<PAGE>
                                                                       EXHIBIT 3





FINANCIAL REVIEW


March 4, 2005

The following management's discussion and analysis (MD&A) should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2004. We prepare our financial statements in accordance with
Canadian generally accepted accounting principles. Where we say "we," "us," or
the "Company," we mean Cinram International Inc. and its subsidiaries.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this management's discussion and analysis and
elsewhere in this annual report constitute "forward-looking statements" within
the meaning of the United States Private Securities Litigation Reform Act of
1995. These forward-looking statements, by their nature, are not guarantees of
future performance and involve risks and uncertainties, which could cause actual
results to differ materially from those anticipated in these forward-looking
statements. We consider the assumptions on which these forward-looking
statements are based to be reasonable, but caution the reader that these
assumptions regarding future events, many of which are beyond our control, may
ultimately prove to be incorrect. Some of these risks and uncertainties as well
as other additional information are outlined in this management's discussion and
analysis. For a complete list of risks and uncertainties, please consult the
Company's annual information form filed with Canadian securities commissions,
available on www.sedar.com.

Cinram disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise, except as required by law. These cautionary statements expressly
qualify all forward-looking statements attributable to Cinram.

                                                     CINRAM ANNUAL REPORT 2004 7

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

NON-GAAP FINANCIAL MEASURES

EBITA is defined herein as earnings before interest expense, investment income,
income taxes and amortization, and is a standard measure that is commonly
reported and widely used in the industry to assist in understanding and
comparing operating results. EBITA is not a defined term under generally
accepted accounting principles (GAAP). Accordingly, this measure should not be
considered as a substitute or alternative for net earnings or cash flow, in each
case as determined in accordance with GAAP. See reconciliation of EBITA to net
earnings under GAAP as found in the table below.

EBIT is defined herein as earnings before interest expense, investment income
and income taxes, and is a standard measure that is commonly reported and widely
used in the industry to assist in understanding and comparing operating results.
EBIT is not a defined term under generally accepted accounting principles
(GAAP). Accordingly, this measure should not be considered as a substitute or
alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as
found in the table below.

We use EBIT and EBITA as a benchmark for measuring operating performance and for
our lending arrangements.

RECONCILIATION OF EBITA AND EBIT TO NET EARNINGS

<TABLE>
<CAPTION>
                                                               Years ended December 31,
               (in thousands of U.S. dollars)                    2004           2003
-------------------------------------------------------------  ---------      ---------
<S>                                                            <C>            <C>
EBITA                                                          $ 382,134      $ 163,617
                                                               ---------      ---------
Amortization of capital assets                                   146,697         63,707
Amortization of intangible assets and deferred financing fees     73,038         11,449
                                                               ---------      ---------
EBIT                                                           $ 162,399      $  88,461
                                                               ---------      ---------
Interest expense                                                  53,102         13,743
Investment income                                                 (2,436)        (3,583)
Income taxes                                                      35,909         25,281
                                                               ---------      ---------
NET EARNINGS                                                   $  75,824      $  53,020
                                                               ---------      ---------
</TABLE>

8 CINRAM ANNUAL REPORT 2004

<PAGE>

1.    ABOUT OUR BUSINESS

      Cinram International Inc. (Cinram or the Company) manufactures and
      distributes pre-recorded DVDs,VHS video cassettes, audio CDs, music
      cassettes and CD-ROMs, for motion picture studios, music labels,
      publishers and computer software companies in North America and Europe. We
      also manufacture print components for the entertainment industry.

      In 2003, Cinram became the world's largest pre-recorded optical disc
      replicator with the acquisition of Time Warner Inc.'s DVD and CD
      manufacturing, distribution, printing and screen-printing entertainment
      merchandising businesses (the Acquisition or the Acquired Businesses).
      Along with the Acquisition, Cinram also signed exclusive, long-term
      manufacturing and distribution agreements with Warner Home Video and
      Warner Music Group in North America and Europe, and with New Line Home
      Entertainment, Inc. in North America (the Time Warner Agreements).

      The final allocation of the purchase price, based on independent
      appraisals and management's estimates is as follows:

<TABLE>
<CAPTION>
(in thousands of U.S. dollars)
<S>                                               <C>
Current assets, including cash of $1,437          $   317,071
Capital assets                                        406,104
Intangible assets                                     387,900
Goodwill                                              320,351
                                                  -----------
                                                    1,431,426
                                                  -----------

Current liabilities                                  (208,715)
Other long-term liabilities                           (49,611)
Future tax liabilities                                (22,611)
                                                  -----------
                                                     (280,937)
                                                  -----------
Total cash purchase consideration                 $ 1,150,489
                                                  -----------
</TABLE>

      We operate four primary business segments: Home Video, Audio/ROM, Printing
      and Distribution. Our Home Video segment consists primarily of the
      replication/duplication of DVDs and VHS video cassettes, including new
      releases and catalog titles. Our Audio/ROM segment consists primarily of
      the replication/duplication of audio CDs, CD-ROMs and audio cassettes. Our
      Printing segment manufactures printing and packaging components for the
      home entertainment industry including the art work that is inserted into
      DVD and CD packaging, custom box sets and point-of-purchase merchandise
      displays, through our wholly-owned subsidiary, Ivy Hill Corporation (Ivy
      Hill). Our Distribution segment includes revenue for direct-to-retail
      distribution, warehousing, and pick, pack and ship and order fulfillment
      services for our home video customers. Revenue from our remaining
      operations is included in `Other', which is principally made up of Giant
      Merchandising Inc. (Giant), the screen-printing entertainment
      merchandising business we purchased through the Acquisition.

      We currently have the capacity to manufacture approximately 1.65 billion
      DVDs and more than one billion CDs per year to service our industry's
      seasonal peaks in demand, which typically occur in the second half of the
      year. We only produce pre-recorded content to specific orders from our
      customers, generally pursuant to multi-year contracts that typically range
      from two to six years, and as a result, we do not bear the risk of unsold
      products. Our major contracts are exclusive for particular territories,
      and frequently contain a market price test that may, depending on
      prevailing industry prices, require us to lower the prices we charge. The
      products we manufacture generally experience larger price declines in the
      early stages of their life-cycles, from introduction up to mass-market
      adoption, at which point prices typically decline in smaller increments.

      Our major customers include Warner Home Video, Warner Music Group, New
      Line Home Entertainment,Twentieth Century Fox Home Entertainment (Fox),
      Metro-Goldwyn-Mayer Home Entertainment (MGM), Artisan Entertainment/Lions
      Gate, Alliance Atlantis and EMI Group plc (EMI).

                                                     CINRAM ANNUAL REPORT 2004 9

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

      Today, we generate the majority of our revenue from the sale of
      pre-recorded DVDs.

THREE-YEAR REVENUE BY PRODUCT

<TABLE>
<CAPTION>
(in thousands of U.S. dollars)              2004              2003              2002
------------------------------  ----------  ----  ----------  ----  ----------  ----
<S>                             <C>         <C>   <C>         <C>   <C>         <C>
DVD                             $1,025,389   51%  $  386,413   47%  $  156,156   28%
VHS video cassette                  65,154    3%     108,889   13%     187,061   33%
Audio CD/CD-ROM                    313,420   15%     162,362   20%     132,074   24%
Audio cassette                      10,906    1%      10,219    1%      21,491    4%
Printing                           225,388   11%      46,626    6%           -    -
Distribution                       207,302   10%      71,302    9%      45,958    8%
Merchandising                      143,368    7%      20,320    2%           -    -
Other                               35,711    2%      20,762    2%      16,547    3%
                                ----------  ---   ----------  ---   ----------  ---
                                $2,026,638  100%  $  826,893  100%  $  559,287  100%
                                ----------  ---   ----------  ---   ----------  ---
</TABLE>

      1.1   THE PRE-RECORDED MEDIA INDUSTRY, which encompasses video and audio
            products, mainly serves major motion picture studios and music
            labels by providing the replication and distribution services
            required for the physical delivery of their content.The industry,
            currently dominated by DVDs and CDs, has evolved significantly since
            its inception. In the home video industry, the VHS video cassette
            was introduced in the early 1970s and experienced strong sales
            growth in the 1980s and early-to-mid 1990s. However, the demand for
            VHS video cassettes has declined in recent years due to the rapid
            growth of DVDs which were introduced in 1997 and have since become
            the standard for the home video industry. The music industry has
            seen a transition from vinyl records and eight-track cartridges to
            cassettes and subsequently to CDs, the current standard for the
            music industry.

            The DVD format currently represents the primary source of growth for
            the pre-recorded media industry. The key drivers of the rapid growth
            in DVD demand include: strong DVD player penetration due to
            declining prices of DVD players, aggressive retail pricing of DVDs,
            and an expanding list of titles and genres. Strong consumer adoption
            of the DVD technology is evident in the growth of household
            penetration of DVD players. According to Understanding & Solutions,
            an industry research and consulting firm, at the end of 2004, the
            installed base of DVD players reached 65% of all U.S. homes, and it
            is forecasted to increase to 80% by the end of 2005. Declining
            retail prices for DVD players have been an important factor
            underlying the growth in DVD player penetration. Studios have also
            intentionally adopted a sell-through philosophy with DVDs,
            maintaining low price points to encourage sales of DVDs rather than
            rentals, which had been the traditional focus for VHS video
            cassettes. In addition, in recent years, the number of titles and
            genres available on DVD has increased substantially.The combination
            of these factors has significantly broadened and increased consumer
            demand for DVDs.

            The CD is, and in the foreseeable future is expected to remain, the
            standard format for the music industry. While CD volumes peaked in
            1999, volumes have since declined due to several factors, including
            the advent of file-sharing and digital distribution through Web
            sites, increased piracy and illegal downloading and a lack of new
            hit titles and gold/platinum releases. We believe that over the past
            year, the music industry has better dealt with distribution
            challenges by more aggressively fighting piracy and illegal
            downloading, as well as refocusing on promoting artists, developing
            new genres and devising creative marketing strategies (e.g.,
            multi-disc sets and bundling with other products such as DVDs and
            apparel).

      1.2   OUR STRATEGY is to secure exclusive, large-scale, multi-year DVD and
            CD replication and distribution agreements in North America and
            Europe. Our expanded distribution capabilities and our new printing
            operations also give us an opportunity to provide additional
            services to our existing customers.

