1. DESCRIPTION OF THE FUND

Yellow Pages Income Fund (“the Fund”) is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on June 25, 2003 by a declaration of trust and amended by amended and restated declarations. The Fund has been created to invest, through YPG Trust (the “Trust”), a wholly-owned trust, in partnership units of YPG LP and shares of YPG General Partner Inc. (“YPG GP”), the general partner of YPG LP. YPG LP, through subsidiaries, operates print and electronic directories advertising businesses (the “directories business”), primarily in the Provinces of Québec, Ontario, British Columbia and Alberta.

On February 10, 2004, BCE Inc. (“BCE”) exchanged all of its 11,111,100 units of YPG LP and its 11,111,100 common shares of YPG GP for the equivalent number of units of the Fund, in accordance with the Investor Liquidity Agreement entered into at the time of the initial public offering (the “Offering”). Following the exercise of this liquidation right, the Fund held a 70.25% equity interest in YPG LP.

On June 11, 2004, the Fund issued 66,666,600 units to the public in exchange for net proceeds of $713.6 million, after deducting underwriters' fees in the amount of $29.7 million (the “June 11, 2004 Offering”). The proceeds were used to indirectly purchase an equivalent number of units of YPG LP from investment funds managed by Kohlberg Kravis Roberts & Co (“KKR”).

On June 11, 2004, TMB Directories Inc. (“Teachers”) exchanged all of its 35,333,300 units of YPG LP and its 35,333,300 common shares of YPG GP for the equivalent number of units of the Fund, in accordance with the Investor Liquidity Agreement entered into at the time of the Offering.

Following the completion of the above-mentioned transactions, the Fund holds a 100% equity interest in YPG LP as of June 11, 2004.

References herein to the Fund represent the financial position, results of operations, cash flows and disclosures of the Fund and its subsidiaries on a consolidated basis. The results of ADS have been consolidated as of May 25, 2005.

2. BUSINESS ACQUISITIONS

2005

a) Acquisition of ADS

On April 1, 2005, the Fund issued 104,100,000 subscription receipts at a price of $13.45 per subscription receipt for proceeds of $1.37 billion (net of one half of the underwriters' fees or $28 million) pursuant to the filing of a prospectus and placed in escrow by CIBC Mellon Trust pending the closing of the acquisition of Yellow Pages Holdings Inc. (formerly Advertising Directory Solutions Holdings Inc. or “ADS”) (“the Acquisition”) which occurred on May 25, 2005. Each subscription receipt entitled the holder thereof to automatically receive one Unit of the Fund upon closing of the Acquisition.

In addition, holders of subscription receipts were entitled to receive an amount per subscription receipt equal to the per Unit distribution, if any, actually paid or payable to Unitholders in respect of all record dates occurring between April 1, 2005 and the closing of the Acquisition, as if the subscription receipts had been converted to Units immediately prior to such record dates. On May 25, 2005, these subscription receipts were exchanged for 104,100,000 Units of the Fund for proceeds of $1.34 billion (net of underwriters' fees of $56 million) which has been recorded in Unitholders' equity. A private placement of Units also closed on May 25, 2005 through the issuance of 22,727,273 Units for proceeds of $288 million (net of placement fees of $12 million). These proceeds combined with new debt financing and cash on hand were used to purchase all of the outstanding shares of ADS for a purchase price consideration of $2,626 million (including acquisition related costs of $76 million).

ADS is the second largest telephone directories publisher in Canada. It publishes directories under the SuperPages^TM brand name, and publishes directories in Alberta, British Columbia and in certain parts of Québec where Telus is the incumbent telephone service provider.

The Fund accounted for the Acquisition using the purchase method of accounting. The purchase price was allocated to the net identifiable assets acquired on the basis of their fair values. The fair value of the underlying net identifiable assets of ADS was allocated as follows:

Consideration

REPAYMENT OF ADS NOTES

On May 25, 2005, a portion of the consideration paid for the Acquisition was utilized to repay long-term debt of ADS. The Fund deposited US $180 million in escrow with the US National Bank Association as Trustee for a period of 30 days in accordance with the terms of a trust indenture. The funds remained in escrow until June 24, 2005 at which time the funds were released and used to discharge the long-term debt of ADS.

b) Transactions during the first quarter

During the first quarter of 2005, optionholders exercised 86,252 options at an exercise price of $3.92 per option for cash consideration of $0.3 million. These options were exercised into 86,252 shares of YPG Holdings Inc. which were automatically exchanged into 86,252 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $13.49 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $0.8 million.

c) Transactions during the second quarter

During the second quarter of 2005, optionholders exercised 213,786 options at an exercise price of $3.92 per option for cash consideration of $0.8 million. These options were exercised into 213,786 shares of YPG Holdings Inc. which were automatically exchanged into 213,786 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $13.70 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $2.1 million.

d) Transactions during the third quarter

During the third quarter of 2005, optionholders exercised 769,356 options at an exercise price of $3.92 per option for cash consideration of $3.1 million. These options were exercised into 769,356 shares of YPG Holdings Inc. which were automatically exchanged into 769,356 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $15.41 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $8.8 million.

e) Transactions during the fourth quarter

During the fourth quarter of 2005, optionholders exercised 18,369 options at an exercise price of $3.92 per option for cash consideration of $0.07 million. These options were exercised into 18,369 shares of YPG Holdings Inc. which were automatically exchanged into 18,369 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $14.10 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $0.2 million.

