consult the online interactive version of our Annual Report, visit: www.ypg.com/annualreport2010

Ce rapport est également disponible en français. Pour obtenir la version française, veuillez communiquer avec la
Compagnie Trust CIBC Mellon à l’adresse indiquée ci-haut.


102 YELLOW MEDIA INC. ANNUAL REPORT 2010

				
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