            We are focused on reinforcing our existing relationships with
            customers by maintaining or improving service levels, increasing the
            level of integration between us and our customers, managing our
            manufacturing capacity to service demand with minimal outsourcing
            and maintaining strong communications with our customers. We expect
            to achieve this, in part,

10 CINRAM ANNUAL REPORT 2004

<PAGE>

            through continued internal development of distribution systems and
            automation that improve our efficiencies and our continued
            commitment to customer service.

            We intend to maintain our focus on reducing costs and increasing
            profitability over time. We expect to achieve this by continuing to
            benchmark our facilities to determine best practices in order to
            improve processes at each facility. We will also continue to pursue
            opportunities to leverage synergies with the Acquired Businesses.
            In addition, our increased geographic capacity and scale of
            operations from the Acquisition enable us to balance production
            loads among our facilities, reducing our need to use third-party
            outsourcing.

            We have consistently evolved with changes in pre-recorded media
            formats over our 36-year history. As our customers and other
            industry participants make the transition to successor pre-recorded
            media formats, such as high-definition DVD (Blu-ray or HD-DVD), we
            expect to leverage our strong presence in North America and Western
            Europe, as well as our manufacturing and distribution scale and
            expertise, to position our Company to capitalize on the new
            opportunities afforded by this transition. We believe that our
            highly developed manufacturing and distribution capabilities and our
            experience in adapting our processes to new pre-recorded media
            formats efficiently and in a cost effective manner will enable us to
            remain an industry leader.

2.    2004 PERFORMANCE

      Our 2004 results include those of the Acquisition for the full period,
      while our 2003 results include only the results of the Acquired Businesses
      from October 24, 2003, to December 31, 2003.

      KEY PERFORMANCE METRICS

<TABLE>
<CAPTION>
(in thousands of U.S. dollars, except per share data)     2004        2003        2002
-----------------------------------------------------  ----------  ----------  ----------
<S>                                                    <C>         <C>         <C>
Revenue                                                $2,026,638  $  826,893  $  559,287
EBITA                                                  $  382,134  $  163,617  $   96,745
EBIT                                                   $  162,399  $   88,461  $   48,979
Net earnings                                           $   75,824  $   53,020  $   34,671
Basic earnings per share                               $     1.34  $     0.95  $     0.63
Diluted earnings per share                             $     1.32  $     0.94  $     0.63
</TABLE>

      2.1   GENERAL OVERVIEW

            Over the last three years, our revenue base has shifted
            significantly from VHS video cassettes to DVD as a result of the
            shift in consumer preferences, as well as the change in our product
            mix pursuant to the Acquisition. DVD revenue increased from 28% of
            consolidated revenue in 2002, to 47% in 2003, and 51% in 2004.
            Conversely, VHS video cassettes accounted for 33% of our
            consolidated revenue in 2002, 13% in 2003 and 3% in 2004. In 2004,
            our revenue increased 145% to $2,026.6 million from $826.9 million
            in 2003, and 262% from $559.3 million in 2002, principally as a
            result of the contribution of the Acquisition and solid organic
            growth in our DVD sales. A strong slate of home video releases by
            our existing studio customers along with additional business from
            new customers such as MGM, EMI and Fox Europe also contributed to
            the increase in our consolidated revenue in 2004. In November, we
            signed an exclusive, multi-year manufacturing and distribution
            agreement with Fox in Europe; however, we began manufacturing and
            distributing DVDs and VHS video cassettes for Fox in France under a
            transitional agreement in August 2004. We will begin manufacturing
            and distributing Fox products in the United Kingdom, Germany and the
            Benelux in the first half of 2005.

            We sold more than 1.9 billion optical discs (DVD and CD) in 2004, up
            144% from 2003, and 339% from 2002. Because we began balancing our
            production requirements across our facilities immediately after the
            close of the Acquisition in October 2003, it is not meaningful to
            separate our organic growth from that of the Acquired Businesses.

                                                    CINRAM ANNUAL REPORT 2004 11

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

            EBITA increased to $382.1 million from $163.6 million in 2003 and
            $96.7 million in 2002, principally due to the contribution of a full
            year of results from the Acquired Businesses in addition to new
            business from MGM.

            We recorded EBITA margins of 19% in 2004, down from 20% in 2003
            mainly as a result of the increase in raw material costs, start-up
            expenses related to new and existing customers, and to a lesser
            extent, lower selling prices. In comparison, we recorded EBITA
            margins of 17% in 2002. The change in margin from 2002 to 2003 was
            attributable to the significant shift in our product mix from VHS
            video cassettes to higher margin DVDs. VHS video cassettes, by their
            product makeup, yield higher average selling prices, generate lower
            profit margins and are more expensive to produce than DVDs because
            of higher raw material costs and real-time manufacturing
            constraints. While the shift in our product mix in 2003 had a
            positive impact on gross margins and net earnings, it had a negative
            impact on revenue for that year.

      2.2   2004 GUIDANCE REVIEW: RESULTS VERSUS EXPECTATIONS

            In March 2004, the Company issued guidance for the full year of $1.8
            to $2.0 billion in revenue and $390 to $410 million in EBITA.
            Subsequent to this, higher than expected commodity price increases
            caused our third quarter results to vary significantly from our
            initial internal expectations, which in turn prompted us to revise
            our expectations for the full year. Accordingly, we lowered our
            initial EBITA estimate to $360 to $380 million and narrowed the
            range of our revenue guidance to $1.9 to $2.0 billion in our 2004
            third quarter news release.

            2004 GUIDANCE VS. ACTUAL RESULTS

<TABLE>
<CAPTION>
(in U.S. dollars)        Initial              Revised            Actual
-----------------  -------------------  -------------------  --------------
<S>                <C>                  <C>                  <C>
Revenue            $1.8 - $2.0 billion  $1.9 - $2.0 billion  $  2.0 billion
EBITA              $390 - $410 million  $360 - $380 million  $382.1 million
</TABLE>

            Our business is seasonal, with a large portion of sales recorded
            towards the holidays (U.S.Thanksgiving and Christmas), and is
            dependent on consumer acceptance of our customers' products (DVD
            movies and CD albums). For these reasons, we generate the majority
            of our revenue and earnings in the fourth quarter, and the success
            of a few titles can play an important role in December re-order
            volumes, and in turn, the strength of our year-end results. In 2004,
            we benefited from strong production volumes up until the end of
            December, which allowed us to reach the high end of our revised
            revenue and EBITA guidance ranges.

3.    SEGMENTED RESULTS

      3.1   INDUSTRY SEGMENTS - REVENUE

<TABLE>
<CAPTION>
(in millions of U.S. dollars)              2004              2003
-----------------------------  ----------  ----  ----------  ----
<S>                            <C>         <C>   <C>         <C>
Home video                     $1,090,543   54%  $  495,302   60%
Audio/ROM                         324,326   16%     172,581   21%
Printing                          225,388   11%      46,626    6%
Distribution                      207,302   10%      71,302    9%
Other                             179,079    9%      41,082    4%
                               ----------  ---   ----------  ---
Total                          $2,026,638  100%  $  826,893  100%
                               ----------  ---   ----------  ---
</TABLE>

            3.1.1 HOME VIDEO

                  Revenue from our Home Video segment, which includes DVD and
                  VHS video cassettes sales, increased 120% to $1,090.5 million
                  from $495.3 million in 2003. The significant growth in our DVD
                  sales was partially offset by a decline in VHS video cassettes
                  sales and lower average selling prices for both products.

12 CINRAM ANNUAL REPORT 2004

<PAGE>

                  DVD revenue increased 165% to $1,025.4 million from $386.4
                  million in 2003, reflecting a full-year contribution of the
                  Acquired Businesses, the addition of the MGM business in
                  North America, the Fox business in France and greater overall
                  consumer demand for DVDs across all geographic regions. DVD
                  revenue represented 51% of consolidated revenue in 2004, up
                  from 47% in 2003.

                  Revenue from VHS video cassettes was down 40% to $65.1 million
                  from $108.9 million in 2003, reflecting lower unit shipments
                  in Europe and North America, and lower average selling
                  prices. VHS video cassettes accounted for 3% of consolidated
                  revenue in 2004, down from 13% in 2003.

                  The Home Video segment represented 54% of our consolidated
                  revenue, down from 60% in 2003 due to the change in our
                  product mix subsequent to the Acquisition.

            3.1.2 AUDIO/ROM

                  Revenue from our Audio/ROM segment (audio CDs, CD-ROMs and
                  audio cassettes) increased 88% to $324.3 million from $172.6
                  million in 2003. The growth in this segment resulted from
                  higher unit shipments due to the Acquired Businesses in the
                  United States and Europe, along with the new EMI contract in
                  the United States.

                  Audio CD revenue increased 94% to $267.3 million from $137.6
                  million in 2003. The increase was driven primarily by the
                  full-year contribution of the Acquired Businesses and the
                  addition of the EMI business in the second half of the year.
                  The revenue growth in audio CDs was offset by lower unit
                  shipments in France and Canada, as well as lower average
                  selling prices. Audio CDs represented 13% of consolidated
                  revenue in 2004, down from 17% in 2003.

                  CD-ROM revenue increased 86% to $46.1 million from $24.8
                  million in 2003, principally as a result of the full-year
                  contribution of the Acquired Businesses in North America and
                  Europe in addition to strong organic growth in France. CD-ROM
                  represented 2% of consolidated sales in 2004, down from 3% in
                  2003.

                  Audio cassette revenue increased 7% to $10.9 million from
                  $10.2 million in 2003 as a result of the contribution of the
                  Acquired Businesses. Audio cassette revenue represented 1% of
                  consolidated revenue in both 2004 and 2003.

                  The Audio/ROM segment accounted for 16% of consolidated
                  revenue in 2004, down from 21% in 2003. This segment has
                  declined as a percentage of consolidated revenue because of
                  the increasing importance of DVDs and distribution services in
                  our product mix, and the addition of new businesses from the
                  Acquisition.

            3.1.3 PRINTING

                  Printing revenue increased to $225.4 million from $46.6
                  million in 2003 as a result of the full-year inclusion of Ivy
                  Hill's results in our 2004 consolidated revenue, compared to
                  its nine-week contribution in 2003. In 2004, Ivy Hill
                  benefited from additional business from movie studios and
                  record labels who were considered competitors when it was a
                  captive subsidiary of Time Warner. Printing sales accounted
                  for 11% of consolidated revenue in 2004.