2004

f) Transactions during the first quarter

In February 2004, optionholders exercised 413,683 options at an exercise price of $3.92 per option for cash consideration of $1.6 million. These options were exercised into 413,683 shares of YPG Holdings Inc. which were automatically exchanged into 413,683 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $11.86 per share, which in turn were exchanged into units of YPG LP. This transaction, combined with the exchange by BCE of all its 11,111,100 units of YPG LP and its 11,111,100 common shares of YPG GP for the equivalent number of units of the Fund as described in Note 1, resulted in the Fund acquiring, directly and indirectly, an additional 3.28% interest in YPG LP for a total consideration of $134.6 million, increasing its interest to 70.28% . The Fund accounted for this 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 market values using the purchase method of accounting. The Fund's share in the fair value increments of the underlying net identifiable assets of YPG LP was allocated as follows:

g) Transactions during the second quarter

During the second quarter of 2004, optionholders exercised 852,430 options at an exercise price of $3.92 per option for cash consideration of $3.3 million. These options were exercised into 852,430 shares of YPG Holdings Inc. which were automatically exchanged into 852,430 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $11.34 per share, which in turn were exchanged into units of YPG LP. This transaction, combined with the June 11, 2004 Offering and the exchange by Teachers of all its 35,333,300 units of YPG LP and its 35,333,300 common shares of YPG GP for the equivalent number of units of the Fund, both described in Note 1, resulted in the Fund acquiring, directly and indirectly, an additional 29.72% interest in YPG LP for a total consideration of $1,117.2 million, bringing its interest to 100%. The Fund accounted for this 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 market values using the purchase method of accounting. The Fund's share in the fair value increments of the underlying net identifiable assets of YPG LP was allocated as follows:

h) Transactions during the third quarter

During the third quarter of 2004, optionholders exercised 132,125 options at an exercise price of $3.92 per option for cash consideration of $0.5 million. These options were exercised into 132,125 shares of YPG Holdings Inc. which were automatically exchanged into 132,125 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $11.48 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $1.0 million.

i) Transactions during the fourth quarter

During the fourth quarter of 2004, optionholders exercised 128,872 options at an exercise price of $3.92 per option for cash consideration of $0.5 million. These options were exercised into 128,872 shares of YPG Holdings Inc. which were automatically exchanged into 128,872 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average stated value of approximately $12.89 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $1.2 million.

3. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

ADOPTION OF NEW ACCOUNTING POLICIES

Variable Interest Entities

Effective January 1, 2005, the Fund adopted the Canadian Institute of Chartered Accountants (“CICA”) Accounting Guideline 15 (“AcG-15”), Consolidation of Variable Interest Entities (“VIEs”). AcG-15 applies to interim periods beginning on or after November 1, 2004. VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary (i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity's losses). Management of the Fund conducted a review of the ownership and contractual interest in entities and determined that the adoption of this guideline did not have any impact on the Fund's consolidated financial statements.

Exchangeable Securities Issued by Subsidiaries of Income Trusts

On January 19, 2005, the CICA Emerging Issues Committee (“EIC”) issued EIC Abstract 151, Exchangeable Securities Issued by Subsidiaries of Income Trusts which provides guidance on how to present exchangeable securities representing a retained interest in a subsidiary of an income trust on the consolidated balance sheet of the income trust. This Abstract must be applied retroactively, with restatement of prior periods, to all financial statements issued after January 19, 2005. As the Fund did not meet all the conditions to present the exchangeable units held by each of BCE, KKR, and Teachers as part of unitholders' equity, these exchangeable units were presented as non-controlling interest in the consolidated financial statements. Therefore, the implementation of this new Abstract did not have any impact on the Fund's consolidated financial statements.

