Message to Unitholders

Our operational excellence has enabled us to establish a track record of growth four years running.

Marc P. Tellier
President and Chief Executive Officer 2006 was another year of achievements for Yellow Pages Income Fund. Our team continued to demonstrate operational excellence, achieving industry-leading levels of organic growth in the core directory business, while at the same time pursuing external expansion opportunities.

With the acquisition of Trader Media Corporation and Classified Media (Canada) Holdings Inc., we created a second national platform, this time in vertical media. These operations were combined to form Trader Corporation (Trader), a leading vertical media player in Canada. The Company produces approximately 200 publications and hosts 20 web sites.

These investments were in line with our external growth strategy and were made possible thanks to our performance in our core business of directories. Vertical Media are a great complement to directories. The business model involves local advertising content, direct customer contact and leading print and online properties. The acquired entities also came with established track records of organic growth and met our requirement of being immediately accretive to cash flow from operations.

During the year, we also expanded the geographic scope of our directory publishing operations. In October, we completed the acquisition of MTS Media, the incumbent directory publisher in Manitoba. As a result, we are now the number one directory publisher in Canada's 10 largest markets. We are well positioned to maximize our performance in the Canadian directory space.

Marc L. Reisch
Chairman of the BoardThe added contribution from these three investments, as well as from the ADS business acquired in May 2005, led to a significant increase in our 2006 financial results. Consolidated Adjusted Revenues increased by 45.9% to $1.39 billion compared to the prior year, and Adjusted EBITDA grew by 36.5% to $748 million.

Since becoming a stand-alone entity four years ago, we have consistently achieved operating and financial metrics in our core directory business that are best-in-class globally. On a comparable basis, Directories' results in 2006 were particularly strong with a 5.3% increase in Adjusted Revenues and a 7.7% growth in Adjusted EBITDA. In addition, the Adjusted EBITDA margin reached an unprecedented new level of 58.6%. The new record levels of performance attained by Yellow Pages Group (YPG) in 2006 were the result of productivity gains and the accelerating momentum in online revenues.

We started reporting our results and providing guidance on a segmented basis in the second quarter of 2006. Our Vertical Media segment, in other words Trader, performed in line with our expectations, generating revenues of $225.2 million and EBITDA of $65.7 million.

The Fund's solid operating performance in 2006 was accretive to distributable cash, which grew by 35.3% to $604.4 million. On a per-unit basis, distributable cash improved 11.3% to $1.18 from $1.06 in 2005. Based on this sustained growth and our confidence in the future, we announced two increases in cash distributions during the year, meeting our 2006 and 2007 targets. In February, we went from an annualized level of $0.96 per unit to $1.03 and to $1.09 in December 2006, effective with the January 15, 2007 distribution.

In terms of financing activities, we accessed the capital markets on several occasions during the year, enabling us to deliver on our commitment to reinforce our capital structure. As of December 31, 2006, the Fund's ratio of net debt to EBITDA improved to 3.2 times from 3.6 times when Trader was formed.

Growing our Online Revenues

As online advertising evolves and takes a growing share of the advertising media mix, we have placed more emphasis on this side of our business. On a consolidated basis, online revenues for both Directories and Vertical Media reached $101.1 million for the year. In addition to contributions from acquisitions, this strong growth reflects our efforts to increase the number of YPG's customers choosing to advertise online as well. At year-end 2006, that number had reached more than 40% across Canada, underlining considerable potential for further growth.

In 2006, we made significant investments in our online directories. We launched our new YellowPages.ca^TM search engine in September. By integrating keyword search functionality with the content of our Yellow Pages^TM directories, we have developed what we call a local “find engine”. In addition to improving the user experience, the new search engine was a critical step in expanding our products such as the offering of pay-per-click packages to advertisers.

Raising the Bar on Productivity

We continue to improve our productivity through sales force effectiveness initiatives, sharing of best practices and investments in technology. We have had great success in standardizing our processes nationally and managing change in the ADS operations. We expect continuing improvements in 2007. We will also extend these initiatives to our acquired operations in Manitoba.

Thanks to the relentless support of our employees, we are proceeding on target with our Customer First project, one of our more complex initiatives of the last three years. This project is all about providing better customer service. The ultimate goal is to get a single view of the customer throughout the organization. This will allow us to better position the right solutions to them. Our employees are realizing the advantages of the new tool, and are embracing the technology. This initiative has notably enabled us to create an integrated national call center that helps us respond more quickly to a higher volume of calls. We offer an enhanced customer experience, and at the same time, we improve our productivity.

From a cost efficiency standpoint, we completed the consolidation of our print supply chain in late 2006. Through YPG, we signed a national contract with Quebecor World Inc. for directories, bringing together all of our print contracts into one, with an extended expiry date in 2020. We also renegotiated and extended the Trader printing contracts with St. Joseph Print and Transcontinental Inc. under 10-year agreements. This strategy will allow us to reduce our manufacturing costs and protect our margins over the long term.

Developing the Vertical Media Opportunities

When the original decision was made to expand into vertical media, we had identified two main avenues for growth. The first was the potential to strengthen our online positioning given the access to additional local content and higher online traffic. The acquisitions in vertical media increased our already strong market reach of more than 30% of all online Canadians to approximately 40%. To further build on this positioning, we are implementing initiatives to offer a better user experience and raise awareness of the Trader properties.

The second main opportunity for growth is the potential of leveraging the existing platforms of Trader and YPG. For example, in late 2006 we distributed a special supplement on winter driving under the Auto Trader^TM banner with our Yellow Pages^TM neighbourhood directories in Montreal and Toronto. In 2007, we will be looking to introduce enhancements to both YPG and Trader product offerings in order to create new revenue and cross-selling opportunities.

Aside from these growth avenues, we are pleased to report that the expected annualized cost savings of $10 million were achieved by year-end through the consolidation of Trader's print supply chain and the elimination of duplicate activities. There is more opportunity than we had originally anticipated – on both the revenue and the productivity side – to be obtained from the integration of the Trader businesses into a national platform.

Outlook — Creating Value for Unitholders

The Federal Government's proposed measures to start taxing most publicly-traded income trusts beginning in 2011 are not expected to impact our operations. We have reaffirmed that our business model and operating plans remain unchanged.

With two leading national platforms in complementary media businesses, involving both print and online properties, we believe that we have secured the right strategic mix of assets to maximize returns to unitholders. In addition, our national platforms in Directories and Vertical Media position us well for the next stage of our evolution in the local commercial search market.

Our mission of finding the best seller for each buyer will continue to be the foundation of everything we do. Our management team is striving to fulfill this mission by executing our print and online strategies and implementing new ways to improve operations.

In 2007, in Directories, we expect to progressively realize the benefits of change management in Western Canada, along with the positive impact of Customer First, supply chain consolidation and other initiatives being implemented to offer more value to our advertisers and unitholders. We are also taking actions to grow our directory revenues organically, including continuing enhancement of our print and online products and the development of new ones.

In Vertical Media, we see many exciting organic growth prospects, both print and online, as well as the opportunity to maximize operating efficiency. 2007 is expected to be a year of transition and investment at Trader, the results of which are expected to come to fruition beginning in 2008.

Given the many prospects to grow and endorse best practices, supported by strong business fundamentals and a solid capital structure, we look to the future with great confidence.