            3.1.4 DISTRIBUTION

                  Distribution and fulfillment services revenue was up 191% to
                  $207.3 million from $71.3 million in 2003, and represented 10%
                  of consolidated revenue compared to 9% in 2003. The increase
                  in distribution revenue was attributable to the full-year
                  contribution of the Acquired Businesses, the addition of the
                  MGM business and the July acquisition of The Entertainment
                  Network in the United Kingdom. Distribution and fulfillment
                  services continue to be a major factor in our ability to
                  attract and retain customers. In 2004, we expanded our
                  distribution and fulfillment service offerings by opening two
                  customer-dedicated distribution centers in Tennessee to
                  accommodate Warner Home Video and MGM. We incurred costs for
                  setting up these facilities, including training, relocation of
                  customers' components, equipment relocation, freight and
                  expediting costs as well as travel expenses that had an

                                                    CINRAM ANNUAL REPORT 2004 13
<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

            unfavorable impact on gross profit margins for the year. We also
            made enhancements to our existing distribution facility in Alabama
            to provide Fox and Lions Gate with increased frequency of shipments,
            more customized order sizes, and the ability to handle more stock
            keeping units, which also had a negative impact on our margins.

      3.1.5 OTHER

            Revenue from Giant Merchandising (included in Other segment)
            increased to $143.4 million from $20.3 million in 2003 as a result
            of the full-year inclusion of Giant's results in our 2004
            consolidated revenue compared to its nine-week contribution in 2003.
            Giant accounted for 7% of consolidated revenue in 2004, up from 2%
            in 2003.

            Revenue from other non-core activities increased to $35.7 million
            from $20.8 million in 2003. Non-core activities represented 2% of
            consolidated revenue in 2004, on par with 2003. Non-core activities
            include authoring and other pre-production services, information
            technology, the sale of components, stampers and digital linear
            tapes.

3.2   GEOGRAPHIC SEGMENTS - REVENUE

<TABLE>
<CAPTION>
(in millions of U.S. dollars)                  2004                 2003
-----------------------------                  ----                 ----
<S>                              <C>           <C>     <C>          <C>
North America                    $ 1,534,229    76%    $ 641,508     78%
Europe                               492,409    24%      185,385     22%
                                 -----------   ---     ---------    ---
Total                            $ 2,026,638   100%    $ 826,893    100%
                                 ===========   ===     =========    ===
</TABLE>

      3.2.1 NORTH AMERICA

            North American revenue increased 139% to $1,534.2 million from
            $641.5 million in 2003. The significant increase in revenue was
            primarily driven by the full-year results of the Acquired
            Businesses, which included DVD, CD, distribution, printing and
            merchandising revenue. New customer agreements with MGM in North
            America and EMI in the United States also fueled the increase in
            revenue in addition to a general increase in consumer demand for
            DVDs across the industry. While we replicated virtually all of MGM's
            DVD volume in 2004, we only benefited from EMI's CD volume in the
            third and fourth quarters of the year. The growth in North American
            revenue was partially offset by lower VHS video cassette and audio
            cassette shipments as well as a typical decline in selling prices
            for all products.

            With full-year results from the Acquired Businesses, strong organic
            growth from Fox and new business from MGM, DVD revenue increased
            130% to $753.2 million from $326.9 million in 2003. The increase in
            DVD revenue was offset by expected declines in unit selling prices.
            As a percentage of North American revenue, DVDs accounted for 49%
            of revenue down from 51% in 2003 because of the change in our
            product mix subsequent to the Acquisition. VHS video cassette
            revenue decreased 28% to $43.4 million from $60.6 million in 2003
            due to lower shipments owing to a significant shift in consumer
            preferences, as well as lower unit selling prices. VHS video
            cassette sales accounted for 3% of North American revenue in 2004,
            down from 9% in 2003.

            Audio CD and CD-ROM revenue was up 90% to $203.9 million from $107.6
            million in 2003 as a result of the increase in unit shipments from
            the Acquired Businesses and the new EMI agreement in the United
            States. Audio CD and CD-ROM sales accounted for 13% of North
            American revenue in 2004, down from 17% in 2003. Audio cassette
            revenue declined 4% to $9.5 million from $9.9 million in 2003, and
            represented less than one percent of North American revenue in 2004,
            compared with 2% in 2003.

            Printing revenue increased to $225.4 million from $46.6 million in
            2003 as result of the full-year inclusion of Ivy Hill's results in
            our 2004 consolidated revenue compared to its nine-week contribution
            in 2003. Printing sales accounted for 15% of North American revenue
            in 2004, compared with 7% in 2003.

14 CINRAM ANNUAL REPORT 2004

<PAGE>

            North American distribution revenue increased 146% to $136.8 million
            in 2004 from $55.5 million in 2003 principally due to a significant
            increase in the number of units distributed for Warner Home Video,
            New Line Home Entertainment and MGM, in addition to organic growth
            from Fox and our other studio clients. During the year, we invested
            in two state-of-the-art distribution facilities in
            LaVergne,Tennessee to accommodate the growing distribution
            requirements of Warner Home Video and MGM. Distribution accounted
            for 9% of North American revenue in 2004, in line with 2003.

            Revenue from Giant Merchandising increased to $143.4 million from
            $20.3 million in 2003 as a result of the full-year inclusion of
            Giant's results in our 2004 consolidated revenue compared to its
            nine-week contribution in 2003. Giant accounted for 9% of North
            American revenue in 2004, compared with 3% in 2003.

            Revenue from other non-core activities increased to $18.6 million
            from $14.1 million in 2003. It represented 1% of North American
            revenue in 2004, down from 2% in 2003. Non-core activities include
            authoring and other pre-production services, information technology,
            the sale of components, stampers and digital linear tapes.

            North American revenue accounted for 76% of consolidated revenue in
            2004, down from 78% in 2003.

      3.2.2 EUROPE

            European revenue increased 166% to $492.4 million from $185.4
            million in 2003, primarily due to the inclusion of a full-year of
            results from the Acquired Businesses, which included DVD, CD and
            distribution revenue. The growth in Europe was offset by a
            significant decline in VHS video cassettes sales and typical annual
            price declines for all products.

            DVD revenue in Europe increased 357% to $272.2 million from $59.5
            million in 2003 as a result of revenue generated from the European
            Acquired Businesses and new business from Fox in France. In line
            with industry trends in North America, consumer demand for DVDs
            increased significantly in Europe in 2004. DVD sales accounted for
            55% of European revenue in 2004, up from 32% in 2003. In contrast,
            VHS video cassette sales declined 55% to $21.7 million from $48.3
            million in 2003 due to the shift in consumer preferences to DVD and
            lower selling prices. VHS video cassette sales accounted for 5% of
            European revenue in 2004, down from 26% in 2003.

            Audio CD and CD-ROM revenue increased 100% to $109.5 million from
            $54.8 million in 2003 as a result of higher unit shipments from the
            European Acquired Businesses as well as increased CD-ROM sales in
            France. The increase in revenue was offset by lower Audio CD sales
            in France and the United Kingdom and lower selling prices. Audio CD
            and CD-ROM sales accounted for 22% of European revenue in 2004, down
            from 30% in 2003. Audio cassette revenue increased to $1.4 million
            from $0.3 million in 2003, and represented less than one percent of
            European revenue in both 2004 and 2003.

            European distribution revenue increased 346% to $70.5 million from
            $15.8 million in 2003 due to the July acquisition of The
            Entertainment Network in the United Kingdom, the full-year results
            of the European Acquired Businesses and new business from Fox in
            France. Distribution revenue accounted for 14% of European revenue
            in 2004, up from 8% in 2003.

            Revenue from other non-core activities increased to $17.1 million
            from $6.7 million in 2003. It represented 4% of European revenue in
            2004, in line with 2003. Non-core activities include authoring and
            other pre-production services, information technology, the sale of
            components, stampers and digital linear tapes.

            European revenue accounted for 24% of consolidated revenue in 2004,
            up from 22% in 2003.

                                                    CINRAM ANNUAL REPORT 2004 15

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

4.    GROSS PROFIT

      Gross profit increased by 140% to $411.1 million from $171.5 million in
      2003. As a percentage of consolidated revenue, gross profit decreased to
      20% from 21% in 2003 largely as a result of the increase in raw material
      costs in the second half of the year, notably polycarbonate and
      polystyrene. Polycarbonate is the type of plastic that is used to
      manufacture discs (DVDs and CDs) and polystyrene is used to manufacture
      jewel boxes and trays for CDs. Although we have the ability to
      pass-through polycarbonate cost increases to most of our DVD customers, we
      are contractually restricted as to the timing of the pass-through to our
      customers. If we have several consecutive raw material cost increases such
      as those we experienced over the course of the second half of 2004, we can
      only pass on these increases on a time delay basis. Our major CD contracts
      do not contain any raw material pass-through mechanisms that currently
      allow us to adjust pricing for polycarbonate cost increases, and there are
      limitations on price adjustments for polystyrene.

      Our polycarbonate costs increased by approximately 50% from January 2004
      to December 2004, while our polystyrene costs increased by nearly 40%
      during the same period. After taking into account our raw material
      pass-throughs, these costs increases had a $20.1 million dollar impact on
      gross profit in 2004.

[BAR CHART]

FIVE-YEAR
GROSS PROFIT
(% of sales)

<TABLE>
<S>     <C>
'00     15%

'01     14%

'02     18%

'03     21%

'04     20%
</TABLE>

      4.1   START-UP COSTS

            During the second half of 2004, we also incurred start-up costs
            associated with new customers that had a $5 million impact on our
            gross profit margins. These start-up costs included:

            - Training and overtime;

            - Relocation of customers' finished goods and components;

            - Equipment relocation;

            - Incremental overtime costs to pick and process orders manually
              until automation was up and running;

            - Manual packaging at higher costs while operators were being
              trained;

            - Freight and expediting costs; and

            - Travel expenses.

      Amortization expense from capital assets, which is included in our cost of
      goods sold, increased to $146.7 million in 2004 from $63.7 million in
      2003.The increase was mainly attributable to increased amortization
      associated with the Acquired Businesses as well as with the increase in
      capital assets that were purchased and put into service during the year.

      Foreign exchange loss on transactions, included in our costs of goods
      sold, increased to $1.8 million from $0.2 million in 2003 due to the
      weakening U.S. dollar against other currencies in the countries in which
      we operate.

5.    GOODWILL

      As a result of the Acquisition that was completed in October 2003, we
      recorded $320.4 million in goodwill for the excess of the purchase price
      over the value of the acquired assets. In the fourth quarter of 2004, we
      completed our annual goodwill impairment test and concluded that there was
      no impairment.