PRINCIPLES OF CONSOLIDATION

The Fund's consolidated financial statements include the accounts of the Trust, YPG GP, YPG LP, YPG Holdings Inc., Yellow Pages Group Co., Aliant Actimedia, Snap Guides Inc., Vertical Guides Limited Partnership, ADS, Yellow Pages Inc. (formerly Advertising Directory Solutions Inc.) and those of 3100653 Nova Scotia Limited (“Nova Scotia”) and of Advertising Directory Solutions Independent LP (Ontario). All intercompany transactions and balances have been eliminated. The Fund accounts for its 12.86% general partnership interest in Aliant Actimedia, which it jointly controls, and its 50% interest in Vertical Guides Limited Partnership, using the proportionate consolidation method.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of funds on deposit and, from time to time, highly liquid investments with a purchased maturity of three months or less.

REVENUES

Revenues are earned through the sale of telephone directory advertising. 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 electronic 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, respectively. Amounts billed up front for the directories are deferred and recognized over the billing period for which the corresponding directories are in circulation, not exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twenty-four months.

DEFERRED PUBLICATION COSTS

Direct and incremental costs incurred for sales, manufacturing and distribution of telephone print directories not yet published are deferred. Upon publication, these costs are amortized on a systematic basis over the same period in which the related revenues are recognized.

CAPITAL ASSETS, DEPRECIATION AND AMORTIZATION

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

The cost of internally developed software is capitalized and included in capital assets at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project. The Fund does not capitalize pilot projects and projects where it believes that future economic benefits are less than probable.

Internally developed software costs include the costs of software tools and licenses used in the development of the Fund's systems, as well as payroll and consulting costs.

Assets under development consist primarily of internally developed software that is not amortized until the assets are available for use.

DEFERRED FINANCING COSTS

Deferred financing costs are amortized on a straight-line basis over the terms of the related debt.

INTANGIBLES

Intangibles are recorded at cost. Intangibles with finite lives are amortized as follows:

The trademark 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

Effective January 1, 2004, the Fund adopted the accounting standard of the new CICA Handbook, Section 3063, Impairment of long-lived assets. This standard provides guidance on recognizing, measuring and disclosing the impairment of long-lived assets. The new standard requires the recognition of an impairment loss for a long-lived asset to be held and used when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. The adoption of this standard did not have any impact on the Fund's consolidated financial statements.

GOODWILL

Goodwill represents the excess of the purchase price over the estimated fair value of the net identifiable assets of businesses acquired. Goodwill is not amortized but rather is assessed for impairment annually, or more frequently if circumstances change, on the basis of its fair value. Fair value is determined using discounted expected future cash flows.

EMPLOYEE BENEFIT PLANS

The Fund maintains defined benefit pension plans which cover substantially all the employees. These plans provide pensions and other retirement and post-retirement benefits to retired employees based on years of service and average earnings at retirement. For the plans that are non-contributory, the Fund is responsible for contributions to adequately fund the plans. The plans acquired through ADS are contributory with both the Fund and the employees responsible for contributions to adequately fund the plans.

The Fund 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 long-term bonds; and
• management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected healthcare costs.

A valuation is performed at least every three years to determine the actuarial present value of the accrued pension and other employee future benefits. 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 16 years at period 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. The latest actuarial valuations were performed as at December 31, 2003 and December 31, 2002 for the YPG and ADS pension benefit plans, respectively and as at January 1, 2005 and December 31, 2005 for the YPG and ADS other employee future benefit plans, respectively. The next valuations will be performed as at December 31, 2005 for the pension benefit plans and for other employee future benefit plans the next valuations will be performed as at January 1, 2007.

STOCK-BASED COMPENSATION PLAN

Effective January 1, 2004, the Fund adopted the amendment to CICA Handbook Section 3870 Stock-Based Compensation and Other Stock-Based Payments. The amendment, issued in November 2003, requires the expensing of all stock-based compensation awards for fiscal years beginning on or after January 1, 2004 using the fair value method. The Fund has chosen to adopt the amendment using the retroactive without restatement transitional alternative, as permitted by the standard (see Note 17).

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.

INCOME TAXES

The Fund is a mutual fund trust for income tax purposes. As such, the Fund is only taxable on any amount not allocated to Unitholders. As substantially all taxable income will be allocated to the Unitholders, no provision for income taxes on earnings has been made in these consolidated financial statements. Income tax liabilities relating to distributions of the Fund are taxed in the hands of the Unitholders.

The Fund 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 bases result in either future income tax assets or liabilities. Future income taxes are computed using substantively enacted tax rates for 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, assets 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 areas requiring the use of management estimates relate to the determination of collectibility of accounts receivable, valuation of intangibles, goodwill, impairment of assets, pension and other employee benefits, useful lives for amortization, future income taxes and other deferred costs. These estimates are revised periodically. Results, as determined by actual events, could differ materially from the above estimates.

HEDGING RELATIONSHIPS

As at January 1, 2004, the Fund adopted Accounting Guideline (“AcG-13”), Hedging Relationships. The guideline applies to all existing and new hedging relationships and provides additional documentation and designation requirements for hedge accounting and requires regular, periodic assessment of effectiveness. Derivatives that are economic hedges, but do not qualify for hedge accounting, are recognized at fair value on the balance sheet with changes in fair value recorded in earnings in accordance with EIC-128, Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments.