6.    AMORTIZATION OF INTANGIBLE ASSETS AND DEFERRED FINANCING FEES

      Amortization of intangible assets and deferred financing fees related to
      the acquisition was $73.0 million in 2004 compared with $11.4 million in
      2003. We completed our intangible asset impairment test at the end of 2004
      and concluded there was no impairment.

7.    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses - which include sales and
      marketing expenses, office expenses, non-manufacturing related salaries
      and professional fees - increased to $177.4 million from $68.9 million in
      2003 due to the full-year effect of expenses incurred by the Acquired
      Businesses. As a percentage of consolidated revenue, selling, general and
      administrative expenses were 9% in 2004 compared with 8% in 2003.

16 CINRAM ANNUAL REPORT 2004

<PAGE>

8.    INTEREST EXPENSE

      Interest expense increased to $53.1 million from $13.7 million in 2003 due
      to a full year of interest charges associated with the debt incurred to
      finance the Acquisition. We paid interest at both fixed and floating rates
      during 2004. Earlier this year, we entered into interest protection
      arrangements for a three-year term on $250.0 million of our long-term
      debt. In July, we entered into an additional interest rate cap arrangement
      for $210.0 million of our long-term debt that is set to expire in January
      2007.

      In August, we amended our $1,175.0 million credit facilities, originally
      established in connection with the acquisition of the Time Warner
      businesses in 2003, to significantly reduce borrowing costs. The interest
      rate on the outstanding principal amount of $181.1 million on Cinram's
      $250.0 million term loan A facility was reduced to the London Interbank
      Offered Rate (LIBOR) plus 250 basis points, from LIBOR plus 300 basis
      points. We used $65.0 million in cash to repay part of the $635.0 million
      outstanding principal amount under our $675.0 million term loan B facility
      and part of the $98.3 million outstanding principal amount under our
      $100.0 million term loan C facility. The remaining principal amounts
      outstanding under term loan facilities B and C were paid out from a new
      $668.2 million term loan D facility that bears an interest rate of LIBOR
      plus 300 basis points. Prior to the amendments, the term loan B facility
      had an interest rate of LIBOR plus 375 basis points and the term loan C
      facility an interest rate of LIBOR plus 575 basis points. The maturity
      date for the term loan A facility remains September 2007. The maturity
      date for the term loan D facility is September 2009; the maturity dates
      for term loan facilities B and C were September 2009 and March 2010,
      respectively. We fully benefited from the reduced rates in the fourth
      quarter of 2004.

9.    INVESTMENT INCOME

      Investment income decreased to $2.4 million from $3.6 million in 2003 due
      to lower cash balances and lower interest rates.

10.   UNUSUAL ITEMS

      During 2003, we closed a VHS duplication facility in St. Die, France. We
      began to formulate an exit plan in April 2003, concurrent with our
      discussions with the employee works council, which were concluded in July
      2003. The exit plan was finalized in November 2003, and termination
      notices were given shortly thereafter to St. Die's 102 employees. The
      duplication facility closed on December 17, 2003, and we recorded a
      restructuring provision of $2.7 million in 2003 for severance and other
      employee-related costs, lease cancellation and idle facility costs, asset
      write-downs and certain other exit costs. In October 2004, we realized a
      gain of $2.2 million on the sale of this facility. We also incurred an
      additional $0.5 million in other exit costs in 2004 relating to the
      closure of this facility, which was paid out during the year.

11.   INCOME TAXES

      Our effective tax rate for 2004 was 32%, on par with our effective tax
      rate in 2003. This rate is below the 36% statutory rate as a result of
      lower tax rates in certain jurisdictions, and the use of certain tax loss
      carryforwards.

12.   EARNINGS

      Net earnings for the year were up 43% to $75.8 million or $1.34 per share,
      from $53.0 million or $0.95 per share in 2003, principally due to the
      full-year contribution of the Acquired Businesses as well as higher DVD
      sales from both new and existing customers. Our 2004 earnings also
      included the full-year non-cash intangible asset amortization expense
      relating to the Time Warner Agreements and increased interest expense
      related to the Acquisition financing. By comparison, 2002 net earnings
      were $34.7 million or $0.63 per share.

13.   LIQUIDITY AND CAPITAL RESOURCES

      Cinram's principal sources of funds include cash flow from operating
      activities and long-term debt issued under our syndicated credit facility.
      Our primary uses of funds are working capital requirements as the business
      grows, operational expenses, maintenance and growth capital spending,
      principal and interest debt repayments on our credit facilities, and
      dividends.

                                                    CINRAM ANNUAL REPORT 2004 17

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

<TABLE>
<CAPTION>
     SOURCES AND USES OF CASH
   (in thousands of U.S. dollars)                     2004             2003
-----------------------------------                ----------      ------------
<S>                                                <C>             <C>
Cash flow from operating activities                $  129,400      $    358,652
Cash flow from financing activities                $ (183,025)     $    987,997
Cash flow from investing activities                $ (155,102)     $ (1,225,298)
</TABLE>

We ended 2004 with a cash balance of $41.8 million, down from $253.8 million in
2003, largely due to the net repayment of $191.5 million of long-term debt,
$145.7 million of capital asset purchases, which were offset by positive cash
flows from operations of $129.4 million.

We generated cash flow from operations of $129.4 million in 2004, down from
$358.7 million in 2003, as stronger net earnings and a significant increase in
amortization related to the Acquisition were offset by a non-cash working
capital outflow of $171.1 million, compared with a non-cash working capital
inflow of $213.8 million in 2003. The outflow in non-cash working capital in
2004 was due in part to a $63.0 million purchase price adjustment related to the
Acquisition, combined with the build-up of accounts receivable and inventory
levels during the year. Conversely, the non-cash working capital inflow in 2003
was the result of a significant increase in accounts payable and accrued
liabilities related to the Acquisition, with no offsetting increase in accounts
receivable as a significant portion of the acquired receivables were collected
before year-end. Our working capital position at December 31, 2004, was $11.1
million, compared with $34.9 million in 2003, principally reflecting a lower
cash balance.

Cash used in financing activities was an outflow $183.0 million, compared with
an inflow of $988.0 million in 2003, as we made net repayments of $191.5 million
to long-term debt during the year, which were partially offset by proceeds from
the issuance of common shares combined with an increase in other long-term
liabilities. The large inflow of cash from financing activities in 2003 was
primarily due to the debt we incurred to finance the Acquisition in October
2003.

At December 31, 2004, our net debt position (long-term debt, including the
current portion, less cash and cash equivalents) was a liability of $816.6
million compared to a liability of $796.1 million at the end of 2003. The
decrease in our long-term debt was offset by a lower year-end cash position in
2004 due to significant debt repayments, working capital usage and capital
expenditures throughout 2004.

We had total assets of $2,097.0 million at December 31, 2004, compared with
$2,059.2 million in 2003 and $525.4 million in 2002. The significant increase in
assets in 2003 was attributable to the Acquisition.

13.1  CAPITAL SPENDING

      In 2004, we paid $145.7 million for capital assets to increase our DVD
      replication capacity in the United States and Europe, and distribution
      automation in the United States. We also purchased an additional $48.8
      million of capital assets, in line with our 2004 capital spending budget,
      which will be paid out during 2005.

13.2  LONG-TERM DEBT

      In October 2003, we entered into a credit agreement with a syndicate of
      lenders for credit facilities comprised of term loans of $1,025.0 million
      and a revolving credit facility of $150.0 million to finance the
      Acquisition. Consequently, total debt increased significantly to $1,049.9
      million at December 31, 2003, from $34.2 million in 2002. Amounts
      outstanding under the facilities are secured by substantially all of the
      assets of the Company.

      In August 2004, we amended the credit facilities to lower our interest
      costs and to take advantage of better terms. The interest rate on the
      outstanding principal amount of $181.1 million on our $250.0 million term
      loan A facility was reduced to LIBOR plus 250 basis points, from LIBOR
      plus 300 basis points. We used $65.0 million in cash to repay part of the
      $635.0

18 CINRAM ANNUAL REPORT 2004

<PAGE>

      million outstanding principal amount under our $675.0 million term loan B
      facility and part of the $98.3 million outstanding principal amount under
      our $100.0 million term loan C facility. The remaining principal amounts
      outstanding under term loan facilities B and C were paid out from a new
      $668.2 million term loan D facility that bears an interest rate of LIBOR
      plus 300 basis points. At December 31, 2004, $659.0 million was
      outstanding under the term loan D facility, and our total debt was at
      $858.3 million. Amounts outstanding under the facilities are shown in the
      table below:

<TABLE>
<CAPTION>

                                  DECEMBER 31,                   December 31,
(in thousands of U.S. dollars)        2004       INTEREST RATE       2003       Interest rate     Maturity
------------------------------    ------------   -------------   ------------   -------------  --------------
<S>                               <C>            <C>             <C>            <C>            <C>
Credit agreement:
Term loan A                         $ 181,050     LIBOR + 250    $   250,000     LIBOR + 300   Sept. 30, 2007
Term loan B                                 -              -         675,000     LIBOR + 375   Sept. 30, 2009
Term loan C                                 -              -          98,270     LIBOR + 575    Mar. 31, 2010
Term loan D                           658,976     LIBOR + 300             -               -    Sept. 30, 2009
                                    ---------     -----------    -----------     -----------   --------------
                                    $ 840,026                    $ 1,023,270
                                    =========                    ===========
</TABLE>

      The revolving credit facility bears interest of LIBOR plus 300 basis
      points. In the third quarter of 2004, we borrowed $48.0 million from our
      revolving credit facility to finance capital expenditures. We subsequently
      repaid the $48.0 million during the fourth quarter of 2004. At December
      31, 2004, there were no amounts outstanding under the revolving credit
      facility.

      In 2004, we renegotiated the terms of our asset-backed financing
      agreement, which is now due in June 2007 and bears an interest rate of
      5.49%.

13.3  DEBT COVENANTS

      Our credit agreement includes four covenants: three are leverage tests
      based on earnings before interest, taxes and amortization (EBITA), and one
      is a maximum level of capital expenditures in any fiscal year during the
      life of the credit agreement. We are required to complete all leverage
      tests on a quarterly basis, using trailing 12-month data. The capital
      expenditure covenant is tested annually.

      As of December 31, 2004, we were in compliance with all of the terms of
      our credit agreement. We also expect to remain compliant with our debt
      covenants based on our current internal forecasts. Under the terms of the
      credit agreement, we are obliged to make a mandatory offer to prepay the
      credit facilities from the following:

            - 75% of excess cash flow (as defined in the credit agreement);

            - 100% of net cash proceeds of non-ordinary course asset sales;

            - 100% of net proceeds of debt issuance;

            - 100% of net cash proceeds of casualty events (in excess of
              $2.5 million); and

            - 75% of net proceeds of equity issuance.

      The above percentages are subject to a step-down, based on reductions in
      leverage.

      The credit agreement is guaranteed by Cinram and each of its existing and
      future material subsidiaries, and will be secured by substantially all of
      the assets of Cinram and each guarantor, including but not limited to (a)
      a first-priority pledge of all of the capital stock of each of the
      subsidiaries of Cinram, and (b) perfected first-priority security
      interests in, and mortgages on, substantially all tangible and intangible
      assets of Cinram and each guarantor (including but not limited to all
      material multi-year revenue-generating contracts, accounts receivable,
      inventory, equipment, leaseholds, investment property, intellectual
      property, real property, cash and proceeds of the foregoing).

                                                    CINRAM ANNUAL REPORT 2004 19

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

      13.4  CONTRACTUAL OBLIGATIONS

            At December 31, 2004, we had contractual obligations that require
            future payment as follows:

<TABLE>
<CAPTION>
Contractual obligations
(in thousands of U.S. dollars)       2005      2006       2007       2008       2009    2010 & after    Total
------------------------------    ---------  ---------  ---------  --------  ---------  ------------  ----------
<S>                               <C>        <C>        <C>        <C>       <C>        <C>           <C>
Long-term debt                    $  71,509  $ 112,698  $ 116,842  $ 36,975  $ 520,319  $          -  $  858,343
Capital lease obligations             1,177      1,102        885       654        607         2,351       6,776
Operating leases                     10,032      7,621      6,270     5,416      2,750         2,485      34,574
Capital obligations                  49,000          -          -         -          -             -      49,000
Pension obligations                   1,250      1,249      1,238     1,228      1,218         5,853      12,036
Other obligations                     4,214      4,214      4,214     1,328      1,328            -       15,298
                                  ---------  ---------  ---------  --------  ---------  ------------  ----------
                                  $ 137,182  $ 126,884  $ 129,449  $ 45,601  $ 526,222  $     10,689  $  976,027
                                  =========  =========  =========  ========  =========  ============  ==========
</TABLE>

            Included in other long-term liabilities are amounts recorded as
            management's best estimate of contingent liabilities assumed on the
            acquisition of the Acquired Businesses. The actual cash settlement
            amount is unknown at this time, and accordingly, these amounts are
            not reflected in the table above.

            All of the Company's debt and future commitments are disclosed in
            NOTES 7 and 8 to the financial statements.

      13.5  OTHER FINANCIAL INSTRUMENTS

            During 2004, we entered into hedging agreements for a three-year
            term on $250.0 million of long-term debt expiring in June 2007. We
            also entered into an additional interest rate cap agreement for
            $210.0 million of long-term debt expiring in January 2007. At
            December 31, 2004, the fair values of these arrangements, based on
            values quoted by the counterparties to the agreements, represent a
            liability of $0.5 million.

            Revenue and expenses are predominantly incurred in the currencies of
            the countries in which we have substantial operations - Canada, the
            United States, Germany, France and the United Kingdom. We are
            exposed to U.S. dollar, Euro and Pound Sterling currency
            fluctuations. The majority of our borrowings are denominated in U.S.
            dollars and represent a hedge of our net investment in our U.S.
            operations. We have not entered into any other foreign currency
            management arrangements.

      13.6  CAPITAL STOCK AND DIVIDENDS

            The authorized capital stock of the Company consists of an unlimited
            number of common shares and an unlimited number of preference
            shares. The preference shares are non-voting and are entitled to
            dividends, as and when declared by the Board of Directors.

            At March 1, 2005, Cinram had 56.9 million common shares issued and
            outstanding. Cinram's Board of Directors declared a C$0.03 cash
            quarterly dividend for all of the Company's shareholders in 2004.The
            Board of Directors also declared cash dividends of C$0.12 in 2003
            and $0.08 in 2002, respectively.

            At December 31, 2004, the Company had one stock-based compensation
            plan pursuant to which the Company may grant options to employees,
            Officers and Directors of the Company for up to 5,500,000 common
            shares. For more details, please refer to NOTE 9 to the financial
            statements.

      We anticipate that all capital spending and debt repayments for the
      foreseeable future will be financed with cash generated from operations,
      which will be supplemented, if and as necessary, by borrowing from our
      existing revolving credit facility. We believe that outside sources for
      additional debt and equity financing will, if needed, be available to
      finance debt repayment, expansion projects and any acquisition. The form
      of any financing will vary depending on prevailing market and other
      conditions. However, there can be no assurance that funds will be
      available on terms acceptable to the Company.

20 CINRAM ANNUAL REPORT 2004

<PAGE>

14.   RELATED PARTY TRANSACTIONS
      In 2004, we entered into the following related party transactions:

            -     Paid $1.5 million ($2.3 million including $2.2 million for
                  acquisition-related work in 2003, $0.3 million in 2002) to a
                  law firm where one of our Directors and one of our Officers
                  are each partners; and

            -     Paid $0.2 million ($0.2 million in 2003, $0.1 million in 2002)
                  in consulting fees to one of our Directors.

      In 2003, we purchased premises from three companies owned by certain
      shareholders of the Company and their families for $5.5 million,
      representing the fair market value of the land and building, based on
      independent appraisals. Prior to the purchase of the land and building, we
      leased the premises on a month-to-month basis at an exchange amount as
      agreed to by the parties. Lease costs for 2003 up to the purchase of the
      premises amounted to $0.4 million.

15.   SUMMARY OF QUARTERLY RESULTS

      Cinram's annual and quarterly operating results vary significantly from
      period to period as a result of the level and timing of customer orders,
      fluctuations in materials and other costs, and the relative mix of
      value-add products and services. Since most large-scale home video
      releases are clustered around the holidays (U.S. Thanksgiving and
      Christmas), and since this period is the busiest shopping season of the
      year, we typically experience stronger manufacturing volumes and record
      higher revenue and earnings in the fourth quarter. In 2004, the fourth
      quarter accounted for 32% of our annual revenue and 46% of our annual
      earnings, compared with 50% and 44% in 2003, and 34% and 51% in 2002,
      respectively.

<TABLE>
<CAPTION>
(in thousands of U.S. dollars)                              Revenue                          Net Earnings
           Quarter                  2004          2003        2002       2004       2003         2002
------------------------------   -----------   ---------   ---------   --------   -------    ------------
<S>                              <C>           <C>         <C>         <C>        <C>        <C>
First                            $   462,237   $ 130,261   $ 113,509   $ 14,972   $  7,297     $  2,493
Second                               425,411     137,812     111,610      8,477      8,340        4,928
Third                                494,772     147,229     142,877     17,822     13,833        9,437
Fourth                               644,218     411,591     191,291     34,553     23,550       17,813
                                 -----------   ---------   ---------   --------   --------     --------
Year                             $ 2,026,638   $ 826,893   $ 559,287   $ 75,824   $ 53,020     $ 34,671
                                 ===========   =========   =========   ========   ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                            Earnings                          Earnings
                                                           per share                          per share
(in U.S. dollars)                                            Basic                             Diluted
     Quarter                         2004         2003        2002       2004        2003       2002
-----------------                -----------   ---------   ---------   --------   --------    --------
<S>                              <C>           <C>         <C>         <C>        <C>         <C>
First                            $      0.27   $    0.13   $    0.05   $   0.26   $   0.13    $   0.05
Second                                  0.15        0.15        0.09       0.15       0.15        0.09
Third                                   0.31        0.25        0.17       0.31       0.24        0.17
Fourth                                  0.61        0.42        0.32       0.60       0.42        0.32
                                 -----------   ---------   ---------   --------   --------    --------
Year                             $      1.34   $    0.95   $    0.63   $   1.32   $   0.94    $   0.63
                                 ===========   =========   =========   ========   ========    ========
</TABLE>

      The seasonality of our business can also cause our capacity utilization to
      vary throughout the year. Although we have made significant investments in
      our DVD capacity in the past three years to accommodate our growing
      customer requirements and to handle peaks in demand, the shift of a
      particular release or the timing of the arrival of a master can affect our
      manufacturing schedule and influence our outsourcing decisions. We
      generate lower profit margins on units that are offloaded to a third
      party.

16.   RISKS AND UNCERTAINTIES

      16.1  OUR FINANCIAL PERFORMANCE IS SENSITIVE TO ECONOMIC TRENDS AND
            CONSUMER PREFERENCES IN OUR MAJOR MARKETS.

            Our financial performance depends on consumer demand for our
            customers' products. Substantially all of the purchases of the
            pre-recorded media products sold by our customers are discretionary.
            Accordingly, weak economic conditions or outlook or consumer
            confidence could significantly reduce consumption in any of our
            customers' major markets thereby causing material declines in our
            sales and net earnings. In addition, because of the discretionary
            nature of their products,

                                                    CINRAM ANNUAL REPORT 2004 21

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

            our customers must continually compete for the public's leisure time
            and disposable income with other forms of entertainment, including
            sporting events, concerts, live theatre and restaurants. They also
            compete for retail shelf space with other consumer goods. As a
            result of this competition, demand for our customers' products could
            be reduced and our sales volumes and gross profit margins could be
            adversely affected.

      16.2  EVENTS AND CONDITIONS IN THE MOTION PICTURE INDUSTRY MAY AFFECT
            SALES OF OUR PRODUCTS.

            Our DVD sales tend to fluctuate based on the underlying trends in
            the motion picture industry and are driven in part the by the
            release of hit films on home video, particularly on DVD. When box
            office receipts for the motion picture industry increase, we have
            typically seen sales of related DVDs increase as well. The number of
            films that are produced can be affected by a number of factors,
            including strikes and work stoppages within the motion picture
            industry, as well as by the tax incentive arrangements that many
            foreign governments provide filmmakers to promote local filmmaking.

      16.3  INCREASED COSTS OR SHORTAGES OF RAW MATERIALS OR ENERGY COULD
            ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

            Each year we purchase significant quantities of plastics, the key
            raw materials used in the production of DVDs, CDs,VHS video
            cassettes and audio cassettes. The availability and prices of these
            materials may be influenced by a number of different factors, many
            of which are beyond our control, including weather, transportation,
            increased demand, production delays and the price of oil.
            Significant shortages of, and price increases for, the plastics we
            use have occurred in the past. We generally do not hedge against
            price increases in the raw materials that we use. If we experience
            raw material price increases and we are either unable to pass such
            increases through to our customers or we are contractually
            restricted as to the timing of any increases in the amount we charge
            our customers, our gross margins would be adversely affected. Also,
            the processes at our manufacturing, distribution and printing
            facilities are energy-intensive. Therefore, increases in energy
            costs would adversely affect our gross margins and, consequently,
            our results of operations.