The Fund uses derivative financial instruments to manage its interest risk exposures on debt financing. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Fund 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.

Derivatives that are economic hedges, but do not qualify for hedge accounting are recognized on the balance sheet at fair value with changes in fair value recorded in earnings. When hedging instruments mature or become ineffective before their maturity and are not replaced within the Fund's documented hedging strategy, deferred gains or losses on such instruments continue to be deferred and are charged to income in the same period as the corresponding gains or losses on the hedged items. Gains and losses that are realized subsequently to the maturity of the hedging instruments or subsequent to the hedging instruments becoming ineffective, are charged directly to income. If the hedged item ceases to exist due to its maturity, expiry, cancellation or exercise before the hedging instrument expires, deferred gains or losses are charged to earnings.

4. CAPITAL ASSETS

			December 31, 2004
			Accumulated depreciation and amortization
					Net Book Value
	Cost
Office equipment	$4,449		$470		$3,979
Office equipment under capital lease	7,340		962		6,378
Computer equipment and software	25,183		9,551		15,632
Computer software under capital lease	2,250		689		1,561
Leasehold improvements	7,652		890		6,762
Assets under development	23,770		—		23,770
	$70,644		$12,562		$58,082

During the year, capital assets with a cost of $1.5 million and accumulated depreciation of $0.6 million were written off. Depreciation and amortization for the year ended December 31, 2005, was $23.3 million (2004—$12.1 million).

5. OTHER ASSETS

In connection with the issuance of the new Medium Term Notes described in Note 10, the Fund incurred financing costs of $11.6 million. Also, in connection with the New Credit Facilities described in Note 10, the Fund incurred financing costs of $31.7 million of which $21.3 million was recorded in financial charges in the consolidated statement of earnings as the $1.5 billion subordinated equity bridge facility originally included in the above credit facilities was cancelled as a result of the issuance of units. The balance of these deferred financing costs was written off since the underlying debt was fully reimbursed during the last quarter of 2005.

During 2004, the Fund incurred financing charges totalling $10.5 million in connection with the issuance of the Medium Term Notes described in Note 10. The balance of deferred financing costs as of December 31, 2003 was written off in 2004 since the underlying debt was fully reimbursed.

6. INTANGIBLES

			December 31, 2004
			Accumulated Amortization		Net Book Value
	Cost
Trademark	$1,052,292		$—		$1,052,292
Non-competition agreement and logo	110,322		3,938		106,384
Customer contracts	216,043		199,683		16,360
Customer relationships	67,425		49,282		18,143
Domain names	6,017		—		6,017
	$1,452,099		$252,903		$1,199,196

Amortization for the year ended December 31, 2005, was $204.8 million (2004—$240.3 million).

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

8. DEFERRED CREDITS

In May 2005, the Fund terminated existing interest rate swap agreements as discussed in Note 21 and a $5.2 million gain was realized. The deferred gain will be amortized over the remaining term of the underlying debt which matures on November 18, 2019.

In November 2005, the Fund settled the bond forward agreements triggering a deferred loss of $1.7 million and a deferred gain of $5.3 million for a combined net $3.6 million gain as discussed in Note 21. The deferred loss of $1.7 million will be amortized over the remaining term of the underlying debt which matures on February 15, 2036. The deferred gain of $5.3 million will be amortized over the remaining term of the underlying debt which matures on February 15, 2016.

During 2004, the Fund recorded a deferred gain on hedging activities, following the changes to the existing interest rate swap discussed in Note 21. The deferred gain will be amortized over the remaining life of the hedged items.

9. EMPLOYEE BENEFIT PLANS

The Fund maintains defined benefit plans that provide for pension and other retirement and post-employment benefits (“other benefits”) for substantially all its employees based on length of service and rate of pay.

The changes in the accrued benefit obligations and in the fair value of assets and the funded status of the defined benefit plans to the amount recorded on the consolidated balance sheets for the years ended December 31, 2005 and 2004 were as follows:

The pension benefits and the other benefits are shown as accrued benefit assets and as accrued benefit liabilities within the consolidated balance sheets.

The following is the aggregate information of the plans that are not fully funded as at:

While 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 weighted-average assumptions adopted in measuring the Fund's pension and other benefit obligations as at December 31, 2005 and 2004, were as follows:

For measurement purposes, a 9.5% (9.0% for ADS) annual increase in the per capita cost of covered health care benefits (the health care cost trend rate) was assumed in 2005. The cost of medication was assumed to gradually decline to 4.5% by 2015 (5.0% by 2009 for ADS) and to remain at that level thereafter.

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:

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