      16.4  OUR DEPENDENCE ON A LIMITED NUMBER OF LARGE CUSTOMERS WITH
            SUBSTANTIAL BARGAINING POWER CREATES POTENTIAL RISKS TO OUR REVENUE
            AND CASH FLOWS.

            We operate in an industry in which there is a high degree of
            customer concentration. Our two largest customers are Warner Home
            Video and Twentieth Century Fox Home Entertainment. Collectively,
            these two customers accounted for approximately 50% of our
            consolidated 2004 revenue. Warner Home Video, our largest customer,
            accounted for more than one-third of our 2004 consolidated revenue.
            If any of our most significant customers discontinues its
            relationship with us for any reason, our business could be
            materially adversely affected. In addition, our customers face a
            variety of risks and competitive pressures in the industries in
            which they operate and if market and other factors cause them to
            cancel, reduce or postpone current or expected purchase commitments
            for our products, our operating results and financial condition may
            be adversely affected. Similarly, if our significant customers do
            not own the licensing and distribution rights to the content they
            produce, there is no assurance that we will be provided with the
            contract for such products regardless of the exclusive nature of our
            contracts with such customers. Our operating results could also be
            significantly impacted if one of our largest customers fails or is
            unable to pay amounts owed to us in a timely manner, or at all,
            whether due to strategic redirections or adverse changes in their
            businesses or for other reasons.

      16.5  OUR BUSINESS COULD BE HARMED IF WE ARE UNABLE TO MANAGE THE
            SUCCESSFUL PRODUCTION, SUPPLY OR SECURITY OF OUR PRODUCTS.

            In our business, we are required to deliver substantial volumes of
            products meeting the stringent requirements of our customers. Our
            failure to successfully manage the production or supply of our
            products, including the failure to meet scheduled production and
            delivery deadlines, or the failure of our products to meet the
            quality requirements of our customers, could materially adversely
            affect our business, operating results and financial condition. In
            addition, if a person with authorized access to any of our
            facilities was to make an unauthorized copy of one of our clients'
            audio or video files and to circulate such content prior to its
            scheduled release, we could be subject to liability arising from
            this breach of security. Accordingly, our business operations, as
            well as our reputation, could be adversely affected.

22 CINRAM ANNUAL REPORT 2004

<PAGE>

      16.6  ADVANCES IN TECHNOLOGY AND CHANGES IN OUR CUSTOMERS' DEMANDS MAY
            REQUIRE US TO INCUR SIGNIFICANT CAPITAL EXPENDITURES IN ORDER TO
            REMAIN COMPETITIVE.

            Changes in the technology employed by the pre-recorded media
            industry and the emergence of the future generations of multimedia
            products, such as Blu-ray discs or HD-DVD, may require us to
            extensively upgrade or alter our manufacturing processes and
            production facilities in order to offer the most up-to-date product
            variations. As the demands and requirements of our customers shift,
            it will be necessary for us to modify the products and services we
            offer in order to retain these customers. The costs associated with
            adapting our operations to these requirements will likely be
            significant. There can be no assurance that we will be able to
            finance the necessary capital requirements through internally
            generated funds, additional borrowings or other sources. If we are
            unable to obtain the resources necessary to fund product expansion
            and new technology development, we may not be able to successfully
            implement our business strategies and our market share, gross profit
            margins and results of operations could be adversely affected. In
            addition, we cannot assure you that any of our existing customers
            will continue to employ our services with respect to future
            generations of multimedia products.

      16.7  DUE TO THE NATURE OF OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
            CASH FLOWS MAY FLUCTUATE SIGNIFICANTLY FROM PERIOD TO PERIOD.

            Our production levels and, in turn, our revenue and cash flows are
            largely affected by the schedule according to which our major
            customers release their products, which, in turn, is dependent on a
            variety of factors such as consumer demand and the availability of
            marketable content. Our results of operations and cash flows in any
            period are materially affected by the timing of product releases by
            our customers, which may result in significant fluctuations from
            period to period. In addition, in the music and home video
            industries, purchases typically are made in the last three months of
            the calendar year. Accordingly, a significant percentage of our
            annual revenue and earnings is typically realized during our fourth
            quarter. These fluctuations in our sales may adversely affect our
            ability to meet our obligations.

      16.8  FLUCTUATIONS IN OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY
            ADVERSELY AFFECT THE VALUE OF OUR STOCK.

            A number of factors, many of which are outside our control, may
            cause or contribute to significant fluctuations in our quarterly and
            annual revenue and operating results. These fluctuations may make
            financial planning and forecasting more difficult. In addition,
            these fluctuations may result in unanticipated decreases in our
            available cash, which could negatively impact our business and
            prospects. As discussed more fully below, these fluctuations also
            could increase the volatility of our stock price. Factors that may
            cause or contribute to fluctuations in our operating results and
            revenue include:

            -     Fluctuations in demand for our products;

            -     Introduction or enhancement of products and technologies by us
                  and our competitors, and market acceptance of these new or
                  enhanced products and technologies;

            -     Events and conditions in the motion picture industry that
                  affect the number of movies produced and distributed on home
                  video, the popularity of motion pictures generally and strikes
                  by motion picture industry participants;

            -     Consolidation by participants in the markets in which we
                  compete, which could result, among other things, in pricing
                  pressure;

            -     The amount and timing of our operating costs and capital
                  expenditures, including those related to the expansion of our
                  business, operations and infrastructure;

            -     Variations in the time-to-market of our technologies in the
                  entertainment industries in which we operate;

            -     Seasonal product purchasing patterns by consumers;

            -     The impact of, and our ability to react to, interruptions in
                  the entertainment distribution chain, including as a result of
                  work stoppages at our facilities, our customers' facilities
                  and other points throughout the entertainment distribution
                  chain;

            -     The impact of, and our ability to react to, political
                  instability, natural disasters, war and/or events of
                  terrorism;

            -     Adverse outcomes of litigation or governmental proceedings,
                  including any foreign, federal, state or local tax assessments
                  or audits; and

            -     Costs of litigation.

                                                    CINRAM ANNUAL REPORT 2004 23

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

            One or more of the foregoing or other factors may cause our
            operating expenses to be disproportionately higher or lower or may
            cause our revenue and operating results to fluctuate significantly
            in any particular quarterly or annual period. Results from prior
            periods are thus not necessarily indicative of the results of future
            periods.

      16.9  DEMAND AND PRICING FOR OUR PRODUCTS COULD BE MATERIALLY ADVERSELY
            AFFECTED BY THE DEVELOPMENT OR PROLIFERATION OF DIGITAL DISTRIBUTION
            ALTERNATIVES, INCLUDING COPYING AND DISTRIBUTION OF MUSIC AND VIDEO
            FILES.

            Our business is dependent on the continued viability and growth of
            physical distribution of music and video through authorized
            pre-recorded media. Alternative distribution channels and methods,
            both authorized and unauthorized, for delivering music have eroded
            our volume of sales and the pricing of our products and services.
            The growth of these alternatives is driven by advances in technology
            that allow for the transfer and downloading of music and video files
            from the Internet. The proliferation of this copying, use and
            distribution of such files is supported by the increasing
            availability and decreasing price of new technologies, such as
            personal video recorders, CD and DVD burners and portable MP3 music
            and video players, widespread access to the Internet and the
            increasing number of peer-to-peer digital distribution services that
            facilitate file transfers and downloading. We expect that file
            sharing and downloading, both legitimate and illegal, will continue
            to exert significant downward pressure on the demand for CDs. As
            current technologies improve, the digital transfer and downloading
            of video files will likely become more widespread. As the speed and
            quality with which video files can be transferred and downloaded
            improves, file sharing and downloading may in the future exert
            significant downward pressure on the demand for DVDs. Demand for our
            products may also be adversely affected by CD, DVD and VHS video
            cassette piracy if this practice increases in the future. In
            addition, our business faces pressure from the emerging distribution
            alternatives, like video on demand, or VOD, and personal digital
            video recorders. As substantially all of our revenues are derived
            from the sale of DVDs and CDs, continued file sharing, downloading
            and piracy or the growth of other alternative distribution channels
            and methods could materially adversely affect our business,
            financial condition and results of operations.

      16.10 CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT OUR CASH FLOWS AND
            RESULTS OF OPERATIONS.

            The Credit Facility bears interest at variable rates with a fixed
            interest rate spread. The weighted average interest rate on the debt
            of $840 million for the year ended December 31, 2004, was below
            6%.The Company currently has hedged 30% of its debt balance at fixed
            interest rates, with an interest rate cap in place on an additional
            25% of the debt balance. With respect to the remaining 45% floating
            rate debt, we continuously monitor the interest rate environment and
            are prepared to hedge additional debt should we feel it is
            necessary. Any increases in interest rates will affect the amount of
            cash required to service our indebtedness under the Credit Facility
            and could have a negative impact on our cash flows and results of
            operations.

      16.11 WE MAY EXPERIENCE ADVERSE EFFECTS DUE TO EXCHANGE RATE FLUCTUATIONS.

            While the majority of our revenue and earnings are generated in the
            United States, our operations in foreign markets expose us to the
            risk of foreign currency fluctuations. To the extent we incur
            expenses that are not denominated in the same currency as the
            related revenue, exchange rate fluctuations could cause our expenses
            to increase as a percentage of revenue, thereby negatively affecting
            our profitability and cash flows.

      16.12 DEMAND AND PRICING FOR OUR PRODUCTS GENERALLY DECLINE AS OUR
            PRODUCTS MATURE.

            Demand for our products and the prices at which we are able to sell
            our products generally decline as our products mature. Over the
            course of their product lifecycle, each of the audio cassette, VHS
            video cassette and CD formats has experienced a substantial decline
            in demand and pricing. As a result, to the extent we are unable to
            increase our sales volumes or reduce our manufacturing costs, our
            profit margin for these formats may decline. We have experienced
            similar pricing declines in respect of the DVD format and expect to
            experience similar volume declines as the DVD format matures. We
            also expect to experience similar pricing and volume declines in any
            future formats that we manufacture. Therefore, our long-term success
            depends on our ability to invest in new technologies and to secure
            our customers for new formats as they make the transition from
            mature formats. In addition, as a result of declines in demand for
            audio cassette, VHS video cassette and CD formats, our revenue is
            increasingly dependent on sales of the DVD format.

24 CINRAM ANNUAL REPORT 2004

<PAGE>

      16.13 WE FACE SIGNIFICANT COMPETITIVE AND PRICING PRESSURES IN THE MARKETS
            WE SERVE.

            We are engaged in an industry that is highly price competitive. Some
            of our competitors are companies, or divisions or operating units of
            conglomerates that have greater financial and other resources than
            we have. We may not be able to continuously compete successfully in
            our industry, and this could have a material adverse effect on our
            business, results of operations and financial condition.
            Furthermore, our multi-year contracts with our customers frequently
            contain a market price test which may, depending on prevailing
            industry prices, require us to lower the prices we charge such
            customers. Many of our customers have recently undergone, or may
            undergo, consolidation. As our customers grow larger and their
            industries grow more concentrated, the few remaining large entities
            may develop greater bargaining power and may be able to exert
            significant pricing pressure on our products which would adversely
            affect our results of operations. If any of our customers is
            acquired by or consolidates with another participant in the
            industry that has either an existing relationship with one of our
            competitors or the internal capacity to supply the products and
            services we provide, we may lose that customer and our results of
            operations may be materially adversely affected.

      16.14 WE RELY ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY AND
            WE MAY NOT BE ABLE TO RETAIN THOSE EMPLOYEES OR RECRUIT ADDITIONAL
            QUALIFIED PERSONNEL.

            Our operations and prospects depend, in large part, on the
            performance and continued service of our senior and middle
            management teams. The loss of key employees or the inability to
            attract and retain skilled employees could adversely affect our
            ability to effectively pursue our business strategy. Currently, only
            certain of our key officers and employees are bound by written
            employment contracts.

      16.15 WE ARE EXPOSED TO POTENTIAL CLAIMS OF INTELLECTUAL PROPERTY
            INFRINGEMENT.

            The industry in which we compete has many participants who own, or
            who claim to own, intellectual property for certain of the
            manufacturing processes we employ, the products we produce or the
            content produced by our customers. We currently accrue for the
            payment of licensing fees to certain third parties that claim to own
            the rights to intellectual property that we employ in our
            manufacturing processes or products. While currently we believe that
            these accruals are adequate, we cannot assure you that, if we are
            required to obtain licensing in respect of these rights, we could
            obtain such licensing on the terms assumed in these accruals.
            Furthermore, we cannot determine with certainty whether these or any
            other existing third party patents or the issuance of any new third
            party patents would require us to alter, or obtain licenses relating
            to, our processes or products. There is no assurance that we will be
            able to obtain any such licenses on terms favorable to us, if at
            all, and obtaining and paying royalties on new licenses might
            materially increase our costs. Additionally, the fees we pay in
            respect of existing licenses could increase materially in the future
            when these licenses are renewed. New multimedia formats will likely
            require that we obtain additional licenses. There can be no
            assurance that the content on the multimedia products we manufacture
            on behalf of our customers does not infringe upon the rights of
            third parties. Any claims brought against us by third parties with
            respect to intellectual property rights, with or without merit,
            could be time-consuming, result in costly litigation or cause delays
            in our operations. Since there can be no assurance of the outcome of
            such claims, we may be subject to fines or penalties that could be
            significant. We are involved in various intellectual property
            related legal actions that are in the ordinary course of our
            business. We cannot be certain that these actions, or any future
            actions, will not have a material adverse effect on our business,
            operating results or financial condition.

      16.16 IF WE FAIL TO MAINTAIN PROPER AND EFFECTIVE INTERNAL CONTROLS, OUR
            ABILITY TO PRODUCE ACCURATE FINANCIAL STATEMENTS COULD BE IMPAIRED,
            WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS, OUR ABILITY TO
            OPERATE OUR BUSINESS AND INVESTORS' VIEWS OF US.

            We have a complex business organization that is international in
            scope. Ensuring that we have adequate internal financial and
            accounting controls and procedures in place to help ensure that we
            can produce accurate financial statements on a timely basis is a
            costly and time-consuming effort that needs to be re-evaluated
            frequently. We are in the process of documenting, reviewing and, if
            appropriate, improving our internal controls and procedures in
            connection with Section 404 of the Sarbanes-Oxley Act, which
            requires annual management assessments of the effectiveness of our
            internal controls over financial reporting and a report by our
            independent auditors addressing these assessments, commencing
            December 31, 2006. Both we and our independent auditors will be
            testing our internal controls in connection with the

                                                    CINRAM ANNUAL REPORT 2004 25

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

            Section 404 requirements and could, as part of that documentation
            and testing, identify areas for further attention or improvement.
            Implementing any appropriate changes to our internal controls may
            require specific compliance training of our directors, officers and
            employees, entail substantial costs in order to modify our existing
            accounting systems, and take a significant period of time to
            complete. Such changes may not, however, be effective in maintaining
            the adequacy of our internal controls, and any failure to maintain
            that adequacy, or consequent inability to produce accurate financial
            statements on a timely basis, could increase our operating costs and
            could materially impair our ability to operate our business. In
            addition, investors' perceptions that our internal controls are
            inadequate or that we are unable to produce accurate financial
            statements may adversely affect our stock price.

      16.17 WE CONDUCT BUSINESS INTERNATIONALLY WHICH EXPOSES US TO
            UNCERTAINTIES AND RISKS THAT COULD NEGATIVELY AFFECT OUR OPERATIONS
            AND SALES.

            A significant portion of our sales are made to customers located
            outside the United States and Canada, primarily in Western Europe.
            We expect our international operations to continue to account for a
            significant portion of our revenues in the future and we may expand
            into new international markets in the future. The economies of
            foreign countries important to our operations could suffer slower or
            negative economic growth or instability in the future. In addition,
            our operations and sales in foreign markets could be negatively
            affected by a variety of risks, including new restrictions and
            controls on access to markets, unusual or burdensome foreign laws or
            regulatory requirements or unexpected changes to such laws or
            requirements, fluctuations in the value of foreign currencies
            against the Canadian and U.S. dollar, dependence on foreign
            distributors and their sales channels and the failure to recognize
            intellectual property rights. We may not be able to insure or hedge
            against these risks, and we may not be able to ensure compliance
            with all applicable regulations without incurring significant
            additional costs.

      16.18 WORK STOPPAGES OR OTHER LABOR DISRUPTIONS AFFECTING OUR KEY
            CUSTOMERS COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY AND
            FINANCIAL CONDITION.

            Labor disruptions at our key customers or with or by the clients
            they service, particularly work stoppages and disputes involving
            those associated with the music recording or film industries, could
            significantly affect demand for our products. Any prolonged strikes
            or other forms of labor protests or disputes affecting the
            businesses of our customers could have a material impact on our
            financial condition and results of operations.

      16.19 OUR MANUFACTURING OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND
            REQUIREMENTS THAT MAY IMPOSE MATERIAL LIABILITIES AS WELL AS
            OPERATING AND CAPITAL EXPENDITURES ON US.

            Our manufacturing facilities are subject to a range of federal,
            state, provincial, local and foreign laws and regulations relating
            to the environment. These include laws and regulations that govern
            discharges into the air, water and land, the handling and disposal
            of hazardous substances and wastes and the remediation of
            contamination associated with our facilities and off-site disposal
            locations. Compliance with existing and future environmental laws
            and regulations and enforcement policies may require us to incur
            capital and other costs, which may materially adversely affect our
            future financial condition. In addition, if we are found not to be
            in compliance with applicable environmental laws and regulations at
            our facilities, we may be subject to fines and penalties that could
            be significant.

17.   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      We prepare our financial statements in accordance with Canadian generally
      accepted accounting principles (GAAP). 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 revenue and expenses
      during the year. Significant accounting policies and methods used in
      preparation of the financial statements are described in NOTE 1 to the
      2004 consolidated financial statements. The Company evaluates its
      estimates and assumptions on a regular basis, based on historical
      experience and other relevant factors. Significant estimates are used in
      determining, but not limited to, the valuation of intangible assets and
      goodwill, provisions for sales allowances, royalty accruals, the allowance
      for doubtful accounts, inventory valuation, income tax valuation
      allowances, restructuring costs, the useful lives of all depreciable
      assets and the recoverability of capital assets and long lived assets.
      Actual results could differ from those estimates.

26 CINRAM ANNUAL REPORT 2004

<PAGE>

      17.1  BUSINESS COMBINATIONS

            The Company accounts for business combinations using the purchase
            method and accordingly, the results of operations of the businesses
            acquired have been included in the consolidated financial statements
            since the acquisition date. The purchase method of accounting
            requires that all assets acquired and liabilities assumed in a
            business combination be assigned a portion of the total cost of the
            purchase based on their fair values at the date of acquisition. The
            excess of the cost of the purchase over the net amounts assigned to
            assets acquired and liabilities assumed should be recognized as
            goodwill. The process of determining the purchase price allocation
            requires management to make certain estimates of the assets and
            liabilities assumed including their respective fair values.

      17.2  REVENUE RECOGNITION

            Revenue is comprised of product sales and service revenue earned
            from fulfillment services. Revenue from product sales is recognized
            upon shipment since title to the goods is transferred to customers,
            persuasive evidence of an arrangement exists, the selling price is
            fixed and determinable, and collectibility is reasonably assured.
            Volume rebates are recorded as a reduction of revenue at the time of
            shipment. Contractual payments to acquire sales contracts are
            amortized against revenue over the term of the contract. Services
            revenue is recognized as services are performed.

      17.3  INTANGIBLE ASSETS

            Intangible assets are comprised of customer supply agreements
            arising from the acquisition of certain of the assets of Time Warner
            Inc. Customer supply agreements are amortized on a straight line
            basis over a period of six years, which represents the exclusive
            term in which the Company will manufacture, print, package and
            physically distribute DVDs and CDs for Warner Home Video and Warner
            Music Group in North America and Europe, and for New Line Home
            Entertainment Inc. in North America.

            The Company performs an annual impairment test on all intangible
            assets, and more frequently if events or changes in circumstances
            indicate that the carrying value may not be recoverable. The
            valuation of intangible assets is based on the amount of
            undiscounted future net cash flows these assets are estimated to
            generate. Revenue and expense projections are based on management's
            estimates, including estimates of current and future industry
            conditions. A significant change to these assumptions could impact
            the estimated useful lives or valuation of intangible assets
            resulting in a change to amortization expense and impairment
            charges in the Home Video replication/duplication, Audio/ROM
            replication/duplication and Printing operating segments.

      17.4  GOODWILL

            The Company performs an annual impairment test on goodwill, and more
            frequently if events or changes in circumstances indicate that an
            impairment loss may have been incurred. Impairment is tested at the
            reporting unit level by comparing the reporting unit's carrying
            amount to its fair value. The fair values of the reporting units are
            estimated using discounted cash flows. The process of determining
            fair values is subjective and requires management to exercise
            judgment in making assumptions about future results, including
            revenue and cash flow projections at the reporting unit level,
            current and future industry conditions, and discount rates. A
            significant change to these assumptions could impact the valuation
            of goodwill resulting in impairment charges in the Home Video
            replication/duplication, Audio/ROM replication/duplication and
            Printing operating segments.

      17.5  PROVISIONS FOR VOLUME REBATES

            The Company records provisions for volume rebates offered to certain
            of its customers. The volume rebates are based on a discount
            percentage per unit ordered and increase in accordance with
            contractual sales volume target requirements. The accrual for volume
            rebates is recorded as a reduction of revenue at the time of
            shipment based on contractual terms. The process of determining the
            appropriate provision requires management to exercise judgment in
            making assumptions about future sales to customers. A significant
            change to this assumption could impact revenue recognized and the
            provision for sales allowances in the Home Video
            replication/duplication, Audio/ROM replication/duplication and
            Printing operating segments.

                                                    CINRAM ANNUAL REPORT 2004 27

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

      17.6  ROYALTY ACCRUALS

            The Company records accruals for royalty obligations due to various
            companies holding patents on the DVD and CD manufacturing processes.
            The royalty rates are on a per unit basis and based on contractual
            terms and conditions or management's best estimates. The royalty
            provision is recorded as a cost of goods sold at the time of
            shipment. The process of determining the appropriate provision
            requires management to apply the applicable royalty rates in
            accordance with the Company's license agreements. In situations
            where formal license agreements are not in place, management's best
            estimate of the royalty obligation is used. A significant change in
            the royalty rates used could impact the cost of goods sold
            recognized and the provisions for royalties in the Home Video
            replication/duplication and Audio/ROM replication/duplication
            operating segments.

      17.7  ALLOWANCE FOR DOUBTFUL ACCOUNTS

            The Company records an allowance for doubtful accounts related to
            accounts receivable that are considered to be noncollectible. The
            allowance is based on the Company's knowledge of the financial
            condition of its customers, the ageing of the receivables, current
            business environment, customer and industry concentrations, and
            historical experience. A change to these factors could impact the
            estimated allowance and the provision for bad debts recorded in
            selling, general and administrative expenses in the Home Video
            replication/duplication, Audio/ROM replication/duplication,
            Printing, Distribution and Other operating segments.

      17.8  INCOME TAX VALUATION ALLOWANCE

            The Company records a valuation allowance against future income tax
            assets when management believes it is more likely than not that some
            portion or all of the future tax assets will not be realized.
            Management considers factors such as reversal of future income tax
            liabilities, projected future taxable income, and the character of
            the income tax asset. A change to these factors could impact the
            estimated valuation allowance and income tax expense in the Home
            Video replication/duplication, Audio/ROM replication/duplication,
            Printing and Other operating segments.

      17.9  RESTRUCTURING COSTS

            The Company recorded restructuring charges in 2003, relating to
            facility consolidations and workforce reductions. These charges are
            recorded based on detailed plans approved and committed to by
            management. The restructuring charges include employee severance and
            other employee related costs, lease cancellation and idle facilities
            costs, other exit costs, and certain asset write-downs. The
            recognition of these charges requires management to make certain
            judgments and estimates regarding the nature, timing and amount
            associated with these plans. The estimates of future liability may
            change, requiring additional restructuring charges or a reduction of
            the liabilities already recorded. At the end of each reporting
            period, the Company evaluates the appropriateness of the remaining
            accrued balances.

      17.10 LONG-LIVED ASSETS

            The Company reviews capital and intangible assets (long-lived
            assets) for impairment on an annual basis or whenever events or
            changes in circumstances indicate that the carrying amount may not
            be recoverable. The Company uses the estimated useful life of
            long-lived assets to determine amortization expense. The estimate of
            an asset's useful life is made when the Company acquires the asset,
            and is based on past experience with similar assets, taking into
            account expected technological or industry changes.

            The valuation of long-lived assets depends upon whether the assets
            are classified as either held-for-use or available-for-sale. An
            impairment loss is recognized when the carrying amount of an asset
            that is held-for use exceeds the projected undiscounted future net
            cash flows expected from its use and disposal, and is measured as
            the amount by which the carrying amount of the asset exceeds its
            fair value, which is measured by discounted cash flows when quoted
            market prices are not available. For assets available-for-sale, an
            impairment loss is recognized when the carrying amount exceeds the
            fair value less costs to sell.

28 CINRAM ANNUAL REPORT 2004

<PAGE>

            The process of determining the projected cash flows is subjective
            and requires management to exercise judgment in making assumptions
            about future results, including revenue and cash flow projections,
            current and future industry conditions, and discount rates. A
            significant change to these assumptions could impact the valuation
            or the estimated useful lives of long-lived assets resulting in a
            change to amortization expense and could result in impairment
            charges in the Home Video replication/duplication, Audio/ROM
            replication/duplication, Printing, and Other operating segments.

      17.11 CHANGES AND INITIAL ADOPTION OF ACCOUNTING POLICIES

            17.11.1 CHANGE IN REPORTING CURRENCY

                    The Company has historically prepared its consolidated
                    financial statements in Canadian dollars. Beginning with the
                    first quarter of 2004, the Company changed its reporting
                    currency to U.S. dollars to provide the financial statement
                    users with more relevant information. The change in
                    reporting currency and presentation of the financial
                    statements is acceptable under Canadian GAAP, and does not
                    impact the amounts recorded in the statement of earnings
                    related to foreign currency gains and losses. The Company
                    used the current rate method to translate the consolidated
                    Canadian dollar results into U.S. dollars for both the
                    current and prior periods. Under the current rate method,
                    the consolidated assets and liabilities are translated into
                    U.S. dollars at the rate of exchange in effect at the
                    balance sheet date. Revenue and expenses as well as cash
                    flow items are translated at weighted average rates for the
                    period. Any resulting exchange gain or loss is charged or
                    credited to the "foreign currency translation adjustment"
                    account included as a separate component of shareholders'
                    equity.

                    The functional currencies of the Company and each of its
                    subsidiaries remained unchanged. The Company's operations in
                    the United States, the United Kingdom, France, Germany, and
                    Mexico are considered to be self-sustaining. Assets and
                    liabilities are translated using period-end exchange rates
                    and revenue and expenses are translated at average exchange
                    rates. Exchange gains and losses arising from the
                    translation of the financial statements of self-sustaining
                    foreign operations are deferred in the "foreign currency
                    translation adjustment" account included as a separate
                    component of shareholders' equity.

            17.11.2 ASSET RETIREMENT OBLIGATIONS

                    Effective January 1, 2004, the Company retroactively adopted
                    CICA Handbook Section 3110, Asset Retirement Obligations
                    (Section 3110), which establishes standards for the
                    recognition, measurement and disclosure of liabilities for
                    asset retirement obligations and the associated retirement
                    costs. Section 3110 applies to legal obligations associated
                    with the retirement of tangible long-lived assets that
                    results from their acquisition, lease, construction,
                    development or normal operation. We record the present value
                    of the estimated fair value of a liability for an asset
                    retirement obligation in the year in which it is incurred
                    and when a reasonable estimate of fair value can be made.
                    The fair value of a liability for an asset retirement
                    obligation is the amount at which that liability could be
                    settled in a current transaction between willing parties,
                    that is, other than in a forced liquidation transaction. We
                    subsequently allocate the asset retirement cost to expense
                    using a systematic and rational method over the asset's
                    useful life, and record the accretion of the liability as a
                    charge to the statement of earnings.

                                                    CINRAM ANNUAL REPORT 2004 29

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MANAGEMENT'S DISCUSSION & ANALYSIS
Of financial condition and results of operations (in U.S. dollars)

      17.12 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

            17.12.1 LIABILITIES AND EQUITY

                    Effective for fiscal years beginning after November 1, 2004,
                    CICA Handbook Section 3860, "Financial Instruments -
                    Presentation and Disclosure," has been amended to provide
                    guidance for classifying certain financial obligations of a
                    fixed amount that may be settled, at the issuer's option, by
                    a variable number of the issuer's own equity instruments to
                    be presented as liabilities. Any financial instruments
                    issued by an enterprise that give the issuer unrestricted
                    rights to settle the principal amount in cash or in the
                    equivalent value of its own equity instruments will no
                    longer be presented as equity.

                    The CICA concluded that not all such obligations establish
                    the type of relationship that exists between an entity and
                    its owners, but rather they convey more of a debtor/creditor
                    relationship because they require the issuer to convey a
                    fixed amount of value to the holder that does not vary with
                    changes in the fair value of the issuer's equity
                    instruments. Therefore, these instruments should be
                    presented as liabilities. The standard will be effective for
                    the Company's 2005 fiscal year on a retroactive basis. The
                    adoption of this standard will not have an impact on the
                    consolidated financial statements.

            17.12.2 CONSOLIDATION OF VARIABLE INTEREST ENTITIES

                    In June 2003, the CICA issued Accounting Guideline AcG-15,
                    "Consolidation of Variable Interest Entities" (AcG-15).
                    AcG-15 addresses the consolidation of variable interest
                    entities (VIEs), which are entities that have insufficient
                    equity at risk to finance their operations without
                    additional subordinated financial support and/or entities
                    whose equity investors lack one or more of the specified
                    essential characteristics of a controlling financial
                    interest. AcG-15 will be applied in the Company's year
                    beginning January 1, 2005.The adoption of this standard will
                    not have an impact on the consolidated financial statements.

            17.12.3 ARRANGEMENTS CONTAINING A LEASE

                    Emerging Issues Committee (EIC) Abstract 150, "Determining
                    Whether an Arrangement Contains a Lease," addresses a
                    situation where an entity enters into an arrangement,
                    comprising a transaction that does not take the legal form
                    of a lease but conveys a right to use a tangible asset in
                    return for a payment or series of payments. For example,
                    this may include items such as take-or-pay or similar
                    contracts, in which specified payments must be made
                    regardless of whether delivery is taken of the contracted
                    products or services. The Company will adopt this standard
                    effective January 1, 2005, and is currently assessing its
                    impact.

30 CINRAM ANNUAL REPORT 2004